XNAS:AMRB American River Bankshares Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

or

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________________________________ to ___________________________________

 

Commission File Number: 0-31525

 

AMERICAN RIVER BANKSHARES

 

(Exact name of registrant as specified in its charter)

 

     
 California    68-0352144
 (State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)

 

     
3100 Zinfandel Drive, Suite 450, Rancho Cordova, California   95670
 (Address of principal executive offices)     (Zip Code)

 

(916) 851-0123

 

(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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x   No o  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

         
   Large accelerated filer  o    Accelerated filer  o  
   Non-accelerated filer x (Do not check if a smaller reporting company)    Smaller reporting company  o  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  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 – 9,631,764 shares outstanding at May 4, 2012.

 

 
 

 

AMERICAN RIVER BANKSHARES

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2012

     Page
Part I.    
     
Item 1. Financial Statements    3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
Item 4. Controls and Procedures 45
     
Part II.    
     
Item 1. Legal Proceedings 46
Item 1A. Risk Factors 46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
Item 3. Defaults Upon Senior Securities 46
Item 4. Mine Safety Disclosures 46
Item 5. Other Information 46
Item 6. Exhibits 47
     
Signatures 51
   
Exhibit Index   52
     
31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 53
31.2 Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 54
32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 55
   
101.INS XBRL Instance Document  
101.SCH XBRL Taxonomy Extension Schema  
101.CAL XBRL Taxonomy Extension Calculation  
101.DEF  XBRL Taxonomy Extension Definition  
101.LAB XBRL Taxonomy Extension Label  
101.PRE XBRL Taxonomy Extension Presentation  

 

2

 

 
 
 

 

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

 

AMERICAN RIVER BANKSHARES

CONSOLIDATED BALANCE SHEET

(Unaudited)

 

(dollars in thousands) 

March 31,

2012

  

December 31,
2011

 
           
ASSETS           
Cash and due from banks  $46,967   $23,768 
Interest-bearing deposits in banks    1,250    1,250 
Investment securities:          
Available-for-sale, at fair value   202,832    208,711 
Held-to-maturity, at amortized cost   3,563    4,010 
Loans and leases, less allowance for loan and lease losses of $6,265 at March 31, 2012 and $7,041 at December 31, 2011   284,062    293,731 
Premises and equipment, net   2,280    2,355 
Federal Home Loan Bank stock   3,093    3,093 
Goodwill and other intangible assets   16,454    16,504 
Other real estate owned   10,733    8,190 
Accrued interest receivable and other assets   19,247    19,906 
   $590,481   $581,518 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits:          
Noninterest bearing  $136,654   $133,440 
Interest-bearing   339,928    328,845 
Total deposits   476,582    462,285 
           
Short-term borrowings       5,000 
Long-term borrowings   14,000    14,000 
Accrued interest payable and other liabilities   5,751    6,134 
          
Total liabilities   496,333    487,419 
           
Commitments and contingencies          
           
Shareholders’ equity:          
Preferred stock, no par value; 20,000,000 shares authorized; none outstanding          
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding – 9,742,634 shares at March 31, 2012 and 9,890,909 shares at December 31, 2011   71,005     72,016  
Retained earnings   19,237    18,525 
Accumulated other comprehensive income, net of taxes   3,906    3,558 
           
Total shareholders’ equity   94,148    94,099 
   $590,481   $581,518 

 

See Notes to Unaudited Consolidated Financial Statements

 

3

 

 
 
 

 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

 

(dollars in thousands, except per share data)

For the three months ended March 31,

   2012  2011
           
Interest income:          
Interest and fees on loans  $4,316   $4,997 
Interest on deposits in banks   3    6 
Interest and dividends on investment securities:          
Taxable   1,039    801 
Exempt from Federal income taxes   152    150 
Total interest income   5,510    5,954 
Interest expense:          
Interest on deposits   435    631 
Interest on borrowings   67    94 
Total interest expense   502    725 
           
Net interest income   5,008    5,229 
           
Provision for loan and lease losses   580    1,375 
           
Net interest income after provision for loan and lease losses   4,428    3,854 
           
Noninterest income:          
Service charges on deposit accounts   196    197 
Gain on sale of securities   64    2 
Other noninterest income   433    234 
Total noninterest income   693    433 
           
Noninterest expense:          
Salaries and employee benefits   2,203    2,080 
Occupancy   296    278 
Furniture and equipment   190    187 
Federal Deposit Insurance Corporation assessments   142    298 
Other real estate owned expense   374    202 
Other expense   907    1,006 
Total noninterest expense   4,112    4,051 
           
Income before provision for income taxes   1,009    236 
           
Provision for income taxes   297    30 
           
Net  income  $712   $206 
           
Basic earnings per share  $0.07   $0.02 
Diluted earnings per share  $0.07   $0.02 
           
Cash dividends per share  $   $ 

 

See Notes to Unaudited Consolidated Financial Statements

4

 

 
 
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF COMPRENENSIVE INCOME

(Unaudited)

 

(dollars in thousands)

For the three months ended March 31,

   2012  2011
           
Net income  $712   $206 
           
Other Comprehensive Income          
           
Unrealized Gains on Investment Securities:          
Unrealized holding gains arising during the period, net of income tax effects of $238 in 2012 and $85 in 2011   386    129 
           
Less: Reclassification adjustment for realized gains included in net income net of related income tax effects of $26 in 2012 and $1 in 2011   38    1 
           
Total Other Comprehensive Income   348    128 
           
Comprehensive Income  $1,060   $334 

 

5

 

 
 
 

 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(dollars in thousands) 

                  Accumulated      
                  Other    Total 
   Common Stock   Retained   Comprehensive    Shareholders’ 
    Shares    Amount   Earnings   Income   Equity 
Balance, January 1, 2011   9,874,867    71,814    16,021    1,709    89,544 
                          
Net income             2,504         2,504 
Other comprehensive income, net of tax:                         
Net change in unrealized gains on available-for-sale investment securities                  1,849    1,849 
                          
Net restricted stock awarded and related compensation expense   16,042    86              86 
Stock option compensation expense        116              116 
Balance, December 31, 2011   9,890,909    72,016    18,525    3,558    94,099 
Net income             712         712 
Other comprehensive income, net of tax:                         
Net change in unrealized gains on available-for-sale investment securities                  348    348 
                          
Net restricted stock award activity and related compensation expense   (3,246)   17              17 
Stock option compensation expense        16              16 
Retirement of common stock   (145,029)   (1,044)             (1,044)
                          
Balance, March 31, 2012   9,742,634   $71,005   $19,237   $3,906   $94,148 

See Notes to Unaudited Consolidated Financial Statements

 

6

 

 
 
 

 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

 

(dollars in thousands)

For the three months ended March 31,

   2012   2011 
           
Cash flows from operating activities:          
Net income  $712   $206 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan and lease losses   580    1,375 
Decrease in deferred loan origination fees, net   (42)   (23)
Depreciation and amortization   200    187 
Gain on sale and call of investment securities   (64)   (2)
Amortization of investment security premiums and discounts, net   982    818 
Increase in cash surrender values of life insurance policies   (65)   (68)
Stock based compensation expense   33    72 
Loss on sale and write-down of other real estate owned   161    28 
Decrease in accrued interest receivable and other assets   492    301 
Decrease in accrued interest payable and other liabilities   (383)   (1,792)
           
Net cash provided by operating activities   2,606    1,102 
           
Cash flows from investing activities:          
Proceeds from the sale of available-for-sale investment securities   4,713     
Proceeds from matured available-for-sale investment securities   165    130 
Proceeds from called available-for-sale investment securities   195    472 
Purchases of available-for-sale investment securities   (10,755)   (13,141)
Proceeds from principal repayments for available-for-sale investment securities   11,220    6,345 
Proceeds from principal repayments for held-to-maturity investment securities   449    677 
Net increase in interest-bearing deposits in banks        
Net decrease in loans   5,961    9,935 
Proceeds from sale of other real estate   467    526 
Net decrease in FHLB stock       138 
Purchases of equipment   (75)   (163)
           
Net cash provided by investing activities   12,340    4,919 
           
Cash flows from financing activities:          
Net increase in demand, interest-bearing and savings deposits  $11,556   $7,980 
Net increase (decrease) in time deposits   2,741    (7,194)
Net decrease in short-term borrowings   (5,000)    
Net decrease in long-term borrowings       (5,000)
Cash paid to repurchase common stock   (1,044)    
           
Net cash provided by (used in) financing activities  $8,253   $(4,214)
           
Increase in cash and cash equivalents   23,199    1,807 
           
Cash and cash equivalents at beginning of year   23,768    31,871 
           
Cash and cash equivalents at end of period  $46,967   $33,678 

 

See Notes to Unaudited Consolidated Financial Statements

 

7

 
 
 

 

AMERICAN RIVER BANKSHARES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

 

1. CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of American River Bankshares (the “Company”) at March 31, 2012 and December 31, 2011, and the results of its operations, cash flows, and comprehensive income for the three-month periods ended March 31, 2012 and 2011 and its statement of changes in shareholders’ equity for the year ended December 31, 2011 and the three months ended March 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

Certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2011 annual report on Form 10-K. The results of operations for the three-month period ended March 31, 2012 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, the valuation of goodwill and the estimated fair value of investment securities, impaired loans and other real estate owned.

Management has determined that since all of the banking products and services offered by the Company are available in each branch office of American River Bank, all branch offices are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate all of the branch offices and report them as a single operating segment. No client accounts for more than ten percent (10%) of revenues for the Company or American River Bank.

2. STOCK-BASED COMPENSATION

Equity Plans

On March 17, 2010, the Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan was approved by the Company’s shareholders on May 20, 2010. In 2000, the Board of Directors adopted and the Company’s shareholders approved a stock option plan (the “2000 Plan”), under which 355,527 options remain outstanding at March 31, 2012. The total number of authorized shares that remain available for issuance under the 2010 Plan is 1,463,531. The 2010 Plan provides for the following types of stock-based awards: incentive stock options; nonqualified stock options; stock appreciation rights; restricted stock; restricted performance stock; unrestricted Company stock; and performance units. Awards granted under the 2000 Plan were either incentive stock options or nonqualified stock options. Under the 2010 Plan, the awards may be granted to employees and directors under incentive and nonstatutory agreements and other awards agreements. The 2010 Plan and the 2000 Plan (collectively the “Plans”) require that the option price may not be less than the fair market value of the stock at the date the option is granted. The option awards under the Plans expire on dates determined by the Board of Directors, but not later than ten years from the date of award. The vesting period is generally five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding option awards under the Plans are exercisable until their expiration, however, no new options will be awarded under the 2000 Plan. New shares are issued upon exercise of an option.

8

 
 
 

The grant date fair value of awards is determined by the market price of the Company’s common stock on the date of grant and is recognized ratably as compensation expense or director expense over the vesting periods. The shares of common stock granted pursuant to such agreements vest in increments over one to five years from the date of grant. The shares awarded to employees and directors under the restricted stock agreements vest on the applicable vesting dates only to the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated. New shares are issued upon vesting of the restricted common stock.

Equity Compensation

For the three-month periods ended March 31, 2012 and 2011, the compensation cost recognized for equity compensation was $33,000 and $72,000, respectively. The recognized tax benefit for equity compensation expense was $8,000 and $20,000, for the three-month periods ended March 31, 2012 and 2011, respectively.

At March 31, 2012, the total compensation cost related to nonvested stock option awards not yet recorded is expected to be $42,000. This amount will be recognized over the next two years and the weighted average period of recognizing these costs is expected to be 1.2 years. At March 31, 2012, the total compensation cost related to restricted stock awards not yet recorded is expected to be $113,000. This amount will be recognized over the next four and a half years and the weighted average period of recognizing these costs is expected to be 1.3 years.

Equity Plans Activity

Stock Options

There were no stock options awarded during the three-month periods ended March 31, 2012 and 2011. A summary of option activity under the Plans as of March 31, 2012 and changes during the period then ended is presented below:

 

 

 

 

Options

  Shares   Weighted
Average
Exercise
Price
   Weighted Average Remaining Contractual Term    Aggregate
Intrinsic
Value ($000)
 
                      
Outstanding at January 1, 2012   358,198   $17.25    4.0 years    $ 
Granted                 
Exercised                 
Cancelled   2,671   $10.87          
Outstanding at March 31, 2012   355,527   $17.18    4.2 years    $ 
                      
Vested at March 31, 2012   324,820   $17.89    4.0 years    $ 
                      
Non-vested at March 31, 2012   30,707   $11.07    6.5 years    $ 

Restricted Stock 

There was no restricted stock awarded during the three month periods ended March 31, 2012 or 2011. There were no restricted awards that were fully vested, nor were there any awards that had been forfeited during the same period and the intrinsic value at March 31, 2011 was $194,000. The intrinsic value of unvested restricted stock at March 31, 2012 was $228,000.

 

 

Restricted Stock

  Shares   Weighted Average Grant Date Fair Value 
           
Nonvested at January 1, 2012   32,078   $5.96 
Awarded        
Vested        
Cancelled   (3,246)   6.54 
Nonvested at March 31, 2012   28,832   $5.90 

 

9

 
 
 

Other Equity Awards

There were no stock appreciation rights; restricted performance stock; unrestricted Company stock; or performance units awarded during the three month periods ended March 31, 2012 or 2011.

The intrinsic value used for stock options and restricted stock was derived from the market price of the Company’s common stock of $7.90 as of March 31, 2012.

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 $40,745,000 and standby letters of credit of approximately $8,633,000 at March 31, 2012. Such commitments relate primarily to real estate construction loans, revolving lines of credit and other commercial loans. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company during 2012 as some of these are expected to expire without being fully drawn upon.

Standby letters of credit are commitments issued to guarantee the performance or financial obligation of a client to a third party. These guarantees are issued primarily relating to purchases of inventory or as security for real estate rents by commercial clients and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to clients and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The majority of all such commitments are collateralized. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at March 31, 2012 or March 31, 2011.

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 (9,823,269 shares and 9,845,533 shares for the three-month periods ended March 31, 2012 and 2011, respectively). Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or restricted stock, result in the issuance of common stock. 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 stock based awards (10,281 shares for the three-month period ended March 31, 2012 and 8,122 shares for the three-month period ended March 31, 2011). Earnings per share is retroactively adjusted for stock dividends and stock splits for all periods presented.

5. INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities at March 31, 2012 and December 31, 2011 consisted of the following (dollars in thousands):

Available-for-Sale

   March 31, 2012
        Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
Debt securities:                    
Mortgage-backed securities  $167,698   $5,169   $(78)  172,789 
Obligations of states and political subdivisions   28,560    1,449    (34)   29,975 
Equity securities:                    
Corporate stock   64    4        68 
   $196,322   $6,622   $(112)  202,832 
                     

 

10

 

 
 
 

 

   December 31, 2011
        Gross   Gross   Estimated 
   Amortized  Unrealized   Unrealized   Fair 
   Cost  Gains   Losses   Value 
Debt securities:                    
Mortgage-backed securities  $175,038   $4,570  (154)  $179,454 
Obligations of states and political subdivisions   27,678    1,510        29,188 
Equity securities:                    
 Corporate stock   65    4        69 
   $202,781   $6,084   $(154)  $208,711 
                     

Net unrealized gains on available-for-sale investment securities totaling $6,510,000 were recorded, net of $2,604,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at March 31, 2012. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the quarter ended March 31, 2012 totaled $4,908,000 and $64,000, respectively. There were no sales or transfers of available-for-sale investment securities for the period ended March 31, 2012.

Net unrealized gains on available-for-sale investment securities totaling $3,061,000 were recorded, net of $1,224,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at March 31, 2011. Proceeds and gross realized gains from the call of available-for-sale investment securities for the quarter ended March 31, 2011 totaled $470,000 and $2,000, respectively. There were no sales or transfers of available-for-sale investment securities for the quarter ended March 31, 2011.

Held-to-Maturity

   March 31, 2012 
         Gross    Gross    Estimated 
    Amortized    Unrealized    Unrealized    Fair 
    Cost    Gains    Losses    Value 
Debt securities:                    
Mortgage-backed securities  $3,563   $210   $   $3,773 

  December 31, 2011 
         Gross    Gross    Estimated 
    Amortized    Unrealized    Unrealized    Fair 
    Cost    Gains    Losses    Value 
Debt securities:                    
Mortgage-backed securities  $4,010   $221   $   $4,231 

11

 
 
 

There were no sales of held-to-maturity investment securities for the three months ended March 31, 2012 and 2011 and no transfers of held-to-maturity investment securities for the three months ended March 31, 2012 and 2011. Investment securities with unrealized losses at March 31, 2012 and December 31, 2011 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):

   2012 
    Less than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair     Unrealized   Fair   Unrealized 
   Value   Losses   Value     Losses   Value   Losses 
Available-for-Sale                             
                               
Debt securities:                              
Mortgage-backed securities  $8,647   $(78)          $8,647   $(78)
Obligations of states and political subdivisions   3,027    (34)           3,027    (34)
Equity Securities:                              
Corporate stock                          
   $11,674   $(112)  $   $   $11,674   $(112)
                               

   2011 
    Less than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair     Unrealized   Fair   Unrealized 
   Value   Losses   Value     Losses   Value   Losses 
Available-for-Sale                             
                               
Debt securities:                              
Mortgage-backed securities  $21,749   $(154)            $21,749   $(154)
   $21,749   $(154)  $   $   $21,749   $(154)

There were no held-to-maturity investment securities with unrealized losses as of March 31, 2012 or December 31, 2011.

At March 31, 2012, the Company held 189 securities of which 8 were in a loss position for less than twelve months and none were in a loss position for twelve months or more. Of the 8 securities in a loss position, 3 are mortgage-backed securities and 5 are obligations of states and political subdivisions. At December 31, 2011, the Company held 189 securities of which 11 were in a loss position for less than twelve months and none were in a loss position for twelve months or more. All 11 securities in a loss position were mortgage-backed securities.

The unrealized loss on the Company’s investments in mortgage-backed securities is primarily driven by interest rates. Because the decline in market value is attributable to a change in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be until maturity, management does not consider these investments to be other-than-temporarily impaired.

The amortized cost and estimated fair values of investment securities at March 31, 2012 by contractual maturity are shown below (dollars in thousands).

12

 
 
 

   Available-for-Sale   Held-to-Maturity 
        Estimated        Estimated  
   Amortized   Fair    Amortized    Fair 
   Cost   Value    Cost    Value 
                     
Within one year  $659   $662         
After one year through five years   2,455    2,483         
After five years through ten years   11,702    12,340         
After ten years   13,744    14,490         
    28,560    29,975         
Investment securities not due at a single maturity date:                    
Mortgage-backed securities   167,698    172,789   $3,563  $3,773 
Corporate stock   64    68           
   $196,322   $202,832   $3,563  $3,773 

Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

6. IMPAIRED AND NONPERFORMING LOANS AND LEASES AND OTHER REAL ESTATE OWNED

At March 31, 2012 and December 31, 2011, the recorded investment in nonperforming loans and leases was approximately $10,689,000 and $13,423,000, respectively. Nonperforming loans and leases include all such loans and leases that are either placed on nonaccrual status or are 90 days past due as to principal or interest but still accrue interest because such loans are well-secured and in the process of collection. The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the contractual terms of the original loan agreement. At March 31, 2012, the recorded investment in loans and leases that were considered to be impaired totaled $28,898,000, which includes $10,685,000 in nonaccrual loans and leases and $18,213,000 in performing loans and leases. Of the total impaired loans of $28,898,000, loans totaling $16,856,000 were deemed to require no specific reserve and loans totaling $12,042,000 were deemed to require a related valuation allowance of $789,000. At December 31, 2011, the recorded investment in loans and leases that were considered to be impaired totaled $30,085,000 and had a related valuation allowance of $1,680,000. If interest had been accruing on the nonperforming loans, such income would have approximated $272,000 and $425,000 for the three months ended March 31, 2012 and 2011, respectively.

At March 31, 2012 and December 31, 2011, the recorded investment in other real estate owned (“OREO”) was $10,733,000 and $8,190,000, respectively. In addition, the Company owned one repossessed mobile home classified on the balance sheet in accrued interest receivable and other assets with a book value of $55,000. For the three months ended March 31, 2012, the Company transferred four properties with loan balances in the amount of $3,439,000 to OREO and wrote these balances down by $194,000 to $3,245,000, and sold four properties with balances of $497,000 for a net loss of $30,000. In addition to the $194,000 in write downs, the Company also adjusted balances through charges to the allowance for loan and lease losses of $74,000 and OREO expense of $60,000 for properties obtained in the prior quarter. The Company also had a $127,000 valuation allowance on properties that it expects to sell in the second quarter of 2012. The March 31, 2012 OREO balance of $10,733,000 consists of 21 properties including nine commercial real estate properties in the amount of $8,272,000, six residential land properties in the amount of $1,619,000, one commercial land property totaling $276,000 and five residential real estate properties in the amount of $566,000.

13

 
 
 

Nonperforming loans and leases and OREO at March 31, 2012 and December 31, 2011 are summarized as follows:

 (in thousands)  March 31,
2012
   December 31,
2011
 
           
Nonaccrual loans and leases that are current to terms  $320   $396 
Nonaccrual loans and leases that are past due   10,365    13,027 
Loans and leases past due 90 days and accruing interest   4     
Other real estate owned   10,733    8,190 
Total nonperforming assets  $21,422   $21,613 
           
Nonperforming loans and leases to total loans and leases   3.68%   4.46%
Total nonperforming assets to total assets   3.64%   3.73%

 

Impaired loans and leases as of and for the periods ended March 31, 2012 and December 31, 2011 are summarized as follows:

March 31, 2012      Unpaid       Average   Interest 
(dollars in thousands)  Recorded   Principal   Related   Recorded   Income 
   Investment   Balance   Allowance   Investment   Recognized 
With no related allowance recorded:                         
Commercial  $4,632   $6,265       $6,193   $218 
Real estate:                         
Commercial   9,145    9,925        7,357    303 
Multi-family   1,199    1,291        1,216    44 
Construction   1,719    1,790        1,755     
Residential               1,571    8 
Other:                         
Leases   7    7        9    1 
Consumer   154    154        171    12 
   $16,856   $19,432   $   $16,701   $578 
                          
With an allowance recorded:                         
Commercial  $535   $535   $169   $564   $22 
Real estate:                         
Commercial   7,673    7,722    282    7,980    395 
Construction   364    612    15    468    19 
Residential   2,512    2,512    106    2,869    154 
Other:                         
Agriculture   396    396    154    497    3 
Consumer   562    562    63    567    31 
   $12,042   $12,339   $789   $12,945   $624 
Total:                         
Commercial  $5,167   $6,800   $169   $6,757   $240 
Real estate:                         
Commercial   16,818    17,647    282    15,337    698 
Multi-family   1,199    1,291        1,216    44 
Construction   2,083    2,402    15    2,223    19 
Residential   2,512    2,512    106    2,869    154 
Other:                         
Leases   7    7        9    1 
Agriculture   396    396    154    497    3 
Consumer   716    716    63    738    43 
   $28,898   $31,771   $789   $29,646   $1,202 

 

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December 31, 2011                 
(dollars in thousands)               
   Recorded
Investment (1)
   Unpaid
Principal
Balance(1)
   Related
Allowance (1)
   Average
Recorded
Investment (2)
   Interest
Income
Recognized (2)
 
                          
With no related allowance recorded:                         
Commercial  $3,069   $3,089       $5,243   $44 
Real estate:                         
Commercial   4,723    6,428        8,183    55 
Multi-family   17    17        1,985    9 
Construction               4,641     
Residential   180    180        1,571    8 
Other:                         
Leases   17    17             
Agriculture               129     
Consumer   133    133        182    4 
                          
   $8,139   $9,864   $   $21,934   $120 
                          
With an allowance recorded:                         
Commercial  $2,054   $3,705   $538   $2,220   $16 
Real estate:                         
Commercial   13,504    13,853    707    12,500    81 
Multi-family   1,187    1,280    5    607     
Construction   2,083    2,402    147    221    6 
Residential   1,936    1,936    118    1,422    21 
Other:                         
Agriculture   597    597    89         
Consumer   585    585    76    490    6 
   $21,946   $24,358   $1,680   $17,460   $130 
                          
Total:                         
Commercial  $5,123   $6,794   $538   $7,463   $60 
Real estate:                         
Commercial   18,227    20,281    707    20,684    136 
Multi-family   1,204    1,297    5    2,592    9 
Construction   2,083    2,402    147    4,861    6 
Residential   2,116    2,116    118    2,993    29 
Other:                         
Leases   17    17             
Agriculture   597    597    89    129     
Consumer   718    718    76    672    10 
   $30,085   $34,222   $1,680   $39,394   $250 

(1)Data in this column represents information as of December 31, 2011.
(2)Data in this column represents information for the three-month period ended March 31, 2011.

7. TROUBLED DEBT RESTRUCTURINGS

At March 31, 2012, there were 24 loans and leases that were considered to be troubled debt restructurings. Of these loans and leases, 12 were modified and are currently performing (less than ninety days past due) totaling $6,732,000 and 12 are considered nonperforming (and included in the $10,689,000 noted above in Note 6), totaling $3,307,000. At March 31, 2012 and December 31, 2011, there were no unfunded commitments on those loans considered troubled debt restructures. See also “Impaired Loans and Leases” in Item 2.

The Company has allocated $351,000 and $535,000 of specific reserves to loans whose terms have been modified as troubled debt restructurings as of March 31, 2012 and December 31, 2011.

During the three-month period ended March 31, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

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The following table presents loans by class modified as troubled debt restructurings during the three months ended March 31, 2012:

         Pre-   Post- 
        Modification   Modification 
        Outstanding   Outstanding 
   Number   Recorded   Recorded 
   of Loans   Investment   Investment 
Troubled debt restructurings:               
Commercial   1   $47   $47 
Real estate – commercial   2    2,210    2,210 
Real estate – multi-family   1    265    265 
Real estate – residential   3    921    808 
Other – agriculture   1    410    410 
Other – consumer   2    31    31 
Total   10   $3,884   $3,771 

The troubled debt restructurings described above increased the allowance for loan and lease losses by $40,000 and resulted in charge offs of $113,000 during the three months ended March 31, 2012. 

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2012:

   Number   Recorded 
  of Loans   Investment 
Troubled debt restructurings that subsequently defaulted:          
Commercial   1   $863 
Real estate – commercial   4    1,260 
           
Total   5   $2,123 
           

 

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8. ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company’s loan and lease portfolio allocated by management’s internal risk ratings as of March 31, 2012 and December 31, 2011 are summarized below:

March 31, 2012  Credit Risk Profile by Internally Assigned Grade 
(dollars in thousands)                    
        Real Estate 
   Commercial   Commercial   Multi-Family   Construction   Residential 
Grade:                         
Pass  $31,260   $159,562   $6,986   $6,384   $17,483 
Watch   1,648    20,745    1,199    330    1,596 
Special mention   2,110    6,688    447    823    839 
Substandard   3,691    9,032    518    2,083    908 
Doubtful   726                 
Total  $39,435   $196,027   $9,150   $9,620   $20,826 

 

   Other Credit Exposure 
   Credit Risk Profile by Internally Assigned Grade 
   Leases   Agriculture   Consumer 
Grade:               
Pass  $1,403   $3,416   $8,928 
Watch           677 
Special mention           147 
Substandard   7    396    554 
Doubtful            
Total  $1,410   $3,812   $10,306 

 

December 31, 2011  Credit Risk Profile by Internally Assigned Grade 
(dollars in thousands)                    
        Real Estate 
   Commercial   Commercial   Multi-Family   Construction   Residential 
Grade:                         
Pass  $33,856   $164,117   $5,669   $6,462   $16,215 
Watch   1,540    20,673    1,204    984    1,163 
Special mention   2,173    7,187    449    827    1,372 
Substandard   3,794    11,938    258    2,083    945 
Doubtful   745    128             
Total  $42,108   $204,043   $7,580   $10,356   $19,695 

 

   Other Credit Exposure
Credit Risk Profile by Internally Assigned Grade
 
   Leases   Agriculture    Consumer 
Grade:               
Pass  $1,708   $3,416   $9,684 
Watch       570    237 
Special mention           264 
Substandard   17    597    799 
Doubtful            
Total  $1,725   $4,583   $10,984 

 

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The allocation of the Company’s allowance for loan and lease losses as of March 31, 2012 and 2011, by portfolio segment and by impairment methodology are summarized below:

 March 31, 2012       Real Estate   Other           
(dollars in thousands)  Com-   Com-   Multi-   Construc-             Agri-                
  mercial   mercial   Family   tion   Residential   Leases   culture   Consumer   Unallocated   Total 
                                                   
Allowance for Loan and Lease Losses                                                  
                                                   
Beginning balance  $1,536   $3,156   $198   $582   $609   $79   $167   $348   $366   $7,041 
Provision for loan losses   (543)   370    102    (111)   217    (64)   289    435    (115)   580 
Loans charged-off   (48)   (611)   (8)   (4)   (113)   (8)   (202)   (410)        (1,404)
Recoveries       44    4                             48 
                                                   
Ending balance allocated to portfolio segments  $945   $2,959   $296   $467   $713   $7   $254   $373   $251   $6,265 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $169   $282   $   $15   $106   $   $154   $63   $   $789 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $776   $2,677   $296   $452   $607   $7   $100   $310   $251   $5,476 
                                                   
Loans                                                  
                                                   
Ending balance  $39,435   $196,027   $9,150   $9,620   $20,826   $1,410   $3,812   $10,306   $   $290,586 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $5,167   $16,818   $1,199   $2,083   $2,512   $7   $396   $716   $   $28,898 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $34,268   $179,209   $7,951   $7,537   $18,314   $1,403   $3,416   $9,590   $   $261,688 

 

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 March 31, 2011       Real Estate   Other           
(dollars in thousands)  Com-   Com-   Multi-   Construc-             Agri-                
  mercial   mercial   Family   tion   Residential   Leases   culture   Consumer   Unallocated   Total 
                                                   
Allowance for Loan and Lease Losses                                                  
                                                   
Beginning balance  $2,574   $2,715   $115   $1,090   $581   $7   $131   $221   $151   7,585 
Provision   (70)   1,187    12    (416)   375    88    4   (17)   212    1,375 
Loans charged-off   (291)   (1,123)       (63)   (262)          (6)       (1,745)
Recoveries   133                            14        147 
                                                   
Ending balance allocated to portfolio segments  $2,346   $2,779   $127   $611   $694   $95   $135   $212   $363   $7,362 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $30   $789   $   $9   $197   $   $   $10   $   $1,035 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $2,316   $1,990   $127   $602   $497   $95   $135   $202   $363   $6,327 
                                                   
Loans                                                  
                                                   
Ending balance  $51,821   $211,168   $8,606   $14,544   $24,866   $2,384   $7,361   $12,663   $   $333,413 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $6,669   $20,181   $2,589   $5,027   $3,310   $   $129   $645   $   $38,550 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $45,152   $190,987   $6,017   $9,517   $21,556   $2,384   $7,232   $12,018   $   $294,863 

 

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The Company’s aging analysis of the loan and lease portfolio at March 31, 2012 and December 31, 2011 are summarized below:

March 31, 2012                                Past Due      
(dollars in thousands)            Past Due                  Greater Than      
   30-59 Days   60-89 Days   Greater Than   Total Past             90 Days and      
   Past Due   Past Due   90 Days   Due   Current   Total Loans   Accruing   Nonaccrual 
Commercial:                                        
Commercial  $139   $34   $1,913   $2,086   $37,349   $39,435       $1,993 
Real estate:                                        
Commercial   816    214    5,590    6,620    189,407    196,027        5,900 
Multi-family   518            518    8,632    9,150         
Construction           2,189    2,189    7,431    9,620        2,189 
Residential                   20,826    20,826         
Other:                                        
Leases           7    7    1,403    1,410        7 
Agriculture           396    396    3,416    3,812        396 
Consumer   790    9    140    939    9,367    10,306    4    200 
Total  $2,263   $257   $10,235   $12,755   $277,831   $290,586   $4   $10,685 

 

December 31, 2011                                Past Due      
(dollars in thousands)            Past Due                  Greater Than      
   30-59 Days   60-89 Days   Greater Than   Total Past             90 Days and      
   Past Due   Past Due   90 Days   Due   Current   Total Loans   Accruing   Nonaccrual 
Commercial:                                        
Commercial  $60   $277   $2,472   $2,809   $39,299   $42,108       $2,775 
Real estate:                                        
Commercial   2,318    1,527    5,271    9,116    194,927    204,043        7,469 
Multi-family           257    257    7,323    7,580        257 
Construction       244    1,967    2,211    8,145    10,356        2,083 
Residential                   19,695    19,695         
Other:                                        
Leases           17    17    1,708    1,725        17 
Agriculture           597    597    3,986    4,583        597 
Consumer   188    411    139    738    10,246    10,984        225 
Total  $2,566   $ 2,459   $10,720   $15,745   $285,329   $301,074   $   $13,423 

 

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9. BORROWING ARRANGEMENTS

At March 31, 2012, the Company had $17,000,000 of unsecured short-term borrowing arrangements with two of its correspondent banks. There were no advances under the borrowing arrangements as of March 31, 2012 or December 31, 2011.

The Company has a line of credit available with the Federal Home Loan Bank of San Francisco (the “FHLB”) which is secured by pledged mortgage loans and investment securities. Borrowings may include overnight advances as well as loans with terms of up to thirty years. Advances (both short and long-term) totaling $14,000,000 were outstanding from the FHLB at March 31, 2012, bearing interest rates ranging from 0.67% to 2.73% and maturing between May 20, 2013 and July 10, 2016. Advances totaling $19,000,000 were outstanding from the FHLB at December 31, 2011, bearing interest rates ranging from 0.67% to 2.73% and maturing between January 9, 2012 and July 20, 2016. Remaining amounts available under the borrowing arrangement with the FHLB at March 31, 2012 and December 31, 2011 totaled $67,356,000 and $62,242,000, respectively. The increased borrowing capacity during the first quarter of 2012 resulted from the reduction in outstanding borrowings. In addition, the Company has a secured borrowing agreement with the Federal Reserve Bank of San Francisco. The borrowing can be secured by pledging selected loans and investment securities. Borrowings generally are short-term including overnight advances as well as loans with terms up to ninety days. Amounts available under this borrowing arrangement at March 31, 2012 and December 31, 2011 were $26,785,000 and $30,396,000, respectively. The decreased borrowing capacity during the first quarter of 2012 resulted from the decrease in the borrowing capacity of the pledged loan collateral. There were no advances outstanding under this borrowing arrangement as of March 31, 2012 and December 31, 2011.

10. 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, if applicable, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties related to unrecognized tax benefits, if applicable, as a component of interest expense in the consolidated statement of income. There have been no unrecognized tax benefits or accrued interest and penalties for the three month periods ended March 31, 2012 and 2011.

 

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11. FAIR VALUE MEASUREMENTS

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2012 and December 31, 2011. They indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

   Carrying   Fair Value Measurements Using:     
March 31, 2012  Amount   Level 1   Level 2   Level 3   Total 
                     
Financial assets:                         
Cash and due from banks  $46,967   $46,967             $46,967 
Interest-bearing deposits in banks   1,250        $1,256         1,256 
Available-for-sale securities   202,832    9    202,823         202,832 
Held-to-maturity securities   3,563         3,773         3,773 
FHLB stock   3,093                     
Net loans and leases:   290,586              287,492    287,492 
Accrued interest receivable   1,829    1,829              1,829 
                          
Financial liabilities:                         
Deposits:                         
Noninterest-bearing  $136,654   $136,654             $136,654 
Savings   50,874    50,874              50,874 
Money market   141,126    141,126              141,126 
NOW accounts   47,464    47,464              47,464 
Time, $100,000 or more   72,308         73,148         73,148 
Other time   28,156         28,399         28,399 
Long-term borrowings   14,000         14,312         14,312 
Accrued interest payable   139    139              139 

 

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   Carrying   Fair Value Measurements Using:     
December 31, 2011   Amount   Level 1   Level 2   Level 3   Total 
Financial assets:                          
Cash and due from banks  $23,768   $23,768             $23,768 
Interest-bearing deposits in banks   1,250        $1,254         1,254 
Available-for-sale securities   208,711    9    208,702         208,711 
Held-to-maturity securities   4,010         4,231         4,231 
FHLB stock   3,093                     
Net loans and leases:   301,074             $297,848    297,848 
Accrued interest receivable   1,952              1,952    1,952 
                          
Financial liabilities:                         
Deposits:                         
Noninterest-bearing  $133,440   $133,440             $133,440 
Savings   47,919    47,919              47,919 
Money market   132,244    132,244              132,244 
NOW accounts   43,959    43,959              43,959 
Time, $100,000 or more   69,464         70,143         70,143 
Other time   28,259         28,513         28,513 
Short-term borrowings   5,000    5,000              5,000 
Long-term borrowings   14,000         14,326         14,326 
Accrued interest payable   226         226         226 

 

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.

The following methods and assumptions were used by the Company to estimate the fair values of its financial instruments at March 31, 2012 and December 31, 2011:

Cash and due from banks: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Interest-bearing deposits in banks: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions and are classified as Level 2

Investment securities: For investment securities, fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers and are classified as Level 2.

Loans and leases: Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality also resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FHLB stock: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Deposits: The fair values disclosed for demand deposits (e.g. interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

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Short-term and long-term borrowings: The fair value of short-term borrowings is estimated to be the carrying amount and are classified as Level 1. The fair value of long-term borrowings is estimated using a discounted cash flow analysis using interest rates currently available for similar debt instruments and are classified as Level 2.

Accrued interest receivable and payable: The carrying amount of accrued interest receivable approximates fair value resulting in a Level 3 classification and the carrying amount of accrued interest payable approximates fair value resulting in a Level 2.

Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments was not material at March 31, 2012 and December 31, 2011.

Assets and liabilities measured at fair value on a recurring and non-recurring basis are presented in the following table:

Description     Fair Value Measurements Using   Total Gains 
(dollars in thousands)   Fair Value   Level 1   Level 2   Level 3   (Losses) 
                     
March 31, 2012                         
Assets and liabilities measured on a recurring basis:                         
Available-for-sale securities:                         
Mortgage-backed securities  $172,789        $172,789           
Obligations of states and political subdivisions   29,975         29,975           
Corporate stock   68   $9    59          
Total recurring  $202,832   $9   $202,828   $   $ 
                          
Assets and liabilities measured on a nonrecurring basis:                         
Impaired loans:                         
Commercial  $1,015   $   $   $1,015   $(113)
Real estate:                         
Commercial   2,971            2,971    41 
Multi-family                   (5)
Construction   1,152            1,152    (103)
Residential                   (11)
Other:                         
Agriculture   396            396    267 
Consumer   562            562    (3)
Other real estate owned   10,733            10,733    (161)
Total nonrecurring  $16,829   $   $   $16,829   $(88)

 

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Description     Fair Value Measurements Using   Total Gains 
(dollars in thousands)   Fair Value   Level 1   Level 2   Level 3   (Losses) 
                     
December 31, 2011                         
Assets and liabilities measured on a recurring basis:                         
Available-for-sale securities:                         
Mortgage-backed securities  $179,454       $179,454         
Obligations of states and political subdivisions   29,188        29,188         
Corporate stock   69   $9    60           
Total recurring  $208,711   $9   $208,702   $   $ 
                          
Assets and liabilities measured on a nonrecurring basis:                         
Impaired loans:                         
Commercial  $1,828   $   $   $1,828   $(181)
Real estate:                         
Commercial   7,982            7,982    (489)
Construction   2,083            2,083    (422)
Other:                         
Agriculture   597            597    (330)
Consumer   565            565    (66)
Other real estate owned   8,190            8,190    (1,002)
Total nonrecurring  $21,245   $   $   $21,245   $(2,490)

 

There were no significant transfers between Levels 1 and 2 during the three months ended March 31, 2012 or the twelve months ended December 31, 2011.

The following methods were used to estimate the fair value of each class of financial instrument above:

Available-for-sale securitiesFair values for investment securities are based on quoted market prices, if available, and are considered Level 1, or evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information and are considered Level 2. Pricing applications apply available information, as applicable, through processes such as benchmark curves, benchmarking to like securities, sector groupings and matrix pricing.

Impaired loans – The fair value of collateral dependent impaired loans adjusted for specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring loans is the sales comparison approach less a reserve for past dues taxes and selling costs ranging from 8% to 10%.

Other real estate owned – Certain commercial and residential real estate properties classified as other real estate owned (“OREO”) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may use a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring OREO is the sales comparison approach less selling costs ranging from 8% to 10%.

 

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12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (“IASB”) (the “Boards”) on fair value measurement.  The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.”  The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS.  The amendments to the FASB Accounting Standards Codification (Codification) in this ASU are to be applied prospectively.  The additional disclosures are presented in Note 11, Fair Value Measurements.  These new disclosure requirements were adopted by the Company in the first quarter of 2012, and did not have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  This ASU amends the FASB Accounting Standards Codification (“Codification”) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of ASU 2011-05 must be applied retrospectively.  The Company adopted this standard on March 31, 2012.  The Company elected to present comprehensive income as a separate statement of comprehensive income.  Adoption of the standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

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

 

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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. 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 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 have been no unrecognized tax benefits or accrued interest and penalties for the three- month periods ended March 31, 2012 and 2011.

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 113 full-time employees as of March 31, 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. American River Bank also operates two full service offices in Sonoma County in Healdsburg and Santa Rosa, operated under the name “North Coast Bank, a division of American River Bank.” 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. In 2000, North Coast Bank was acquired by the Company as a separate bank subsidiary. 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 and now operates three full service banking offices in Amador County in Jackson, Pioneer, and Ione, operating as “Bank of Amador, a division of American River Bank.”

 

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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 the first quarter of 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 $712,000 for the quarter ended March 31, 2012, which was $506,000 (245.6%) more than the $206,000 reported for the same period of 2011. Diluted earnings per share for the first quarter of 2012 were $0.07 compared to $0.02 recorded in the first quarter of 2011. The return on average equity (ROAE) and the return on average assets (ROAA) for the first quarter of 2012 were 3.03% and 0.49%, respectively, as compared to 0.93% and 0.14%, respectively, for the same period in 2011.

Total assets of the Company increased by $8,963,000 (1.5%) from $581,518,000 at December 31, 2011 to $590,481,000 at March 31, 2012. Net loans totaled $284,062,000 at March 31, 2012, down $9,669,000 (3.3%) from $293,731,000 at December 31, 2011. Deposit balances at March 31, 2012 totaled $476,582,000, up $14,297,000 (3.1%) from the $462,285,000 at December 31, 2011.

The Company ended the first quarter of 2012 with a Tier 1 capital ratio of 13.1% and a total risk-based capital ratio of 23.4% compared to 13.1% 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 March 31
(dollars in thousands)  2012  2011
Net interest income*  $5,082   $5,279 
Provision for loan losses   (580)   (1,375)
Noninterest income   693    433 
Noninterest expense   (4,112)   (4,051)
Provision for income taxes   (297)   (30)
Tax equivalent adjustment   (74)   (50)
Net income  $712   $206 
 
Average total assets  $582,398   $576,622 
Net income (annualized) as a percentage  of average total assets   0.49   0.14%
 
* 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 4.01% for the three months ended March 31, 2011 down 23 basis points from 4.24% for the three months ended March 31, 2011.

The fully taxable equivalent interest income component for the first quarter of 2012 decreased $420,000 (7.0%) to $5,584,000 compared to $6,004,000 for the three months ended March 31, 2011. The decrease in the fully taxable equivalent interest income for the first quarter of 2012 compared to the same period in 2011 is broken down by rate (down $174,000) and volume (down $246,000). The rate decrease can be attributed to the overall lower interest rate environment, forgone interest on nonaccrual loans, and lower average loan balances replaced with higher average investment securities. During the first quarter of 2012, foregone interest income on nonaccrual loans was approximately $272,000, compared to foregone interest of $425,000 during the first quarter of 2011. The foregone interest of $272,000 had a 21 basis point negative impact on the yield on earning assets. The average balance of earning assets increased $5,103,000 (1.0%) from $505,041,000 in the first quarter of 2011 to $510,144,000 in the first quarter of 2012; however, there was a significant change in the average earning asset mix during these periods, there was an increase in investment securities, offset by a decrease in loan balances. Non-earning cash and principal reductions from loan balances were invested into investment securities. When compared to the first quarter of 2011, average loan balances were down $40,572,000 (12.0%) to $297,098,000 for the first quarter of 2012 and average investment securities were up $46,673,000 (28.3%) to $211,796,000 for the first quarter of 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 42 basis point decrease in the yield on average earning assets from 4.82% for the first quarter of 2011 to 4.40% for the first quarter of 2012. The volume decrease of $246,000 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 $223,000 (30.8%) lower in the first quarter of 2012 versus the first quarter of 2011. The average balances on interest bearing liabilities were $5,097,000 (1.4%) lower in the first quarter of 2012 compared to the same quarter in 2011. The lower balances accounted for a $17,000 decrease in interest expense for the same periods. Average time deposit balances were down $8,083,000 (7.6%) during the first quarter of 2011 compared to the first quarter of 2012. The Company focused its marketing efforts on replacing higher cost borrowings and time deposits with lower cost checking and money market accounts. Despite the drop in average time deposits, average total deposit balances remained approximately the same, decreasing by just $406,000 or less that 1% from $466,234,000 during the first quarter of 2011 to $465,828,000 during the first quarter of 2012. The Company continues to have success attracting new deposit relationships as a direct result of its business development efforts. As a result of the lower overall interest rate environment, the decrease in rates accounted for a $206,000 reduction in interest expense for the three-month period ended March 31, 2012 compared to the same quarter in 2011. Rates paid on interest bearing liabilities decreased 26 basis points from 0.84% to 0.58% for the first quarter of 2011 compared to the first quarter of 2012.

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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,  2012  2011
(Taxable Equivalent Basis)
(dollars in thousands)
  Avg
Balance
  Interest 

Avg

Yield (4)

  Avg
Balance
  Interest 

Avg

Yield (4)

Assets                              
Earning assets:                              
Loans and leases (1)  $297,098   $4,316    5.84%  $337,670   $4,997    6.00%
Taxable investment securities   182,975    1,039    2.28%   150,114    801    2.16%
Tax-exempt investment securities (2)   28,812    226    3.15%   14,982    200    5.41%
Corporate stock (2)   9            27         
Federal funds sold                        
Investments in time deposits   1,250    3    0.97%   2,248    6    1.08%
Total earning assets   510,144    5,584    4.40%   505,041    6,004    4.82%
Cash & due from banks   32,902              36,903           
Other assets   46,330              42,435           
Allowance for loan & lease losses   (6,978)             (7,757)          
  $582,398             $576,622           
                              
Liabilities & Shareholders’ Equity                              
Interest bearing liabilities:                              
Interest checking and money market  $183,696    192    0.42%  $183,617    295    0.65%
Savings   48,477    29    0.24%   45,830    54    0.48%
Time deposits   98,885    214    0.87%   106,968    282    1.07%
Other borrowings   15,593    67    1.73%   15,333    94    2.49%
Total interest bearing liabilities   346,651    502    0.58%   351,748    725    0.84%
Noninterest bearing demand deposits   134,770              129,819           
Other liabilities   6,493              5,594           
Total liabilities   487,914              487,161           
Shareholders’ equity   94,484              89,461           
  $582,398             $576,622           
Net interest income & margin (3)       $5,082    4.01%       $5,279    4.24%

 

(1)Loan interest includes loan fees of $4,000 and $2,000 during the three months ending March 31, 2012 and March 31, 2011, respectively. 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 2012 and 2011.
(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 (91 days for 2012 and 90 days for 2011) and annualized to actual days in year (366 days for 2012 and 365 days for 2011).

 

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Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
Three Months Ended March 31, 2012 over 2011 (dollars in thousands)
Increase (decrease) due to change in:                 
                  
Interest-earning assets:   Volume    Rate (4)      Net Change 
Net loans (1)(2)  $(606)  $(75)    $(681)
Taxable investment securities   177    61      238 
Tax exempt investment securities (3)   186    (160)     26 
Corporate stock              
Federal funds sold              
Interest-bearing deposits in banks   (3)         (3)
Total   (246)   (174)     (420)
Interest-bearing liabilities:                 
Interest checking and money market       (103)     (103)
Savings deposits   3    (28)     (25)
Time deposits   (22)   (46)     (68)
Other borrowings   2    (29)     (27)
Total   (17)   (206)     (223)
Interest differential  $(229)  $32     $(197)

 
(1)The average balance of non-accruing loans and leases is immaterial as a percentage of total loans and leases and has been included in net loans and leases.
(2)Loan fees of $4,000 and $2,000 during the three months ending March 31, 2012 and March 31, 2011, 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 2012 and 2011.
(4)The rate/volume variance has been included in the rate variance.

Provision for Loan and Lease Losses

The Company provided $580,000 for loan and lease losses for the first quarter of 2012 as compared to $1,375,000 for the first quarter of 2011. Net loan and lease charge-offs for the three months ended March 31, 2012 were $1,356,000 or 1.84% (on an annualized basis) of average loans and leases as compared to $1,598,000 or 1.92% (on an annualized basis) of average loans and leases for the three months ended March 31, 2011. The Company continues to provide significant amounts to the reserve for loan and lease losses resulting from a continued high level of nonperforming loans and leases. The high level of nonperforming loans and leases is due to the impact that the overall challenging economy in the Company’s market areas and the United States, overall, has had on the Company’s borrowers. For additional information see the “Allowance for Loan and Lease Losses Activity.”

Noninterest Income

Table Four below provides a summary of the components of noninterest income for the periods indicated (dollars in thousands):

Table Four: Components of Noninterest Income  
 

Three Months
Ended

March 31,

  2012  2011
Service charges on deposit accounts $196   $197 
Gain on sale of securities  64    2 
Merchant fee income  128    102 
Bank owned life insurance  66    68 
Income from rental properties  163     
Other  76    64 
Total noninterest income $693   $433 

 

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Noninterest income increased $260,000 (60.0%) to $693,000 for the three months ended March 31, 2012 as compared to $433,000 for the three months ended March 31, 2011. The increase from the first quarter of 2011 to the first quarter of 2012 was primarily related to rents received on properties obtained through foreclosure and an increase in the gains on sales of investment securities. For the first quarter of 2012, rental income was $163,000 compared to zero in the first quarter of 2011 and sales of investment securities were $64,000 compared to $2,000 for the first quarter of 2011. The income from the rental properties results primarily from leased office properties the Company foreclosed upon in the fourth quarter of 2011.

Noninterest Expense

Noninterest expense increased $61,000 (1.5%) to a total of $4,112,000 in the first quarter of 2012 versus $4,051,000 in the first quarter of 2011. Salary and employee benefits expense increased $123,000 (5.9%) from $2,080,000 during the first quarter of 2011 to $2,203,000 during the first quarter of 2012. The increase in salary and employee benefits expense was due in part to an increase in salaries (up $37,000 or 2.4%), increased incentive accruals (up $75,000 or 312.5%), and higher employer taxes and group insurance (up $41,000 or 11.7%). The increased salaries are mainly due to additional general support staff and normal merit increases. Incentive accruals increased from $24,000 in the first quarter of 2011 to $99,000 in the first quarter of 2012. These incentive accruals are estimates based on anticipated full year results and will be adjusted before the end of the year when actual results are known. On a quarter-over-quarter basis, occupancy expense increased $18,000 (6.5%) and furniture and equipment expense increased $3,000 (1.6%). FDIC assessments decreased $156,000 (52.3%) during 2012 to $142,000, from $298,000 in 2011. The majority of this decrease relates to the change in the FDIC assessment methodology from a deposit based system to an asset risk-based system and American River Bank’s improved risk assessment category. Other real estate owned (“OREO”) expense increased $172,000 (85.1%) from $202,000 during the first quarter of 2011 to $374,000 during the first quarter of 2012. The increased OREO expense relates to higher valuation adjustments and higher costs related to maintaining the Company’s existing and sold properties during the quarter. Other expense decreased $99,000 (9.8%) to a total of $907,000 in the first quarter of 2012 compared to $1,006,000 in the first quarter of 2011. The fully taxable equivalent efficiency ratio for the first quarter of 2012 increased slightly to 70.33% from 69.96% for the first quarter of 2011.

Provision for Income Taxes 

Federal and state income taxes for the quarter ended March 31, 2012 increased $267,000 from $30,000 in the first quarter of 2011 to $297,000 in the first quarter of 2011. The effective tax rate for the quarter ended March 31, 2012 was 29.4%, an increase from 12.7% for the first quarter of 2011. The higher level of income taxes and effective tax rate resulted from higher pretax income that which contributed to a more normalized tax expense and effective tax rate when compared to the tax expense recorded in 2011. The Company realizes less of the benefits of tax-free income related to such items as municipal bonds and bank owned life insurance when it records an overall higher amount of taxable income as these benefits are spread over a larger base of taxable income.

Balance Sheet Analysis

The Company’s total assets were $590,481,000 at March 31, 2012 as compared to $581,518,000 at December 31, 2011, representing an increase of $8,963,000 (1.5%). The average assets for the three months ended March 31, 2012 were $582,398,000, which represents an increase of $5,776,000 or 1.0% over the balance of $576,622,000 during the three-month period ended March 31, 2011.

Investment Securities

The Company classifies its investment securities as available-for-sale or held-to-maturity. The Company’s intent is to hold all securities classified as held-to-maturity until maturity and management believes that it has the ability to do so. Securities available-for-sale may be sold to implement asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Table Five below summarizes the values of the Company’s investment securities held on March 31, 2012 and December 31, 2011.

 

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Table Five: Investment Securities Composition         
(dollars in thousands)         
          
Available-for-sale (at fair value)  March 31, 2012    December 31, 2011 
Debt securities:         
Mortgage-backed securities $172,789   $179,454 
Obligations of states and political subdivisions  29,975    29,188 
Corporate stock  68    69 
Total available-for-sale investment securities $202,832   $208,711 
Held-to-maturity (at amortized cost)         
Debt securities:         
Mortgage-backed securities $3,563   $4,010 
Total held-to-maturity investment securities $3,563   $4,010 

Net unrealized gains on available-for-sale investment securities totaling $6,510,000 were recorded, net of $2,604,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at March 31, 2012 and net unrealized gains on available-for-sale investment securities totaling $5,930,000 were recorded, net of $2,372,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2011.

Management periodically evaluates each investment security in a loss position for other than temporary impairment relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Management has the ability and intent to hold securities with established maturity dates until recovery of fair value, which may be until maturity, and believes it will be able to collect all amounts due according to the contractual terms for all of the underlying investment securities; therefore, management does not consider these investments to be other-than-temporarily-impaired.

Loans and Leases

The Company concentrates its lending activities in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) lease financing receivable; (7) agriculture; and (8) consumer loans. The Company’s continuing focus in our market area, new borrowers developed through the Company’s marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company originating $9 million in new loans during the first three months of 2012. Normal pay downs, loan charge-offs, and loans transferred to OREO resulted in a net decrease in total loans and leases of $10,488,000 (3.5%) from December 31, 2011. The market in which the Company operates continues to see a slowdown in new loan volume as existing borrowers continue to pay down debt and delay expansion plans. Table Six below summarizes the composition of the loan portfolio as of March 31, 2012 and December 31, 2011.

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Table Six: Loan and Lease Portfolio Composition
(dollars in thousands)  March 31, 2012 December 31, 2011  Change in
dollars
  Percentage
change
     %  $             
Commercial  $39,435    14%  $42,108    14%  $(2,673)   (6.3%)
Real estate                              
Commercial   196,027    67%   204,043    68%   (8,016)   (3.9%)
Multi-family   9,150    3%   7,580    2%   1,570    20.7%
Construction   9,620    3%   10,356    3%   (736)   (7.1%)
Residential   20,826    7%   19,695    7%   1,131    5.7%
Lease financing receivable   1,410    1%   1,725    1%   (315)   (18.3%)
Agriculture   3,812    1%   4,583    1%   (771)   (16.8%)
Consumer   10,306    4%   10,984    4%   (678)   (6.2%)
Total loans and leases   290,586    100%   301,074    100%   (10,488)   (3.5%)
Deferred loan and lease fees, net   (259)        (302)        43      
Allowance for loan and lease losses   (6,265)        (7,041)        776      
Total net loans and leases  $284,062        $293,731        $(9,669)   (3.3%)

A significant portion of the Company’s loans and leases are direct loans and leases made to individuals and local businesses. The Company relies substantially on local promotional activity and personal contacts by American River Bank officers, directors and employees to compete with other financial institutions. The Company makes loans and leases to borrowers whose applications include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment. 

Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products. Consumer loans include a range of traditional consumer loan products such as personal lines of credit and homeowner equity lines of credit and loans to finance purchases of autos, boats, recreational vehicles, mobile homes and various other consumer items. Construction loans are generally comprised of commitments to customers within the Company’s service area for construction of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans consist primarily of loans secured by first trust deeds on commercial, multi-family, and residential properties typically with maturities from 3 to 10 years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily of vineyard loans and development loans to plant vineyards. In general, except in the case of loans under SBA programs or Farm Services Agency guarantees, the Company does not make long-term mortgage loans. 

“Subprime” real estate loans generally refer to residential mortgages made to higher-risk borrowers with lower credit and/or income histories. Within the industry, many of these loans were originated with adjustable interest rates that reset upward after an introductory period. These “subprime” loans coupled with declines in housing prices have led to an increase in the banking industry’s default rates resulting in many instances of increased foreclosure rates as the adjustable interest rates reset to higher levels. The Company did not have any such “subprime” loans at March 31, 2012 and December 31, 2011.

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, through 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.

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Ultimately, underlying trends in economic and business cycles 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, in Sonoma County, through North Coast Bank, a division of American River Bank, whose business is focused on businesses within the two communities in which it has offices (Santa Rosa and Healdsburg) and in other areas of Sonoma County and in Amador County, through Bank of Amador, a division of American River Bank, whose business is focused on businesses and consumers within the three communities in which it has offices (Jackson, Pioneer, and Ione). The economy of Sonoma County is diversified with professional services, manufacturing, agriculture and real estate investment and construction, while the economy of Amador County is reliant upon government, services, retail trade, manufacturing industries and Indian gaming. 

The Company has significant extensions of credit and commitments to extend credit that are secured by real estate. The ultimate repayment of these loans is generally dependent 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 rates and terms, vacancy rates, absorption and sale rates and capitalization rates; real estate values, supply and demand factors, and rates of return; operating expenses; inflation and deflation; 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 81.2% of the Company’s loan and lease portfolio at March 31, 2012, an increase from 79.8% at December 31, 2011. Management believes that the residential land and residential construction portion of the Company’s loan portfolio carries more than the normal credit risk it has seen in the past several years, due primarily to severely curtailed demand for new and resale residential property, a large supply of unsold residential land and new and resale homes, and observed reductions in values throughout the Company’s market area. Management has responded by evaluating loans that it considers to carry any significant risk above the normal risk of collectability by taking actions where possible to reduce credit risk exposure by methods that include, but are not limited to, seeking liquidation of the loan by the borrower, seeking additional tangible collateral or other repayment support, converting the property through judicial or non-judicial foreclosure proceedings, and other collection techniques. Management currently believes that it maintains its allowance for loan and lease losses at levels adequate to reflect the loss risk inherent in its total loan portfolio. 

A continued substantial further decline in the economy in general, or a continued additional decline in real estate values in the Company’s primary market areas, in particular, could continue to have an adverse impact on the collectability of real estate loans and require an increase in the provision for loan and lease losses. This could adversely affect the Company’s future prospects, results of operations, profitability and stock price. Management believes that its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no assurance that losses will not occur. The Company’s loan practices and underwriting standards include, but are not limited to, the following: (1) maintaining a thorough understanding of the Company’s service area and originating a significant majority of its loans within that area, (2) maintaining a thorough understanding of borrowers’ knowledge, capacity, and market position in their field of expertise, (3) basing real estate loan approvals not only on market demand for the project, but also on the borrowers’ capacity to support the project financially in the event it does not perform to expectations (whether sale or income performance), and (4) maintaining conforming and prudent loan-to-value and loan-to-cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Company’s lending officers or contracted third-party professionals.

 

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Nonperforming, Past Due and Restructured Loans and Leases

At March 31, 2012, nonperforming loans and leases (those loans and leases on nonaccrual status and those loans and leases still accruing and past due 90 days or more) were $10,689,000 or 3.68% of total loans and leases. The $10,689,000 in nonperforming loans and leases was made up of thirty loans and one lease. Two of those loans totaling $320,000 were current (less than 30 days past due pursuant to their original or modified terms). Nonperforming loans and leases were $13,423,000 or 4.46% of total loans and leases at December 31, 2011. Specific reserves of $789,000 were held on the nonperforming loans at March 31, 2012 and specific reserves of $1,680,000 were held on the nonperforming loans at December 31, 2011.

The overall level of nonperforming loans decreased $2,734,000 (20.4%) to $10,689,000 at March 31, 2012 compared to $13,423,000 at December 31, 2011. At December 31, 2011, nonperforming loans were comprised of sixteen real estate loans totaling $9,809,000; thirteen commercial loans totaling $2,775,000; one agriculture loan totaling $597,000; four consumer loans totaling $225,000; and two leases totaling $17,000. During the first quarter of 2012, four of those loans totaling $3,245,000 were moved to OREO, six loans and leases were completely charged off in the amount of $594,000, two loans were partially charged off in the amount of $413,000, one loan in the amount of $258,000 had a sale of the collateral prior to foreclosure and termination of the note and six additional loans in the total amount of $1,810,000 were placed on nonperforming status. The Company also collected approximately $34,000 in principal paydowns. Of the six loans added in the first quarter, three in the amount of $1,303,000 were commercial loans, two in the amount of $394,000 were consumer loans, and one in the amount of $113,000 was a residential loan.

The net interest due on nonaccrual loans and leases but excluded from interest income was $272,000 for the three months ended March 31, 2012, compared to foregone interest of $425,000 during the same period in 2011.

There were no loan or lease concentrations in excess of 10% of total loans and leases not otherwise disclosed as a category of loans and leases as of March 31, 2012. Management is not aware of any potential problem loans, which were accruing and current at March 31, 2012, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms and that would result in a significant loss to the Company. Table Seven below sets forth nonaccrual loans and loans past due 90 days or more as of March 31, 2012 and December 31, 2011.

Table Seven:  Nonperforming Loans and Leases   
 (dollars in thousands)  March 31,
2012
  December 31,
2011
Commercial  $   $ 
Real estate        
Lease financing receivable        
Agriculture        
Consumer   4     
Nonaccrual          
Commercial   1,993    2,775 
Real estate   8,089    9,809 
Lease financing receivable   7    17 
Agriculture   396    597 
Consumer   200    225 
Total nonperforming loans  $10,689   $13,423 

Impaired Loans and Leases

The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the original contractual terms of the loan or lease agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan or lease discounted at the loan or lease’s original effective interest rate, (ii) the observable market price of the impaired loan or lease, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans or leases that are collectively evaluated for credit risk. In assessing whether a loan or lease is impaired, the Company typically reviews loans or leases graded substandard or lower with outstanding principal balances in excess of $100,000, as well as, loans considered troubled debt restructures with outstanding principal balances in excess of $25,000. The Company identifies troubled debt restructures by reviewing each renewal, modification, or extension of a loan with a screening document.  This document is designed to identify any characteristic of such a loan that would qualify it as a troubled debt restructure.  If the characteristics are not present that would qualify a loan as a troubled debt restructure, it is deemed to be a modification. 

 

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At March 31, 2012, the recorded investment in loans and leases that were considered to be impaired totaled $28,898,000, which includes $18,212,000 in performing loans and leases. Of the total impaired loans of $28,898,000, loans totaling $16,856,000 were deemed to require no specific reserve and loans totaling $12,042,000 were deemed to require a related valuation allowance of $789,000. Of the $16,856,000 impaired loans that did not carry a specific reserve there were $4,564,000 in loans or leases that had previous partial charge-offs and $12,292,000 in loans or leases that were analyzed and determined not to require a specific reserve or charge-off because the collateral value or discounted cash flow value exceeded the loan or lease balance. The recorded investment in loans and leases that were considered to be impaired totaled $30,085,000 at December 31, 2011. Of the total impaired loans of $30,085,000, loans totaling $8,139,000 were deemed to require no specific reserve and loans totaling $21,946,000 were deemed to require a related valuation allowance of $1,680,000.

The Company has been operating in a market that has experienced significant decreases in real estate values of commercial, residential, land, and construction properties. As such, the Company is focused on monitoring collateral values for those loans considered collateral dependent. The collateral evaluations performed by the Company are updated as necessary, which is generally once every six months, and are reviewed by a qualified credit officer.   In the first three months of 2012, the Company had net charge-offs of $1,356,000 with a provision of $580,000. In the first three months of 2011, the Company had net charge-offs of $1,598,000 with a provision of $1,375,000.

At March 31, 2012, there were twelve loans and leases that were modified and are currently performing (less than ninety days past due) totaling $6,732,000 and twelve loans and leases that are considered nonperforming (and included in Table Seven above), totaling $3,307,000, that are considered troubled debt restructures (“TDR”). These TDRs have a specific reserve of $209,000. As of March 31, 2012, of the twenty-four TDRs, there were twelve extensions, five changes in terms, three rate reductions, two forbearances, one term out, and one interest only structure change. All were performing as agreed except for seven extensions, four changes to amortizing loans and one term out. The Company generally requires TDRs that are on non-accrual status to make six consecutive payments on the restructured loan or lease prior to returning the loan or lease to accrual status.

Allowance for Loan and Lease Losses Activity

The Company maintains an allowance for loan and lease losses (“ALLL”) to cover probable losses inherent in the loan and lease portfolio, which is based upon management’s estimated range of those losses. The ALLL is established through a provision for loan and lease losses and is increased by provisions charged against current earnings and recoveries and reduced by charge-offs. Actual losses for loans and leases can vary significantly from this estimate. The methodology and assumptions used to calculate the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change.

The adequacy of the ALLL and the level of the related provision for loan and lease losses is determined based on management’s judgment after consideration of numerous factors including but not limited to: (i) local and regional economic conditions, (ii) the financial condition of the borrowers, (iii) loan impairment and the related level of expected charge-offs, (iv) evaluation of industry trends, (v) industry and other concentrations, (vi) loans and leases which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management, (vii) continuing evaluations of the performing loan portfolio, (viii) ongoing review and evaluation of problem loans identified as having loss potential, (ix) quarterly review by the Board of Directors, and (x)  assessments by banking regulators and other third parties. Management and the Board of Directors evaluate the ALLL and determine its appropriate level considering objective and subjective measures, such as knowledge of the borrowers’ business, valuation of collateral, the determination of impaired loans or leases and exposure to potential losses. 

The allowance for loan and lease losses totaled $6,265,000 or 2.16% of total loans and leases at March 31, 2012 compared to $7,041,000 or 2.34% of total loans and leases at December 31, 2011. The Company establishes general and specific reserves in accordance with the generally accepted accounting principles. The ALLL is maintained by categories of the loan and lease portfolio based on loan type and loan rating; however, the entire allowance is available to cover actual loan and lease losses. While management uses available information to recognize possible losses on loans and leases, future additions to the allowance may be necessary, based on changes in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require the Company to provide additions to the allowance based on their judgment of information available to them at the time of their examination.

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The allowance for loans and leases as a percentage of non-performing loans and leases was 58.6% at March 31, 2012 and 52.5% at December 31, 2011. The allowance for loans and leases as a percentage of impaired loans and leases was 21.7% at March 31, 2012 and 23.4% at December 31, 2011. Of the total non-performing and impaired loans and leases outstanding as of March 31, 2012, there were $5,431,000 in loans or leases that had been reduced by partial charge-offs of $2,874,000. As these loan or lease balances are charged off, the remaining balances, following analysis, normally do not initially require specific reserves and are not eligible for general reserves. The impact of this on credit ratios is such that the Company’s allowance for loan and lease losses as a percentage may be lower, because the partial charge-offs have reduced the potential future losses related to those credits.

The Company’s policy with regard to loan or lease charge-offs continues to be that a loan or lease is charged off against the allowance for loan and lease losses when management believes that the collectability of the principal is unlikely. Generally, a loan or lease is charged off, or partially charged down, when estimated losses related to impaired loans and leases are identified. If the loan is collateralized by real estate the impaired portion will be charged off to the allowance for loan and lease losses unless the loan or lease is in the process of collection, in which case a specific reserve may be warranted. If the collateral is other than real estate the Company will typically charge-off the impaired portion of a loan or lease, unless the loan or lease is in the process of collection, in which case a specific reserve may be warranted. Table Eight below summarizes, for the periods indicated, the activity in the ALLL.

Table Eight: Allowance for Loan and Lease Losses   

(dollars in thousands)

 

  Three Months
Ended March 31,
   2012  2011
       
Average loans and leases outstanding  $297,098   $337,670 
           
Allowance for loan and lease losses at beginning of period  $7,041   $7,585 
           
Loans and leases charged off:          
Commercial   (48)   (291)
Real estate   (736)   (1,448)
Lease financing receivable   (8)    
Agriculture   (202)    
Consumer   (410)   (6)
Total   (1,404)   (1,745)
Recoveries of loans and leases previously charged off:          
Commercial       133 
Real estate   48     
Lease financing receivable        
Consumer       14 
Total   48    147 
Net loans and leases charged off   (1,356)   (1,598)
Additions to allowance charged to operating expenses   580    1,375 
Allowance for loan and lease losses at end of period  $6,265   $7,362 
Ratio of net charge-offs to average loans and
leases outstanding (annualized)
   1.84%   1.92%
Provision for loan and lease losses to average
loans and leases outstanding (annualized)
   0.79%   1.65%
Allowance for loan and lease losses to loans and leases net of deferred fees at end of period   2.16%   2.21%

It is the policy of management to maintain the allowance for loan and lease losses at a level believed to be adequate for known and inherent risks in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Based on information currently available to analyze inherent credit risk, including economic factors, overall credit quality, historical delinquencies and a history of actual charge-offs, management believes that the provision for loan and lease losses and the allowance for loan and lease losses are prudent and adequate. Adjustments may be made based on differences from estimated loan and lease growth, the types of loans constituting this growth, changes in risk ratings within the portfolio, and general economic conditions. However, no prediction of the ultimate level of loans and leases charged off in future periods can be made with any certainty.

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Other Real Estate Owned

At March 31, 2012, the Company had 21 other real estate owned (“OREO”) properties totaling $10,733,000. This compares to 21 properties totaling $8,190,000 at December 31, 2011 and 17 properties totaling $3,742,000 at March 31, 2010. During the first quarter of 2012, the Company sold four properties with balances of $497,000 for a loss of $30,000 and added four properties to OREO with fair values less costs to sell totaling $3,245,000 after writing the related loans down by $194,000 through the allowance for loan losses. Of the four properties added during the quarter, one is twenty-three acres of undeveloped land in Amador County carried at $128,000; one property is commercial office buildings in El Dorado County carried at $2,077,000; one is a commercial retail building in Sacramento County carried at $671,000; and the other is a commercial industrial building in Sacramento County carried at $369,000.

The Company periodically obtains property valuations to determine whether the recorded book value represents fair value. During the first quarter of 2012, this valuation process resulted in the Company reducing the book value of the OREO properties by $60,000. In addition, the Company received an updated appraisal on a property that was obtained in late 2011 resulting in a write down to the allowance for loan and lease losses of $74,000. At March 31, 2012, OREO included a valuation reserve of $127,000. This compares to a reserve balance of $63,000 at March 31, 2011 and $56,000 at December 31, 2011. The Company believes that all 21 OREO properties owned at March 31, 2012 are carried approximately at fair value.

Deposits

At March 31, 2012, total deposits were $476,582,000 representing a $14,297,000 (3.1%) increase from the December 31, 2011 balance of $462,285,000. The Company’s deposit growth plan for 2012 is to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing money market and NOW accounts, and savings accounts and allow higher cost time deposits to mature and close. The Company experienced increases in noninterest-bearing ($3,214,000 or 2.4%), interest-bearing checking ($3,505,000 or 8.0%), money market ($1,882,000 or 1.4%), savings ($2,955,000 or 6.2%), and time deposits ($2,741,000 or 2.8%) accounts during the first quarter of 2012.

Other Borrowed Funds

Other borrowings outstanding as of March 31, 2012 and December 31, 2011, consist of advances (both long-term and short-term) from the Federal Home Loan Bank of San Francisco (“FHLB”). Table Nine below summarizes these borrowings.

 Table Nine: Other Borrowed Funds       
 (dollars in thousands)       
   March 31, 2012   December 31, 2011 
   Amount    Rate   Amount    Rate 
Short-term borrowings:                    
                     
FHLB advances  $         $5,000    2.08%
                     
Long-term borrowings:                    
                     
FHLB advances  $14,000    1.80%  $14,000    1.80%

The maximum amount of short-term borrowings at any month-end during the first quarters of 2012 and 2011 was zero and $12,000,000, respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of rates and maturities on FHLB advances (dollars in thousands):

    Short-term    Long-term 
Amount $   $14,000 
Maturity      2013 to 2016 
Average rates     1.80%

 

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The Company has also been issued a total of $10,000,000 in letters of credit by the FHLB which are 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 2012 or 2011 and management does not currently expect to draw upon these lines in the foreseeable future. See the Liquidity section that follows for additional information on FHLB borrowings.

Capital Resources

The Company and American River Bank are subject to certain regulatory capital requirements administered by the Federal Reserve Board and the Federal Deposit Insurance Corporation (the “FDIC”). Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and American River Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

At March 31, 2012, shareholders’ equity was $94,148,000, representing an increase of $49,000 (0.1%) from $94,099,000 at December 31, 2011. The slight increase results from net income for the period, the stock based compensation, and the increase in other comprehensive income, offset by repurchases of common stock. The ratio of total risk-based capital to risk adjusted assets was 23.4% at March 31, 2012 and 22.8% at December 31, 2011. Tier 1 risk-based capital to risk-adjusted assets was 22.1% at March 31, 2012 and 21.5% at December 31, 2011. The leverage ratio was 13.1% at March 31, 2012 and 13.1% at December 31, 2011. 

Table Ten below lists the Company’s actual capital ratios at March 31, 2012 and December 31, 2011 as well as the minimum capital ratios for capital adequacy.

Table Ten: Capital Ratios                
Capital to Risk-Adjusted Assets  At March 31,
2012
    At December 31,
2011
    Minimum Regulatory
Capital Requirements
 
               
Leverage ratio  13.1%   13.1%   4.00%
               
Tier 1 Risk-Based Capital  22.1%   21.5%   4.00%
               
Total Risk-Based Capital  23.4%   22.8%   8.00%

Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory requirements and is adequate to meet future needs. Management believes that both the Company and American River Bank met all of their capital adequacy requirements as of March 31, 2012 and December 31, 2011.

On December 17, 2009, the Company filed a Current Report with the SEC on Form 8-K announcing the completion of an offering of approximately $24 million of its common stock. Effective July 27, 2009, the Company temporarily suspended both the payment of cash dividends and stock repurchases. On January 26, 2012, the Company approved and authorized a new stock repurchase program for 2012 (the “2012 Program”). See Part II, Item 2, for additional disclosure regarding the 2012 Program.

Inflation

The impact of inflation on a financial institution differs significantly from that exerted on manufacturing or other commercial concerns primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company and it subsidiaries through its effect on market rates of interest, which affects the Company’s ability to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand and potentially adversely affects capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which may be generated in the future. In addition to its effects on interest rates, inflation increases overall operating expenses. Inflation has not had a significant effect upon the results of operations of the Company and its subsidiaries during the quarters ended March 31, 2012 and 2011.

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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 and lease repayments contribute to liquidity, along with deposit increases, while loan and lease 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 standby letters of credit at March 31, 2012 were approximately $40,745,000 and $8,633,000, respectively. Such loan commitments 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. At March 31, 2012, consolidated liquid assets totaled $181.7 million or 30.8% of total assets compared to $177.3 million or 30.5% of total assets on December 31, 2011. In addition to liquid assets, the Company maintains two short-term unsecured lines of credit in the amount of $17,000,000 with two of its correspondent banks. At March 31, 2012, the Company had $17,000,000 available under these credit lines. Additionally, the Bank is a member of the FHLB. At March 31, 2012, the Bank could have arranged for up to $91,356,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At March 31, 2012, the Company had advances, borrowings and commitments (including letters of credit) outstanding of $24,000,000, leaving $67,356,000 available under these FHLB secured borrowing arrangements. American River Bank also has a secured borrowing arrangement with the Federal Reserve Bank of San Francisco. The borrowing can be secured by pledging selected loans and investment securities. At March 31, 2012, the Company’s borrowing capacity at the Federal Reserve Bank was $26,785,000. The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets and borrowing capacity to offset the potential runoff of these volatile and/or cyclical deposits.

Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The Company can sell any of its unpledged securities held in the available-for-sale category to meet liquidity needs. The Bank has established a master repurchase agreement with a correspondent bank to enable such transactions. Furthermore, the Bank can pledge additional unencumbered securities to borrow from the Federal Reserve Bank of San Francisco and the FHLB.

Off-Balance Sheet Items

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company applies the same credit policies to commitments and letters of credit as it does for loans included on the consolidated balance sheet. As of March 31, 2012 and December 31, 2011, commitments to extend credit and standby letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and standby letters of credit were $49,378,000 and $46,565,000 at March 31, 2012 and December 31, 2011, respectively. As a percentage of net loans and leases these off-balance sheet items represent 17.4% and 15.9%, respectively.

The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results.

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Website Access

American River Bankshares maintains a website where certain information about the Company is posted. Through the website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments thereto, as well as Section 16 Reports and amendments thereto, are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). These reports are free of charge and can be accessed through the address www.amrb.com by clicking on the SEC Filings link located at that address. Once you have selected the SEC Filings link you will have the option to access the Section 16 Reports or the other above-referenced reports filed by the Company by selecting the appropriate link.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk Management

Overview. Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its loan, investment and deposit functions. The goal for managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk. The Board of Directors has overall responsibility for the interest rate risk management policies. The Company has a Risk Management Committee, made up of Company management that establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates.

Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits and investing in securities. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments. The Company uses simulation models to forecast earnings, net interest margin and market value of equity.

Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer-modeling techniques, the Company is able to estimate the potential impact of changing interest rates on earnings. A balance sheet forecast is prepared quarterly using inputs of actual loans, securities and interest-bearing liabilities (i.e. deposits/borrowings) positions as the beginning base. The forecast balance sheet is processed against three interest rate scenarios. The scenarios include a 200 basis point rising rate forecast, a flat rate forecast and a 200 basis point falling rate forecast which take place within a one-year time frame. The net interest income is measured during the year assuming a gradual change in rates over the twelve-month horizon. The simulation modeling indicated below attempts to estimate changes in the Company’s net interest income utilizing a forecast balance sheet projected from the end of period balances.

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Table Eleven below summarizes the effect on net interest income (NII) of a ±200 basis point change in interest rates as measured against a constant rate (no change) scenario.

Table Eleven: Interest Rate Risk Simulation of Net Interest as of March 31, 2012 and December 31, 2011
(dollars in thousands)

$ Change in NII

from Current

12 Month Horizon

March 31, 2012

 

$ Change in NII

from Current

12 Month Horizon

December 31, 2011

Variation from a constant rate scenario         
+200bp $528   $773 
-200bp $(772)  $(1,192)

Management does not consider the fluctuations, as outlined in the table above, to have a material impact on the Company’s projected results and are within the tolerance levels outlined in the Company’s interest rate risk polices. The simulations of earnings do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as reasonable estimates of interest rate risk.

Item 4. Controls and Procedures.

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2012. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

During the quarter ended March 31, 2012, there have been no changes in the Company’s internal control over financial reporting that have significantly affected, or are reasonably likely to materially affect, these controls.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, the Company and/or its subsidiaries is a party to claims and legal proceedings arising in the ordinary course of business. The Company’s management is not aware of any significant pending legal proceedings to which either it or its subsidiaries may be a party or has recently been a party, which will have a significant adverse effect on the financial condition or results of operations of the Company or its subsidiaries, taken as a whole.

Item 1A. Risk Factors.

There have been no significant changes in the risk factors previously disclosed in the Company’s Form 10-K for the period ended December 31, 2011, filed with the Securities and Exchange Commission on March 2, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On January 26, 2012, the Company approved and authorized a new stock repurchase program for 2012 (the “2012 Program”). The 2012 Program authorizes the repurchase during 2012 of up to 5% of the outstanding shares of the Company’s common stock, or approximately 494,500 shares based on the 9,890,909 shares outstanding as of January 26, 2012. Any repurchases under the 2012 Program will be made from time to time by the Company in the open market as conditions allow. All such transactions will be structured to comply with Commission Rule 10b-18 and all shares repurchased under the 2012 Program will be retired. The number, price and timing of the repurchases will be at the Company’s sole discretion and the 2012 Program may be re-evaluated depending on market conditions, capital and liquidity needs or other factors. Based on such re-evaluation, the Board of Directors may suspend, terminate, modify or cancel the 2012 Program at any time without notice. The following table lists shares repurchased during the quarter ended March 31, 2012 and the maximum amount available to repurchase under the repurchase plan.

     (a)    (b)    (c)    (d) 
 Period     Total Number
of Shares (or
Units)
Purchased
    

Average Price
Paid Per Share

(or Unit)

    Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs    Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs 
 Month #1                      
 

January 1 through

January 31, 2012

    

 

None

    

 

N/A

    

 

None

    494,500 
 Month #2                      
 

February 1 through

February 29, 2012

    32,202   $6.85    32,202    462,298 
 Month #3                      
 

March 1 through

March 31, 2012

    112,827    7.20    112,827    349,471 
 Total    145,029   $7.15    145,029      

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit
Number
Document Description
(2.1)   Agreement and Plan of Reorganization and Merger by and among the Registrant, ARH Interim National Bank and North Coast Bank, N.A., dated as of March 1, 2000 (included as Annex A). **
   
(2.2)   Agreement and Plan of Reorganization and Merger by and among the Registrant, American River Bank and Bank of Amador, dated as of July 8, 2004 (included as Annex A). ***
     
(3.1)   Articles of Incorporation, as amended, incorporated by reference from Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2011, filed with the Commission on May 10, 2011.
     
(3.2)   Bylaws, as amended, incorporated by reference from Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2008, filed with the Commission on August 8, 2008.
     
(4.1)   Specimen of the Registrant’s common stock certificate, incorporated by reference from Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed with the Commission on August 11, 2004.
     
(10.1)   Lease agreement between American River Bank and Spieker Properties, L.P., a California limited partnership, dated April 1, 2000, related to 1545 River Park Drive, Suite 107, Sacramento, California (**) and the Second Amendment thereto dated August 27, 2010, with HINES VAF II SACRAMENTO PROPERTIES, L.P., a Delaware limited partnership, the successor to Spieker Properties, L.P., incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on August 30, 2010.
     
(10.2)   Lease agreement between American River Bank and Bradshaw Plaza Associates, Inc. dated November 27, 2006, related to 9750 Business Park Drive, Sacramento, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on November 28, 2006.
     
(10.3)   Lease agreement between American River Bank and Marjorie Wood Taylor, Trustee of the Marjorie Wood-Taylor Trust, dated April 5, 1984, and addendum thereto dated July 16, 1997, related to 10123 Fair Oaks Boulevard, Fair Oaks, California (**) and Amendment No. 2 thereto dated May 14, 2009, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 15, 2009.
     
(10.4)   Lease agreement between American River Bank and LUM YIP KEE, Limited (formerly Sandalwood Land Company) dated August 28, 1996, related to 2240 Douglas Boulevard, Suite 100, Roseville, California (**) and Amendment No. 1 thereto dated July 28, 2006, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 31, 2006.
     
*(10.5)   Registrant’s Deferred Compensation Plan, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 2, 2012.
     
*(10.6)   Registrant’s Deferred Fee Plan, incorporated by reference from Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 3, 2012.
     
(10.7)   Lease agreement between American River Bank and 520 Capitol Mall, Inc., dated August 19, 2003, related to 520 Capitol Mall, Suite 100, Sacramento, California, incorporated by reference from Exhibit 10.29 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2003, filed with the Commission on November 7, 2003 and the First Amendment thereto dated April 21, 2004, incorporated by reference from Exhibit 10.37 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed with the Commission on August 11, 2004.

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*(10.8)   Employment Agreement between Registrant and David T. Taber dated June 2, 2006, incorporated by reference from Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 30, 2006.
     
*(10.9)   Salary Continuation Agreement, as amended on February 21, 2008, between American River Bank and Mitchell A. Derenzo, incorporated by reference from Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008.
     
*(10.10)   Salary Continuation Agreement, as amended on February 21, 2008, between the Registrant and David T. Taber, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008.
     
*(10.11)   Salary Continuation Agreement, as amended on February 21, 2008, between American River Bank and Douglas E. Tow, incorporated by reference from Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008.
     
*(10.12)   Registrant’s 2000 Stock Option Plan with forms of Nonqualified Stock Option Agreement and Incentive Stock Option Agreement. **
     
*(10.13)   Registrant’s 401(k) Plan dated December 23, 2008, incorporated by reference from Exhibit 99.1 to the Current Report on Form 8-K, filed with the Commission on December 24, 2008.
     
  (10.14)   Lease agreement between Bank of Amador and the United States Postal Service, dated May 24, 2011, related to 424 Sutter Street, Jackson, California,  incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 25, 2011.
     
*(10.15)   Salary Continuation Agreement, as amended on February 21, 2008, between Bank of Amador, a division of American River Bank, and Larry D. Standing and related Endorsement Split Dollar Agreement, incorporated by reference from Exhibit 99.4 to the Registrant’s Report on Form 8-K, filed with the Commission on February 22, 2008.
     
*(10.16)   Director Retirement Agreement, as amended on February 21, 2008, between Bank of Amador, a division of American River Bank, and Larry D. Standing, incorporated by reference from Exhibit 99.5 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008.
     
(10.17)   Item Processing Agreement between American River Bank and Fidelity Information Services, Inc., dated April 22, 2005, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on April 27, 2005.
     
 (10.18)   Lease agreement between Registrant and One Capital Center, a California limited partnership, dated May 17, 2005, related to 3100 Zinfandel Drive, Rancho Cordova, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 18, 2005 and the First Amendment thereto dated April 23, 2010, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on April 23, 2010.
     
(10.19)   Managed Services Agreement between American River Bankshares and ProNet Solutions, Inc., dated June 16, 2009, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on June 18, 2009.
     

48

 
 
 

*(10.20)   American River Bankshares 2005 Executive Incentive Plan, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on October 27, 2005; the First Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 17, 2006; the Second Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 23, 2007; the Third Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008; the Fourth Amendment thereto, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on March 20, 2009; the Fifth Amendment thereto, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on March 18, 2010; the Sixth Amendment thereto, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on March 17, 2011; and the Seventh Amendment thereto, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on February 17, 2012.
     
*(10.21)   American River Bankshares Director Emeritus Program, incorporated by reference from Exhibit 10.33 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2006, filed with the Commission on August 8, 2006.
     
*(10.22)   Employment Agreement dated September 20, 2006, between American River Bankshares and Mitchell A. Derenzo, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on September 20, 2006.
     
*(10.23)   Employment Agreement dated September 20, 2006, between American River Bankshares and Kevin B. Bender, incorporated by reference from Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on September 20, 2006.
     
*(10.24)   Employment Agreement dated September 20, 2006, between American River Bank and Raymond F. Byrne, incorporated by reference from Exhibit 99.5 to the Registrant’s Current Report on Form 8-K, filed with the Commission on September 20, 2006.
     
*(10.25)   Salary Continuation Agreement, as amended on February 21, 2008, between American River Bank and Kevin B. Bender, incorporated by reference from Exhibit 99.6 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008.
     
*(10.26)   Salary Continuation Agreement, as amended on February 21, 2008, between American River Bank and Raymond F. Byrne, incorporated by reference from Exhibit 99.7 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008.
   
(10.27)   Lease agreement dated May 23, 2007 between Bank of Amador, a division of American River Bank, and Joseph Bellamy, Trustee of the Joseph T. Bellamy 2005 Trust, related to 26395
    Buckhorn Ridge Road, Pioneer, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 24, 2007 and the First Amendment thereto, dated October 15, 2007, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on October 16, 2007.
     
(10.28)     Lease agreement dated December 23, 2008, between North Coast Bank, a division of American River Bank, and 90 E Street LLC, related to 90 E Street, Santa Rosa, California, incorporated by reference from Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on December 24, 2008.      
     
(10.29)   Customer Service Agreement dated January 4, 2010, between American River Bankshares and TriNet HR Corporation, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 5, 2010.  
     
*(10.31)   Form of Indemnification Agreement entered into on January 20, 2010, between American River Bankshares and its Directors and certain named executive officers, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 22, 2010. 
   
*(10.32)   Form of Indemnification Agreement entered into on January 20, 2010, between American River Bank and its Directors and certain named executive officers, incorporated by reference from Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 22, 2010.

49

 
 
 

*(10.33)   Registrant’s 2010 Equity Incentive Plan, incorporated by reference from the Registrant’s Definitive Proxy Statement for its 2010 Annual Meeting of Shareholders, filed with the Commission on April 9, 2010.
*(10.34)   Employment Agreement dated February 1, 2012, between American River Bank and Robert H. Muttera, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 8, 2012.
     
(14.1)   Registrant’s Code of Ethics, incorporated by reference from Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2003, filed with the Commission on March 19, 2004. 
     
(21.1)     The Registrant’s only subsidiaries are American River Bank, a California banking corporation, and American River Financial, a California corporation.
     
(31.1)     Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
(31.2)     Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
(32.1)   Certification of Registrant by its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document****
101.SCH   XBRL Taxonomy Extension Schema****
101.CAL   XBRL Taxonomy Extension Calculation****
101.DEF   XBRL Taxonomy Extension Definition****
101.LAB   XBRL Taxonomy Extension Label****
101.PRE   XBRL Taxonomy Extension Presentation****

 

*Denotes management contracts, compensatory plans or arrangements. 

 

**Incorporated by reference to Registrant’s Registration Statement on Form S-4 (No. 333-36326) filed with the Commission on May 5, 2000. 

 

***Incorporated by reference to Registrant’s Registration Statement on Form S-4 (No. 333-119085) filed with the Commission on September 17, 2004. 

 

****These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections. 

50

 
 
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized

  AMERICAN RIVER BANKSHARES  
     
     
May 7, 2012 By: /s/ DAVID T. TABER  
     
  David T. Taber  
  President and  
  Chief Executive Officer  
     
     
  AMERICAN RIVER BANKSHARES  
     
     
May 7, 2012 By: /s/ MITCHELL A. DERENZO  
     
  Mitchell A. Derenzo  
  Executive Vice President and Chief Financial Officer  
  (Principal Financial and Accounting Officer)  

51

 
 
 

EXHIBIT INDEX

Exhibit Number Description Page
   
31.1              Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 53
     
31.2              Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 54
     
32.1              Certification of American River Bankshares by its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 55

52


XNAS:AMRB American River Bankshares Quarterly Report 10-Q Filling

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XNAS:AMRB American River Bankshares Quarterly Report 10-Q Filing - 3/31/2012
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