SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2001
-----------------
[ ] Transition report pursuant to Section 13 or 15 (d) of Securities Exchange
Act of 1934
Commission File No. 0-31525
AMERICAN RIVER HOLDINGS
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0352144
- ------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
1545 River Park Drive, Sacramento, California 95815
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(916) 565-6100
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
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
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price of the stock, as of March
22, 2002: $38,684,000
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 22, 2002
No par value Common Stock - 2,521,270 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K: Part
III, Items 10 through 13 from Registrant's definitive proxy statement for the
2002 annual meeting of shareholders.
The Index to the Exhibits is located at Page 80 Page 1 of 87
PART I
ITEM 1. Business
Certain matters discussed or incorporated by reference in this Annual
Report on Form 10-K including, but not limited to, matters described in "Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Changes to such risks and uncertainties, which could impact future
financial performance, include, among others, (1) competitive pressures in the
banking industry; (2) changes in the interest rate environment; (3) general
economic conditions, nationally, regionally and in operating market areas; (4)
changes in the regulatory environment; (5) changes in business conditions and
inflation; (6) changes in securities markets; (7) data processing problems; (8)
a decline in real estate values in the Company's market area; (9) the California
energy shortage; and (10) the effects of terrorism, including the events of
September 11, 2001 and thereafter, and the conduct of the war on terrorism by
the United States and its allies. Therefore, the information set forth therein
should be carefully considered when evaluating the business prospects of the
Company and its subsidiaries.
American River Holdings (the "Company") is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. The Company
was incorporated under the laws of the State of California in 1995. As a bank
holding company, the Company is authorized to engage in the activities permitted
under the Bank Holding Company Act of 1956, as amended, and regulations
thereunder. Its principal office is located at 1545 River Park Drive, Suite 107,
Sacramento, California 95815 and its telephone number is (916) 565-6100.
The Company owns 100% of the issued and outstanding common shares of
American River Bank. American River Bank was incorporated and commenced business
in Fair Oaks, California, in 1983 and thereafter moved its headquarters office
to Sacramento, California in 1985. 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 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. American River Bank operates four banking
offices in Placer and Sacramento Counties including the head office at 1545
River Park Drive, Suite 107, Sacramento, and branch offices at 9750 Business
Park Drive, Sacramento, 10123 Fair Oaks Boulevard, Fair Oaks and 2240 Douglas
Boulevard, Roseville. American River Bank's deposits are insured by the Federal
Deposit Insurance Corporation (the "FDIC") up to applicable legal limits.
American River Bank does not offer trust services or international banking
services and does not plan to do so in the near future.
The Company also owns 100% of First Source Capital formed in July 1999 to
conduct lease financing for most types of business assets, from computer
software to heavy earth-moving equipment. Specific leasing programs are tailored
for vendors of equipment in order to increase their sales. First Source Capital
acts as a lease broker and receives a fee for each lease recorded on the books
of the party acting as the funding source. Various funding sources are utilized
in connection with multiple leasing programs made available by First Source
Capital.
The Company also owns 100% of North Coast Bank, National Association
("North Coast 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. North Coast Bank is headquartered in Santa
Rosa, California and operates three full service banking offices within its
primary service areas of Sonoma County, in the cities of Healdsburg, Santa Rosa
and Windsor. North Coast Bank's primary business is serving the business or
commercial banking needs of small to mid-sized businesses within Sonoma County.
2
Other than holding the shares of American River Bank, North Coast Bank
(collectively "the Subsidiary Banks") and First Source Capital, the Company
conducts no significant activities. However, it is authorized, with the prior
approval of the Board of Governors of the Federal Reserve System (the "Board of
Governors"), the Company's principal regulator, to engage in a variety of
activities which are deemed closely related to the business of banking.
At December 31, 2001, the Company had consolidated assets of $287 million,
deposits of $255 million and shareholders' equity of $28 million.
General
The Company is a community oriented bank holding company headquartered in
Sacramento, California. The principal communities served are located in
Sacramento, Placer, Yolo, El Dorado, Sonoma, Napa, Marin and Mendocino counties.
The Company generates most of its revenue by providing a wide range of products
and services to small and middle-market businesses and individuals. The
Company's principal source of revenues are: (i) interest and fees on loans; (ii)
interest on investments (principally government securities); and (iii) interest
on Federal funds sold (funds loaned on a short-term basis to other banks). For
the year ended December 31, 2001, these sources comprised 85.8%, 13.2%, and
1.0%, respectively, of the Company's interest income.
The Subsidiary Banks' deposits are not received from a single depositor or
group of affiliated depositors, the loss of any one of which would have a
materially adverse effect on the business of the Company. A material portion of
the Subsidiary Banks' deposits are not concentrated within a single industry or
group of related industries.
As of December 31, 2001 and December 31, 2000, American River Bank held
$9,000,000 and $6,000,000, respectively, in certificates of deposit for the
State of California. In connection with these deposits, American River Bank is
generally required to pledge securities to secure such deposits, except for the
first $100,000, which are insured by the FDIC.
American River Bank competes with approximately 32 and 22 other banking or
savings institutions in Sacramento County and Placer County, respectively.
American River Bank's market share of FDIC insured deposits in the service areas
of Sacramento County and Placer County was approximately 1.2% and 1.6%,
respectively (based upon the most recent information made available by the FDIC
through June 30, 2001). North Coast Bank competes with approximately 19 other
banking or savings institutions in its service areas. North Coast Bank's, market
share of FDIC insured deposits in the service area of Sonoma County was
approximately .7% (based upon the most recent information made available by the
FDIC through June 30, 2001).
Employees
At December 31, 2001, the Company and its subsidiaries employed 100
persons on a full-time equivalent basis. The Company believes its employee
relations are good.
Regulation and Supervision
General
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the qualification
requirements of the California Corporate Securities Law of 1968, as amended. The
Company is also subject to the periodic reporting requirements of Section 13 of
the Securities Exchange Act of 1934, as amended, which include, but are not
limited to, annual, quarterly and other current reports with the Securities and
Exchange Commission.
American River Bank is licensed by the California Commissioner of
Financial Institutions, its deposits are insured by the FDIC up to the
applicable legal limits, and it has chosen not to become a member of the Federal
Reserve System. Consequently, American River Bank is subject to the supervision
of, and is regularly examined by, the California Commissioner of Financial
Institutions and the FDIC. The supervision and regulation includes comprehensive
3
reviews of all major aspects of American River Bank's business and condition,
including its capital ratios, allowance for possible loan losses and other
factors. However, no inference should be drawn that such authorities have
approved any such factors. American River Holdings and American River Bank are
required to file reports with the Board of Governors of the Federal Reserve
System (the "Board of Governors"), the California Commissioner of Financial
Institutions, and the FDIC and provide the additional information that the Board
of Governors, California Commissioner of Financial Institutions, and FDIC may
require.
North Coast Bank is a national bank licensed under the national banking
laws of the United States. North Coast Bank is regularly examined by the Office
of the Comptroller of the Currency (the "OCC") and is subject to the supervision
of the FDIC and the Office of the Comptroller of the Currency, and is a member
of the Federal Reserve System. The supervision and regulation includes
comprehensive reviews of all major aspects of North Coast Bank's business and
condition, including its capital ratios, allowance for possible loan losses and
other factors. However, no inference should be drawn that such authorities have
approved any such factors. North Coast Bank is required to file reports with the
Office of the Comptroller of the Currency and the FDIC. North Coast Bank's
deposits are insured by the FDIC up to the applicable legal limits.
First Source Capital is a California corporation which conducts a lease
brokerage business as a permissible non-banking activity under the Federal
Reserve Act. First Source Capital is subject to regulatory supervision by the
Board of Governors and the California Commissioner of Corporations.
American River Holdings is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company
Act"), and is registered as such with, and subject to the supervision of, the
Board of Governors. The Company is required to obtain the approval of the Board
of Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.
The Company, and any subsidiaries which it may acquire or organize, are
deemed to be "affiliates" within the meaning of that term as defined in the
Federal Reserve Act. This means, for example, that there are limitations (a) on
loans by the Subsidiary Banks to affiliates, and (b) on investments by the
Subsidiary Banks in affiliates' stock as collateral for loans to any borrower.
The Company and its subsidiaries are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
In addition, regulations of the Board of Governors under the Federal
Reserve Act require that reserves be maintained by the Subsidiary Banks in
conjunction with any liability of the Company under any obligation (promissory
note, acknowledgement of advance, banker's acceptance or similar obligation)
with a weighted average maturity of less than seven (7) years to the extent that
the proceeds of such obligations are used for the purpose of supplying funds to
the Subsidiary Banks for use in its banking business, or to maintain the
availability of such funds.
Capital Standards
The Board of Governors, the FDIC, and the Office of the Comptroller of the
Currency have adopted risk-based capital guidelines for evaluating the capital
adequacy of bank holding companies and banks. The guidelines are designed to
make capital requirements sensitive to differences in risk profiles among
banking organizations, to take into account off-balance sheet exposures and to
aid in making the definition of bank capital uniform internationally. Under the
guidelines, American River Holdings, American River Bank, and North Coast Bank
are required to maintain capital equal to at least 8.0% of its assets and
commitments to extend credit, weighted by risk, of which at least 4.0% must
consist primarily of common equity (including retained earnings) and the
4
remainder may consist of subordinated debt, cumulative preferred stock, or a
limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of those loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which includes,
among other items, limited life (and in the case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses. Tier 2 capital may also include up to 45% of the
pretax net unrealized gains on certain available-for-sale equity securities
having readily determinable fair values (i.e. the excess, if any, of fair market
value over the book value or historical cost of the investment security). The
federal regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier 2
capital, but may be taken into account in the evaluation of overall capital
adequacy and net unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against risk. Each
institution is required to maintain a minimum risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
A leverage capital standard was adopted as a supplement to the
risk-weighted capital guidelines. Under the leverage capital standard, an
institution is required to maintain a minimum ratio of Tier 1 capital to the sum
of its quarterly average total assets and quarterly average reserve for loan
losses, less intangibles not included in Tier 1 capital. Period-end assets may
be used in place of quarterly average total assets on a case-by-case basis. The
Board of Governors and the FDIC have also adopted a minimum leverage ratio for
bank holding companies as a supplement to the risk-weighted capital guidelines.
The leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to
total assets) for the highest rated bank holding companies or those that have
implemented the risk-based capital market risk measure. All other bank holding
companies must maintain a minimum Tier 1 leverage ratio of 4% with higher
leverage capital ratios required for bank holding companies that have
significant financial and/or operational weakness, a high risk profile, or are
undergoing or anticipating rapid growth.
At December 31, 2001, American River Holdings, American River Bank and
North Coast Bank were in compliance with the risk-weighted capital and leverage
ratio guidelines.
Prompt Corrective Action
The Board of Governors, FDIC, and Office of the Comptroller of the
Currency have adopted regulations implementing a system of prompt corrective
action pursuant to Section 38 of the Federal Deposit Insurance Act and Section
131 of the FDIC Improvement Act of 1991 ("FDICIA"). The regulations establish
five capital categories with the following characteristics: (1) "Well
capitalized" - consisting of institutions with a total risk-based capital ratio
of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a
leverage ratio of 5% or greater, and the institution is not subject to an order,
written agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet
the definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than 8%, a
Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less
than 4%; (4) "Significantly undercapitalized" - consisting of institutions with
a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
5
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitations upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without prior
regulatory approval and regulators must prohibit a critically undercapitalized
institution from taking certain other actions without prior approval, including
(1) entering into any material transaction other than in the usual course of
business, including investment expansion, acquisition, sale of assets or other
similar actions; (2) extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply with any law,
regulation or order; (4) making any material change in accounting methods; (5)
engaging in certain affiliate transactions; (6) paying excessive compensation or
bonuses; and (7) paying interest on new or renewed liabilities at rates which
would increase the weighted average costs of funds beyond prevailing rates in
the institution's normal market areas.
Additional Regulations
Under the FDICIA, the federal financial institution agencies have adopted
regulations which require institutions to establish and maintain comprehensive
written real estate policies which address certain lending considerations,
including loan-to-value limits, loan administrative policies, portfolio
diversification standards, and documentation, approval and reporting
requirements. The FDICIA further generally prohibits an insured state bank from
6
engaging as a principal in any activity that is impermissible for a national
bank, absent FDIC determination that the activity would not pose a significant
risk to the Bank Insurance Fund, and that the bank is, and will continue to be,
within applicable capital standards.
The Federal Financial Institution Examination Counsel ("FFIEC") on
December 13, 1996, approved an updated Uniform Financial Institutions Rating
System ("UFIRS"). In addition to the five components traditionally included in
the so-called "CAMEL" rating system which has been used by bank examiners for a
number of years to classify and evaluate the soundness of financial institutions
(including capital adequacy, asset quality, management, earnings and liquidity),
UFIRS includes for all bank regulatory examinations conducted on or after
January 1, 1997, a new rating for a sixth category identified as sensitivity to
market risk. Ratings in this category are intended to reflect the degree to
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
revised rating system is identified as the "CAMELS" system.
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital adequacy
in conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending to
low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings. American
River Bank and North Coast Bank each have current ratings of "satisfactory" for
CRA compliance.
Limitations on Dividends
The Company's ability to pay cash dividends is subject to restrictions set
forth in the California General Corporation Law. Funds for payment of any cash
dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from its subsidiaries. The payment of cash
dividends and/or management fees by American River Bank is subject to
restrictions set forth in the California Financial Code, as well as restrictions
established by the FDIC. North Coast Bank's ability to pay cash dividends is
subject to restrictions imposed under the National Bank Act and regulations
promulgated by the Office of the Comptroller of the Currency. See Item 5.
"Market for Registrant's Common Equity and Related Stockholder Matters" for more
information regarding cash dividends.
Competition
Competitive Data
American River Bank. At June 30, 2001, based on the most recent "Data Book
Summary of Deposits in FDIC Insured Commercial and Savings Banks" report at that
date, the competing commercial and savings banks had 153 offices in the cities
of Fair Oaks, Rancho Cordova, Roseville and Sacramento, California, where
7
American River Bank has its 4 offices. Additionally, American River Bank
competes with thrifts and, to a lesser extent, credit unions, finance companies
and other financial service providers for deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which American River Bank is not authorized nor prepared to
offer currently. American River Bank has made arrangements with its
correspondent banks and with others to provide some of these services for its
customers. For borrowers requiring loans in excess of American River Bank's
legal lending limits, American River Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other independent banks, including North Coast Bank, retaining the portion
of such loans which is within its lending limits. As of December 31, 2001,
American River Bank's aggregate legal lending limits to a single borrower and
such borrower's related parties were $3,645,000 on an unsecured basis and
$6,075,000 on a fully secured basis based on regulatory capital of $24,298,000.
American River Bank's business is concentrated in its service area, which
primarily encompasses Sacramento County and South Western Placer County. The
economy of American River Bank's service area is dependent upon government,
manufacturing, tourism, retail sales, population growth and smaller service
oriented businesses.
Based upon the most recent "Data Book Summary of Deposits in FDIC Insured
Commercial and Savings Banks" report dated June 30, 2001, there were 185
operating commercial and savings bank offices in Sacramento County with total
deposits of $12,360,700,000. This was an increase of $1,252,000,000 over the
June 30, 2000 balances. American River Bank held a total of $146,417,000 in
deposits, representing approximately 1.2% of total commercial and savings banks
deposits in Sacramento County as of June 30, 2001.
Based upon the most recent "Data Book Summary of Deposits in FDIC Insured
Commercial and Savings Banks" report dated June 30, 2001, there were 78
operating commercial and savings bank offices in Placer County with total
deposits of $2,880,300,000. This was an increase of $377,600,000 over the June
30, 2000 balances. American River Bank held a total of $46,764,000 in deposits,
representing approximately 1.6% of total commercial and savings banks deposits
in Placer County as of June 30, 2001.
In 1996, pursuant to Congressional mandate, the FDIC reduced bank deposit
insurance assessment rates to a range from $0 to $0.27 per $100 of deposits,
dependent upon a bank's risk. Based upon the risk-based assessment rate
schedule, American River Bank's current capital ratios and levels of deposits,
American River Bank anticipates no change in the assessment rate applicable to
it during 2002 from that in 2001.
North Coast Bank. At June 30, 2001, based on the most recent "Data Book
Summary of Deposits in FDIC Insured Commercial and Savings Banks" report at that
date, the competing commercial and savings banks had 57 offices in the cities of
Healdsburg, Santa Rosa and Windsor, California, where North Coast Bank has its 3
offices. Additionally, North Coast Bank competes with thrifts and, to a lesser
extent, credit unions, finance companies and other financial service providers
for deposit and loan customers.
North Coast Bank has also made arrangements with its correspondent banks
and with others to provide some of the services for its customers, international
banking, discount brokerage and insurance services, which North Coast Bank is
not authorized nor prepared to offer currently. For borrowers requiring loans in
excess of North Coast Bank's legal lending limits, North Coast Bank has offered,
and intends to offer in the future, such loans on a participating basis with its
correspondent banks and with other independent banks, including American River
Bank, retaining the portion of such loans which is within its lending limits. As
of December 31, 2001, North Coast Bank's aggregate legal lending limits to a
single borrower and such borrower's related parties were $806,000 based on
regulatory capital of $5,371,000. On March 13, 2002, North Coast Bank was
approved by the OCC to participate in a pilot program, whereby, North Coast
Bank's lending limit would be increased to $1,343,000 for certain 1-4
8
family residential real estate and loans to small businesses on an exception
basis. The aggregate amount of loans under the exception shall not exceed 100%
of North Coast Bank's regulatory capital. The OCC defines the exception amount
as that portion of a loan that is greater than the basic lending limit of
$806,000 and less than the pilot program aggregate maximum of $1,343,000. These
exceptions made under the pilot program will be monitored by North Coast Bank's
Board of Directors on a monthly basis.
North Coast Bank's business is concentrated in its service area, which
primarily encompasses Sonoma County. The economy of North Coast Bank's service
area is dependent upon agriculture, tourism, retail sales, population growth and
smaller service oriented businesses.
Based upon the most recent "Data Book Summary of Deposits in FDIC Insured
Commercial and Savings Banks" report dated June 30, 2001, there were 113
operating commercial and savings bank offices in Sonoma County with total
deposits of $6,975,200,000. This was an increase of $72,800,000 over the June
30, 2000 balances. North Coast Bank held a total of $50,577,000 in deposits,
representing approximately .7% of total commercial and savings banks deposits in
Sonoma County as of June 30, 2001.
Based upon the risk-based assessment rate schedule implemented by the FDIC
in 1996, North Coast Bank's current capital ratios and levels of deposits, North
Coast Bank anticipates no change in the assessment rate applicable to it during
2002 from that in 2001.
General Competitive Factors
In order to compete with the major financial institutions in their primary
service areas, community banks such as American River Bank and North Coast Bank
use to the fullest extent possible the flexibility which is accorded by their
independent status. This includes an emphasis on specialized services, local
promotional activity, and personal contacts by their respective officers,
directors and employees. They also seek to provide special services and programs
for individuals in their primary service area who are employed in the
agricultural, professional and business fields, such as loans for equipment,
furniture, tools of the trade or expansion of practices or businesses. In the
event there are customers whose loan demands exceed their respective lending
limits, they seek to arrange for such loans on a participation basis with other
financial institutions. They also assist those customers requiring services not
offered by either bank to obtain such services from correspondent banks.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by a bank to obtain their
deposits and other borrowings and the interest rate received by a bank on loans
extended to customers and on securities held in a bank's portfolio comprise the
major portion of a bank's earnings.
The interest rate differentials of a bank, and therefore their earnings,
are affected not only by general economic conditions, both domestic and foreign,
but also by the monetary and fiscal policies of the United States as set by
statutes and as implemented by federal agencies, particularly the Federal
Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on American River Bank and North
Coast Bank are not predictable.
9
Impact of Legislative and Regulatory Proposals
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank which has been in existence for at least five years.
The federal financial institution agencies, especially the Office of the
Comptroller of the Currency and the Board of Governors, have taken steps to
increase the types of activities in which national banks and bank holding
companies can engage, and to make it easier to engage in such activities. The
Office of the Comptroller of the Currency has issued regulations permitting
national banks to engage in a wider range of activities through subsidiaries.
"Eligible institutions" (those national banks that are well capitalized, have a
high overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through operating
subsidiaries subject to an expedited application process. In addition, a
national bank may apply to the Office of the Comptroller of the Currency to
engage in an activity through a subsidiary in which American River Bank itself
may not engage.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act"), which is potentially the most significant
banking legislation in many years. The Act eliminates most of the remaining
depression-era "firewalls" between banks, securities firms and insurance
companies which was established by The Banking Act of 1933, also known as the
Glass-Steagall Act ("Glass-Steagall"). Glass-Steagall sought to insulate banks
as depository institutions from the perceived risks of securities dealing and
underwriting, and related activities. The Act repeals Section 20 of
Glass-Steagall which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can now
acquire securities firms or create them as subsidiaries, and securities firms
can now acquire banks or start banking activities through a financial holding
company. The Act includes provisions which permit national banks to conduct
financial activities through a subsidiary that are permissible for a national
bank to engage in directly, as well as certain activities authorized by statute,
or that are financial in nature or incidental to financial activities to the
same extent as permitted to a "financial holding company" or its affiliates.
This liberalization of United States banking and financial services regulation
applies both to domestic institutions and foreign institutions conducting
business in the United States. Consequently, the common ownership of banks,
securities firms and insurance firms is now possible, as is the conduct of
commercial banking, merchant banking, investment management, securities
underwriting and insurance within a single financial institution using a
"financial holding company" structure authorized by the Act.
Prior to the Act, significant restrictions existed on the affiliation of
banks with securities firms and on the direct conduct by banks of securities
dealing and underwriting and related securities activities. Banks were also
(with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The Act removes these restrictions and substantially
eliminates the prohibitions under the Bank Holding Company Act on affiliations
between banks and insurance companies. Bank holding companies which qualify as
financial holding companies can now insure, guarantee, or indemnify against
loss, harm, damage, illness, disability, or death; issue annuities; and act as a
principal, agent, or broker regarding such insurance services.
In order for a commercial bank to affiliate with a securities firm or an
insurance company pursuant to the Act, its bank holding company must qualify as
a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
10
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that federal financial
institution and securities regulatory agencies prescribe regulations to
implement the policy that financial institutions must respect the privacy of
their customers and protect the security and confidentiality of customers'
non-public personal information. These regulations require, in general, that
financial institutions (1) may not disclose non-public personal information of
customers to non-affiliated third parties without notice to their customers, who
must have the opportunity to direct that such information not be disclosed; (2)
may not disclose customer account numbers except to consumer reporting agencies;
and (3) must give prior disclosure of their privacy policies before establishing
new customer relationships.
Neither American River Holdings, American River Bank nor North Coast Bank
have determined whether or when they may seek to acquire and exercise new powers
or activities under the Act, and the extent to which competition will change
among financial institutions affected by the Act has not yet become clear.
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act prohibits
any insured financial institution such as the Subsidiary Banks, from providing
correspondent accounts to foreign banks which do not have a physical presence in
any country (designated as "shell banks"), subject to certain exceptions for
regulated affiliates of foreign banks. Section 313(a) also requires financial
institutions to take reasonable steps to ensure that foreign bank correspondent
accounts are not being used to indirectly provide banking services to foreign
shell banks, and Section 319(b) requires financial institutions to maintain
records of the owners and agent for service of process of any such foreign banks
with whom correspondent accounts have been established.
Effective July 23, 2002, Section 312 of the Patriot Act creates a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
The Company and the Subsidiary Banks are not currently aware of any
account relationships between the Subsidiary Banks and any foreign bank or other
person or entity as described above under Sections 313(a) or 312 of the Patriot
Act. The terrorist attacks on September 11, 2001 have realigned national
security priorities of the United States and it is reasonable to anticipate that
the United States Congress may enact additional legislation in the future to
combat terrorism including modifications to existing laws such as the Patriot
Act to expand powers as deemed necessary. The effects which the Patriot Act and
any additional legislation enacted by Congress may have upon financial
institutions is uncertain; however, such legislation could increase compliance
costs and thereby potentially may have an adverse effect upon the Company's
results of operations.
Certain legislative and regulatory proposals that could affect American
River Holdings, American River Bank, North Coast Bank and the banking business
in general are periodically introduced before the United States Congress, the
California State Legislature and Federal and state government agencies. It is
not known to what extent, if any, legislative proposals will be enacted and what
effect such legislation would have on the structure, regulation and competitive
11
relationships of financial institutions. It is likely, however, that such
legislation could subject American River Holdings, American River Bank and North
Coast Bank to increased regulation, disclosure and reporting requirements,
competition, and costs of doing business.
In addition to legislative changes, the various Federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such regulations may have on American River Holdings,
American River Bank and North Coast Bank.
ITEM 2. Properties
The Company and its subsidiaries lease seven and own one of their
respective premises. American River Bank's head office is located at 1545 River
Park Drive, Suite 107, Sacramento, California, in a modern, five floor building
which has offstreet parking for its clients. American River Bank leases premises
in the building from Spieker Properties, L.P., a California limited partnership.
The lease term is ten years and expires on March 31, 2010. The premises consist
of 9,498 square feet on the ground floor.
American River Bank leases premises at 9750 Business Park Drive,
Sacramento, California. The office space is leased from Bradshaw Plaza Group,
which is owned in part by Charles D. Fite, a director of the Company. The lease
term is seven years and expires on November 30, 2006. The premises consist of
4,590 square feet on the ground floor.
American River Bank leases premises at 10123 Fair Oaks Boulevard, Fair
Oaks, California. The office space is leased from Marjorie Taylor, a director of
the Company. The lease term is 12 years and expires on March 1, 2009. The
premises consist of 2,380 square feet on the ground floor.
American River Bank leases premises at 2240 Douglas Boulevard, Roseville,
California. The office space is leased from Sandalwood Land Company. The lease
term is 10 years and expires on December 18, 2006. The premises consist of 3,790
square feet on the ground floor.
The Company leases premises (used by First Source Capital) at 1540 River
Park Drive, Suite 106, Sacramento California. The office space is leased from
Union Bank of California N.A., as Trustee for Agnes M. Bourn and William B.
Bourn. The one-year lease term expired on February 1, 2002. Management has
negotiated a one-year extension of similar terms and is waiting for final
approval from its landlord. The premises consist of 847 square feet on the
ground floor.
North Coast Bank leases premises at 8733 Lakewood Drive, Windsor,
California. The office space is leased from R. and R. Partners. The
lease term is 10 years and expires on February 1, 2003. The premises consist of
approximately 5,670 square feet on the first and second floors.
North Coast Bank owns premises at 412 Center Street, Healdsburg,
California. The premises were purchased June 1, 1993. The purchase price for the
land and building was $343,849. The building is 2,620 square feet sitting on
10,835 square feet of land.
North Coast Bank leases premises at 50 Santa Rosa Avenue, Santa Rosa,
California. The office space is leased from Rosario LLC. The lease term is ten
(10) years and expires on October 31, 2008. The premises consist of 7,072 square
feet on the ground floor.
The leases on the premises located at 1545 River Park Drive, 9750 Business
Park Drive, 2240 Douglas Boulevard and 50 Santa Rosa Avenue contain options to
extend for five years. Included in the above are two facilities leased from
directors of the Company at terms and conditions which management believes are
consistent with the commercial lease market.
The foregoing summary descriptions of leased premises are qualified in
their entirety by reference to the lease agreements listed as exhibits to this
report.
12
ITEM 3. Legal Proceedings
There are no material legal proceedings adverse to the Company and its
subsidiaries to which any director, officer, affiliate of the Company, or 5%
shareholder of the Company or its subsidiaries, or any associate of any such
director, officer, affiliate or 5% shareholder of the Company or its
subsidiaries are a party, and none of the above persons has a material interest
adverse to the Company or its subsidiaries.
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 material pending legal proceedings to
which either it or its subsidiaries may be a party or has recently been a party,
which will have a material adverse effect on the financial condition or results
of operations of the Company or its subsidiaries, taken as a whole.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the shareholders during the
fourth quarter of 2001.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock began trading on the NASDAQ National Stock
Market ("NASDAQ") under the symbol "AMRB" on October 26, 2000. Prior to October
26, 2000, the common stock was not listed on any exchange and was quoted on the
OTC Bulletin Board under the symbol "AMRB.OB." The following table shows the
high and the low prices for the common stock, for each quarter, as reported by
NASDAQ and the OTC Bulletin Board. The prices have been adjusted to reflect the
5% stock dividends distributed in 2000 and 2001.
============================================
2001 High Low
- --------------------------------------------
First quarter $15.24 $13.45
Second quarter 15.95 14.00
Third quarter 18.57 12.14
Fourth quarter 16.70 13.89
2000
- --------------------------------------------
First quarter $14.51 $ 9.98
Second quarter 13.61 9.52
Third quarter 12.62 11.45
Fourth quarter 14.29 11.23
============================================
As of December 31, 2001, there were approximately 1,287 shareholders of
record of the Company's common stock.
The Company has paid cash dividends on its common stock twice a year since
1992, and it is currently the intention of the Board of Directors of the Company
to continue payment of cash dividends on a twice a year basis. There is no
assurance, however, that any dividends will be paid since they are dependent
upon earnings, financial condition and capital requirements of the Company and
its subsidiaries. As of December 31, 2001, the Subsidiary Banks had $8.4 million
in retained earnings available for dividend payments to the Company, which in
turn could be paid out to shareholders of the Company.
13
See Note 13 to the consolidated financial statements included in this
report for additional information regarding the amount of cash dividends
declared and paid on common stock for the two most recent fiscal years.
14
ITEM 6. Selected Financial Data
FINANCIAL SUMMARY
The following table presents certain consolidated financial information
concerning the business of the Company and its subsidiaries. This information
should be read in conjunction with the Consolidated Financial Statements, the
notes thereto, and Management's Discussion and Analysis included in this report.
As of and for the Years Ended December 31,
(In thousands, except per share amounts and
ratios)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA
Net interest income $ 14,577 $ 13,585 $ 11,754 $ 10,743 $ 9,582
Provision for loan or lease losses 791 672 582 509 605
Other income 2,365 2,183 1,647 1,433 1,211
Other expenses 9,502 9,329 7,770 7,143 6,563
Income before income taxes 6,649 5,767 5,049 4,524 3,625
Income taxes 2,612 2,221 1,921 1,673 1,278
Net income $ 4,037 $ 3,546 $ 3,128 $ 2,851 $ 2,347
Earnings per share - basic $ 1.59 $ 1.42 $ 1.25 $ 1.13 $ 0.93
Earnings per share - diluted 1.50 1.35 1.18 1.06 0.86
Cash dividends per share 0.27 0.24 0.21 0.18 0.16
Book value per share 11.09 9.70 8.70 8.01 7.33
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $286,559 $284,126 $248,540 $220,001 $197,177
Loans and leases, net 195,026 200,658 157,044 143,132 121,960
Deposits 254,888 239,312 223,077 197,104 176,329
Shareholders' equity 27,942 24,413 20,611 19,168 17,664
Average balance sheet amounts:
Assets $279,049 $259,315 $224,960 $201,958 $179,667
Loans and leases 202,624 175,134 148,369 133,381 115,099
Earning assets 255,904 238,837 207,388 187,071 166,104
Deposits 246,960 230,822 201,180 180,288 161,794
Shareholders' equity 26,316 22,258 19,916 18,434 16,801
SELECTED RATIOS:
For the year:
Return on average equity 15.34% 15.93% 15.71% 15.47% 13.97%
Return on average assets 1.45% 1.37% 1.39% 1.41% 1.31%
Efficiency ratio * 55.57% 58.59% 57.48% 58.28% 60.47%
Net interest margin * 5.76% 5.75% 5.72% 5.79% 5.80%
Net chargeoffs to average loans & leases 0.31% 0.14% 0.14% 0.26% 0.52%
At December 31:
Average equity to average assets 9.43% 8.58% 8.85% 9.13% 9.35%
Leverage capital ratio 9.75% 9.28% 9.23% 9.31% 9.64%
Allowance for loan & leases losses 1.32% 1.21% 1.30% 1.17% 1.24%
* fully taxable equivalent
15
ITEM 7. MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is American River Holdings management's discussion and
analysis of the significant changes in income and expense accounts for the years
ended December 31, 2001, 2000 and 1999.
Introduction
In addition to the historical information contained herein, this Annual
Report contains certain forward-looking statements. The reader of this Annual
Report should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments, rates paid on deposits,
competition effects, fee and other noninterest income earned, general economic
conditions, nationally, regionally and in the operating market areas of the
Company and its subsidiaries, changes in the regulatory environment, changes in
business conditions and inflation, changes in securities markets, data
processing problems, a decline in real estate values in the Company's market
area, the California energy shortage, the effects of terrorism, including the
events of September 11, 2001 and thereafter, and the conduct of the war on
terrorism by the United States and its allies, as well as other factors. This
entire Report and the Company's audited financial statements and notes thereto
should be read to put such forward-looking statements in context and to gain a
more complete understanding of the uncertainties and risks involved in the
Company's business.
Overview
The Company recorded its 72nd consecutive profitable quarter for the
quarter ended December 31, 2001. Net income in 2001 increased 13.8% to
$4,037,000 versus $3,546,000 in 2000. Diluted earnings per share for the two
years were $1.50 and $1.35, respectively. For 2001, the Company realized a
return on average equity of 15.3% and a return on average assets of 1.45%, as
compared to 15.9% and 1.37% for 2000. The net income for 2000 was $418,000
(13.4%) higher than the $3,128,000 recorded in 1999. Diluted earnings per share
in 1999 were $1.18, return on average assets was 1.39% and return on average
equity was 15.7%. The earnings per share for 2001, 2000 and 1999 have been
adjusted for 5 percent stock dividends distributed on October 19, 2001, December
19, 2000 and October 14, 1999.
During 2001, total assets of the Company increased $2,433,000 (0.9%) to
a total of $286,559,000 at year-end. At December 31, 2001, net loans totaled
$195,026,000, down $5,632,000 (-2.8%) from the ending balances on December 31,
2000. Deposit growth for the year was 6.5% resulting in ending deposit balances
of $254,888,000. The Company ended 2001 with a Tier 1 capital ratio of 12.4% and
a total risk-based capital ratio of 13.6%.
Table One below provides a summary of the components of net income for the
years indicated:
16
Table One: Components of Net Income
- --------------------------------------------------------------------------------
For the twelve months ended:
(In thousands, except percentages) 2001 2000 1999
--------- --------- ---------
Net interest income* $ 14,733 $ 13,739 $ 11,871
Provision for loan losses (791) (672) (582)
Non-interest income 2,365 2,183 1,647
Non-interest expense (9,502) (9,329) (7,770)
Provision for income taxes (2,612) (2,221) (1,921)
Tax equivalent adjustment (156) (154) (117)
--------- --------- ---------
Net income $ 4,037 $ 3,546 $ 3,128
========= ========= =========
================================================================================
Average total assets $ 279,049 $ 259,315 $ 224,960
Net income as a percentage
of average total assets 1.45% 1.37% 1.39%
- --------------------------------------------------------------------------------
* 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, securities, federal funds sold and investments
in time deposits) over the interest paid on deposits and borrowed funds. Net
interest margin is net interest income expressed as a percentage of average
earning assets.
The Company's fully taxable equivalent net interest margin was 5.75% in
2000, and 5.76% in 2001. The fully taxable equivalent net interest margin in
dollars was up $994,000 (7.2%) in 2001 over 2000.
The fully taxable equivalent interest income component decreased from
$21,381,000 in 2000 to $20,999,000 in 2001, representing a 1.8% decrease. The
decrease in the fully taxable equivalent interest income for 2001 compared to
the same period in 2000 is broken down by rate (down $2,434,000) and volume (up
$2,052,000). The rate decrease can be attributed to decreases implemented by the
Company during 2001 in response to the Federal Reserve Board's (the "FRB")
decreases in the Federal Funds and Discount rates. During the year there were
eleven such rate decreases by the FRB resulting in a 475 basis point drop in the
prime rate, which contributed to the drop in the yield in average earning assets
from 8.95% for 2000 to 8.21% for 2001. The volume increase was the result of a
7.1% increase in average earning assets. Average loan balances were up
$27,490,000 (15.7%) in 2001 over the balances in 2000, while average investment
securities balances were down $10,995,000 (21.2%). The shift in assets from
investment securities to the higher yielding loans helped to lessen the effect
of the above-mentioned sharp decrease in rates during 2001.
The fully taxable equivalent interest income component increased from
$17,346,000 in 1999 to $21,381,000 in 2000, representing a 23.3% increase. The
increase in the fully taxable equivalent interest income for 2000 compared to
the same period in 1999 is broken down by rate (up $1,202,000) and volume (up
$2,833,000). The rate increase can be attributed to six rate increases
implemented by the Company over the eighteen month period ending December 31,
2000, in response to the FRB's increases in the Federal Funds and Discount
rates. The average yield on earning assets increased from 8.36% in 1999 to 8.95%
in 2000. The volume increase was the result of a 15.2% increase in average
earning assets primarily the result of a concentrated effort on business lending
and the effects of a strong local market. Average loan balances were up
17
$26,765,000 (18.0%) and average investment securities balances were up
$8,214,000 (16.4%). Average fed fund balances were down $3,530,000 (-39.1%).
Interest expense decreased $1,376,000 (18.0%) in 2001 compared to 2000.
The average balances on interest bearing liabilities were $10,864,000 (6.2%)
higher in 2001 versus 2000. The higher balances accounted for a $495,000
increase in interest expense. The higher balances were due to internal growth of
average deposits ($11,924,000) with a slight decrease in other borrowings
($1,060,000). The decrease in rates paid on interest bearing liabilities more
than offset the increased expense due to the volume growth as the average rate
paid decreased 99 basis points on a year over year basis and accounted for a
decrease in interest expense of $1,871,000 for the period.
Interest expense increased $2,167,000 (39.6%) in 2000 over 1999. The
average balances on interest bearing liabilities were $25,362,000 (16.8%) higher
in 2000 versus 1999. The higher balances accounted for $942,000 of the increase
in interest expense. The higher balances were due to internal growth of average
deposits ($23,188,000) and other borrowings ($2,174,000). Rates paid on interest
bearing liabilities increased 71 basis points on a year over year basis and
accounted for $1,225,000 of the interest expense increase for the period.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and past trends
of the Company's interest income and expenses. Table Two provides an analysis of
net interest margin on earning assets setting forth average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
18
Table Two: Analysis of Net Interest Margin on Earning Assets
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 2000 1999
------------------------------- ---------------------------- ----------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg Avg Avg
(In thousands, except Balance Interest Yield Balance Interest Yield Balance Interest Yield
percentages) ------- -------- ----- ------- -------- ----- ------- -------- -----
Assets:
Earning assets
Loans (1) $ 202,624 $ 17,883 8.83% $ 175,134 $ 17,294 9.87% $ 148,369 $ 13,926 9.39%
Taxable investment
securities 30,511 1,871 6.13% 41,763 2,643 6.33% 36,252 2,126 5.86%
Tax-exempt investment
securities (2) 9,656 608 6.30% 9,232 600 6.50% 6,984 444 6.36%
Corporate stock 820 93 11.34% 987 82 8.31% 765 63 8.24%
Federal funds sold 6,727 202 3.00% 5,493 353 6.43% 9,023 451 5.00%
Investments in time
deposits 5,566 342 6.14% 6,228 409 6.57% 5,995 336 5.60%
--------- -------- --------- -------- --------- --------
Total earning assets 255,904 20,999 8.21% 238,837 21,381 8.95% 207,388 17,346 8.36%
-------- -------- --------
Cash & due from banks 17,023 15,776 14,089
Other assets 6,122 4,702 3,483
--------- --------- ---------
$ 279,049 $ 259,315 $ 224,960
========= ========= =========
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
NOW & MMDA $ 90,440 1,964 2.17% $ 87,159 2,834 3.25% $ 72,048 1,801 2.50%
Savings 13,602 166 1.22% 12,212 297 2.43% 13,054 307 2.35%
Time deposits 79,332 3,912 4.93% 72,079 4,199 5.83% 63,160 3,208 5.08%
Other borrowings 3,758 224 5.96% 4,818 312 6.48% 2,644 159 6.01%
--------- -------- --------- -------- --------- --------
Total interest bearing
liabilities 187,132 6,266 3.35% 176,268 7,642 4.34% 150,906 5,475 3.63%
-------- -------- --------
Demand deposits 63,586 59,372 52,918
Other liabilities 2,015 1,417 1,220
--------- --------- ---------
Total liabilities 252,733 237,057 205,044
Shareholders' equity 26,316 22,258 19,916
--------- --------- ---------
$ 279,049 $ 259,315 $ 224,960
========= ========= =========
Net interest income &
margin (3) $ 14,733 5.76% $ 13,739 5.75% $ 11,871 5.72%
======== ===== ======== ===== ======== =====
(1) Loan interest includes loan fees of $506,000, $355,000 and $402,000 in
2001, 2000 and 1999, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
19
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
- -----------------------------------------------------------------------------------------------
Year ended December 31, 2001 over 2000 (In thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
--------- --------- ----------
Net loans (1)(2) $ 2,715 $ (2,126) $ 589
Taxable investment securities (712) (60) (772)
Tax exempt investment securities (3) 28 (20) 8
Corporate stock (14) 25 11
Federal funds sold & other 79 (230) (151)
Investment in time deposits (44) (23) (67)
--------- --------- ---------
Total 2,052 (2,434) (382)
--------- --------- ---------
Interest-bearing liabilities:
Demand deposits 107 (977) (870)
Savings deposits 34 (165) (131)
Time deposits 423 (710) (287)
Other borrowings (69) (19) (88)
--------- --------- ---------
Total 495 (1,871) (1,376)
--------- --------- ---------
Interest differential $ 1,557 $ (563) $ 994
========= ========= =========
Year Ended December 31, 2000 over 1999 (In thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
--------- --------- ----------
Net loans (1)(2) $ 2,512 $ 856 $ 3,368
Taxable investment securities 323 194 517
Tax exempt investment securities (3) 143 13 156
Corporate stock 18 1 19
Federal funds sold & other (176) 78 (98)
Investment in time deposits 13 60 73
--------- --------- ---------
Total 2,833 1,202 4,035
--------- --------- ---------
Interest-bearing liabilities:
Demand deposits 378 655 1,033
Savings deposits (20) 10 (10)
Time deposits 453 538 991
Other borrowings 131 22 153
--------- --------- ---------
Total 942 1,225 2,167
--------- --------- ---------
Interest differential $ 1,891 $ (23) $ 1,868
========= ========= =========
(1) The average balance of non-accruing loans is immaterial as a percentage of
total loans and, as such, has been included in net loans.
(2) Loan fees of $506,000, $355,000 and $402,000 for the years ended December
31, 2001, 2000 and 1999, respectively, have been included in the interest
income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company provided $791,000 for loan and lease losses in 2001 as
compared to $672,000 for 2000. Net loan charge-offs for 2001 were $631,000 as
compared to $239,000 in 2000. In 2001 and 2000, net loan charge-offs as a
percentage of average loans outstanding was .31% and .14%, respectively. In
1999, the Company provided $582,000 for loan and lease losses and net
charge-offs were $213,000. For further information please see the Allowance for
Loan and Lease Losses Activity.
20
Service Charges and Fees and Other 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
- --------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Service charges on deposit accounts $ 562 $ 602 $ 537
Accounts receivable servicing fees 459 430 272
Merchant fee income 277 202 153
Fees from lease brokerage services 264 177 48
Income from residential lending division 274 142 133
Other 529 630 504
--------- --------- ---------
$ 2,365 $ 2,183 $ 1,647
========= ========= =========
Noninterest income was up $182,000 (8.3%) to $2,365,000 in 2001 from the
2000 level. The increase in the noninterest income can be attributed to an
increase in accounts receivable servicing (up $29,000 or 6.7%), merchant fee
income up ($75,000 or 37.1%), increased revenue from lease brokerage services
from First Source Capital (up $87,000 or 49.2%) and an increase in fees from the
residential lending division (up $132,000 or 93.0%). The increases were offset
by decreases in service charges on deposit accounts (down $40,000 or 6.6%) and
financial services income (down $113,000 or 55.7%). The increase in accounts
receivable servicing was a result of adding new clients and increasing average
accounts receivable balances outstanding from $2,696,000 in 2000 to $3,467,000
(28.6%) in 2001. The increase in merchant fee income can be attributed to higher
transaction volume from existing clients and more favorable pricing received by
the Company from its processor. The increase in lease brokerage results from
First Source Capital, the Company's lease brokerage subsidiary, completing their
second full year of operations and continuing to generate increases in fees as
it developed new relationships. The residential lending division experienced an
increase in loan volume as a result of decreases in mortgage rates, which caused
the number of refinances to increase. American River Bank's residential lending
division acts as a broker between American River Bank's customers and the loan
wholesalers. American River Bank receives an origination fee for loans closed.
Noninterest income was up $536,000 (32.5%) to $2,183,000 in 2000 from the
1999 level. The increase in the noninterest income can be attributed to an
increase in service charges (up $65,000 or 12.1%), merchant fee income up
($49,000 or 32.0%), accounts receivable servicing (up $158,000 or 58.1%) and
increased revenue from First Source Capital (up $129,000 or 268.8%) (First
Source Capital was formed during the second half of 1999). The increase in
accounts receivable servicing was a result of adding new clients and increasing
average accounts receivable balances outstanding from $1,505,000 in 1999 to
$2,696,000 (79.1%) in 2000. The increase in service charges and merchant fee
income can be attributable to the 13.4% increase in core deposits (demand and
money market accounts). These accounts allow the Company the opportunity for
more service charge fees and the access to potential merchant accounts.
Salaries and Benefits
Salaries and benefits were $5,334,000 (up $373,000 or 7.5%) for 2001 as
compared to $4,961,000 in 2000. Base salaries increased $688,000, resulting from
normal cost of living raises of roughly 3% or $120,000, increased salaries of
$39,000 at First Source Capital (due to increased lease volume), salaries paid
to the new employees at the new Real Estate Division of North Coast Bank
($118,000), commissions paid in American River Bank's Real Estate Lending
Division ($166,000) and staffing additions made during the year as the Company
continues to grow and to implement the new technology acquired during the year.
Benefit costs and employer taxes increased commensurate with the salaries. The
salary and benefit increases were offset by a reduction in the amount accrued
for employee incentive compensation by $440,000 due to the Company not reaching
its projected growth goals. At the end of 2001, the full time equivalent staff
was 100, the same as of at the end of 2000.
21
For the year ended December 31, 2000, salaries and benefits were
$4,961,000 (up $595,000 or 13.6%) as compared to $4,366,000 in 1999. Base
salaries increased $469,000, resulting from normal cost of living raises of
roughly 3% or $100,000, increased salaries of $87,000 at First Source Capital
(due to a full year of salaries in 2000), increased commissions paid out in the
Investment Services Division ($23,000) and salaries paid to the new employees at
the new Real Estate Division of North Coast Bank ($65,000). The remainder of the
increase represents market adjustments made to key employees as a way of
retaining their services during a tight job market and the staffing additions
made during the year as the Company continues to grow. Incentive compensation
increased $59,000 (9.0%) as the Company's incentive compensation is based on the
Company's financial performance. Benefit costs increased commensurate with the
salaries. At the end of 2000, the full time equivalent staff was 100 versus 93
at the end of 1999.
Occupancy, Furniture and Equipment
Occupancy expense increased $53,000 (7.0%) during 2001 to $810,000, up
from $757,000 in 2000. The increase represents annual rent adjustments under the
existing lease agreements and higher utility costs passed on to the Company from
its landlords. Furniture and equipment expense was $564,000 in 2001 compared to
$461,000 in 2000, representing a $103,000 (22.3%) increase. This increase
relates to technology upgrades made over the past twelve months including the
purchase of a new core banking system, new telephone system, unified messaging,
a rebuilding of the network utilizing thin client technology and an internet
based online banking system.
Occupancy expense increased $58,000 (8.3%) during 2000 to $757,000, up
from $699,000 in 1999. Premises rent payments increased $58,000 or 11.6% during
the year. Annual rent adjustments under the lease agreements, as well as the
opening of the First Source Capital location in the second half of 1999,
represented $20,000 of the rent increase and the remainder ($38,000) resulted
from a new lease for the building occupied by the Company's corporate office and
one of American River Bank's branch offices. The new lease added additional
space as well as highly visible signage. Furniture and equipment expense
increased $4,000 (0.9%) to $461,000 in 2000 from $457,000 in 1999.
Other Expenses
Other expenses were $2,794,000 (down $356,000 or 11.3%) for 2001 as
compared to $3,150,000 for 2000. Expenses for 2000 included one-time costs of
$693,000 associated with the acquisition of North Coast Bank, NASDAQ listing
fees and expenses related to registering the Company with the SEC. Excluding
these one-time costs, expenses in 2001 were up $337,000 (13.7%) over the
adjusted 2000 total. Professional fees accounted for $115,000 (34.1%) of the
increase in other expense. The increase in professional fees relates to legal
fees paid to resolve problem loan credits and accounting and legal fees related
to the periodic filings with the SEC. Normal price increases and growth in the
Company's operations accounted for slight increases in the other expense items.
The overhead efficiency ratio on a taxable equivalent basis for 2001 was 55.6%
as compared to 58.6% in 2000.
Other expenses were $3,150,000 (up $902,000 or 40.1%) for 2000 as compared
to $2,248,000 for 1999. These include one-time costs of $693,000 (or roughly
76.8% of the entire increase) associated with the acquisition of North Coast
Bank, NASDAQ listing fees and expenses related to registering the Company with
the SEC. Outsourced item processing expenses were $498,000 (up $88,000 or 21.4%)
in 2000 as compared to $410,000 in 1999. The increase can be attributable to a
below market contract that expired in mid-2000. The contract reverted to
month-to-month expense at market rates upon expiration. Normal price increases
and growth in the Company's operations accounted for slight increases in the
other expense items. The overhead efficiency ratio on a taxable equivalent basis
for 2000 was 58.6% as compared to 57.5% in 1999. Excluding the one-time expenses
described above, the efficiency ratio for 2000 would have been 54.2%.
Provision for Taxes
The effective tax rate on income was 39.3%, 38.5% and 38.0% in 2001, 2000
and 1999, respectively. The effective tax rate has increased slightly each of
the last three years as a result of the increases in taxable income growing
22
faster than the benefits of investments made in tax-qualified municipal bonds.
The effective tax rate was greater than the federal statutory tax rate due to
state tax expense (net of federal tax effect) of $465,000, $420,000 and $346,000
in these years. Tax-exempt income of $464,000, $462,000 and $339,000 from
investment securities in these years helped to reduce the effective tax rate.
Balance Sheet Analysis
The Company's total assets were $286,559,000 at December 31, 2001 as
compared to $284,126,000 at December 31, 2000, representing an increase of 0.9%.
The average balances of total assets during 2001 were $279,049,000 which
represent an increase of $19,734,000 (7.6%) over the December 31, 2000 total of
$259,315,000.
Loans
The Company concentrates its lending activities in the following principal
areas: 1) commercial; 2) commercial real estate; 3) real estate construction
(both commercial and residential); 4) residential real estate; 5) agriculture;
6) consumer loans; and 7) lease financing receivable. At December 31, 2001,
these categories accounted for approximately 22%, 51%, 15%, 2%, 5%, 4% and 1%,
respectively, of the Company's loan portfolio. This mix was relatively unchanged
compared to 26%, 48%, 13%, 4%, 5%, 3% and 1% at December 31, 2000. Continuing
strong economic activity in the Company's market area, new borrowers developed
through the Company's marketing efforts and credit extensions expanded to
existing borrowers, offset by normal loan paydowns and payoffs, resulted in net
increases in balances for commercial real estate ($2,768,000 or 2.8%), real
estate construction ($3,639,000 or 13.4%), lease financing receivable
($1,349,000 or 117.3%) and consumer ($1,185,000 or 18.5%). Despite the new
borrowers the Company experienced decreases in commercial ($9,107,000 or 17.3%),
residential real estate ($4,966,000 or 61.4%) and agriculture ($513,000 or 4.8%)
as a result of normal paydowns and higher than average payoffs. The higher
payoffs can be attributed to refinances during the low rate environment. Table
Five below summarizes the composition of the loan and lease portfolio for the
past five years as of December 31.
Table Five: Loan and Lease Portfolio Composition
- ------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------
(In thousands) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------
Commercial $ 43,619 $ 52,726 $ 42,148 $ 36,916 $ 30,670
Real estate:
Commercial 100,158 97,390 72,142 66,883 62,825
Construction 30,821 27,182 25,784 25,011 13,565
Residential 3,119 8,085 6,234 7,037 8,541
Agriculture 10,251 10,764 7,200 3,416 1,221
Consumer 7,598 6,413 5,896 5,654 6,140
Lease financing receivable 2,499 1,150 122 364 918
Deferred loan fees, net (425) (598) (420) (456) (394)
- ------------------------------------------------------------------------------------------
Total loans and leases 197,640 203,112 159,106 144,825 123,486
Allowance for loan and
lease losses (2,614) (2,454) (2,062) (1,693) (1,526)
- ------------------------------------------------------------------------------------------
Total net loans and leases $ 195,026 $ 200,658 $ 157,044 $ 143,132 $ 121,960
==========================================================================================
A significant portion of the Company's loans are direct loans made to
individuals and local businesses. The Company relies substantially on local
promotional activity and personal contacts by bank officers, directors and
employees to compete with other financial institutions. The Company makes loans
to borrowers whose applications include a sound purpose and a viable primary
repayment source, generally supported by a secondary source of repayment.
23
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases, working capital, and various other business loan products.
Consumer loans include a range of traditional consumer loan products such as
personal lines of credit and loans to finance purchases of autos, boats,
recreational vehicles, mobile homes and various other consumer items.
Construction loans are generally composed of commitments to customers within the
Company's service area for construction of both commercial properties and custom
and semi-custom single-family residences. Other real estate loans consist
primarily of loans secured by first trust deeds on commercial and residential
properties typically with maturities from 3 to 10 years and original loan to
value ratios generally from 65% to 80%. Agriculture loans consist primarily of
vineyard loans and development loans to plant vineyards. In general, except in
the case of loans with SBA or Farm Services Agency guarantees, the Company does
not make long-term mortgage loans; however, American River Bank has a
residential lending division to assist customers in securing most forms of
longer term single-family mortgage financing. American River Bank acts as a
broker between American River Bank's customers and the loan wholesalers.
American River Bank receives an origination fee for loans closed.
Average net loans and leases in 2001 were $202,624,000 which represents an
increase of $27,490,000 (15.7%) over the average in 2000. Average loans and
leases in 2000 were $175,134,000 representing an increase of $26,765,000 (18.0%)
over 1999. Loan growth in 2001 and 2000 resulted from a favorable economy in the
Company's market area, new borrowers developed through the Company's marketing
efforts and credit extensions expanded to existing borrowers.
Risk Elements
The Company assesses and manages credit risk on an ongoing basis through a
total credit culture that emphasizes excellent credit quality, extensive
internal monitoring and established formal lending policies. Additionally, the
Company contracts with an outside loan review consultant to periodically review
the existing loan and lease portfolio. Management believes its ability to
identify and assess risk and return characteristics of the Company's loan and
lease portfolio is critical for profitability and growth. Management strives to
continue its emphasis on credit quality in the loan and lease approval process,
active credit administration and regular monitoring. With this in mind,
management has designed and implemented a comprehensive loan and lease review
and grading system that functions to continually assess the credit risk inherent
in the loan and lease portfolio.
Ultimately, underlying trends in economic and business cycles may
influence credit quality. American River Bank's business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base. North
Coast Bank's business is focused on Sonoma County. Special emphasis is placed
within the three communities in which North Coast Bank has offices (Santa Rosa,
Windsor, and Healdsburg). The economy of Sonoma County is diversified with
professional services, manufacturing, agriculture and real estate investment and
construction.
The Company has significant extensions of credit and commitments to extend
credit that are secured by real estate. The ultimate repayment of these loans is
generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rate and terms, absorption and sale rates; real estate values
and rates of return; operating expenses; inflation; and sufficiency of
collateral 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.
24
In management's judgment, a concentration exists in real estate loans
which represented approximately 67.7% of the Company's loan and lease portfolio
at December 31, 2001. Although management believes the concentration to have no
more than the normal risk of collectability, a substantial decline in the
economy in general, or a decline in real estate values in the Company's primary
market areas in particular, could have an adverse impact on the collectability
of these loans and require an increase in the provision for loan and lease
losses which could adversely affect the Company's future prospects, results of
operations, profitability and stock price. Management believes that its lending
policies and underwriting standards will tend to minimize losses in an economic
downturn, however, there is no assurance that losses will not occur under such
circumstances. The Company's loan policies and underwriting standards include,
but are not limited to, the following: (1) maintaining a thorough understanding
of the Company's service area and originating a significant majority of its
loans within that area, (2) maintaining a thorough understanding of borrowers'
knowledge, capacity, and market position in their field of expertise, (3) basing
real estate loan approvals not only on market demand for the project, but also
on the borrowers' capacity to support the project financially in the event it
does not perform to expectations (whether sale or income performance), and (4)
maintaining conforming and prudent loan to value and loan to cost ratios based
on independent outside appraisals and ongoing inspection and analysis by the
Company's lending officers.
Nonaccrual, Past Due and Restructured Loans
Management generally places loans on nonaccrual status when they become 90
days past due, unless the loan is well secured and in the process of collection.
Loans are charged off when, in the opinion of management, collection appears
unlikely. Table Six below sets forth nonaccrual loans and loans past due 90 days
or more as of year-end for the past five years.
Interest due but excluded from interest income on nonaccrual loans was not
material during 2001, 2000 and 1999. In 2001, 2000 and 1999, interest income
recognized from payments received on nonaccrual loans was also not material.
Table Six: Non-Performing Loans
- ----------------------------------------------------------------------------------------
December 31,
-----------------------------------------
(In thousands) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------
Past due 90 days or more and still accruing:
Commercial $ - $ - $ - $ - $ 87
Real estate - - - - -
Consumer and other - - - 7 -
- ----------------------------------------------------------------------------------------
Nonaccrual:
Commercial 533 225 30 110 281
Real estate 314 449 - - 98
Consumer and other 8 - - - 7
- ----------------------------------------------------------------------------------------
Total non-performing loans $856 $674 $30 $ 117 $ 473
========================================================================================
The recorded investments in loans that were considered to be impaired
totaled $856,000 and $674,000 at December 31, 2001 and 2000, respectively. The
related allowance for loan losses for these loans at December 31, 2001 and
December 31, 2000 was $263,000 and $86,000, respectively. Management believes
that the allowance allocations are adequate for the inherent risk of those
loans. The average recorded investment in impaired loans for the years ended
December 31, 2001, 2000 and 1999 was $733,000, $128,000 and $279,000,
respectively.
There were no loan concentrations in excess of 10% of total loans not
otherwise disclosed as a category of loans as of December 31, 2001. Management
is not aware of any potential problem loans, which were accruing and current at
December 31, 2000 or 2001, where serious doubt exists as to the ability of the
borrower to comply with the present repayment terms.
25
Allowance for Loan and Lease Losses Activity
The provision for loan and lease losses is based upon management's
evaluation of the adequacy of the existing allowance for loans and leases
outstanding and loan commitments. This allowance is increased by provisions
charged to expense and recoveries, and is reduced by loan charge-offs.
Management determines an appropriate provision based upon the interaction of
three primary factors: (1) loan and lease portfolio growth, (2) a comprehensive
grading and review formula for total loans and leases outstanding, and (3)
estimated inherent credit risk in the portfolio.
Management reserves 2% of credit exposures graded "Special Mention", 15%
of credits classified "Substandard" and 50% of credits classified "Doubtful".
These reserve factors may be adjusted for significant commercial and real estate
loans that are individually evaluated by management for specific risk of loss.
The amounts allocated for "Special Mention", "Substandard" and "Doubtful"
represent $552,000 at December 31, 2001. In addition, reserve factors ranging
from 0.375% to 3.00% are assigned to currently performing loans that are not
otherwise graded as Special Mention, Substandard or Doubtful. These factors are
assigned based on management's assessment of the following for each identified
loan type: (1) inherent credit risk, (2) historical losses and, (3) where the
Company has not experienced losses, historical losses experienced by peer banks.
Management also computes specific and expected loss reserves for loan
commitments to provide for risks of loss inherent in the loan extension process.
Finally, a residual component is maintained to cover uncertainties that could
affect management's estimate of probable losses. This residual component of the
allowance reflects a margin of imprecision inherent in the underlying
assumptions used to estimate losses in specifically graded loans and expected
losses in the performing portfolio.
The Loan Committees of each of the Subsidiary Banks review the adequacy of
the allowance for loan and lease losses at least quarterly to include
consideration of the relative risks in the portfolio and current economic
conditions. The Subsidiary Banks also engage outside firms to independently
assess our methodology and reserve adequacy, and on a regular basis engage
outside firms to perform independent reviews of the loan portfolios. The
allowance is adjusted based on those reviews if, in the judgment of the loan
committees and management, changes are warranted.
The allowance for loan and lease losses totaled $2,614,000 or 1.32% of
total loans at December 31, 2001, $2,454,000 or 1.21% of total loans at December
31, 2000, and $2,062,000 or 1.30% at December 31, 1999. During the first quarter
of 2000, $41,000 was transferred out of the allowance for loan and lease losses
account into a separate valuation reserve for the accounts receivable servicing
receivables.
It is the policy of management to maintain the allowance for loan and
lease losses at a level adequate for known and inherent risks in the portfolio.
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 are prudent and adequate. Each of the
Subsidiary Banks generally makes monthly allocations to the allowance for loan
and lease losses based on estimates of loss risk and loan and lease growth.
Adjustments may be made based on differences from estimated loan 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 charged off in future years can be made with any
certainty.
26
Table Seven below summarizes, for the periods indicated, the activity in
the allowance for loan and lease losses.
Table Seven: Allowance for Loan and Lease Losses
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except for percentages)
Year Ended December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 202,624 $ 175,134 $ 148,369 $ 133,381 $ 115,099
- -------------------------------------------------------------------------------------------------------------------
Allowance for possible loan & lease
losses at beginning of period $ 2,454 $ 2,062 $ 1,693 $ 1,526 $ 1,515
Loans charged off:
Commercial 556 265 214 478 486
Real estate 85 -- -- 22 86
Consumer 13 1 3 7 49
Lease financing receivable 57 -- 14 -- --
- -------------------------------------------------------------------------------------------------------------------
Total 711 266 231 507 621
- -------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 9 23 15 165 25
Real estate -- -- -- -- --
Consumer -- 4 3 -- 2
Lease financing receivable 71 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total 80 27 18 165 27
- -------------------------------------------------------------------------------------------------------------------
Net loans charged off 631 239 213 342 594
Amount transferred for accounts
receivable servicing valuation
reserve -- (41) -- -- --
Additions to allowance charged
to operating expenses 791 672 582 509 605
- -------------------------------------------------------------------------------------------------------------------
Allowance for possible loan and lease
losses at end of period $ 2,614 $ 2,454 $ 2,062 $ 1,693 $ 1,526
Ratio of net charge-offs to average
loans and leases outstanding .31% .14% .14% .26% .52%
Provision for possible loan and lease
losses to average loans and leases
outstanding .39% .38% .39% .38% .53%
Allowance for possible loan and lease
losses to loans and leases, net of
deferred fees at end of period 1.32% 1.21% 1.30% 1.17% 1.24%
As part of its loan review process, management has allocated the overall
allowance based on specific identified problem loans, qualitative factors,
uncertainty inherit in the estimation process and historical loss data. The risk
exists of future losses which cannot be precisely quantified or attributed to
particular loans or classes of loans. Management continues to evaluate the loan
and lease portfolio and assess current economic conditions that will dictate
future allowance levels. Table Eight below summarizes the allocation of the
allowance for loan and lease losses for the five years ended December 31, 2001.
27
Table Eight: Allowance for Loan and Lease Losses by Loan Category
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands,
except percentages) December 31, 2001 December 31, 2000 December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Percent of loans in Percent of loans in Percent of loans in
each category to total each category to each category to
Amount loans Amount total loans Amount total loans
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial $ 923 22.0% $ 781 25.9% $ 642 26.4%
Real estate 1,288 67.7% 1,392 65.1% 1,252 65.3%
Agriculture 147 5.3% 105 5.3% 78 4.5%
Consumer 206 3.8% 153 3.1% 88 3.7%
Lease financing receivable 50 1.2% 23 .6% 2 .1%
- ----------------------------------------------------------------------------------------------------------------------------------
Total allocated $2,614 100.0% $2,454 100.0% $2,062 100.0%
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------
Percent of loans in Percent of loans in
each category to total each category to
Amount loans Amount total loans
- -------------------------------------------------------------------------------------------------
Commercial $ 509 25.4% $ 459 24.8%
Real estate 1,052 68.1% 877 68.6%
Agriculture 39 2.4% 14 1.0%
Consumer 86 3.8% 158 4.9%
Lease financing receivable 7 .3% 18 .7%
- -------------------------------------------------------------------------------------------------
Total allocated $1,693 100.0% $1,526 100.0%
- -------------------------------------------------------------------------------------------------
Other Real Estate
At December 31, 2001 and 2000, the Company did not have any ORE
properties.
Deposits
At December 31, 2001, total deposits were $254,888,000 representing an
increase of $15,576,000 (6.5%) over the December 31, 2000 balance of
$239,312,000. State of California certificates of deposit accounted for
$3,000,000 of the deposit growth in 2001. The remainder of the increase in total
deposits is attributable to internal growth in noninterest-bearing demand,
interest-bearing demand, savings and time deposit categories. During 2000,
deposits increased $16,235,000 (7.3%) from the total of $223,077,000 at December
31, 1999.
Capital Resources
The current and projected capital position of the Company and the impact
of capital plans and long-term strategies is reviewed regularly by management.
The Company's capital position represents the level of capital available to
support continuing operations and expansion.
In May of 1997, the board of directors of the Company authorized a stock
repurchase plan. The Company acquired 77,000 shares of its common stock during
1999, 60,000 in 1998 and 25,000 in 1997. These repurchases were made
periodically in the open market with the intention to lessen the dilutive impact
of issuing new shares in connection with stock option plans and in conjunction
with annual distributions of a five percent common stock dividend. As a result
of the acquisition of North Coast Bank during 2000, which was accounted for as a
pooling of interests, the Company was required to discontinue the repurchase of
its common stock during the transition period. On September 20, 2001, the
Company announced a new plan to repurchase, as conditions warrant, up to 5%
annually of the Company's stock in connection with the Company's annual
distribution of a 5% stock dividend. During 2001, the Company repurchased 21,400
shares under the new plan.
28
The Company and the Subsidiary Banks are subject to certain regulations
issued by the Board of Governors of the Federal Reserve System, the FDIC and the
OCC, which require maintenance of certain levels of capital. At December 31,
2001, shareholders' equity was $27,942,000, representing an increase of
$3,529,000 (14.5%) from $24,413,000 at December 31, 2000. In 2000, shareholders'
equity increased $3.8 million (18.5%) from 1999. The ratio of total risk-based
capital to risk adjusted assets was 13.6% at December 31, 2001 compared to 11.7%
at December 31, 2000. Tier 1 risk-based capital to risk-adjusted assets was
12.4% at December 31, 2001 and 10.6% at December 31, 2000.
Table Nine below lists the Company's actual capital ratios at December 31,
2001 and 2000 as well as the minimum capital ratios for capital adequacy.
Table Nine: Capital Ratios
- --------------------------------------------------------------------------------
At December 31, Minimum Regulatory
Capital to Risk-Adjusted Assets 2001 2000 Capital Requirements
- --------------------------------------------------------------------------------
Leverage ratio 9.8% 8.7% 4.00%
Tier 1 Risk-Based Capital 12.4% 10.6% 4.00%
Total Risk-Based Capital 13.6% 11.7% 8.00%
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
All Subsidiary Banks ratios are in excess of the regulatory definition of "well
capitalized."
See "American River Holdings and Subsidiaries Financial Statements--Note
13, Regulatory Matters" for a discussion of regulatory capital requirements.
Management believes that the Company's capital is adequate to support current
operations and anticipated growth, cash dividends and future capital
requirements of the Company and its subsidiaries.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises primarily from interest rate
risk inherent in its loan and deposit functions. The goal for managing the
assets and liabilities of the Company is to maximize shareholder value and
earnings while maintaining a high quality balance sheet without exposing the
Company to undue interest rate risk. The Board of Directors has overall
responsibility for the interest rate risk management policies. Each of the
Subsidiary Banks have an Asset and Liability Management Committee (ALCO) 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
29
rate forecast which take place within a one year time frame. The net interest
income is measured during the year assuming a gradual change in rates over the
twelve-month horizon. The Company's 2002 net interest income, as forecast below,
was modeled utilizing a forecast balance sheet projected from year-end 2001
balances.
Table Ten 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 Ten: Interest Rate Risk Simulation of Net Interest as of December 31, 2001
- --------------------------------------------------------------------------------
(In thousands) $ Change in NII
from Current
12 Month Horizon
----------------
Variation from a constant rate scenario
+200bp $ 635
-200bp $ (587)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
Interest Rate Sensitivity Analysis
Interest rate sensitivity is a function of the repricing characteristics
of the portfolio of assets and liabilities. These repricing characteristics are
the time frames within which the interest-bearing assets and liabilities are
subject to change in interest rates either at replacement, repricing or
maturity. Interest rate sensitivity management focuses on the maturity of assets
and liabilities and their repricing during periods of changes in market interest
rates. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in the current portfolio that are subject to
repricing at various time horizons. The differences are known as interest
sensitivity gaps.
A positive cumulative gap may be equated to an asset sensitive position.
An asset sensitive position in a rising interest rate environment will cause a
bank's interest rate margin to expand. This results as floating or variable rate
loans reprice more rapidly than fixed rate certificates of deposit that reprice
as they mature over time. Conversely, a declining interest rate environment will
cause the opposite effect. A negative cumulative gap may be equated to a
liability sensitive position. A liability sensitive position in a rising
interest rate environment will cause a bank's interest rate margin to contract,
while a declining interest rate environment will have the opposite effect.
30
As reflected in Table Eleven below, at December 31, 2001, the cumulative
gap through the one-year time horizon indicates a slightly asset sensitive
position.
Table Eleven: Interest Rate Sensitivity
December 31, 2001
- -----------------------------------------------------------------------------------------------------
Assets and Liabilities which mature or reprice within (days):
Non-
(In thousands) 0-90 91-180 181-365 Over 365 repricing Total
- -----------------------------------------------------------------------------------------------------
Assets:
Investment securities $ 15,195 $ 2,504 $ 7,155 $ 37,612 $ -- $ 62,466
Loans 105,784 26,126 20,800 42,316 -- 195,026
Other assets -- -- -- -- 29,067 29,067
- -----------------------------------------------------------------------------------------------------
Total assets $120,979 $ 28,630 $ 27,955 $ 79,928 $ 29,067 $286,559
=====================================================================================================
Liabilities:
Non-interest bearing $ -- $ -- $ -- $ -- $ 67,740 $ 67,740
Interest bearing:
Transaction 11,688 4,675 3,506 3,506 -- 23,375
Money market 37,326 14,930 11,198 11,198 -- 74,652
Savings 6,476 2,590 1,295 2,590 -- 12,951
Time certificates 42,519 14,674 13,919 5,058 -- 76,170
Other borrowings 6 6 12 2,015 -- 2,039
Other liabilities -- -- -- -- 1,690 1,690
Shareholders' equity -- -- -- -- 27,942 27,942
- -----------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 98,015 $ 36,875 $ 29,930 $ 24,367 $ 97,372 $286,559
=====================================================================================================
Interest rate
sensitivity gap $ 22,964 $ (8,245) $ (1,975) $ 55,561 $(68,305) --
Cumulative interest
rate sensitivity gap $ 22,964 $ 14,719 $ 12,744 $ 68,305 -- --
Inflation
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing, or other commercial concerns, primarily
because its assets and liabilities are largely monetary. In general, inflation
primarily affects the Company and it subsidiaries through its effect on market
rates of interest, which affects the Company's ability to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings which may be generated in the
future. In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a material effect upon the
results of operations of the Company and its subsidiaries during the periods
ending December 31, 2001, 2000 and 1999.
Liquidity
Liquidity management refers to the Company's ability to provide funds on
an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, short-term investments
and securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Company assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. Commitments to fund loans and outstanding
standby letters of credit at December 31, 2001 were approximately $60,840,000
and $3,776,000, respectively. Such loans relate primarily to revolving lines of
credit and other commercial loans and to real estate construction loans. Since
31
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. On December 31, 2001,
consolidated liquid assets totaled $54.8 million or 19.1% of total assets
compared to $38.8 million or 13.6% of total assets on December 31, 2000. In
addition to liquid assets, the Company maintains short-term lines of credit in
the amount of $22,000,000 with correspondent banks. At December 31, 2001, the
Company had $22,000,000 available under these credit lines. Additionally, the
Subsidiary Banks are members of the Federal Home Loan Bank. At December 31,
2001, the Subsidiary Banks could have arranged for up to $11,161,000 in secured
borrowings from the Federal Home Loan Bank. American River Bank also has
informal agreements with various other banks to sell participations in loans, if
necessary. The Company serves primarily a business and professional customer
base and, as such, its deposit base is susceptible to economic fluctuations.
Accordingly, management strives to maintain a balanced position of liquid assets
to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the Available-for-
Sale category to meet liquidity needs. Due to the falling interest rate
environment throughout the last half of 2000 and continuing through the end of
2001, much of the investment portfolio has experienced significant price
appreciation, which has resulted in unrealized gains. These unrealized gains
allow the Company the ability to sell these securities should the liquidity
needs arise. These securities are also available to pledge as collateral for
borrowings if the need should arise. American River Bank has established a
master repurchase agreement with a correspondent bank to enable such
transactions. American River Bank and North Coast Bank can also pledge
securities to borrow from the Federal Reserve Bank and the Federal Home Loan
Bank.
The maturity distribution of certificates of deposit is set forth in Table
Twelve below for the periods presented. These deposits are generally more rate
sensitive than other deposits and, therefore, are more likely to be withdrawn to
obtain higher yields elsewhere if available.
Table Twelve: Certificates of Deposit Maturities
December 31, 2001
- -------------------------------------------------------------------------------
(In thousands) Over $100,000 Less than $100,000
- -------------------------------------------------------------------------------
Three months or less $20,852 $10,502
Over three months through six months 8,989 5,721
Over six months through twelve months 6,754 7,401
Over twelve months 8,302 7,649
- -------------------------------------------------------------------------------
Total $44,897 $31,273
===============================================================================
32
Loan demand also affects the Company's liquidity position. Table Thirteen
below presents the maturities of loans for the period indicated.
Table Thirteen: Loan Maturities (Gross Loans)
- -------------------------------------------------------------------------------
December 31, 2001
- -------------------------------------------------------------------------------
One year One year through Over
(In thousands) or less five years five years Total
- -------------------------------------------------------------------------------
Commercial $ 19,370 $ 16,316 $ 7,933 $ 43,619
Real estate 39,528 26,427 68,143 134,098
Agriculture 1,346 5,713 3,192 10,251
Consumer 1,037 4,187 2,374 7,598
Leases 0 2,499 0 2,499
- -------------------------------------------------------------------------------
Total $ 61,281 $ 55,142 $ 81,642 $198,065
===============================================================================
Loans shown above with maturities greater than one year include
$116,118,000 of floating interest rate loans and $20,666,000 of fixed rate
loans.
The maturity distribution and yields of the investment portfolios are
presented in Table Fourteen below. The yields on tax-exempt obligations have
been computed on a tax equivalent basis.
Table Fourteen: Securities Maturities and Weighted Average Yields
December 31, 2001, 2000 and 1999
- ------------------------------------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis) Weighted
Amortized Unrealized Unrealized Market Average
(In thousands) Cost Gain Losses Value Yield
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2001
Available-for-sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 5,866 $ 158 $ - $ 6,024 6.310%
Maturing after 1 year but within 5 years 12,184 307 12 12,479 5.302%
State & political subdivisions
Maturing after 1 year but within 5 years 1,788 101 - 1,889 6.651%
Maturing after 5 years but within 10 Years 1,821 82 - 1,903 7.615%
Maturing after 10 years 6,015 160 27 6,148 7.487%
Government guaranteed mortgage-backed
securities 1,108 2 6 1,104 5.258%
Other
Maturing within 1 year 4,518 19 4 4,533 3.667%
Maturing after 1 year but within 5 years 784 11 6 789 4.623%
Non maturing 923 20 9 934 6.799%
- ------------------------------------------------------------------------------------------------------------
Total investment securities $ 35,007 $ 860 $ 64 $ 35,803 5.717%
============================================================================================================
33
(Taxable Equivalent Basis)
Amortized Unrealized Unrealized Market Average
(In thousands) Cost Gain Losses Value Yield
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 2000
Available-for-sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 4,350 $ 4 $ (3) $ 4,351 6.021%
Maturing after 1 year but within 5 years 11,804 157 (5) 11,956 6.294%
State & political subdivisions
Maturing within 1 year 200 - - 200 6.100%
Maturing after 1 year but within 5 years 1,788 29 (6) 1,811 6.566%
Maturing after 5 years but within 10 Years 381 6 - 387 6.907%
Maturing after 10 years 7,211 193 (23) 7,381 7.308%
Government guaranteed mortgage-backed
securities 163 - - 163 6.765%
Other
Maturing within 1 year 3,950 - - 3,950 6.370%
Non maturing 1,366 24 (26) 1,364 5.600%
- ------------------------------------------------------------------------------------------------------------
Total investment securities $ 31,213 $ 413 $ (63) $ 31,563 6.497%
============================================================================================================
December 31, 1999
Available-for-sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 6,481 $ 4 $ (6) $ 6,479 6.173%
Maturing after 1 year but within 5 years 12,338 - (147) 12,191 6.139%
State & political subdivisions
Maturing after 1 year but within 5 years 1,156 - (27) 1,129 6.426%
Maturing after 5 years but within 10 Years 450 - (26) 424 6.333%
Maturing after 10 years 7,029 15 (307) 6,737 7.835%
Government guaranteed mortgage-backed
securities 228 - (3) 225 6.300%
Other
Maturing within 1 year 9,908 - - 9,908 6.168%
Maturing after 5 years but within 10 years 252 - (17) 235 8.652%
Maturing after 10 years 486 25 - 511 10.135%
Non maturing 922 15 - 937 3.936%
- ------------------------------------------------------------------------------------------------------------
Total investment securities $ 39,250 $ 59 $(533) $ 38,776 6.473%
============================================================================================================
December 31, 2001
Held-to-maturity securities:
State & political subdivisions
Maturing after 1 year but within 5 years $ 1,323 $ 51 $ - $1,374 6.510%
Maturing after 5 years but within 10 Years 16 - - 16 15.840%
Government guaranteed mortgage-backed
securities 11,770 169 95 11,844 5.923%
- ------------------------------------------------------------------------------------------------------------
Total investment securities $ 13,109 $ 220 $ 95 $ 13,234 5.994%
============================================================================================================
34
(Taxable Equivalent Basis)
Amortized Unrealized Unrealized Market Average
(In thousands) Cost Gain Losses Value Yield
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 2000
Held-to-maturity securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 1,501 $ 2 $ (1) $ 1,502 6.396%
State & political subdivisions
Maturing within 1 year 553 4 - 557 8.352%
Maturing after 1 year but within 5 years 1,324 16 - 1,340 6.510%
Maturing after 5 years but within 10 Years 23 - - 23 15.840%
Government guaranteed mortgage-backed
securities 9,965 48 (12) 10,001 6.580%
Other
Maturing within 1 year 1,836 1 (3) 1,834 5.838%
Maturing after 1 year but within 5 years 1,253 13 - 1,266 6.884%
- ------------------------------------------------------------------------------------------------------------
Total investment securities $ 16,455 $ 84 $ (16) $ 16,523 6.570%
============================================================================================================
December 31, 1999
Held-to-maturity securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 1,505 - $ (3) $ 1,502 5.862%
Maturing after 1 year but within 5 years 1,498 $ 3 (4) 1,497 6.397%
State & political subdivisions
Maturing within 1 year 116 2 - 118 8.250%
Maturing after 1 year but within 5 years 2,041 14 (7) 2,048 6.979%
Maturing after 5 years but within 10 Years 31 31 15.840%
Government guaranteed mortgage-backed
securities 11,891 - (155) 11,736 6.421%
Other
Maturing within 1 year 753 - (3) 750 5.703%
Maturing after 1 year but within 5 years 2,664 - (42) 2,622 6.054%
- ------------------------------------------------------------------------------------------------------------
Total investment securities $ 20,499 $ 19 $(214) $ 20,304 6.384%
============================================================================================================
The principal cash requirements of the Company are for expenses incurred
in the support of administration and operations. For nonbanking functions, the
Company is dependent upon the payment of cash dividends from its subsidiaries to
service its commitments. The Company expects that the cash dividends paid by its
subsidiaries to the Company will be sufficient to meet this payment schedule.
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases. These
commitments do not significantly impact operating results. See "American River
Holdings and Subsidiaries Financial Statements--Note 11, Commitments and
Contingencies".
Certain financial institutions have elected to use special purpose
vehicles ("SPV") to dispose of problem assets. An SPV is typically a subsidiary
company with an asset and liability structure and legal status that makes its
obligations secure even if the parent corporation goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from
their reported impaired and non-performing assets. We do not use those vehicles
or any other structures to dispose of problem assets.
35
As of December 31, 2001, commitments to extend credit and letters of
credit were the only financial instruments with off-balance sheet risk. The
Company has not entered into any contracts for financial derivative instruments
such as futures, swaps, options or similar instruments. Loan commitments and
letters of credit were $60,840,000 and $3,776,000, respectively, at December 31,
2001, a compared to $51,201,000 and $875,000, respectively, at December 31,
2000. As a percentage of net loans and leases these off-balance sheet items
represent 33.1%, and 25.5%, respectively.
Disclosure of Fair Value
The Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards Number 107, Disclosures about Fair Value of Financial
Statements, requires the disclosure of fair value of most financial instruments,
whether recognized or not recognized in the financial statements. The intent of
presenting the fair values of financial instruments is to depict the market's
assessment of the present value of net future cash flows discounted to reflect
both current interest rates and the market's assessment of the risk that the
cash flows will not occur.
In determining fair values, the Company used the carrying amount for cash
and cash equivalents, accounts receivable, servicing receivable, accrued
interest receivable and accrued interest payable as all of these instruments are
short term in nature. Securities are reflected at quoted market values. Loans
and deposits have a long term time horizon which required more complex
calculations for fair value determination. Loans are grouped into homogeneous
categories and broken down between fixed and variable rate instruments. Loans
with a variable rate, which reprice immediately, are valued at carrying value.
The fair value of fixed rate instruments is estimated by discounting the future
cash flows using current rates. Credit risk and repricing risk factors are
included in the current rates. Fair value for nonaccrual loans is reported at
carrying value and is included in the net loan total. Since the allowance for
loan losses exceeds any potential adjustment for nonaccrual valuation, no
further valuation adjustment has been made.
Demand deposits, savings and certain money market accounts are short term
in nature so the carrying value equals the fair value. For certificates of
deposit, the fair value is estimated by discounting the future cash payments
using the rates currently offered for deposits of similar remaining maturities.
The change in the calculated fair value percentage relates to the loan and
investment categories and is the result of changes in interest during the year.
See "American River Holdings and Subsidiaries Financial Statements--Note 18,
Disclosures About Fair Value of Financial Instruments".
Accounting Pronouncements
In July 2001, the Financial Standards Accounting Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations covering elimination of pooling accounting treatment in business
combinations and financial accounting and reporting for acquired goodwill and
other intangible assets at acquisition. SFAS No. 141 supersedes APB Opinion No.
16, Business Combinations and SFAS No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises and is effective for transactions
initiated after June 30, 2001. Under SFAS No. 141, all mergers and business
combinations initiated after the effective date must be accounted for as
"purchase" transactions. A merger or business combination was considered
initiated if the major terms of the transaction, including the exchange or
conversion ratio, were publicly announced or otherwise disclosed to shareholders
of the combining companies prior to the effective date. Goodwill in any merger
or business combination which was not initiated prior to the effective date will
be recognized as an asset in the financial statements, measured as the excess of
the cost of an acquired entity over the net of the amounts assigned to
identifiable assets acquired and liabilities assumed, and then tested for
impairment to assess losses and expensed against earnings only in the periods in
which the recorded value of goodwill exceeded its implied fair value. The FASB
concurrently adopted SFAS No. 142, Goodwill and Other Intangible Assets to
address financial accounting and reporting for acquired goodwill and other
intangible assets at acquisition in transactions other than business
combinations covered by SFAS No. 141, and the accounting treatment of goodwill
36
and other intangible assets after acquisition and initial recognition in the
financial statements. SFAS No. 142 supersedes APB Opinion No. 17, Intangible
Assets and is required to be applied at the beginning of an entity's fiscal year
to all goodwill and other intangible assets recognized in its financial
statements at that date, for fiscal years beginning after December 15, 2001. It
is not certain what effect SFAS No. 141 and SFAS No. 142 may have upon the pace
of business combinations in the banking industry in general or upon prospects of
any merger or business combination opportunities involving the Company in the
future. The Company was required to adopt SFAS No. 142 beginning January 1,
2002. The adoption of SFAS No. 142 did not have a material effect on the
Company's financial position, results of operations, or cash flows as the
Company had only $63,000 in goodwill as of December 31, 2001 and all of the
Company's intangible assets at December 31, 2001 will continue to be amortized.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, to replace
SFAS No. 125 which was issued in June 1996. The original statement addressed
issues related to transfers of financial assets in which the transferor has some
continuing involvement with the transferred assets or with the transferee. SFAS
No. 140 resolves implementation issues which arose as a result of SFAS No. 125,
but carries forward most of the provisions of the original statement. SFAS No.
140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The adoption of SFAS No. 140 did not have
a significant impact on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, that replaced SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The accounting model for long-lived assets to be disposed of by
sale applies to all long-lived assets, including discontinued operations, and
replaced the provisions of APB Opinion No. 30, Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, for the
disposal of segments of a business. SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred.
SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The provisions of SFAS No.
144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively. The
adoption of SFAS No. 144 did not have a material impact on the Company's
financial position or results of operations
Other Matters
CALIFORNIA ENERGY SHORTAGE: The State of California recently experienced
periodic electric power shortages. It is uncertain whether these shortages will
continue. Conservation efforts and unanticipated cooler weather conditions
through the summer months of 2001 have resulted in lower demand for electricity
throughout California and an electricity surplus. California also initiated
action to supplement conservation efforts including acceleration of the approval
process for development of new energy production facilities and entering into
long-term energy contracts for the supply of electricity. The Company and its
subsidiaries could be materially and adversely affected either directly or
indirectly by a severe electric power shortage if such a shortage caused any of
its critical data processing or computer systems and related equipment to fail,
or if the local infrastructure systems such as telephone systems should fail, or
the Company's and its subsidiaries' significant vendors, suppliers, service
providers, customers, borrowers, or depositors are adversely impacted by their
internal systems or those of their respective customers or suppliers. Material
increases in the expenses related to electric power consumption and the related
37
increase in operating expense could also have an adverse effect on the Company's
future results of operations.
EFFECTS OF TERRORISM: The terrorist actions on September 11, 2001 and
thereafter have had significant adverse effects upon the United States economy.
Whether the terrorist activities in the future and the actions of the United
States and its allies in combating terrorism on a worldwide basis will adversely
impact the Company and the extent of such impact is uncertain. However, such
events have had and may continue to have an adverse effect on the economy in the
Company's market areas. Such continued economic deterioration could adversely
affect the Company's future results of operations by, among other matters,
reducing the demand for loans and other products and services offered by the
Company, increasing nonperforming loans and the amounts reserved for loan
losses, and causing a decline in the Company's stock price.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A of Form 10-K is contained in Item
7-"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Reports 39
Consolidated Balance Sheet, December 31, 2001 and 2000 40
Consolidated Statement of Income for the years ended
December 31, 2001, 2000 and 1999 41
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999 42
Consolidated Statement of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 43-44
Notes to Consolidated Financial Statements 45-72
All schedules have been omitted since the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the Consolidated Financial Statements or
notes thereto.
38
INDEPENDENT AUDITOR'S REPORT
----------------------------
The Shareholders and Board of Directors
American River Holdings and Subsidiaries
We have audited the accompanying consolidated balance sheet of American
River Holdings and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American River Holdings and subsidiaries as of December 31, 2001 and 2000, and
the consolidated results of their operations and their consolidated cash flows
for each of the years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Perry-Smith LLP
February 8, 2002
39
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2001 and 2000
(Dollars in thousands)
2001 2000
------------- --------------
ASSETS
Cash and due from banks $ 20,342 $ 21,236
Federal funds sold 7,814
Interest-bearing deposits in banks 5,740 5,540
Investment securities (Note 3):
Available for sale, at fair value 35,803 31,563
Held to maturity, at amortized cost 13,109 16,455
Loans and leases, less allowance for loan and lease losses of
$2,614 in 2001 and $2,454 in 2000 (Notes 4, 8, 9, 11 and 16) 195,026 200,658
Premises and equipment, net (Note 5) 1,903 1,688
Accounts receivable servicing receivables, net (Notes 6 and 14) 2,869 3,180
Accrued interest receivable and other assets (Note 10) 3,953 3,806
------------- --------------
$ 286,559 $ 284,126
============= ==============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 67,740 $ 64,920
Interest bearing (Note 7) 187,148 174,392
------------- --------------
Total deposits 254,888 239,312
Short-term borrowings (Note 8) 15,990
Long-term debt (Note 9) 2,039 2,084
Accrued interest payable and other liabilities 1,690 2,327
------------- --------------
Total liabilities 258,617 259,713
------------- --------------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 12 and 13):
Common stock - no par value; 20,000,000 shares authorized;
issued and outstanding - 2,519,717 shares in 2001 and
2,395,158 shares in 2000 14,167 12,320
Retained earnings 13,290 11,876
Accumulated other comprehensive income (Notes 3 and 17) 485 217
------------- --------------
Total shareholders' equity 27,942 24,413
------------- --------------
$ 286,559 $ 284,126
============= ==============
The accompanying notes are an integral
part of these financial statements.
40
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share data)
2001 2000 1999
-------------- ------------- --------------
Interest income:
Interest and fees on loans $ 17,883 $ 17,294 $ 13,926
Interest on Federal funds sold 202 353 451
Interest on deposits in banks 342 409 336
Interest and dividends on investment securities:
Taxable 1,871 2,643 2,126
Exempt from Federal income taxes 464 462 339
Dividends 81 66 51
-------------- ------------- --------------
Total interest income 20,843 21,227 17,229
-------------- ------------- --------------
Interest expense:
Interest on deposits (Note 7) 6,042 7,330 5,316
Interest on short-term borrowings (Note 8) 97 183 28
Interest on long-term debt (Note 9) 127 129 131
-------------- ------------- --------------
Total interest expense 6,266 7,642 5,475
-------------- ------------- --------------
Net interest income 14,577 13,585 11,754
Provision for loan and lease losses (Note 4) 791 672 582
-------------- ------------- --------------
Net interest income after provision for loan
and lease losses 13,786 12,913 11,172
-------------- ------------- --------------
Noninterest income:
Service charges 562 602 537
Gain on sale of available-for-sale investment securities,
net (Note 3) 13
Other income (Notes 6 and 14) 1,803 1,568 1,110
-------------- ------------- --------------
Total noninterest income 2,365 2,183 1,647
-------------- ------------- --------------
Noninterest expense:
Salaries and employee benefits (Notes 4 and 15) 5,334 4,961 4,366
Occupancy (Notes 5 and 11) 810 757 699
Furniture and equipment (Notes 5 and 11) 564 461 457
Other expense (Note 14) 2,794 3,150 2,248
-------------- ------------- --------------
Total noninterest expense 9,502 9,329 7,770
-------------- ------------- --------------
Income before income taxes 6,649 5,767 5,049
Income taxes (Note 10) 2,612 2,221 1,921
-------------- ------------- --------------
Net income $ 4,037 $ 3,546 $ 3,128
============== ============= ==============
Basic earnings per share (Note 12) $ 1.59 $ 1.42 $ 1.25
============== ============= ==============
Diluted earnings per share (Note 12) $ 1.50 $ 1.35 $ 1.18
============== ============= ==============
Cash dividends per share of issued and outstanding common
stock, adjusted for stock dividends $ .27 $ .24 $ .21
============== ============= ==============
The accompanying notes are an integral part of these financial statements.
41
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
Accum-
ulated
Other
Compre-
Common Stock hensive Share- Compre-
-------------------------- Retained Income holders' hensive
Shares Amount Earnings (Loss) Equity Income
------------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 1999 2,177,811 $ 9,747 $ 9,236 $ 185 $ 19,168
Comprehensive income (Note 17):
Net income 3,128 3,128 $ 3,128
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (479) (479) (479)
-----------
Total comprehensive income $ 2,649
===========
Cash dividends ($.21 per share) (416) (416)
5% stock dividend 85,879 1,474 (1,474)
Fractional shares redeemed (7) (7)
Stock options exercised 74,742 692 692
Retirement of common stock (Note 12) (89,753) (1,475) (1,475)
------------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 2,248,679 10,438 10,467 (294) 20,611
Comprehensive income (Note 17):
Net income 3,546 3,546 $ 3,546
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 511 511 511
-----------
Total comprehensive income $ 4,057
===========
Cash dividends ($.24 per share) (535) (535)
5% stock dividend 113,742 1,596 (1,596)
Fractional shares redeemed (6) (6)
Stock options exercised 32,737 286 286
------------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 2,395,158 12,320 11,876 217 24,413
Comprehensive income (Note 17):
Net income 4,037 4,037 $ 4,037
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities (Note 3) 268 268 268
-----------
Total comprehensive income $ 4,305
===========
Cash dividends ($.27 per share) (681) (681)
5% stock dividend 120,531 1,935 (1,935)
Fractional shares redeemed (7) (7)
Stock options exercised 25,428 247 247
Retirement of common stock (Note 12) (21,400) (335) (335)
------------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 2,519,717 $ 14,167 $ 13,290 $ 485 $ 27,942
============= =========== =========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
42
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
-------------- ------------- --------------
Cash flows from operating activities:
Net income $ 4,037 $ 3,546 $ 3,128
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 791 672 582
(Decrease) increase in deferred loan and lease origination
fees, net (173) 178 (36)
Net gain on the sale of available-for-sale investment
securities (13)
Depreciation and amortization 439 359 277
Accretion of investment security discounts, net (46) (251) (54)
Loss on sale of other real estate 3
Provision for losses on other real estate 7
Provision for accounts receivable servicing asset losses 10 30
Increase in accrued interest receivable and other
assets (180) (336) (406)
(Decrease) increase in accrued interest payable
and other liabilities (678) 503 132
Deferred taxes (179) (289) (107)
-------------- ------------- --------------
Net cash provided by operating activities 4,021 4,399 3,526
-------------- ------------- --------------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment
securities 1,979 20 1,996
Proceeds from the redemption of Federal Home Loan
Bank stock 554
Proceeds from called available-for-sale investment
securities 1,500
Proceeds from matured available-for-sale investment
securities 9,020 22,500 23,820
Proceeds from called held-to-maturity investment
securities 155
Proceeds from matured held-to-maturity investment
securities 2,050 2,365 3,330
Purchases of available-for-sale investment securities (13,228) (14,745) (39,391)
Purchases of held-to-maturity investment securities (5,193) (487) (10,865)
Proceeds from principal repayments for available-for-sale
government-guaranteed mortgage-backed securities 92 65 301
Proceeds from principal repayments for held-to-maturity
government-guaranteed mortgage-related securities 3,378 1,918 3,047
Net (increase) decrease in interest-bearing deposits in
banks (200) 780 (612)
Net decrease (increase) in loans and leases 5,023 (44,412) (14,270)
Net decrease (increase) in accounts receivable servicing
receivables 301 (1,128) (934)
Purchases of equipment (629) (799) (479)
Proceeds from the sale of other real estate 450
-------------- ------------- --------------
Net cash provided by (used in) investing activities 4,093 (33,214) (33,607)
-------------- -------------- --------------
(Continued)
43
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
-------------- ------------- --------------
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings
deposits $ 7,764 $ 18,174 $ 15,539
Net increase (decrease) in time deposits 7,812 (1,939) 10,434
Repayment of Federal Home Loan Bank advance (45) (41) (39)
(Decrease) increase in short-term borrowings (15,990) 14,990 1,000
Exercise of stock options 247 286 692
Cash paid to repurchase common stock (335) (1,475)
Payment of cash dividends (640) (438) (386)
Cash paid for fractional shares in connection with stock
dividends (7) (6) (7)
-------------- ------------- --------------
Net cash (used in) provided by financing activities (1,194) 31,026 25,758
-------------- ------------- --------------
Increase (decrease) in cash and cash
equivalents 6,920 2,211 (4,323)
Cash and cash equivalents at beginning of year 21,236 19,025 23,348
-------------- ------------- --------------
Cash and cash equivalents at end of year $ 28,156 $ 21,236 $ 19,025
============== ============= ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 6,299 $ 7,599 $ 5,520
Income taxes $ 2,954 $ 2,279 $ 1,957
Non-cash investing activities:
Net change in unrealized gain on available-for-sale
investment securities $ 446 $ 824 $ (771)
Transfer of corporate debt securities from the held-to-
maturity category to the available-for-sale category $ 3,089
Non-cash financing activities:
Dividends declared and unpaid $ 353 $ 312 $ 215
The accompanying notes are an integral
part of these financial statements.
44
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS OF THE COMPANY
American River Holdings (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.
The Company's wholly-owned subsidiaries include American River Bank (ARB),
First Source Capital, and North Coast Bank (NCB). ARB was incorporated in
1983. ARB 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. ARB operates four banking offices
in Sacramento, Placer, El Dorado and Yolo counties.
First Source Capital was formed in July 1999 to conduct lease financing
activities for most types of business assets. First Source Capital acts as
a lease broker and receives a fee for each lease recorded on the books of
the party acting as the funding source.
On October 25, 2000, the Company completed a merger with NCB by exchanging
486,685 shares of its common stock (after adjustment for fractional
shares) for all of the common stock of NCB. Each share of NCB was
exchanged for .9644 of a share of the Company. In addition, NCB stock
options were converted at the same exchange ratio into options to purchase
154,278 shares of the Company's common stock. The business combination was
accounted for on a pooling-of-interests basis. NCB's net income for the
period ended October 25, 2000 (unaudited) was $420,000 and for the year
ended December 31, 1999 was $227,000. NCB is a national banking
association, organized in 1990 with its headquarters in Santa Rosa,
California. NCB operates three full service banking offices within its
primary service areas of Sonoma County, in the cities of Healdsburg, Santa
Rosa and Windsor. NCB's primary business is serving the business or
commercial banking needs of small to mid-sized businesses within Sonoma,
Napa, Marin and Mendocino counties.
The deposits of both ARB and NCB are insured by the Federal Deposit
Insurance Corporation (the "FDIC") up to applicable legal limits. Neither
bank offers trust services or international banking services and do not
plan to do so in the near future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
-------
The accounting and reporting policies of the Company and its subsidiaries
conform with generally accepted accounting principles and prevailing
practices within the financial services industry.
Reclassifications
-----------------
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 2001.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany transactions
and accounts have been eliminated in consolidation.
45
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities
---------------------
Investments are classified into the following categories:
o Available-for-sale securities, reported at fair value, with
unrealized gains and losses excluded from earnings and reported,
net of taxes, as accumulated other comprehensive income (loss)
within shareholders' equity.
o Held-to-maturity securities, which management has the positive
intent and ability to hold, reported at amortized cost, adjusted
for the accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments at
the time of purchase and may only change the classification in certain
limited circumstances. All transfers between categories are accounted for
at fair value.
Gains or losses on the sale of investment securities are computed on the
specific identification method. Interest earned on investment securities
is reported in interest income, net of applicable adjustments for
accretion of discounts and amortization of premiums. In addition,
unrealized losses that are other than temporary are recognized in earnings
for all investments.
Loans and Leases
----------------
Loans and leases are stated at principal balances outstanding. Interest is
accrued daily based upon outstanding loan and lease balances. However,
when, in the opinion of management, loans and leases are considered to be
impaired and the future collectibility of interest and principal is in
serious doubt, loans and leases are placed on nonaccrual status and the
accrual of interest income is suspended. Any interest accrued but unpaid
is charged against income. Payments received are applied to reduce
principal to the extent necessary to ensure collection. Subsequent
payments on these loans and leases, or payments received on nonaccrual
loans or leases for which the ultimate collectibility of principal is not
in doubt, are applied first to earned but unpaid interest and then to
principal.
An impaired loan or lease is measured based on the present value of
expected future cash flows discounted at the instrument's effective
interest rate or, as a practical matter, at the instrument's observable
market price or the fair value of collateral if the loan or lease is
collateral dependent. A loan or lease is considered impaired when, based
on current information and events, it is probable that the Company will be
unable to collect all amounts due (including both principal and interest)
in accordance with the contractual terms of the loan or lease agreement.
Loan and lease origination fees, commitment fees, direct loan and lease
origination costs and purchase premiums and discounts on loans and leases
are deferred and recognized as an adjustment of yield, to be amortized to
interest income over the contractual term of the loan or lease. The
unamortized balance of deferred fees and costs is reported as a component
of net loans and leases.
46
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Sales and Servicing
------------------------
Included in the portfolio are Small Business Administration (SBA) and
Farmer Mac guaranteed loans that may be sold in the secondary market.
Loans held for sale are carried at the lower of cost or market value.
Market value is determined by the specific identification method as of the
balance sheet date or the date that the purchasers have committed to
purchase the loans. At the time the loan is sold, the related right to
service the loan is either retained, with the Company earning future
servicing income, or released in exchange for a one-time
servicing-released premium. A portion of this premium may be required to
be refunded if the borrower defaults or the loan prepays within ninety
days of the settlement date. However, there were no sales of loans subject
to these recourse provisions at December 31, 2001, 2000 and 1999. Loans
subsequently transferred to the loan portfolio are transferred at the
lower of cost or market value at the date of transfer. Any difference
between the carrying amount of the loan and its outstanding principal
balance is recognized as an adjustment to yield by the interest method.
There were no loans held for sale at December 31, 2001 and 2000.
SBA and Farmer Mac loans with unpaid balances of $2,691,000 and $4,511,000
were being serviced for others as of December 31, 2001 and 2000,
respectively. The Company also serviced loans that are participated with
other financial institutions totaling $12,678,000 and $13,388,000 as of
December 31, 2001 and 2000, respectively. In addition, the Company
serviced loans originated by others totaling $27,732,000 and $25,820,000
as of December 31, 2001 and 2000, respectively.
Servicing rights acquired through 1) a purchase or 2) the origination of
loans which are sold or securitized with servicing rights retained are
recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing, and
are subsequently amortized in proportion to and over the period of the
related net servicing income or expense. Servicing assets are periodically
evaluated for impairment. Servicing assets were not considered material
for disclosure purposes.
Allowance for Loan and Lease Losses
-----------------------------------
The allowance for loan and lease losses is maintained to provide for
probable losses related to impaired loans and leases and other losses on
loans and leases identified by management as doubtful, substandard and
special mention, as well as losses that can be expected to occur in the
normal course of business related to currently performing loans and
leases. The determination of the allowance is based on estimates made by
management, to include consideration of the character of the loan and
lease portfolio, specifically identified problem loans and leases,
inherent risk of loss in the portfolio taken as a whole and economic
conditions in the Company's service areas.
Commercial and real estate loans and leases determined to be impaired or
classified are individually evaluated by management for specific risk of
loss. In addition, reserve factors are assigned to currently performing
loans and leases based on management's assessment of the following for
each identified loan and lease type: (1) inherent credit risk, (2)
historical losses and, (3) where the Company has not experienced losses,
the loss experience of peer banks. Management also computes specific and
expected loss reserves for loan and lease commitments. Finally, a residual
component is maintained to cover the margin of imprecision inherent in the
assumptions used to estimate losses. These estimates are particularly
susceptible to changes in the economic environment and market conditions.
The Company's Loan Committee reviews the adequacy of the allowance for
loan and lease losses at least quarterly, to include consideration of the
relative risks in the portfolio and current economic conditions. The
allowance is adjusted based on that review if, in the judgment of the Loan
Committee and management, changes are warranted.
47
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan and Lease Losses (Continued)
-----------------------------------
The allowance is established through a provision for loan and lease losses
which is charged to expense. Additions to the allowance are expected to
maintain the adequacy of the total allowance after credit losses and loan
growth. The allowance for loan and lease losses at December 31, 2001 and
2000, respectively, reflect management's estimate of possible losses in
the portfolio.
Other Real Estate
-----------------
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess of
the recorded investment in the loan balance and accrued interest income
over the estimated fair market value of the property is charged against
the allowance for loan and lease losses. A valuation allowance for losses
on other real estate is maintained to provide for temporary declines in
value. The allowance is established through a provision for losses on
other real estate which is included in other expenses. Subsequent gains or
losses on sales or writedowns resulting from permanent impairments are
recorded in other income or expense as incurred. There was no other real
estate held by the Company at December 31, 2001 and 2000.
Premises and Equipment
----------------------
Premises and equipment are carried at cost. Depreciation is determined
using the straight-line method over the estimated useful lives of the
related assets. The useful life of building and improvements is forty
years. The useful lives of furniture, fixtures and equipment are estimated
to be three to ten years. Leasehold improvements are amortized over the
life of the asset or the term of the related lease, whichever is shorter.
When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts,
and any resulting gain or loss is recognized in income for the period. The
cost of maintenance and repairs is charged to expense as incurred.
Income Taxes
------------
The Company files its income taxes on a consolidated basis with its
subsidiaries. The allocation of income tax expense (benefit) represents
each entity's proportionate share of the consolidated provision for income
taxes.
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 balance sheet, net deferred tax assets
are included in accrued interest receivable and other assets.
Cash Equivalents
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents. Generally,
Federal funds are sold for one day periods.
48
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
------------------
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts
to issue common stock, such as stock options, result in the issuance of
common stock which shares in the earnings of the Company. The treasury
stock method has been applied to determine the dilutive effect of stock
options in computing diluted EPS. Earnings per share is retroactively
adjusted for stock splits and stock dividends for all periods presented.
In addition, earnings per share have been restated on an equivalent share
basis for all periods presented in connection with the merger previously
noted.
Stock-Based Compensation
------------------------
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the exercise price. However,
if the fair value of stock-based compensation computed under a fair value
based method, as prescribed in Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, is material to the
financial statements, pro forma net income and earnings per share are
disclosed as if the fair value method had been applied.
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Impact of New Financial Accounting Standards
--------------------------------------------
In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, to replace SFAS No. 125 which was
issued in June 1996. The original statement addressed issues related to
transfers of financial assets in which the transferor has some continuing
involvement with the transferred assets or with the transferee. SFAS No.
140 resolves implementation issues which arose as a result of SFAS No.
125, but carries forward most of the provisions of the original statement.
SFAS 140 was effective for transfers occurring after March 31, 2001 and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Management does not believe
the adoption of this statement has had a significant impact on the
Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 addresses the financial accounting and reporting for business
combinations and requires the use of a single method to account for
business combinations, the purchase method of accounting. In addition,
SFAS No. 141 requires that intangible assets be recognized as assets apart
from goodwill if they meet one of two criteria, the contractual-legal
criterion or the separability criterion. SFAS No. 141 applies to all
business combinations for which the date of acquisition is July 1, 2001 or
later.
49
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards (Continued)
--------------------------------------------
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. Pursuant to SFAS No. 142, goodwill and other intangible assets
that have indefinite useful lives will be evaluated periodically for
impairment rather than amortized. The provisions of this statement apply
to financial statements for fiscal years beginning after December 15,
2001, except for goodwill or other intangible assets acquired after June
30, 2001 for which SFAS No. 142 is immediately effective. Management does
not believe the adoption of SFAS No. 141 and SFAS No. 142 will have a
significant impact on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The accounting model for long-lived assets to be
disposed of by sale applies to all long-lived assets, including
discontinued operations, and replaces the provision of Accounting
Principles Board Opinion No. 30, Reporting Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, for the disposal of
segments of a business. SFAS No. 144 requires that those long-lived assets
be measured at the lower of carrying amount or fair value less costs to
sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have
not yet occurred. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15,
2001 and, generally, are to be applied prospectively. Management does not
believe the adoption of this statement will have a significant impact on
the Company's financial position or results of operations.
3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
December 31, 2001 and 2000 consisted of the following (dollars in
thousands):
Available-for-Sale:
------------------
2001
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- --------------- --------------- ----------------
U.S. Government agencies $ 18,050 $ 465 $ (12) $ 18,503
U.S. Government guaranteed
mortgage-backed securities 1,108 2 (6) 1,104
Obligations of states and
political subdivisions 9,624 343 (27) 9,940
Corporate debt securities 2,309 30 (10) 2,329
Corporate stock 583 20 (9) 594
Commercial paper 2,993 2,993
Federal Home Loan Bank stock 220 220
Federal Reserve Bank stock 120 120
---------------- --------------- --------------- ----------------
$ 35,007 $ 860 $ (64) $ 35,803
================ =============== =============== ================
Net unrealized gains on available-for-sale investment securities totaling
$796,000 were recorded, net of $311,000 in tax liabilities, as accumulated
other comprehensive income within shareholders' equity. Proceeds from the
sale of available-for-sale investment securities for the year ended
December 31, 2001 totaled $1,979,000. No gains or losses were recognized.
50
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
------------------
2000
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- --------------- --------------- ----------------
U.S. Government agencies $ 16,154 $ 161 $ (8) $ 16,307
U.S. Government guaranteed
mortgage-backed securities 163 163
Obligations of states and
political subdivisions 9,580 228 (29) 9,779
Corporate stock 1,050 24 (26) 1,048
Commercial paper 3,950 3,950
Federal Home Loan Bank stock 204 204
Federal Reserve Bank stock 112 112
---------------- --------------- --------------- ----------------
$ 31,213 $ 413 $ (63) $ 31,563
================ =============== =============== ================
Net unrealized gains on available-for-sale investment securities totaling
$350,000 were recorded, net of $133,000 in tax liabilities, as accumulated
other comprehensive income within shareholders' equity. Proceeds and gross
realized gains from the sale of available-for-sale investment securities
for the year ended December 31, 2000 totaled $20,000 and $13,000,
respectively. Proceeds from the redemption of Federal Home Loan Bank
stock, at cost, totaled $554,000 for the year ended December 31, 2000.
Proceeds from the sale of available-for-sale investment securities for the
year ended December 31, 1999 totaled $1,996,000. No gains or losses were
recognized.
Held-to-Maturity:
----------------
2001
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- --------------- --------------- ----------------
Obligations of states and
political subdivisions $ 1,339 $ 51 $ 1,390
Government guaranteed
mortgage-backed securities 11,762 169 $ (95) 11,836
SBA loan pools 8 8
---------------- --------------- --------------- ----------------
$ 13,109 $ 220 $ (95) $ 13,234
================ =============== =============== ================
51
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
Held-to-Maturity (Continued)
----------------
2000
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- --------------- --------------- ----------------
U.S. Government agencies $ 1,501 $ 2 $ (1) $ 1,502
Obligations of states and
political subdivisions 1,900 20 1,920
Government guaranteed
mortgage-backed securities 9,944 48 (12) 9,980
Corporate debt securities 3,089 14 (3) 3,100
SBA loan pools 21 21
---------------- --------------- --------------- ----------------
$ 16,455 $ 84 $ (16) $ 16,523
================ =============== =============== ================
On January 1, 2001, all corporate debt securities were transferred from
the held-to-maturity category to the available-for-sale category upon the
adoption of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, issued by the Financial Accounting Standards Board.
The amortized cost and market value of the transferred securities on the
date of the transfer were $3,089,000 and $3,100,000, respectively.
Accordingly, unrealized gains of $11,000 were recorded, net of $4,000 in
tax liabilities, as accumulated other comprehensive income within
shareholders' equity. There were no sales or other transfers of
held-to-maturity investment securities for the years ended December 31,
2001, 2000 and 1999.
The amortized cost and estimated market value of investment securities at
December 31, 2001 by contractual maturity are shown below. 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.
Available-for-Sale Held-to-Maturity
--------------------------------- ---------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------------- --------------- --------------- ----------------
(Dollars in thousands)
Within one year $ 10,384 $ 10,557
After one year through five years 14,756 15,157 $ 1,324 $ 1,375
After five years through ten years 1,821 1,903 15 15
After ten years 6,015 6,148
---------------- --------------- --------------- ----------------
32,976 33,765 1,339 1,390
Investment securities not due at
a single maturity date:
SBA loan pools 8 8
Government guaranteed
mortgage-backed securities 1,108 1,104 11,762 11,836
Corporate stock 583 594
Federal Home Loan Bank
stock 220 220
Federal Reserve Bank stock 120 120
---------------- --------------- --------------- ----------------
$ 35,007 $ 35,803 $ 13,109 $ 13,234
================ =============== =============== ================
52
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
Investment securities with amortized costs totaling $10,654,000 and
$7,732,000 and market values totaling $10,931,000 and $7,794,000 were
pledged to secure treasury tax and loan accounts, State Treasury funds on
deposit, and short-term borrowing arrangements at December 31, 2001 and
2000, respectively.
4. LOANS AND LEASES
Outstanding loans and leases are summarized as follows (dollars in
thousands):
December 31,
----------------------------
2001 2000
------------- -------------
Real estate - commercial $ 100,158 $ 97,390
Real estate - construction 30,821 27,182
Real estate - residential 3,119 8,085
Commercial 43,619 52,726
Lease financing receivable 2,499 1,150
Agriculture 10,251 10,764
Consumer 7,598 6,413
------------- ------------
198,065 203,710
Deferred loan and lease fees, net (425) (598)
Allowance for loan and lease losses (2,614) (2,454)
------------- -------------
$ 195,026 $ 200,658
============= =============
Certain loans have been pledged to secure borrowing arrangements (see
Notes 8 and 9).
Changes in the allowance for loan and lease losses were as follows
(dollars in thousands):
Year Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Balance, beginning of year $ 2,454 $ 2,062 $ 1,693
Provision charged to operations 791 672 582
Losses charged to allowance (711) (266) (231)
Amounts transferred to accounts
receivable servicing receivables
valuation reserve (Note 6) (41)
Recoveries 80 27 18
---------- ---------- ----------
Balance, end of year $ 2,614 $ 2,454 $ 2,062
========== ========== ==========
At December 31, 2001 and 2000, nonaccrual loans totaled $856,000 and
$674,000 respectively. Interest foregone on nonaccrual loans for the years
ended December 31, 2001, 2000 and 1999 was not material.
53
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. LOANS AND LEASES (Continued)
The recorded investment in loans and leases that were considered to be
impaired totaled $856,000 and $674,000 at December 31, 2001 and 2000,
respectively. The related allowance for loan and lease losses for these
loans and leases as determined under loan impairment standards at December
31, 2001 and 2000 was $263,000 and $86,000, respectively. The average
recorded investment in impaired loans and leases for the years ended
December 31, 2001, 2000 and 1999 was $733,000, $128,000 and $279,000,
respectively. Interest income recognized on impaired loans and leases
using a cash-basis method for the years ended December 31, 2001, 2000 and
1999 was not material.
Salaries and employee benefits totaling $483,000, $530,000 and $502,000
have been deferred as loan and lease origination costs for the years ended
December 31, 2001, 2000 and 1999, respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (dollars in thousands):
December 31,
--------------------
2001 2000
--------- ---------
Land $ 149 $ 149
Building and improvements 213 213
Furniture, fixtures and equipment 3,954 3,334
Leasehold improvements 765 759
--------- ---------
5,081 4,455
Less accumulated depreciation
and amortization (3,178) (2,767)
--------- ---------
$ 1,903 $ 1,688
========= =========
Depreciation and amortization included in occupancy and furniture and
equipment expenses totaled $414,000, $325,000 and $324,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
6. ACCOUNTS RECEIVABLE SERVICING RECEIVABLES
The Company purchases existing accounts receivable on a discounted basis
from selected borrowers and assumes the related billing and collection
responsibilities. Accounts receivable servicing fees included in other
income totaled $459,000, $430,000 and $272,000 for the years ended
December 31, 2001, 2000 and 1999 respectively (see Note 14). The valuation
allowance for these receivables is not significant.
7. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following (dollars in
thousands):
December 31,
--------------------
2001 2000
--------- ---------
Savings $ 12,951 $ 12,086
Money market 74,652 71,540
NOW accounts 23,375 22,408
Time, $100,000 or more 44,897 39,007
Other time 31,273 29,351
--------- ---------
$ 187,148 $ 174,392
========= =========
54
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. INTEREST-BEARING DEPOSITS (Continued)
Aggregate annual maturities of time deposits are as follows (dollars in
thousands):
Year Ending
December 31,
------------
2002 $ 60,220
2003 5,904
2004 4,305
2005 3,912
2006 1,829
---------
$ 76,170
=========
Interest expense recognized on interest-bearing deposits consisted of the
following (dollars in thousands):
Year Ended December 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Savings $ 166 $ 297 $ 307
Money market 1,849 2,587 1,576
NOW accounts 115 247 226
Time, $100,000 or more 1,917 2,318 1,677
Other time 1,995 1,881 1,530
----------- ----------- -----------
$ 6,042 $ 7,330 $ 5,316
=========== =========== ===========
8. SHORT-TERM BORROWING ARRANGEMENTS
The Company has a total of $22,000,000 in unsecured short-term borrowing
arrangements with four of its correspondent banks. Advances totaling
$8,000,000 and $7,000,000 were outstanding from two of its correspondent
banks at December 31, 2000, bearing interest rates of 7.25% and 6.50% and
maturing January 1, 2001. There were no borrowings outstanding under these
arrangements at December 31, 2001.
In addition, the Company has a line of credit available with the Federal
Home Loan Bank which is secured by pledged mortgage loans (see Note 9).
Borrowings may include overnight advances as well as loans with a term of
up to thirty years. An advance totaling $990,000 was outstanding from the
Federal Home Loan Bank at December 31, 2000, bearing an interest rate of
6.63% and maturing January 22, 2001. There were no short-term borrowings
outstanding under this line of credit at December 31, 2001.
9. LONG-TERM DEBT
The Company can borrow up to $11,161,000 from the Federal Home Loan Bank
on either a short-term or long-term basis, secured by qualifying mortgage
loans with unpaid balances of $19,655,000 at December 31, 2001. Long-term
debt consisted of an advance from the Federal Home Loan Bank totaling
$2,039,000 and $2,084,000 at December 31, 2001 and 2000, respectively,
bearing a fixed interest rate of 6.13%, due in monthly installments of
approximately $14,000, including principal and interest, with the final
principal payment of $1,711,000 due December 21, 2007.
55
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. LONG-TERM DEBT (Continued)
Future minimum principal payments on long-term debt are as follows
(dollars in thousands):
Year Ending
December 31,
------------
2002 $ 47
2003 50
2004 54
2005 57
2006 60
Thereafter 1,771
---------
$ 2,039
=========
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 2001, 2000
and 1999 consisted of the following (dollars in thousands):
Federal State Total
--------- --------- ----------
2001
----
Current $ 2,000 $ 791 $ 2,791
Deferred (145) (34) (179)
---------- ---------- ----------
Income tax expense $ 1,855 $ 757 $ 2,612
========== ========== ==========
2000
----
Current $ 1,854 $ 656 $ 2,510
Deferred (231) (58) (289)
---------- ---------- ----------
Income tax expense $ 1,623 $ 598 $ 2,221
========== ========== ==========
1999
----
Current $ 1,501 $ 527 $ 2,028
Deferred (90) (17) (107)
---------- ---------- ----------
Income tax expense $ 1,411 $ 510 $ 1,921
========== ========== ==========
Deferred tax assets (liabilities) consisted of the following (dollars in
thousands):
December 31,
----------------------
2001 2000
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 940 $ 851
Future benefit of State tax deduction 244 232
Bank premises and equipment 2
Deferred compensation 152 80
Other 23 8
---------- ----------
Total deferred tax assets 1,359 1,173
---------- ----------
56
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. INCOME TAXES (Continued)
December 31,
--------------------
2001 2000
--------- ---------
Deferred tax liabilities:
Discount on purchased loans $ (31) $ (41)
Future liability of State deferred tax assets (84) (73)
Unrealized gain on available-for-sale investment
securities (311) (133)
Federal Home Loan Bank stock dividends (26) (20)
--------- ---------
Total deferred tax liabilities (452) (267)
--------- ---------
Net deferred tax assets $ 907 $ 906
========= =========
The provision for income taxes differs from amounts computed by applying
the statutory Federal income tax rate of 34% to income before income
taxes. The significant items comprising these differences consisted of the
following:
Year Ended December 31,
--------------------------------------------
2001 2000 1999
-------------- ------------- -------------
Federal income tax rate, at statutory rate 34.0 % 34.0 % 34.0 %
State franchise tax, net of Federal tax effect 7.0 % 7.3 % 6.9 %
Tax benefit of interest on obligations of
states and political subdivisions (2.2)% (2.4)% (2.1)%
Other .5 % (.4)% (.8)%
-------------- ------------- -------------
Total income tax expense 39.3 % 38.5 % 38.0 %
============== ============= =============
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its branch facilities, administrative offices and
various equipment under noncancelable operating leases which expire on
various dates through the year 2009 and certain of the leases have five
year renewal options. Two of the branch facilities are leased from members
of the Board of Directors (see Note 16).
Future minimum lease payments are as follows (dollars in thousands):
Year Ending
December 31,
------------
2002 $ 548
2003 458
2004 465
2005 482
2006 462
Thereafter 915
---------
$ 3,330
=========
57
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
------
Rental expense included in occupancy, furniture and equipment expense, net
of related rental income, totaled $631,000, $564,000 and $509,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
Financial Instruments With Off-Balance-Sheet Risk
-------------------------------------------------
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
uses the same credit policies in making commitments and letters of credit
as it does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk (dollars in thousands):
December 31,
--------------------
2001 2000
--------- ---------
Commitments to extend credit:
Revolving lines of credit secured by
1-4 family residences $ 2,430 $ 1,773
Commercial real estate, construction
and land development commitments
secured by real estate 15,553 18,635
Other commercial commitments not
secured by real estate 2,157 2,150
Credit card arrangements 383 418
Other unused commitments 40,317 28,225
--------- ---------
$ 60,840 $ 51,201
Letters of credit $ 3,776 $ 875
========= =========
Real estate commitments are generally secured by property with a
loan-to-value ratio of 65% to 80%. In addition, the majority of the
Company's commitments have variable interest rates.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any conditions established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Each
client's creditworthiness is evaluated on a case-by-case basis. The amount
of collateral obtained, if deemed necessary upon extension of credit, is
based on management's credit evaluation of the borrower. Collateral held
varies, but may include accounts receivable, inventory, equipment and
deeds of trust on residential real estate and income-producing commercial
properties.
58
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
-------------------------------------------------
Letters of credit are conditional commitments issued to guarantee the
performance or financial obligation of a client to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to clients.
Significant Concentrations of Credit Risk
-----------------------------------------
The Company grants real estate mortgage, real estate construction,
commercial, agricultural and consumer loans to clients throughout
Sacramento, Placer, Yolo, El Dorado, Sonoma, Napa, Marin and Mendocino
counties.
Although the subsidiaries have diversified loan and lease portfolios, a
substantial portion of their portfolios are secured by commercial and
residential real estate. However, personal and business income represent
the primary source of repayment for a majority of these loans.
Correspondent Banking Agreements
--------------------------------
The Company maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements. Uninsured
deposits totaled $10,273,000 at December 31, 2001.
Federal Reserve Requirements
----------------------------
Banks are required to maintain reserves with the Federal Reserve Bank
equal to a percentage of their reservable deposits. Reserve balances held
with the Federal Reserve Bank totaled $3,688,000 and $2,539,000 at
December 31, 2001 and 2000, respectively.
Contingencies
-------------
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to such actions will not materially affect
the financial position or results of operations of the Company.
12. SHAREHOLDERS' EQUITY
Earnings Per Share
------------------
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows (dollars and amounts
in thousands, except per share data):
Weighted
Average
Number of
Net Shares Per-Share
For the Year Ended Income Outstanding Amount
--------------------------- --------- ----------- ----------
December 31, 2001
-----------------
Basic earnings per share $ 4,037 2,535 $ 1.59
=========
Effect of dilutive stock options 161
--------- ----------
Diluted earnings per share $ 4,037 2,696 $ 1.50
========= ========== =========
59
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. SHAREHOLDERS' EQUITY (Continued)
Earnings Per Share (Continued)
------------------
Weighted
Average
Number of
Net Shares Per-Share
For the Year Ended Income Outstanding Amount
--------------------------- --------- ----------- ----------
December 31, 2000
-----------------
Basic earnings per share $ 3,546 2,497 $ 1.42
=========
Effect of dilutive stock options 129
--------- ----------
Diluted earnings per share $ 3,546 2,626 $ 1.35
========= ========== =========
December 31, 1999
-----------------
Basic earnings per share $ 3,128 2,510 $ 1.25
=========
Effect of dilutive stock options 136
--------- ----------
Diluted earnings per share $ 3,128 2,646 $ 1.18
========= ========== =========
Stock Option Plans
------------------
In 2000 and 1995, the Board of Directors adopted stock option plans under
which options may be granted to employees and directors under incentive
and nonstatutory agreements. At December 31, 2001, grants outstanding
combined with shares available for future grants totaled 721,543 shares
under these plans. 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 purchase price of exercised options is payable in full in cash or
shares of the Company's common stock owned by the optionee at the time the
option is exercised. The options expire on dates determined by the Board
of Directors, but not later than ten years from the date of grant. Options
vest ratably over a five year period. Outstanding options under the 1995
plan are exercisable until their expiration; however, no new options will
be granted under this plan.
60
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
------------------
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation expense has been recognized for
its stock option plans. Had compensation cost been determined based on the
fair value at grant date for awards in 1995 through 1999 consistent with
the provisions of SFAS No. 123, the Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated
below. Pro forma compensation expense is recognized in the years in which
the options become vested.
Year Ended December 31,
------------------------------
2001 2000 1999
--------- --------- ---------
(Dollars in thousands, except
per share data)
Net earnings - as reported $ 4,037 $ 3,546 $ 3,128
Net earnings - pro forma $ 3,911 $ 3,357 $ 2,949
Basic earnings per share - as reported $ 1.59 $ 1.42 $ 1.25
Basic earnings per share - pro forma $ 1.54 $ 1.34 $ 1.17
Diluted earnings per share - as reported $ 1.50 $ 1.35 $ 1.18
Diluted earnings per share - pro forma $ 1.45 $ 1.28 $ 1.11
The fair value of each option is estimated on the date of grant using an
option-pricing model with the following assumptions. No options were
granted for the years ended December 31, 2001 and 2000.
Year Ended
December 31,
1999
------------
Dividend yield 1.53%
Expected volatility 72.17%
Risk-free interest rate 6.10%
Expected option life 10 years
61
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
------------------
A summary of the combined activity within the plans follows:
2001 2000 1999
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- -----------
Options outstanding,
beginning of year 465,280 $ 7.92 523,370 $ 8.16 557,198 $ 7.54
Options granted 66,846 $ 12.28
Options exercised (26,566) $ 7.06 (37,114) $ 6.72 (86,054) $ 5.21
Options canceled (16,621) $ 16.12 (20,976) $ 15.35 (14,620) $ 7.19
----------- ----------- -----------
Options outstanding,
end of year 422,093 $ 7.88 465,280 $ 7.92 523,370 $ 8.16
=========== =========== ===========
Options exercisable,
end of year 356,194 $ 7.26 328,854 $ 6.85 268,830 $ 6.69
=========== =========== ===========
Weighted average
fair value of options
granted during the
year $ 4.56
A summary of options outstanding at December 31, 2001 follows:
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 2001 Life 2001
------------------------ -------------- ------------- --------------
$ 5.27 45,844 4.8 years 44,001
$ 5.49 174,531 3.6 years 174,531
$ 5.84 9,296 2.2 years 9,296
$ 7.19 7,507 4.0 years 7,507
$ 8.23 45,198 8.0 years 25,733
$ 8.71 53,099 6.7 years 42,479
$ 9.66 26,801 5.4 years 18,961
$ 13.95 11,025 7.9 years 4,410
$ 14.25 8,682 7.0 years 5,209
$ 15.36 40,110 6.7 years 24,067
-------------- --------------
422,093 356,194
============== ==============
62
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. SHAREHOLDERS' EQUITY (Continued)
Common Stock Repurchase Program
-------------------------------
During 1997, the Board of Directors authorized the annual repurchase of up
to five percent of the Company's common stock in conjunction with
recurring annual distributions of a five percent common stock dividend.
Repurchases are generally made in the open market at market prices.
13. REGULATORY MATTERS
Dividends
---------
Upon declaration by the Board of Directors of the Company, all
shareholders of record will be entitled to receive dividends. Under
applicable Federal laws, the Comptroller of the Currency (OCC) restricts
the total dividend payment of any national banking association in any
calendar year to the net income of the year, as defined, combined with the
net income for the two preceding years, less distributions made to
shareholders during the same three-year period. In addition, the
California Financial Code restricts the total dividend payment of any
state banking association in any calendar year to the lesser of (1) the
bank's retained earnings or (2) the bank's net income for its last three
fiscal years, less distributions made to shareholders during the same
three-year period. At December 31, 2001, the subsidiaries had $8,396,000
in retained earnings available for dividend payments to the Company.
Regulatory Capital
------------------
The Company and its banking subsidiaries are subject to certain regulatory
capital requirements administered by the Board of Governors of the Federal
Reserve System, the Office of the Comptroller of the Currency (the "OCC")
and 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, the
banking subsidiaries 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 its banking subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its banking subsidiaries to maintain minimum
amounts and ratios of total and Tier 1 capital to risk-weighted assets and
of Tier 1 capital to average assets. Each of these components is defined
in the regulations. Management believes that the Company and its banking
subsidiaries met all their capital adequacy requirements as of December
31, 2001 and 2000.
63
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. REGULATORY MATTERS (Continued)
Regulatory Capital (Continued)
------------------
In addition, the most recent notifications from the OCC and FDIC
categorized each of the banking subsidiaries as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the banking subsidiaries must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth
below. There are no conditions or events since those notifications that
management believes have changed the categories.
December 31,
-----------------------------------------------
2001 2000
----------------------- ----------------------
Amount Ratio Amount Ratio
-------------- ------- ------------- -------
(Dollars in thousands)
Leverage Ratio
--------------
American River Holdings and Subsidiaries $ 27,380 9.8% $ 24,069 8.7%
Minimum regulatory requirement $ 11,139 4.0% $ 11,096 4.0%
American River Bank $ 22,226 10.0% $ 19,275 8.9%
Minimum requirement for "Well-Capitalized" institution $ 11,080 5.0% $ 10,833 5.0%
Minimum regulatory requirement $ 8,864 4.0% $ 8,666 4.0%
North Coast Bank $ 4,843 8.6% $ 4,630 8.0%
Minimum requirement for "Well-Capitalized" institution $ 2,832 5.0% $ 2,885 5.0%
Minimum regulatory requirement $ 2,265 4.0% $ 2,308 4.0%
Tier 1 Risk-Based Capital Ratio
-------------------------------
American River Holdings and Subsidiaries $ 27,380 12.4% $ 24,069 10.6%
Minimum regulatory requirement $ 8,827 4.0% $ 9,061 4.0%
American River Bank $ 22,226 12.5% $ 19,275 11.0%
Minimum requirement for "Well-Capitalized" institution $ 10,677 6.0% $ 10,529 6.0%
Minimum regulatory requirement $ 7,118 4.0% $ 7,019 4.0%
North Coast Bank $ 4,843 11.5% $ 4,630 9.1%
Minimum requirement for "Well-Capitalized" institution $ 2,535 6.0% $ 3,060 6.0%
Minimum regulatory requirement $ 1,690 4.0% $ 2,040 4.0%
Total Risk-Based Capital Ratio
------------------------------
American River Holdings and Subsidiaries $ 29,994 13.6% $ 26,523 11.7%
Minimum regulatory requirement $ 17,653 8.0% $ 18,122 8.0%
American River Bank $ 24,298 13.7% $ 21,173 12.1%
Minimum requirement for "Well-Capitalized" institution $ 17,795 10.0% $ 17,548 10.0%
Minimum regulatory requirement $ 14,236 8.0% $ 14,038 8.0%
North Coast Bank $ 5,371 12.7% $ 5,186 10.2%
Minimum requirement for "Well-Capitalized" institution $ 4,225 10.0% $ 5,101 10.0%
Minimum regulatory requirement $ 3,380 8.0% $ 4,081 8.0%
64
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. NONINTEREST INCOME AND EXPENSE
Noninterest income consisted of the following (dollars in thousands):
Year Ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Accounts receivable servicing
fees (Note 6) $ 459 $ 430 $ 272
Merchant fee income 277 202 153
Income from residential lending division 274 142 133
Fees from lease brokerage services 264 177 48
Financial services income 90 203 124
Other 439 414 380
--------- --------- ---------
$ 1,803 $ 1,568 $ 1,110
========= ========= =========
Noninterest expense consisted of the following (dollars in thousands):
Year Ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Professional fees $ 411 $ 296 $ 229
Outsourced item processing 385 358 286
Telephone and postage 313 268 249
Advertising and promotion 275 295 261
Stationery and supplies 203 185 192
Directors' compensation 209 175 194
Merger, NASDAQ listing and SEC
registration expenses 693
Other operating expenses 998 880 837
--------- --------- ---------
$ 2,794 $ 3,150 $ 2,248
========= ========= =========
15. EMPLOYEE BENEFIT PLANS
American River Holdings 401(k) Plan
-----------------------------------
The American River Holdings 401(k) Plan commenced January 1, 1993 and is
available to all employees. Under the plan, the Bank will match 50% of
each participants' contribution up to a maximum of 6% of their annual
compensation. Employer contributions vest at a rate of 20% per year over a
five year period and totaled $111,000, $77,000 and $72,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
Employee Stock Purchase Plan
----------------------------
The Company is the administrator of an Employee Stock Purchase Plan which
allows employees to purchase the Company's stock at fair market value as
of the date of purchase. The Company bears all costs of administering the
Plan, including broker's fees, commissions, postage and other costs
actually incurred.
65
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. EMPLOYEE BENEFIT PLANS (Continued)
American River Holdings Deferred Compensation Plan
--------------------------------------------------
The Company has established a Deferred Compensation Plan for certain
members of the management group and a Deferred Fee Agreement for Directors
for the purpose of providing the opportunity to participants to defer
compensation. Participants of the management group, who are selected by a
Committee designated by the Board of Directors, may elect to defer
annually a minimum of $5,000 or a maximum of eighty percent of their base
salary and all of their cash bonus. Directors may also elect to defer up
to one hundred percent of their monthly fees. The Company bears all
administration costs, and funds the interest earned on participant
deferrals at a rate based on U.S. Government Treasury rates. Deferred
compensation, including interest earned, totaled $201,000, $179,000 and
$90,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
16. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company enters into transactions
with related parties, including Directors and affiliates. These
transactions include borrowings from the Company with substantially the
same terms, including rates and collateral, as loans to unrelated parties.
The following is a summary of the aggregate activity involving related
party borrowers during 2001 (dollars in thousands):
Balance, January 1, 2001 $ 3,795
Disbursements 1,857
Amounts repaid (1,406)
---------
Balance, December 31, 2001 $ 4,246
=========
Undisbursed commitments to related parties,
December 31, 2001 $ 408
=========
The Company also leases certain premises from members of the Board of
Directors (see Note 11). Rental payments to the Directors totaled
$105,000, $105,000 and $106,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
17. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of other comprehensive income (loss)
that historically has not been recognized in the calculation of net
income. Unrealized gains and losses on the Company's available-for-sale
investment securities are included in other comprehensive income (loss).
Total comprehensive income and the components of accumulated other
comprehensive income (loss) are presented in the Statement of Changes in
Shareholders' Equity.
66
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. COMPREHENSIVE INCOME (Continued)
At December 31, 2001, 2000 and 1999, the Company held securities
classified as available-for-sale which had unrealized gains (losses) as
follows (dollars in thousands):
Tax
Before (Expense) After
Tax Benefit Tax
--------- --------- ---------
For the Year Ended December 31, 2001
------------------------------------
Other comprehensive income:
Unrealized holding gains $ 446 $ (178) $ 268
========= ========= =========
For the Year Ended December 31, 2000
------------------------------------
Other comprehensive income:
Unrealized holding gains $ 837 $ (318) $ 519
Less: reclassification adjustment for
net gains included in net income 13 (5) 8
--------- --------- ---------
Total other comprehensive
income $ 824 $ (313) $ 511
========= ========= =========
For the Year Ended December 31, 1999
------------------------------------
Other comprehensive loss:
Unrealized holding losses $ (771) $ 292 $ (479)
========= ========= =========
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
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 value of its financial instruments at December 31, 2001 and 2000:
Cash and cash equivalents and short-term borrowings: For cash and cash
equivalents and short-term borrowings, the carrying amount is estimated to
be fair value.
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.
67
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Investment securities: For investment securities, fair values are based on
quoted market prices, where available. 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.
Loans and leases: For variable-rate loans and leases that reprice
frequently with no significant change in credit risk, fair values are
based on carrying values. The fair values for other loans and leases are
estimated using discounted cash flow analyses, using interest rates being
offered at each reporting date for loans and leases with similar terms to
borrowers of comparable creditworthiness. The carrying amount of accrued
interest receivable approximates its fair value.
Accounts receivable servicing receivables: The carrying amount of accounts
receivable servicing receivables approximates their fair value because of
the relatively short period of time between the origination of the
receivables and their expected collection.
Deposits: The fair values for demand deposits are, by definition, equal to
the amount payable on demand at the reporting date represented by their
carrying amount. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow analysis using interest rates
offered at each reporting date for certificates with similar remaining
maturities. The carrying amount of accrued interest payable approximates
its fair value.
Long-term debt: The fair value of long-term debt is estimated using a
discounted cash flow analysis using interest rates currently available for
similar debt instruments.
Commitments to extend credit: Commitments to extend credit are primarily
for variable rate loans. For these commitments, there is no difference
between the committed amounts and their fair values. Commitments to fund
fixed rate loans and letters of credit are at rates which approximate fair
value at each reporting date.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows (dollars in thousands):
December 31, 2001 December 31, 2000
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- --------------
Financial assets:
Cash and due from banks $ 20,342 $ 20,342 $ 21,236 $ 21,236
Federal funds sold 7,814 7,814
Interest-bearing deposits in banks 5,740 5,790 5,540 5,582
Investment securities 48,912 49,037 48,018 48,086
Loans and leases 195,026 197,947 200,658 201,036
Accounts receivable servicing
receivables 2,869 2,869 3,180 3,180
Accrued interest receivable 1,468 1,468 1,884 1,884
68
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
December 31, 2001 December 31, 2000
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- --------------
Financial liabilities:
Deposits $ 254,888 $ 255,983 $ 239,312 $ 240,304
Short-term borrowings 15,990 15,990
Long-term debt 2,039 2,129 2,084 2,089
Accrued interest payable 264 264 297 297
Off-balance-sheet financial instruments:
Commitments to extend credit $ 60,840 $ 60,840 $ 51,201 $ 51,201
Letters of credit 3,776 3,776 875 875
69
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
December 31, 2001 and 2000
(Dollars in thousands)
2001 2000
----------- -----------
ASSETS
Cash and due from banks $ 470 $ 337
Investment in subsidiaries 27,695 24,313
Dividends receivable from subsidiaries 355 312
Other assets 91 7
----------- -----------
$ 28,611 $ 24,969
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable to shareholders $ 353 $ 312
Other liabilities 316 244
----------- -----------
Total liabilities 669 556
----------- -----------
Shareholders' equity:
Common stock 14,167 12,320
Retained earnings 13,290 11,876
Accumulated other comprehensive income 485 217
----------- -----------
Total shareholders' equity 27,942 24,413
----------- -----------
$ 28,611 $ 24,969
=========== ===========
70
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
------------ ----------- -----------
Income:
Dividends declared by subsidiaries -
eliminated in consolidation $ 1,282 $ 887 $ 1,368
Management fee from subsidiaries 1,199
------------ ----------- -----------
Total income 2,481 887 1,368
------------ ----------- -----------
Expenses:
Salaries and employee benefits 1,228 221
Professional fees 100 26 19
Directors' compensation 144 62 80
Merger, NASDAQ and SEC registration
expenses 460
Other expenses 315 42 31
------------ ----------- -----------
Total expenses 1,787 811 130
------------ ----------- -----------
Income before equity in undistributed
income of subsidiaries 694 76 1,238
Equity in undistributed income of subsidiaries 3,115 3,158 1,839
------------ ----------- -----------
Income before income taxes 3,809 3,234 3,077
Income tax benefit 228 312 51
------------ ----------- -----------
Net income $ 4,037 $ 3,546 $ 3,128
============ =========== ===========
71
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
-------------- ------------- --------------
Cash flows from operating activities:
Net income $ 4,037 $ 3,546 $ 3,128
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiaries (3,115) (3,255) (1,869)
(Increase) decrease in other assets (239) (1) 15
Increase in other liabilities 186 156 88
-------------- ------------- --------------
Net cash provided by operating
activities 869 446 1,362
-------------- ------------- --------------
Cash flows used in investing activities:
Investment in leasing company (100)
-------------- ------------- --------------
Cash flows from financing activities:
Cash dividends paid (641) (438) (386)
Exercise of stock options 247 8 692
Cash paid to repurchase common stock (335) (1,475)
Cash paid for fractional shares in connection
with stock dividends (7) (6) (7)
-------------- ------------- --------------
Net cash used in financing activities (736) (436) (1,176)
-------------- ------------- --------------
Net increase in cash and cash
equivalents 133 10 86
Cash and cash equivalents at beginning
of year 337 327 241
-------------- ------------- --------------
Cash and cash equivalents at end of year $ 470 $ 337 $ 327
============== ============= ==============
Supplemental disclosures of cash flow information:
Non-cash investing activities:
Net change in unrealized gain on available-
for-sale investment securities $ 446 $ 824 $ (771)
Non-cash financing activities:
Dividends declared and unpaid $ 353 $ 312 $ 215
72
Selected Quarterly Information (Unaudited)
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share and price range of common stock)
- -------------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
- -------------------------------------------------------------------------------------------------------------
2001
Interest income $ 5,783 $ 5,317 $ 5,055 $ 4,688
Net interest income 3,687 3,629 3,649 3,612
Provision for loan and lease loss 194 187 192 218
Non-interest income 579 556 656 574
Non-interest expense 2,380 2,500 2,267 2,355
Income before taxes 1,692 1,498 1,846 1,613
Net income 1,024 901 1,111 1,001
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .40 $ .36 $ .44 $ .39
Diluted earnings per share .38 .34 .41 .37
Cash dividends per share - .13 - .14
- -------------------------------------------------------------------------------------------------------------
Price range, common stock $13.45-15.24 $14.00-15.95 $12.14-18.57 $13.89-16.70
=============================================================================================================
2000
Interest income $ 4,826 $ 5,075 $ 5,533 $ 5,793
Net interest income 3,157 3,285 3,469 3,674
Provision for loan and lease loss 133 145 171 223
Non-interest income 501 574 540 568
Non-interest expense 2,089 2,316 2,333 2,591
Income before taxes 1,436 1,398 1,505 1,428
Net income 890 857 916 883
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .36 $ .34 $ .37 $ .35
Diluted earnings per share .34 .33 .35 .33
Cash dividends per share - .12 - .12
- -------------------------------------------------------------------------------------------------------------
Price range, common stock $ 9.98-14.51 $ 9.52-13.61 $11.45-12.92 $11.23-14.29
=============================================================================================================
The earnings per share and price range have been adjusted for 5% stock dividends
in 2000 and 2001.
73
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There has been no change in the independent accountants engaged to audit
the financial statements of the Company and its subsidiaries during the last two
fiscal years ended December 31, 2001. There have been no disagreements with such
independent accountants during the last two fiscal years ended December 31,
2001, on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2002 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 11. Executive Compensation.
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2002 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2002 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2002 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
74
PART IV
ITEM 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.
(a)(1)Financial Statements. Listed and included in Part II, Item 8.
(2)Financial Statement Schedules. Not applicable.
(3)Exhibits.
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and among
the Registrant, ARH Interim National Bank and North Coast Bank,
N.A., dated as of March 1, 2000 (included as Annex A). **
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the period ended December 31, 2000 filed with the
Commission on April 2, 2001.
(3.2) Bylaws, as amended, incorporated by reference from Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2001, filed with the Commission on May 14,
2001.
(4.1) Specimen of the Registrant's common stock certificate. **
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership, dated April
1, 2000, related to 1545 River Park Drive, Suite 107,
Sacramento, California. **
(10.2) Lease agreement and addendum between American River Bank and
Bradshaw Plaza Group each dated January 31, 2000, related to
9750 Business Park Drive, Sacramento, California. **
(10.3) Lease agreement between American River Bank and Marjorie G.
Taylor dated April 5, 1984, and addendum dated July 16, 1997,
related to 10123 Fair Oaks Boulevard, Fair Oaks, California. **
(10.4) Lease agreement between American River Bank and Sandalwood Land
Company dated August 28, 1996, related to 2240 Douglas
Boulevard, Suite 100, Roseville, California. **
(10.5) Lease agreement between American River Holdings and Union Bank
of California dated June 29, 1999, related to 1540 River Park
Drive, Suite 108, Sacramento, California. **
*(10.6) American River Holdings 1995 Stock Option Plan. **
*(10.7) Form of Nonqualified Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.8) Form of Incentive Stock Option Agreement under the 1995 Stock
Option Plan. **
*(10.9) American River Bank 401(k) Plan and amendment no. 1 dated April
1, 1998. **
*(10.10) American River Holdings Stock Option Gross-Up Plan and
Agreement, as amended, dated May 20, 1998. **
75
*(10.11) American River Bank Deferred Compensation Plan dated May 1,
1998. **
*(10.12) American River Bank Deferred Fee Plan dated April 1, 1998. **
*(10.16) American River Bank Employee Severance Policy dated March 18,
1998. **
*(10.18) Employment agreement with David T. Taber dated August 16, 2000,
incorporated by reference from Exhibit 10.18 to the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 2000 filed with the Commission on November 14, 2000.
*(10.19) Employment agreement with William L. Young dated August 16,
2000, incorporated by reference from Exhibit 10.19 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2000 filed with the Commission on November 14,
2000.
*(10.20) American River Holdings Incentive Compensation Plan for the
Year Ended December 31, 2000, incorporated by reference from
Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000 filed with the
Commission on November 14, 2000.
(10.21) Amendment No. 1 dated March 1, 2001, to the lease agreement
between American River Holdings and Union Bank of California
dated June 29, 1999, related to 1540 River Park Drive, Suite
108 and Suite 106, Sacramento, California, incorporated by
reference from Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the period ended December 31, 2000, filed with
the Commission on April 2, 2001.
*(10.22) First Amendment dated December 20, 2000, to the American River
Bank Deferred Compensation Plan dated May 1, 1998, incorporated
by reference from Exhibit 10.22 to the Company's Annual Report
on Form 10-K for the period ended December 31, 2000, filed with
the Commission on April 2, 2001.
*(10.23) Amendment No.1 to the American River Holdings Incentive
Compensation Plan, incorporated by reference from Exhibit 10.23
to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2001, filed with the Commission on August 14,
2001
*(10.24) American River Holdings Employee Stock Purchase Plan dated
November 21, 2001.
(21.1) The Registrant's only subsidiaries are American River Bank,
North Coast Bank, N.A. and First Source Capital.
(23.1) Consent of Perry-Smith LLP
*Denotes management contracts, compensatory plans or arrangements.
**Incorporated by reference to registrant's Registration Statement on Form
S-4 (No. 333-36326) filed with the Commission on May 5, 2000.
(b) Reports on Form 8-K
On October 17, 2001, the Company filed a Report on Form 8-K announcing
its financial results for the third quarter of 2001.
On December 20, 2001, the Company filed a Report on Form 8-K announcing
a $.14 per share cash dividend.
An Annual Report for the fiscal year ended December 31, 2001, and Notice
of Annual Meeting and Proxy Statement for the Company's 2002 Annual Meeting will
76
be mailed to security holders subsequent to the date of filing this Report.
Copies of said materials will be furnished to the Commission in accordance with
the Commission's Rules and Regulations.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN RIVER HOLDINGS
March 20, 2002
By: /s/ DAVID T. TABER
-----------------------------
David T. Taber
Chief Executive Officer
(Principal Executive Officer)
March 20, 2002
By: /s/ MITCHELL A. DERENZO
-----------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ CHARLES D. FITE Director, Chairman 3/20/02
- -----------------------------
Charles D. Fite
/s/ ROGER J. TAYLOR Director, Vice Chairman 3/20/02
- -----------------------------
Roger J. Taylor
/s/ JAMES O. BURPO Director 3/21/02
- -----------------------------
James O. Burpo
/s/ M. EDGAR DEAS Director 3/21/02
- -----------------------------
M. Edgar Deas
/s/ SAM J. GALLINA Director 3/20/02
- -----------------------------
Sam J. Gallina
/s/ WAYNE C. MATTHEWS Director 3/20/02
- -----------------------------
Wayne C. Matthews
/s/ DAVID T. TABER Director 3/20/02
- -----------------------------
David T. Taber
/s/ MARJORIE G. TAYLOR Director 3/20/02
- -----------------------------
Marjorie G. Taylor
78
/s/ STEPHEN H. WAKS Director 3/20/02
- -----------------------------
Stephen H. Waks
/s/ LARRY L. WASEM Director 3/21/02
- -----------------------------
Larry L. Wasem
/s/ WILLIAM L. YOUNG Director 3/20/02
- -----------------------------
William L. Young
79
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
10.24 American River Holdings Employee Stock Purchase Plan 81-86
dated November 21, 2001
23.1 Consent of Perry-Smith LLP 87
80