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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, 2002
-----------------
[ ] Transition report pursuant to Section 13 or 15 (d) of Securities Exchange
Act of 1934
Commission File No. 0-31525
AMERICAN RIVER HOLDINGS
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(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
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(Address of principal executive offices) (Zip code)
(916) 565-6100
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(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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter: $39,596,000
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 13, 2003
No par value Common Stock - 2,635,083 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
2003 annual meeting of shareholders.
The Index to the Exhibits is located at Page 79 Page 1 of 82
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. 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, changes in the interest rate
environment including interest rates charged on loans, earned on securities
investments and 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 effects of terrorism, the threat of terrorism or
the impact of potential military conflicts and the conduct of the war on
terrorism by the United States and its allies, as well as other factors.
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 (including
American River Bank) 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.
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.
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At December 31, 2002, the Company had consolidated assets of $343
million, deposits of $276 million and shareholders' equity of $32 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, 2002, these sources comprised 82.9%, 16.7%, and
0.4%, 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, 2002 and December 31, 2001, American River Bank held
$9,000,000 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 24 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, 2002). 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, 2002).
Employees
At December 31, 2002, the Company and its subsidiaries employed 99
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 (the "SEC").
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
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, 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 OCC, 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 OCC and the FDIC. North Coast
Bank's deposits are insured by the FDIC up to the applicable legal limits.
3
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 OCC 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 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.
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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 intangible assets 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, 2002, 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 OCC 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 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
5
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
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")
utilizes the Uniform Financial Institutions Rating System ("UFIRS") commonly
referred to as "CAMELS" to classify and evaluate the soundness of financial
institutions. Bank examiners use the CAMELS measurements to evaluate capital
adequacy, asset quality, management, earnings, liquidity and sensitivity to
market risk.
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
6
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 OCC. 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, 2002, 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 145 offices in the
cities of Fair Oaks, Rancho Cordova, Roseville and Sacramento, California, where
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 community banks, including North Coast Bank, retaining the portion of
such loans which is within its lending limits. As of December 31, 2002, American
River Bank's aggregate legal lending limits to a single borrower and such
borrower's related parties were $4,312,000 on an unsecured basis and $7,187,000
on a fully secured basis based on capital and reserves of $28,748,000.
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, 2002, there were 175
operating commercial and savings bank offices in Sacramento County with total
deposits of $13,399,262,000. This was an increase of $1,038,562,000 over the
June 30, 2001 balances. American River Bank held a total of $157,811,000 in
deposits, representing approximately 1.2% of total commercial and savings banks
deposits in Sacramento County as of June 30, 2002.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2002, there were 83
operating commercial and savings bank offices in Placer County with total
deposits of $3,315,811,000. This was an increase of $435,511,000 over the June
30, 2001 balances. American River Bank held a total of $52,427,000 in deposits,
representing approximately 1.6% of total commercial and savings banks deposits
in Placer County as of June 30, 2002.
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 2003 from that in 2002.
North Coast Bank. At June 30, 2002, 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 53 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, 2002, North Coast Bank's
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aggregate legal lending limits to a single borrower and such borrower's related
parties were $896,000 based on capital and reserves of $5,976,000. 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
$1,494,000 for certain 1-4 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 $896,000 and less than the pilot program aggregate
maximum of $1,494,000. These exceptions made under the pilot program are
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 government, manufacturing, 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, 2002, there were 111
operating commercial and savings bank offices in Sonoma County with total
deposits of $7,271,422,000. This was an increase of $296,222,000 over the June
30, 2001 balances. North Coast Bank held a total of $52,607,000 in deposits,
representing approximately .7% of total commercial and savings banks deposits in
Sonoma County as of June 30, 2002.
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 2003 from that in 2002.
General Competitive Factors
In order to compete with the major financial institutions in their
primary service areas, American River Bank and North Coast Bank use to the
fullest extent possible the flexibility which is accorded by their community
banks 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.
8
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 OCC 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 OCC 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 OCC to engage in an activity through a subsidiary
in which American River Bank itself may not engage.
In 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was signed into
law. The GLB 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 GLB 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 GLB 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 GLB Act.
Prior to the GLB 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 GLB 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 GLB 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 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 GLB 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
9
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
powers or activities under the GLB Act, and the extent to which competition will
change among financial institutions affected by the GLB 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 created 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
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.
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002 (the "Act") which responds to recent issues in
corporate governance and accountability. Among other matters, key provisions of
the Act and rules promulgated by the SEC pursuant to the Act include the
following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
10
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the
CEO and CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
o Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, and disclosure of any amendments
or waivers to such code of ethics. The disclosure obligation becomes
effective for fiscal years ending on or after July 15, 2003. The ethics
code must contain written standards that are reasonably designed to
deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
o Full, fair, accurate, timely, and understandable disclosure in
reports and documents that a registrant files with, or submits
to, the Securities and Exchange Commission and in other public
communications made by the registrant;
o Compliance with applicable governmental laws, rules and
regulations;
o The prompt internal reporting to an appropriate person or
persons identified in the code of violations of the code; and
o Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an
"audit committee financial expert." The disclosure obligation becomes
effective for fiscal years ending on or after July 15, 2003. To qualify
as an "audit committee financial expert," a person must have:
o An understanding of generally accepted accounting principles
and financial statements;
o The ability to assess the general application of such
principles in connection with the accounting for estimates,
accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable
to the breadth and complexity of issues that can reasonably be
expected to be raised by the registrant's financial
statements, or experience actively supervising one or more
persons engaged in such activities;
o An understanding of internal controls and procedures for
financial reporting; and
o An understanding of audit committee functions.
A person must have acquired the above listed attributes to be
deemed to qualify as an "audit committee financial expert" through any
one or more of the following:
o Education and experience as a principal financial officer,
principal accounting officer, controller, public accountant or
auditor or experience in one or more positions that involve
the performance of similar functions;
o Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant,
auditor or person performing similar functions;
o Experience overseeing or assessing the performance of
companies or public accountants with respect to the
preparation, auditing or evaluation of financial statements;
or
o Other relevant experience.
The rule contains a specific safe harbor provision to clarify
that the designation of a person as an "audit committee financial
expert" does not cause that person to be deemed to be an "expert" for
any purpose under Section 11 of the Securities Act of 1933, as amended,
or impose on such person any duties, obligations or liability greater
that the duties, obligations and liability imposed on such person as a
member of the audit committee and the board of directors, absent such
designation. Such a designation also does not affect the duties,
obligations or liability of any other member of the audit committee or
board of directors.
o A prohibition on insider trading during pension plan black-out periods.
11
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, another
board committee or the entire board of directors certain material
violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to
within 2 business days of the date a transaction triggers an obligation
to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to be phased-in over a
four year period reducing the filing deadline for Form 10-K reports
from 90 days after the fiscal year end to 60 days and Form 10-Q reports
from 45 days after the fiscal quarter end to 35 days.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as
soon as reasonably practicable after such reports and material are
filed with or furnished to the Securities and Exchange Commission.
o Proposed rules requiring national securities exchanges and national
securities associations to prohibit the listing of any security whose
issuer does not meet audit committee standards established pursuant to
the Act. These proposed rules would establish audit committee:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's
independent accountant;
o Responsibility for handling complaints regarding the issuer's
accounting practices;
o Authority to engage advisers; and
o Funding requirements for the independent auditor and outside
advisers engaged by the audit committee.
The proposed audit committee rules provide a one-year phase-in
period for compliance. The Securities and Exchange Commission must
adopt final rules by April 26, 2003.
The effect of the Act upon the Company is uncertain; however, it is
likely that the Company will incur increased costs to comply with the Act and
the rules and regulations promulgated pursuant to the Act by the Securities and
Exchange Commission and other regulatory agencies having jurisdiction over the
Company. The Company does not currently anticipate, however, that compliance
with the Act and such rules and regulations will have a material adverse effect
upon its financial position or results of its operations or its cash flows.
On September 28, 2002, California Governor Gray Davis signed into law
the California Corporate Disclosure Act (the "CCD Act"), which became effective
January 1, 2003. The CCD Act requires publicly traded corporations incorporated
or qualified to do business in California to disclose information about their
past history, auditors, directors and officers. The CCD Act requires the Company
to disclose:
o The name of the a company's independent auditor and a description of
services, if any, performed for the company during the previous 24
months;
o The annual compensation paid to each director and executive officer,
including stock or stock options not otherwise available to other
company employees;
o A description of any loans made to a director at a "preferential" loan
rate during the previous 24 months, including the amount and terms of
the loans;
o Whether any bankruptcy was filed by a company or any of its directors
or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been
convicted of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any
securities or banking provisions of California law during the previous
10 years for which the company was found liable or fined more than
$10,000.
The Company does not currently anticipate that compliance with the CCD
Act will have a material adverse effect upon its financial position or results
of its operations or its cash flows.
12
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 EOP-Point West, L.L.C. 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 Twin Tree 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 15, 2003. 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 ten-year
lease expired on February 1, 2003. Management has negotiated a two-year
extension for approximately 2,012 square feet on the first floor at a rate of
$1.40 per square foot and is waiting for final approval from its landlord.
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 HSG Trust. 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.
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.
13
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 2002.
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. The prices have been adjusted to reflect the 5% stock dividends
distributed in 2001 and 2002.
==============================================
2002 High Low
- ----------------------------------------------
First quarter $18.33 $14.95
Second quarter 20.22 17.81
Third quarter 20.17 17.38
Fourth quarter 23.83 16.75
2001
- ----------------------------------------------
First quarter $14.51 $12.81
Second quarter 15.19 13.33
Third quarter 17.69 11.56
Fourth quarter 15.90 13.23
==============================================
As of March 5, 2003, there were approximately 1,304 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. In 2002
and 2001, the Company declared cash dividends in the amount of $.35 and $.26 per
common share. There is no assurance, however, that any dividends will be paid
since they are subject to regulatory restrictions, and dependent upon earnings,
financial condition and capital requirements of the Company and its
subsidiaries.
The California General Corporation Law (the "Corporation Law") provides
that a corporation may make a distribution to its shareholders if the
corporation's retained earnings equal at least the amount of the proposed
distribution. The Corporation Law further provides that, in the event that
sufficient retained earnings are not available for the proposed distribution, a
corporation may nevertheless make a distribution to its shareholders if it meets
two conditions, which generally stated are as follows: (1) the corporation's
assets equal at least 1-1/4 times its liabilities; and (2) the corporation's
current assets equal at least its current liabilities or, if the average of the
corporation's earnings before taxes on income and before interest expenses for
the two preceding fiscal years was less than the average of the corporation's
interest expenses for such fiscal years, then the corporation's current assets
must equal at least 1-1/4 times its current liabilities.
The Board of Governors generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowing or other
arrangements that might adversely affect a bank holding company's financial
position. The Board of Governors' policy is that a bank holding company should
not continue its existing rate of cash dividends on its common stock unless its
14
net income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition.
The payment of cash dividends by American River Bank is subject to
restrictions set forth in the California Financial Code (the "Financial Code").
The Financial Code provides that a bank may not make a cash distribution to its
shareholders in excess of the lesser of (a) the bank's retained earnings; or (b)
the bank's net income for its last three fiscal years, less the amount of any
distributions made by the bank or by any majority-owned subsidiary of the bank
to the shareholders of the bank during such period. However, a bank may, with
the approval of the Commissioner, make a distribution to its shareholders in an
amount not exceeding the greater of (a) its retained earnings; (b) its net
income for its last fiscal year; or (c) its net income for its current fiscal
year. In the event that the Commissioner determines that the shareholders'
equity of a bank is inadequate or that the making of a distribution by the bank
would be unsafe or unsound, the Commissioner may order the bank to refrain from
making a proposed distribution.
The payment of cash dividends by North Coast Bank may be subject to the
approval of the OCC, as well as restrictions established by federal banking law,
the FDIC or Board of Governors. Approval of the OCC is required if the total of
all dividends declared by North Coast Bank's board of directors in any calendar
year will exceed North Coast Bank's net profits for that year combined with its
retained net profits for the preceding two years, less any required transfers to
surplus or to a fund for the retirement of preferred stock.
The FDIC may also restrict the payment of dividends by a subsidiary
bank if such payment would be deemed unsafe or unsound or if after the payment
of such dividends, the bank would be included in one of the "undercapitalized"
categories for capital adequacy purposes pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991.
As of December 31, 2002, the Subsidiary Banks had $10.0 million in
retained earnings available for dividend payments to the Company, which in turn
could be paid out to shareholders of the Company.
15
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)
2002 2001 2000 1999 1998
STATEMENT OF OPERATIONS DATA
Net interest income $ 15,073 $ 14,577 $ 13,585 $ 11,754 $ 10,743
Provision for loan and lease losses 644 791 672 582 509
Other income 2,323 2,365 2,183 1,647 1,433
Other expenses 9,389 9,502 9,329 7,770 7,143
Income before income taxes 7,363 6,649 5,767 5,049 4,524
Income taxes 2,904 2,612 2,221 1,921 1,673
Net income $ 4,459 $ 4,037 $ 3,546 $ 3,128 $ 2,851
Earnings per share - basic $ 1.69 $ 1.52 $ 1.35 $ 1.19 $ 1.08
Earnings per share - diluted 1.57 1.43 1.29 1.13 1.01
Cash dividends per share 0.35 0.26 0.23 0.20 0.17
Book value per share 12.08 10.56 9.25 8.28 7.63
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $342,563 $286,559 $284,126 $248,540 $220,001
Loans and leases, net 229,008 195,026 200,658 157,044 143,132
Deposits 275,796 254,888 239,312 223,077 197,104
Shareholders' equity 31,726 27,942 24,413 20,611 19,168
Average balance sheet amounts:
Assets $309,574 $279,049 $259,315 $224,960 $201,958
Loans and leases 209,133 202,624 175,134 148,369 133,381
Earning assets 280,623 255,904 238,837 207,388 187,071
Deposits 263,323 246,960 230,822 201,180 180,288
Shareholders' equity 29,509 26,316 22,258 19,916 18,434
SELECTED RATIOS:
For the year:
Return on average equity 15.11% 15.34% 15.93% 15.71% 15.47%
Return on average assets 1.44% 1.45% 1.37% 1.39% 1.41%
Efficiency ratio * 53.47% 55.57% 58.59% 57.48% 58.28%
Net interest margin * 5.43% 5.76% 5.75% 5.72% 5.79%
Net chargeoffs to average loans & 0.03% 0.31% 0.14% 0.14% 0.26%
leases
At December 31:
Average equity to average assets 9.53% 9.43% 8.58% 8.85% 9.13%
Leverage capital ratio 9.83% 9.75% 9.28% 9.23% 9.31%
Allowance for loan and leases losses to 1.38% 1.32% 1.21% 1.30% 1.17%
total loans and leases
* fully taxable equivalent
16
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, 2002, 2001 and 2000.
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, changes in
the interest rate environment including interest rates charged on loans, earned
on securities investments and 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
effects of terrorism, the threat of terrorism or the impact of potential
military conflicts 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 76th consecutive profitable quarter for the
quarter ended December 31, 2002. Net income in 2002 increased 10.5% to
$4,459,000 versus $4,037,000 in 2001. Diluted earnings per share for the two
years were $1.57 and $1.43, respectively. For 2002, the Company realized a
return on average equity of 15.1% and a return on average assets of 1.44%, as
compared to 15.3% and 1.45% for 2001. The net income for 2001 was $481,000
(13.8%) higher than the $3,546,000 recorded in 2000. Diluted earnings per share
in 2000 were $1.29, return on average assets was 1.37% and return on average
equity was 15.9%. The earnings per share for 2002, 2001 and 2000 have been
adjusted for 5 percent stock dividends distributed on October 18, 2002, October
19, 2001 and December 19, 2000.
Table One below provides a summary of the components of net income for
the years indicated:
Table One: Components of Net Income
- --------------------------------------------------------------------------------
For the twelve months ended:
(In thousands, except percentages) 2002 2001 2000
--------- --------- ---------
Net interest income* $ 15,235 $ 14,733 $ 13,739
Provision for loan losses (644) (791) (672)
Noninterest income 2,323 2,365 2,183
Noninterest expense (9,389) (9,502) (9,329)
Provision for income taxes (2,904) (2,612) (2,221)
Tax equivalent adjustment (162) (156) (154)
--------- --------- ---------
Net income $ 4,459 $ 4,037 $ 3,546
========= ========= =========
- --------------------------------------------------------------------------------
Average total assets $ 309,574 $ 279,049 $ 259,315
Net income as a percentage
of average total assets 1.44% 1.45% 1.37%
- --------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
During 2002, total assets of the Company increased $56,004,000 (19.5%) to a
total of $342,563,000 at year-end. At December 31, 2002, net loans totaled
$229,008,000, up $33,982,000 (17.4%) from the ending balances on December 31,
17
2001. Deposit growth for the year was 8.2% resulting in ending deposit balances
of $275,796,000. The Company ended 2002 with a Tier 1 capital ratio of 11.8% and
a total risk-based capital ratio of 13.0%.
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 5.76% in
2001, and 5.43% in 2002. The fully taxable equivalent net interest margin in
dollars was up $502,000 (3.4%) in 2002 over 2001.
The fully taxable equivalent interest income component decreased from
$20,999,000 in 2001 to $18,747,000 in 2002, representing a 10.7% decrease. The
decrease in the fully taxable equivalent interest income for 2002 compared to
the same period in 2001 is broken down by rate (down $3,955,000) and volume (up
$1,703,000). The rate decrease can be attributed to decreases implemented by the
Company during 2001 and 2002 in response to Federal Reserve Board (the "FRB")
decreases in the Federal funds and Discount rates. During the two years there
were twelve such rate decreases by the FRB resulting in a 525 basis point drop
in the prime rate, which contributed to the drop in the yield in average earning
assets from 8.21% for 2001 to 6.68% for 2002. The volume increase was the result
of a 9.7% increase in average earning assets. Average loan balances were up
$6,509,000 (3.2%) in 2002 over the balances in 2001, while average investment
securities balances were up $19,449,000 (41.8%). The increase in investment
securities is primarily due to a change in investment strategy whereby the
Company has invested its excess funds in investment securities rather than
Federal funds sold and the adoption of an investment strategy that allowed the
Company to take advantage of a relatively steep yield curve, to utilize excess
capital and to reduce exposure to further declines in intermediate term interest
rates by purchasing mortgage-backed securities with average lives of 3 to 5
years and funding them with wholesale Federal Home Loan Bank (the "FHLB")
advances that mature in one year or less (for further information see the
"Market Risk Management" section of this report).
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 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.
Interest expense decreased $2,754,000 (44.0%) in 2002 compared to 2001.
The average balances on interest bearing liabilities were $14,936,000 (8.0%)
higher in 2002 versus 2001. The higher balances accounted for a $556,000
increase in interest expense. The higher balances were due to internal growth of
average deposits ($4,570,000) and an increase in other borrowings ($10,366,000).
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
161 basis points on a year over year basis and accounted for a decrease in
interest expense of $3,310,000 for the period.
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.
18
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.
Table Two: Analysis of Net Interest Margin on Earning Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000
------------------------------ ------------------------------ ------------------------------
(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) $209,133 $ 15,400 7.36% $202,624 $ 17,883 8.83% $175,134 $ 17,294 9.87%
Taxable investment
securities 49,875 2,359 4.73% 30,511 1,871 6.13% 41,763 2,643 6.33%
Tax-exempt investment
securities (2) 9,803 616 6.28% 9,656 608 6.30% 9,232 600 6.50%
Corporate stock 320 25 7.81% 820 93 11.34% 987 82 8.31%
Federal funds sold 5,488 80 1.46% 6,727 202 3.00% 5,493 353 6.43%
Investments in time
deposits 6,004 267 4.45% 5,566 342 6.14% 6,228 409 6.57%
-------- -------- -------- -------- -------- --------
Total earning assets 280,623 18,747 6.68% 255,904 20,999 8.21% 238,837 21,381 8.95%
-------- -------- --------
Cash & due from banks 21,149 17,023 15,776
Other assets 10,729 8,774 7,011
Allowance for loan &
lease losses (2,927) (2,652) (2,309)
-------- -------- --------
$309,574 $279,049 $259,315
======== ======== ========
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
NOW & MMDA $100,406 939 0.94% $ 90,440 1,964 2.17% $ 87,159 2,834 3.25%
Savings 13,918 51 0.37% 13,602 166 1.22% 12,212 297 2.43%
Time deposits 73,620 2,178 2.96% 79,332 3,912 4.93% 72,079 4,199 5.83%
Other borrowings 14,124 344 2.44% 3,758 224 5.96% 4,818 312 6.48%
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities 202,068 3,512 1.74% 187,132 6,266 3.35% 176,268 7,642 4.34%
-------- -------- --------
Demand deposits 75,379 63,586 59,372
Other liabilities 2,618 2,015 1,417
-------- -------- --------
Total liabilities 280,065 252,733 237,057
Shareholders' equity 29,509 26,316 22,258
-------- -------- --------
$309,574 $279,049 $259,315
======== ======== ========
Net interest income &
margin (3) $ 15,235 5.43% $ 14,733 5.76% $ 13,739 5.75%
======== ======== ======== ======== ======== ========
(1) Loan interest includes loan fees of $545,000, $506,000 and $355,000 in
2002, 2001 and 2000, 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, 2002 over 2001 (In thousands)
Increase (decrease) due to change in:
Volume Rate (4) Net Change
-------- -------- --------
Interest-earning assets:
Net loans (1)(2) $ 574 $ (3,057) $ (2,483)
Taxable investment securities 1,187 (699) 488
Tax exempt investment securities (3) 9 (1) 8
Corporate stock (57) (11) (68)
Federal funds sold & other (37) (85) (122)
Investment in time deposits 27 (102) (75)
-------- -------- --------
Total 1,703 (3,955) (2,252)
-------- -------- --------
Interest-bearing liabilities:
Demand deposits 216 (1,241) (1,025)
Savings deposits 4 (119) (115)
Time deposits (282) (1,452) (1,734)
Other borrowings 618 (498) 120
-------- -------- --------
Total 556 (3,310) (2,754)
-------- -------- --------
Interest differential $ 1,147 $ (645) $ 502
======== ======== ========
Year Ended December 31, 2001 over 2000 (In thousands)
Increase (decrease) due to change in:
Volume Rate (4) Net Change
-------- -------- --------
Interest-earning assets:
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
======== ======== ========
(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 $545,000, $506,000 and $355,000 for the years ended December
31, 2002, 2001 and 2000, 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 $644,000 for loan and lease losses in 2002 as
compared to $791,000 for 2001. Net loan charge-offs for 2002 were $61,000 as
compared to $631,000 in 2001. In 2002 and 2001, net loan charge-offs as a
percentage of average loans outstanding was .03% and .31%, respectively. In
2000, the Company provided $672,000 for loan and lease losses and net
charge-offs were $239,000. 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,
---------------------------
2002 2001 2000
------- ------- -------
Service charges on deposit accounts $ 563 $ 562 $ 602
Accounts receivable servicing fees 294 459 430
Merchant fee income 344 277 202
Fees from lease brokerage services 459 264 177
Income from residential lending division 278 274 142
Other 385 529 630
------- ------- -------
$ 2,323 $ 2,365 $ 2,183
======= ======= =======
Noninterest income was down $42,000 (1.8%) to $2,323,000 in 2002 from
the 2001 level. The decrease in the noninterest income can be attributed to a
decrease in accounts receivable servicing fees (down $165,000 or 35.9%) and
lower brokerage fees from the Real Estate Division at North Coast Bank (the
"REDNCB") (down $92,000 or 89.3%). The decrease in fees from accounts receivable
servicing and brokerage fees from the REDNCB were offset by increases in fees
from lease brokerage services (up $195,000 or 73.9%) and an increase in merchant
fee income (up $67,000 or 24.2%). The decrease in accounts receivable servicing
was a result of a decrease in average accounts receivable balances outstanding
from $3,467,000 in 2001 to $2,299,000 (33.7%) in 2002. The decrease in brokerage
fees from the REDNCB (which were recorded in "Other" in Table Four) results from
the decision to shut down the REDNCB in the first quarter of 2002. The increase
in lease brokerage services results from First Source Capital, the Company's
lease brokerage subsidiary, which saw an increase in business due to the
development of new relationships and a general positive increase in the
businesses it services.
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.
Salaries and Benefits
Salaries and benefits were $5,595,000 (up $261,000 or 4.9%) for 2002 as
compared to $5,334,000 in 2001. The increase is primarily the result of higher
incentive accruals ($720,000 in 2002 as compared to $277,000 in the 2001). The
increased incentive is due to the Company exceeding its performance goals by a
greater margin for 2002 than in 2001. The increased incentive was offset by
lower commissions paid in the REDNCB (down $115,000). At the end of 2002, the
full time equivalent staff was 99, down one from the 100 at the end of 2001.
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.
21
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 the end of 2000.
Occupancy, Furniture and Equipment
Occupancy expense increased $30,000 (3.7%) during 2002 to $840,000, up
from $810,000 in 2001. 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 $620,000 in 2002 compared to
$564,000 in 2001, representing a $56,000 (9.9%) increase. This increase relates
to technology upgrades made over the past twelve months including upgrades to
the network and improvements to the network and internet security and the
network power stability system. In addition the expense includes a full year of
depreciation related to the purchase of a new core banking system in the second
quarter of 2001.
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.
Other Expenses
Other expenses were $2,334,000 (down $460,000 or 16.5%) for 2002 as
compared to $2,794,000 for 2001. Professional fees accounted for $149,000
(32.4%) of the decrease in other expense. The decrease in professional fees
results from a recovery of legal fees ($48,000) related to the resolution of a
problem loan credit and lower legal fees paid to resolve problem loan credits.
The Company also recognized a recovery of an operating loss in 2002 in the
amount of $80,000. The loss was originally recognized in 2001. The overhead
efficiency ratio on a taxable equivalent basis for 2002 was 53.5% as compared to
55.6% in 2001.
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.
Provision for Taxes
The effective tax rate on income was 39.4%, 39.3% and 38.5% in 2002,
2001 and 2000, respectively. The effective tax rate has increased slightly each
of the last three years as a result of the increases in taxable income growing
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 $501,000, $465,000 and $421,000
in these years. Tax-exempt income of $460,000, $464,000 and $462,000 from
investment securities in these years helped to reduce the effective tax rate.
Balance Sheet Analysis
The Company's total assets were $342,563,000 at December 31, 2002 as
compared to $286,559,000 at December 31, 2001, representing an increase of
19.5%. The average balances of total assets during 2002 were $309,574,000 which
represent an increase of $30,525,000 (10.9%) over the December 31, 2001 total of
$279,049,000.
22
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, 2002, these categories accounted for approximately 21%, 55%, 14%, 1%, 4%, 2%
and 3%, respectively, of the Company's loan portfolio. This mix was relatively
unchanged compared to 22%, 51%, 15%, 2%, 5%, 4% and 1%, at December 31, 2001.
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 ($5,612,000 or 12.9%), commercial real
estate ($27,392,000 or 27.3%), real estate construction ($1,564,000 or 5.1%) and
lease financing receivable ($4,267,000 or 170.7%). Despite the new borrowers the
Company experienced decreases in residential real estate ($1,458,000 or 46.7%),
agriculture ($1,427,000 or 13.9%) and consumer ($1,227,000 or 16.1%) 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) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------
Commercial $ 49,231 $ 43,619 $ 52,726 $ 42,148 $ 36,916
Real estate:
Commercial 127,550 100,158 97,390 72,142 66,883
Construction 32,385 30,821 27,182 25,784 25,011
Residential 1,661 3,119 8,085 6,234 7,037
Agriculture 8,824 10,251 10,764 7,200 3,416
Consumer 6,371 7,598 6,413 5,896 5,654
Lease financing receivable 6,766 2,499 1,150 122 364
- ------------------------------------------------------------------------------------------
232,788 198,065 203,710 159,526 145,281
Deferred loan fees, net (583) (425) (598) (420) (456)
Allowance for loan and
lease losses (3,197) (2,614) (2,454) (2,062) (1,693)
- ------------------------------------------------------------------------------------------
Total net loans and leases $ 229,008 $ 195,026 $ 200,658 $ 157,044 $ 143,132
==========================================================================================
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.
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 2002 were $209,133,000 which represents
an increase of $6,509,000 (3.2%) over the average in 2001. Average loans and
leases in 2001 were $202,624,000 representing an increase of $27,490,000 (15.7%)
over 2000. Loan growth in 2002 and 2001 resulted from a favorable economy in the
23
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.
In management's judgment, a concentration exists in real estate loans
which represented approximately 69.5% of the Company's loan and lease portfolio
at December 31, 2002. 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.
24
Interest due but excluded from interest income on nonaccrual loans was
not material during 2002, 2001 and 2000. In 2002, 2001 and 2000, interest income
recognized from payments received on nonaccrual loans was also not material.
Table Six: Non-Performing Loans
- ------------------------------------------------------------------------------------
December 31,
-------------------------------------
(In thousands) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------
Past due 90 days or more and still accruing:
Commercial $ 2 $ -- $ -- $ -- $ --
Real estate -- -- -- -- --
Consumer and other -- -- -- -- 7
- ------------------------------------------------------------------------------------
Nonaccrual:
Commercial 42 533 225 30 110
Real estate 160 314 449 -- --
Consumer and other 2 8 -- -- --
- ------------------------------------------------------------------------------------
Total non-performing loans $ 206 $ 856 $ 674 $ 30 $ 117
====================================================================================
The recorded investments in loans that were considered to be impaired
totaled $206,000 and $856,000 at December 31, 2002 and 2001, respectively. The
related allowance for loan losses for these loans at December 31, 2002 and
December 31, 2001 was $51,000 and $263,000, 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, 2002, 2001 and 2000 was $472,000, $733,000 and $128,000,
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, 2002. Management
is not aware of any potential problem loans, which were accruing and current at
December 31, 2001 or 2002, where serious doubt exists as to the ability of the
borrower to comply with the present repayment terms.
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. Loans and leases are charged
off when they are deemed to be uncollectable; recoveries are generally recorded
only when cash payments are received subsequent to the charge off.
Management employs a systematic methodology for determining the
allowance for loan and lease losses that includes a periodic review process and
adjustments to the monthly allowance when deemed appropriate. The process
includes periodic review of individual loans that have been identified as
problem loans or have characteristics that could lead to impairment. Management
typically places reserves of 2%-5% of credit exposures graded "Special Mention",
15%-25% of credits classified "Substandard" and 50% of credits classified
"Doubtful". These reserve factors may be adjusted for significant loans that are
individually evaluated by management for specific risk of loss. The amounts
allocated for "Special Mention", "Substandard" and "Doubtful" are within the
calculated range of $264,000 to $484,000 at December 31, 2002. In addition,
reserve factors ranging from 0.50% to 2.50% 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. While the methodology utilizes historical and other objective
information, the establishment of the allowance for loan and lease losses and
the classification of the loans and leases is also to some extent based on
management's judgment and experience.
The Loan Committees of American River Bank and North Coast Bank
(collectively "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 an outside firm to independently assess our methodology and
reserve adequacy, and on a regular basis engage an outside firm 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
25
are warranted. 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.
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,
--------------------------------------------------------------
2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
Average loans and leases
outstanding $ 209,133 $ 202,624 $ 175,134 $ 148,369 $ 133,381
- --------------------------------------------------------------------------------------------------------
Allowance for possible loan & lease
losses at beginning of period $ 2,614 $ 2,454 $ 2,062 $ 1,693 $ 1,526
Loans charged off:
Commercial 44 556 265 214 478
Real estate 59 85 -- -- 22
Consumer 48 13 1 3 7
Lease financing receivable -- 57 -- 14 --
- --------------------------------------------------------------------------------------------------------
Total 151 711 266 231 507
- --------------------------------------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial 1 9 23 15 165
Real estate 85 -- -- -- --
Consumer 4 -- 4 3 --
Lease financing receivable -- 71 -- -- --
- --------------------------------------------------------------------------------------------------------
Total 90 80 27 18 165
- --------------------------------------------------------------------------------------------------------
Net loans charged off 61 631 239 213 342
Amount transferred for accounts
receivable servicing valuation
reserve -- -- (41) -- --
Additions to allowance charged
to operating expenses 644 791 672 582 509
- --------------------------------------------------------------------------------------------------------
Allowance for possible loan and
lease losses at end of period $ 3,197 $ 2,614 $ 2,454 $ 2,062 $ 1,693
Ratio of net charge-offs to average
loans and leases outstanding .03% .31% .14% .14% .26%
Provision for possible loan and lease
losses to average loans and leases
outstanding .31% .39% .38% .39% .38%
Allowance for possible loan and
lease losses to loans and leases, net
of deferred fees at end of period 1.38% 1.32% 1.21% 1.30% 1.17%
The allowance for loan and lease losses totaled $3,197,000 or 1.38% of
total loans at December 31, 2002, $2,614,000 or 1.32% of total loans at December
31, 2001, and $2,454,000 or 1.21% at December 31, 2000. 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.
Our methodology incorporates a variety of risk considerations, both quantitative
and qualitative, in establishing an allowance for loan and lease losses that
management believes is appropriate at each reporting date. Based on information
currently available to analyze inherent credit risk, including economic factors,
overall credit quality, historical delinquencies and a history of actual
charge-offs, management believes that the provision for loan and lease losses
and the allowance for loan and lease losses are prudent and adequate.
26
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 periods can be made with any
certainty.
As part of its loan review process, management has allocated the
overall allowance based on specific identified problem loans, qualitative
factors, uncertainty inherent 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, 2002. The allocation presented should not be interpreted as an
indication that charges to the allowance for loan and lease losses will be
incurred in these amounts or proportions, or that the portion of the allowance
allocated to each loan category represents the total amounts available for
charge-offs that may occur within these categories.
Table Eight: Allowance for Loan and Lease Losses by Loan Category
- -----------------------------------------------------------------------------------------------------------------
(In thousands,
except percentages) December 31, 2002 December 31, 2001 December 31, 2000
- -----------------------------------------------------------------------------------------------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
- -----------------------------------------------------------------------------------------------------------------
Commercial $ 660 21.1% $ 923 22.0% $ 781 25.9%
Real estate 2,173 69.5% 1,288 67.7% 1,392 65.1%
Agriculture 116 3.8% 147 5.3% 105 5.3%
Consumer 152 2.9% 206 3.8% 153 3.1%
Lease financing receivable 96 2.7% 50 1.2% 23 .6%
- -----------------------------------------------------------------------------------------------------------------
Total allocated $ 3,197 100.0% $ 2,614 100.0% $ 2,454 100.0%
- -----------------------------------------------------------------------------------------------------------------
December 31, 2002 December 31, 2001
- ------------------------------------------------------------------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
- ------------------------------------------------------------------------------------
Commercial $ 642 26.4% $ 509 25.4%
Real estate 1,252 65.3% 1,052 68.1%
Agriculture 78 4.5% 39 2.4%
Consumer 88 3.7% 86 3.8%
Lease financing receivable 2 .1% 7 .3%
- ------------------------------------------------------------------------------------
Total allocated $ 2,062 100.0% $ 1,693 100.0%
- ------------------------------------------------------------------------------------
Other Real Estate
At December 31, 2002 and 2001, the Company did not have any ORE
properties.
Deposits
At December 31, 2002, total deposits were $275,796,000 representing an
increase of $20,908,000 (8.2%) over the December 31, 2001 balance of
$254,888,000. The deposit growth in 2002 can be attributed to a concentrated
effort to increase noninterest-bearing demand, interest-bearing money market and
savings accounts. As a result these accounts increased 21.0%, 7.4% and 20.2%,
respectively, in 2002. During 2001, deposits increased $15,576,000 (6.5%) from
the total of $239,312,000 at December 31, 2000.
Other Borrowed Funds
Other borrowings outstanding as of December 31, 2002 consist of
advances (both long-term and short-term) from the FHLB and an overnight
borrowing from a correspondent bank. The following table summarizes these
borrowings (in thousands):
27
2002 2001 2000
---------------------------------------------------
Amount Rate Amount Rate Amount Rate
---------------------------------------------------
Short-Term borrowings:
FHLB advances 24,000 1.71% $ -- -- $ -- --
Advances from correspondent
banks 6,550 1.75% -- -- 15,990 6.88%
---------------------------------------------------
Total Short-Term borrowings $30,550 1.72% $ -- -- $15,990 6.88%
---------------------------------------------------
Long-Term Borrowings:
FHLB advances $ 1,992 6.13% $ 2,039 6.13% $ 2,084 6.13%
---------------------------------------------------
Total Short-Term borrowings $ 1,992 6.13% $ 2,039 6.13% $ 2,084 6.13%
---------------------------------------------------
The maximum amount of short-term borrowings at any month end during
2002, 2001 and 2000, was $33,900,000, $12,390,000 and $15,990,000, respectively.
The advances from correspondent banks at December 31, 2002, bear an interest
rate of 1.75% and mature on January 1, 2003. The FHLB advances are
collateralized by loans and securities pledged to the FHLB. The following is a
breakdown of rates and maturities on FHLB advances (dollars in thousands):
Short Term Long Term
Amount $ 24,000 $ 1,992
Maturity 2003 2007
Average rates 1.71% 6.13%
The Company has also been issued a total of $1,833,000 in letters of
credit by the FHLB which have been pledged to secure Local Agency Deposits. The
letters of credit act as a guarantee of payment to certain third parties in
accordance with specified terms and conditions. The letters of credit were not
drawn upon in 2002 and management does not expect to draw upon these lines in
the future.
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.
On September 20, 2001, the Company announced a plan to repurchase, as
conditions warrant, up to 5% annually of the Company's common stock in
connection with the Company's annual distribution of a 5% stock dividend. During
2002, the Company repurchased 42,001 shares and in 2001, the Company repurchased
21,400 shares under the repurchase plan.
The Company and the Subsidiary Banks are subject to certain regulations
issued by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation and the Office of the Comptroller of the Currency,
which require maintenance of certain levels of capital. At December 31, 2002,
shareholders' equity was $31,726,000, representing an increase of $3,784,000
(13.5%) from $27,942,000 at December 31, 2001. In 2001, shareholders' equity
increased $3.5 million (14.5%) from 2000. The ratio of total risk-based capital
to risk adjusted assets was 13.0% at December 31, 2002 compared to 13.6% at
December 31, 2001. Tier 1 risk-based capital to risk-adjusted assets was 11.8%
at December 31, 2002 and 12.4% at December 31, 2001.
Table Nine below lists the Company's actual capital ratios at December
31, 2002 and 2001 as well as the minimum capital ratios for capital adequacy.
28
Table Nine: Capital Ratios
- -----------------------------------------------------------------------------
At December 31, Minimum Regulatory
Capital to Risk-Adjusted Assets 2002 2001 Capital Requirements
- -----------------------------------------------------------------------------
Leverage ratio 9.8% 9.8% 4.00%
Tier 1 Risk-Based Capital 11.8% 12.4% 4.00%
Total Risk-Based Capital 13.0% 13.6% 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 a Risk Management Committee that establishes and
monitors guidelines to control the sensitivity of earnings to changes in
interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. The Company uses simulation models to forecast
earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer-modeling
techniques, the Company is able to estimate the potential impact of changing
interest rates on earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance sheet
is processed against three interest rate scenarios. The scenarios include a 200
basis point rising rate forecast, a flat rate forecast and a 200 basis point
falling rate forecast which take place within a one year time frame. The net
interest income is measured during the year assuming a gradual change in rates
over the twelve-month horizon. The Company's 2003 net interest income, as
forecast below, was modeled utilizing a forecast balance sheet projected from
year-end 2002 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.
29
Table Ten: Interest Rate Risk Simulation of Net Interest as of December 31, 2002
- --------------------------------------------------------------------------------
(In thousands) $ Change in NII
from Current
12 Month Horizon
----------------
Variation from a constant rate scenario
+200bp $ 318
-200bp $ (382)
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. During the third quarter of 2002, the Company employed an
investment strategy to reduce exposure to further declines in intermediate term
interest rates by purchasing mortgage-backed securities with average lives of 3
to 5 years and funding them with wholesale FHLB advances that mature in one year
or less. The fixed rate mortgage-backed securities should mitigate the Company's
exposure to further declines in rates.
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.
As reflected in Table Eleven below, at December 31, 2002, the
cumulative gap through the one-year time horizon indicates a slightly liability
sensitive position.
Table Eleven: Interest Rate Sensitivity
December 31, 2002
- -----------------------------------------------------------------------------------------------------
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 $ 5,489 $ 6,597 $ 8,718 $ 60,757 $ -- $ 81,561
Loans 110,538 27,037 19,078 72,355 -- 229,008
Other assets -- -- -- -- 31,994 31,994
- -----------------------------------------------------------------------------------------------------
Total assets $ 116,027 $ 33,634 $ 27,796 $ 133,112 $ 31,994 $ 342,563
=====================================================================================================
Liabilities:
Noninterest bearing $ -- $ -- $ -- $ -- $ 81,974 $ 81,974
Interest bearing:
Transaction 11,755 4,702 3,527 3,527 -- 23,511
Money market 41,121 16,497 12,372 12,372 -- 82,362
Savings 7,781 3,112 1,556 3,113 -- 15,562
Time certificates 34,380 14,983 13,689 9,335 -- 72,387
Short-term borrowings 18,050 -- 12,500 -- -- 30,550
Long-term borrowings 5 5 12 1,970 -- 1,992
Other liabilities -- -- -- -- 2,499 2,499
Shareholders' equity -- -- -- -- 31,726 31,726
- -----------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 113,092 $ 39,299 $ 43,656 $ 30,317 $ 116,199 $ 342,563
=====================================================================================================
Interest rate
sensitivity gap $ 2,935 $ (5,665) $ (15,860) $ 102,795 $ (84,205)
Cumulative interest
rate sensitivity gap $ 2,935 $ (2,730) $ (18,590) $ 84,205 --
30
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.
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, 2002, 2001 and 2000.
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, 2002 were approximately $61,714,000
and $3,668,000, respectively. Such loans relate primarily to revolving lines of
credit and other commercial loans and to real estate construction loans. Since
some of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company's sources of liquidity consist of cash and due from
correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments and loans held for sale. On December 31, 2002,
consolidated liquid assets totaled $49.1 million or 14.3% of total assets
compared to $54.8 million or 19.1% of total assets on December 31, 2001. In
addition to liquid assets, the Company maintains short-term lines of credit in
the amount of $26,000,000 with correspondent banks. At December 31, 2002, the
Company had $19,450,000 available under these credit lines. Additionally, the
Subsidiary Banks are members of the FHLB. At December 31, 2002, the Subsidiary
Banks could have arranged for up to $32,371,000 in secured borrowings from the
FHLB. These borrowings are secured by pledged mortgage loans and investment
securities. At December 31, 2002, the Company had $4,541,000 available under
these secured borrowing arrangements. 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 2002, 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 FRB and the FHLB.
31
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.
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, 2002
- --------------------------------------------------------------------------------
(In thousands) Over $100,000 Less than $100,000
- --------------------------------------------------------------------------------
Three months or less $ 19,661 $ 7,720
Over three months through six months 9,548 5,914
Over six months through twelve months 9,559 5,253
Over twelve months 7,595 7,137
- --------------------------------------------------------------------------------
Total $ 46,363 $ 26,024
================================================================================
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, 2002
- --------------------------------------------------------------------------------
One year One year through Over
(In thousands) or less five years five years Total
- --------------------------------------------------------------------------------
Commercial $ 22,426 $ 22,106 $ 4,699 $ 49,231
Real estate 29,051 44,967 87,578 161,596
Agriculture 768 6,619 1,437 8,824
Consumer 858 3,272 2,241 6,371
Leases 66 6,545 155 6,766
- --------------------------------------------------------------------------------
Total $ 53,169 $ 83,509 $ 96,110 $232,788
================================================================================
Loans shown above with maturities greater than one year include
$150,112,000 of floating interest rate loans and $29,507,000 of fixed rate
loans.
The carrying amount, maturity distribution and weighted average yield
of the Company's investment securities available-for-sale and held-to-maturity
portfolios are presented in Table Fourteen below. The yields on tax-exempt
obligations have been computed on a tax equivalent basis.
32
Table Fourteen: Securities Maturities and Weighted Average Yields
December 31, 2002, 2001 and 2000
- ----------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis)
2002 2001 2000
----------------------------------------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
(In thousands) Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------
Available-for-sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 4,907 6.46% $ 6,024 6.31% $ 4,351 6.02%
Maturing after 1 year but within 5 15,660 4.26% 12,479 5.30% 11,956 6.29%
years
State & political subdivisions
Maturing within 1 year 779 6.89% -- -- 200 6.10%
Maturing after 1 year but within 5 1,139 6.48% 1,889 6.65% 1,811 6.57%
years
Maturing after 5 years but within 10 3,215 7.46% 1,903 7.62% 387 6.91%
years
Maturing after 10 years 5,475 7.55% 6,148 7.49% 7,381 7.31%
Government guaranteed mortgage-backed
securities 29,280 4.57% 1,104 5.26% 163 6.77%
Other
Maturing within 1 year 254 7.40% 4,533 3.67% 3,950 6.37%
Maturing after 1 year but within 5 816 3.55% 789 4.62% -- --
years
Non maturing 351 6.61% 594 7.54% 1,048 8.49%
- ---------------------------------------------------------------------------------------------------
Total investment securities $ 61,876 5.13% $ 35,463 5.86% $ 31,247 6.60%
===================================================================================================
Held-to-maturity securities:
U.S. Treasury and agency securities
Maturing within 1 year $ -- -- $ -- -- $ 1,501 6.40%
State & political subdivisions
Maturing within 1 year 1,133 6.53% -- -- 553 8.35%
Maturing after 1 year but within 5 200 6.77% 1,323 6.51% 1,324 6.51%
years
Maturing after 5 years but within 10 -- -- 16 15.84% 23 15.84%
years
Government guaranteed mortgage-backed
securities 10,852 5.05% 11,770 5.92% 9,965 6.58%
Other
Maturing within 1 year -- -- -- -- 1,836 5.84%
Maturing after 1 year but within 5
years -- -- -- -- 1,253 6.88%
- ---------------------------------------------------------------------------------------------------
Total investment securities $ 12,185 5.22% $ 13,109 5.99% $ 16,455 6.57%
===================================================================================================
The carrying values of available-for-sale securities includes net
unrealized gains of $2,149,000, $796,000 and $350,000 at December 31, 2002, 2001
and 2000, respectively. The carrying values of held-to-maturity securities do
not include unrealized gains, however, the net unrealized gains at December 31,
2002, 2001 and 2000 were $201,000, $125,000 and $68,000, respectively. Table 14
does not include FHLB or FRB Stock, which do not have stated maturity dates or
readily available market values. The balance in FHLB and FRB Stock at December
31, 2002, 2001 and 2000 was $1,562,000, $340,000 and $316,000, respectively.
33
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.
As of December 31, 2002, 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 $61,714,000 and $3,668,000, respectively, at December 31,
2002, a compared to $60,840,000 and $3,776,000, respectively, at December 31,
2001. As a percentage of net loans and leases these off-balance sheet items
represent 28.6%, and 33.1%, respectively.
Disclosure of Fair Value
The Financial Accounting Standards Board (the "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 principally the result of changes in interest
rates during the year. See "American River Holdings and Subsidiaries Financial
Statements--Note 18, Disclosures About Fair Value of Financial Instruments".
Accounting Pronouncements
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. This statement, which addresses financial accounting and
reporting matters for the acquisition of all or part of a financial institution,
applies to all such transactions except those between two or more mutual
enterprises. This Statement removes acquisitions of financial institutions,
other than transactions between two or more mutual enterprises, from the scope
of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions, and related interpretations. This Statement requires a financial
institution to apply SFAS No. 144 and evaluate long-term customer relationship
intangible assets (core deposit intangible) for impairment. Under SFAS No. 72, a
34
financial institution may have recorded an unidentifiable intangible asset
arising from a business combination. If certain criteria in SFAS No. 147 are
met, the amount of the unidentifiable intangible asset will be reclassified to
goodwill upon adoption of this Statement and any amortization amounts that were
incurred after the adoption of SFAS No. 142 must be reversed. Reclassified
goodwill would then be measured for impairment under the provisions of SFAS No.
142. Provisions of this statement are applicable on or after October 1, 2002. In
management's opinion, the adoption of this Statement did not have a material
effect on the Company's consolidates financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS
Statement No. 123. This Statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reporting containing financial
statements for interim periods beginning after December 15, 2002. Because the
Company accounts for the compensation cost associated with its stock option plan
under the intrinsic value method, the alternative methods of transition will not
apply to the Company. The additional disclosure requirements of the Statement
are included in these consolidated financial statements. In management's
opinion, the adoption of this Statement did not have a material impact on the
Company's consolidated financial position or results of operations.
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter and potential military conflicts 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 and lease losses, and causing a decline in the Company's stock
price.
Website Access. American River Holdings maintains a website where
certain information about the Company is posted. Through the website, its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments thereto are available as soon as reasonably practicable
after such material is electronically filed with or furnished to the SEC. These
reports are free of charge and can be accessed through the address
www.amrb.com/financial.html by clicking on the SEC Filings link located at that
address.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A of Form 10-K is contained in the "Market
Risk Management" section of Item 7-"Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 27-29.
35
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report 37
Consolidated Balance Sheet, December 31, 2002 and 2001 38
Consolidated Statement of Income for the Years Ended
December 31, 2002, 2001 and 2000 39
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 2002, 2001 and 2000 40
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 41-42
Notes to Consolidated Financial Statements 43-69
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.
36
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, 2002 and 2001 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, 2002.
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, 2002 and 2001, 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, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Perry-Smith LLP
February 7, 2003
37
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2002 and 2001
(Dollars in thousands)
2002 2001
-------- --------
ASSETS
Cash and due from banks $ 25,899 $ 20,342
Federal funds sold 7,814
Interest-bearing deposits in banks 5,938 5,740
Investment securities (Note 3):
Available for sale, at fair value 61,876 35,463
Held to maturity, at amortized cost (fair value of $12,386 and
$13,234 at December 31, 2002 and 2001, respectively) 12,185 13,109
Loans and leases, less allowance for loan and lease losses of
$3,197 in 2002 and $2,614 in 2001 (Notes 4, 8, 9, 11 and 16) 229,008 195,026
Premises and equipment, net (Note 5) 1,665 1,903
FHLB and FRB stock 1,562 340
Accounts receivable servicing receivables, net (Notes 6 and 14) 1,396 2,869
Accrued interest receivable and other assets 3,034 3,953
-------- --------
$342,563 $286,559
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 81,974 $ 67,740
Interest-bearing (Note 7) 193,822 187,148
-------- --------
Total deposits 275,796 254,888
Short-term borrowings (Note 8) 30,550
Long-term debt (Note 9) 1,992 2,039
Accrued interest payable and other liabilities 2,499 1,690
-------- --------
Total liabilities 310,837 258,617
-------- --------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 12 and 13):
Common stock - no par value; 20,000,000 shares authorized;
issued and outstanding - 2,625,922 shares in 2002 and
2,519,717 shares in 2001 16,064 14,167
Retained earnings 14,358 13,290
Accumulated other comprehensive income (Notes 3 and 17) 1,304 485
-------- --------
Total shareholders' equity 31,726 27,942
-------- --------
$342,563 $286,559
======== ========
The accompanying notes are an integral
part of these consolidated financial statements.
38
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
2002 2001 2000
------- ------- -------
Interest income:
Interest and fees on loans $15,400 $17,883 $17,294
Interest on Federal funds sold 80 202 353
Interest on deposits in banks 267 342 409
Interest and dividends on investment securities:
Taxable 2,359 1,871 2,643
Exempt from Federal income taxes 460 464 462
Dividends 19 81 66
------- ------- -------
Total interest income 18,585 20,843 21,227
------- ------- -------
Interest expense:
Interest on deposits (Note 7) 3,168 6,042 7,330
Interest on short-term borrowings (Note 8) 220 97 183
Interest on long-term debt (Note 9) 124 127 129
------- ------- -------
Total interest expense 3,512 6,266 7,642
------- ------- -------
Net interest income 15,073 14,577 13,585
Provision for loan and lease losses (Note 4) 644 791 672
------- ------- -------
Net interest income after provision for loan
and lease losses 14,429 13,786 12,913
------- ------- -------
Noninterest income:
Service charges 563 562 602
Gain on sale of available-for-sale investment securities,
net (Note 3) 13
Other income (Note 14) 1,760 1,803 1,568
------- ------- -------
Total noninterest income 2,323 2,365 2,183
------- ------- -------
Noninterest expense:
Salaries and employee benefits (Notes 4 and 15) 5,595 5,334 4,961
Occupancy (Notes 5 and 11) 840 810 757
Furniture and equipment (Notes 5 and 11) 620 564 461
Other expense (Note 14) 2,334 2,794 3,150
------- ------- -------
Total noninterest expense 9,389 9,502 9,329
------- ------- -------
Income before income taxes 7,363 6,649 5,767
Income taxes (Note 10) 2,904 2,612 2,221
------- ------- -------
Net income $ 4,459 $ 4,037 $ 3,546
======= ======= =======
Basic earnings per share (Note 12) $ 1.69 $ 1.52 $ 1.35
======= ======= =======
Diluted earnings per share (Note 12) $ 1.57 $ 1.43 $ 1.29
======= ======= =======
Cash dividends per share of issued and outstanding common
stock, adjusted for stock dividends $ .35 $ .26 $ .23
======= ======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
39
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
Accum-
ulated
Other
Common Stock Compre-
----------------------- hensive Share- Compre-
Retained Income holders' hensive
Shares Amount Earnings (Loss) Equity Income
---------- ---------- ---------- ---------- ---------- ----------
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 ($.23 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 268 268 268
----------
Total comprehensive income $ 4,305
==========
Cash dividends ($.26 per share) (681) (681)
5% stock dividend 120,531 1,935 (1,935)
Fractional shares redeemed (7) (7)
Stock options exercised 26,566 265 247
Retirement of common stock (Note 12) (22,538) (353) (335)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 2,519,717 14,167 13,290 485 27,942
Comprehensive income (Note 17):
Net income 4,459 4,459 $ 4,459
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 819 819 819
----------
Total comprehensive income $ 5,278
==========
Cash dividend ($.35 per share) (914) (914)
5% stock dividend 124,604 2,469 (2,469)
Fractional shares redeemed (8) (8)
Stock options exercised 25,941 236 236
Retirement of common stock (Note 12) (44,340) (808) (808)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 2,625,922 $ 16,064 $ 14,358 $ 1,304 $ 31,726
========== ========== ========== ========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
40
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income $ 4,459 $ 4,037 $ 3,546
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 644 791 672
Increase (decrease) in deferred loan and lease origination
fees, net 158 (173) 178
Net gain on the sale of available-for-sale investment
securities (13)
Depreciation and amortization 464 439 359
Amortization (accretion) of investment security premiums
and discounts, net 394 (46) (251)
(Reduction in) provision for accounts receivable servicing
receivable losses (27) 10 30
Gain on sale of other real estate (13)
Deferred tax provision (304) (179) (289)
Decrease (increase) in accrued interest receivable and
other assets 679 (180) (336)
Increase (decrease) in accrued interest payable
and other liabilities 611 (678) 503
-------- -------- --------
Net cash provided by operating activities 7,065 4,021 4,399
-------- -------- --------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment
securities 252 1,979 20
Proceeds from called available-for-sale investment
securities 250 1,500
Proceeds from matured available-for-sale investment
securities 10,880 9,020 22,500
Proceeds from called held-to-maturity investment
securities 155
Proceeds from matured held-to-maturity investment
securities 2,050 2,365
Purchases of available-for-sale investment securities (39,112) (13,203) (14,745)
Purchases of held-to-maturity investment securities (4,249) (5,193) (487)
Proceeds from principal repayments for available-for-sale
government guaranteed mortgage-backed securities 2,399 92 65
Proceeds from principal repayments for held-to-maturity
government guaranteed mortgage-related securities 5,050 3,378 1,918
Net (increase) decrease in interest-bearing deposits in banks (198) (200) 780
Net (increase )decrease in loans and leases (34,826) 5,023 (44,412)
Net decrease (increase) in accounts receivable servicing
receivables 1,500 301 (1,128)
Purchases of equipment (222) (629) (799)
Net (increase) decrease in FHLB and FRB stock (1,222) (25) 554
Proceeds from the sale of other real estate 61
-------- -------- --------
Net cash (used in) provided by investing activities (59,437) 4,093 (33,214)
-------- -------- --------
(Continued)
41
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings
deposits $ 24,691 $ 7,764 $ 18,174
Net (decrease) increase in time deposits (3,783) 7,812 (1,939)
Repayment of long-term debt (47) (45) (41)
Increase (decrease) in short-term borrowings 30,550 (15,990) 14,990
Exercise of stock options 236 247 286
Cash paid to repurchase common stock (808) (335)
Payment of cash dividends (716) (640) (438)
Cash paid for fractional shares in connection with stock
dividends (8) (7) (6)
-------- -------- --------
Net cash provided by (used in) financing activities 50,115 (1,194) 31,026
-------- -------- --------
(Decrease) increase in cash and cash
equivalents (2,257) 6,920 2,211
Cash and cash equivalents at beginning of year 28,156 21,236 19,025
-------- -------- --------
Cash and cash equivalents at end of year $ 25,899 $ 28,156 $ 21,236
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 3,473 $ 6,299 $ 7,599
Income taxes $ 2,753 $ 2,954 $ 2,279
Non-cash investing activities:
Net change in unrealized gain on available-for-sale
investment securities $ 1,353 $ 446 $ 824
Transfer of corporate debt securities from the held-to-
maturity category to the available-for-sale category $ 3,089
Other real estate acquired $ 48
Non-cash financing activities:
Dividends declared and unpaid $ 551 $ 353 $ 312
The accompanying notes are an integral
part of these financial statements.
42
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. 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 and 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 does 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 accounting principles generally accepted in
the United States of America and prevailing practices within the
financial services industry.
Reclassifications
-----------------
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 2002.
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.
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.
43
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
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.
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.
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.
44
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, 2002, 2001
and 2000. 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, 2002 and 2001.
SBA and Farmer Mac loans with unpaid balances of $3,970,000 and
$4,129,000 were being serviced for others as of December 31, 2002 and
2001, respectively. The Company also serviced loans that are
participated with other financial institutions totaling $8,102,000, and
$7,316,000 as of December 31, 2002 and 2001, respectively. In addition,
the Company serviced loans originated by others totaling $27,732,000 as
of December 31, 2001. The Company did not service any loans originated
for others at December 31, 2002.
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
possible 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 including concentrations, types of lending,
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.
45
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, 2002 and 2001, 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, 2002 and 2001.
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.
The Company accounts for income taxes using the liability or balance
sheet method, under which deferred tax assets and liabilities are
recognized for the tax consequences of temporary differences between
the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. On the balance
sheet, net deferred tax assets are included in accrued interest
receivable and other assets.
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.
46
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
------------------------
At December 31, 2002, the Company has two stock-based employee
compensation plans, which are described more fully in Note 12. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted
under these plans had an exercise price equal to the market value of
the underlying common stock on the date of grant.
Pro forma adjustments to the Company's consolidated net earnings and
earnings per share are disclosed during the years in which the options
become vested. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
Year Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(Dollars in thousands, except
per share data)
Net income, as reported $ 4,459 $ 4,037 $ 3,546
Deduct: Total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects (174) (126) (189)
--------- --------- ---------
Pro forma net income $ 4,285 $ 3,911 $ 3,357
========= ========= =========
Basic earnings per share - as reported $ 1.69 $ 1.52 $ 1.35
Basic earnings per share - pro forma $ 1.62 $ 1.47 $ 1.28
Diluted earnings per share - as reported $ 1.57 $ 1.43 $ 1.29
Diluted earnings per share - pro forma $ 1.52 $ 1.38 $ 1.22
The fair value of each option is estimated on the date of grant using
an option-pricing model. No options were granted for the years ended
December 31, 2002, 2001 and 2000.
47
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards
--------------------------------------------
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. This statement, which addresses financial
accounting and reporting matters for the acquisition of all or part of
a financial institution, applies to all such transactions except those
between two or more mutual enterprises. This Statement removes
acquisitions of financial institutions, other than transactions between
two or more mutual enterprises, from the scope of SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions,
and related interpretations. This Statement requires a financial
institution to apply SFAS No. 144 and evaluate long-term customer
relationship intangible assets (core deposit intangible) for
impairment. Under SFAS No. 72, a financial institution may have
recorded an unidentifiable intangible asset arising from a business
combination. If certain criteria in SFAS No. 147 are met, the amount of
the unidentifiable intangible asset will be reclassified to goodwill
upon adoption of this Statement and any amortization amounts that were
incurred after the adoption of SFAS No. 142 must be reversed.
Reclassified goodwill would then be measured for impairment under the
provisions of SFAS No. 142. Provisions of this statement are applicable
on or after October 1, 2002. In management's opinion, the adoption of
this Statement did not have a material effect on the Company's
consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of
SFAS Statement No. 123. This Statement amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The transition
guidance and annual disclosure provisions of SFAS No. 148 are effective
for fiscal years ending after December 15, 2002. The interim disclosure
provisions are effective for financial reporting containing financial
statements for interim periods beginning after December 15, 2002.
Because the Company accounts for the compensation cost associated with
its stock option plan under the intrinsic value method, the alternative
methods of transition will not apply to the Company. The additional
disclosure requirements of the Statement are included in these
consolidated financial statements. In management's opinion, the
adoption of this Statement did not have a material impact on the
Company's consolidated financial position or results of operations.
48
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at December 31, 2002 and 2001 consisted of the following (dollars in
thousands):
Available-for-Sale:
-------------------
2002
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- ---------
U.S. Government agencies $ 19,735 $ 832 $ 20,567
U.S. Government guaranteed
mortgage-backed securities 28,792 490 $ (2) 29,280
Obligations of states and
political subdivisions 9,822 786 10,608
Corporate debt securities 1,045 25 1,070
Corporate stock 333 19 (1) 351
--------- --------- --------- ---------
$ 59,727 $ 2,152 $ (3) $ 61,876
========= ========= ========= =========
Net unrealized gains on available-for-sale investment securities
totaling $2,149,000 were recorded, net of $845,000 in tax liabilities,
as accumulated other comprehensive income within shareholders' equity
at December 31, 2002. Proceeds from the sale of available-for-sale
investment securities for the year ended December 31, 2002 totaled
$252,000. No gains or losses were recognized.
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
--------- --------- --------- ---------
$ 34,667 $ 860 $ (64) $ 35,463
========= ========= ========= =========
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 at
December 31, 2001. 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. 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.
49
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
Held-to-Maturity:
----------------
2002
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- ---------
Obligations of states and
political subdivisions $ 1,333 $ 37 $ 1,370
Government guaranteed
mortgage-backed securities 10,852 170 $ (6) 11,016
--------- --------- --------- ---------
$ 12,185 $ 207 $ (6) $ 12,386
========= ========= ========= =========
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
========= ========= ========= =========
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,
2002, 2001 and 2000.
50
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at December 31, 2002 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 $ 5,833 $ 5,941 $ 1,133 $ 1,159
After one year through five years 16,734 17,615 200 211
After five years through ten years 2,974 3,215
After ten years 5,061 5,474
--------- --------- --------- ---------
30,602 32,245 1,333 1,370
Investment securities not due at
a single maturity date:
Government guaranteed
mortgage-backed securities 28,792 29,280 10,852 11,016
Corporate stock 333 351
--------- --------- --------- ---------
$ 59,727 $ 61,876 $ 12,185 $ 12,386
========= ========= ========= =========
Investment securities with amortized cost totaling $35,005,000 and
10,654,000 and market value totaling $35,277,000 and $10,931,000 were
pledged to secure treasury tax and loan accounts, State Treasury funds
on deposit and short-term borrowing arrangements at December 31, 2002
and 2001, respectively.
4. LOANS AND LEASES
Outstanding loans and leases are summarized as follows (dollars in
thousands):
December 31,
----------------------
2002 2001
--------- ---------
Real estate - commercial $ 127,550 $ 100,158
Real estate - construction 32,385 30,821
Real estate - residential 1,661 3,119
Commercial 49,231 43,619
Lease financing receivable 6,766 2,499
Agriculture 8,824 10,251
Consumer 6,371 7,598
--------- ---------
232,788 198,065
Deferred loan and lease origination fees, net (583) (425)
Allowance for loan and lease losses (3,197) (2,614)
--------- ---------
$ 229,008 $ 195,026
========= =========
Certain loans have been pledged to secure borrowing arrangements (see
Notes 8 and 9).
51
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows
(dollars in thousands):
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Balance, beginning of year $ 2,614 $ 2,454 $ 2,062
Provision charged to operations 644 791 672
Losses charged to allowance (151) (711) (266)
Amounts transferred to accounts
receivable servicing receivables
valuation reserve (Note 6) (41)
Recoveries 90 80 27
-------- -------- --------
Balance, end of year $ 3,197 $ 2,614 $ 2,454
======== ======== ========
At December 31, 2002 and 2001, nonaccrual loans and leases totaled
$204,000 and $856,000, respectively. Interest foregone on nonaccrual
loans for the years ended December 31, 2002, 2001 and 2000 was not
material.
The recorded investment in loans and leases that were considered to be
impaired totaled $204,000 and $856,000 at December 31, 2002 and 2001,
respectively. The related allowance for loan and lease losses for these
loans and leases as determined under loan impairment standards at
December 31, 2002 and 2001 was $51,000 and $263,000, respectively. The
average recorded investment in impaired loans and leases for the years
ended December 31, 2002, 2001 and 2000 was $472,000, $733,000 and
$128,000, respectively. Interest income recognized on impaired loans
and leases using a cash-basis method for the years ended December 31,
2002, 2001 and 2000 was not material.
Salaries and employee benefits totaling $543,000, $483,000 and $530,000
have been deferred as loan and lease origination costs for the years
ended December 31, 2002, 2001 and 2000, respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (dollars in
thousands):
December 31,
--------------------
2002 2001
-------- --------
Land $ 149 $ 149
Building and improvements 213 213
Furniture, fixtures and equipment 4,053 3,954
Leasehold improvements 783 765
-------- --------
5,198 5,081
Less accumulated depreciation
and amortization (3,533) (3,178)
-------- --------
$ 1,665 $ 1,903
======== ========
Depreciation and amortization included in occupancy and furniture and
equipment expenses totaled $464,000, $439,000 and $359,000 for the
years ended December 31, 2002, 2001 and 2000, respectively.
52
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $294,000, $459,000 and $430,000 for
the years ended December 31, 2002, 2001 and 2000, 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,
-----------------------
2002 2001
-------- --------
Savings $ 15,562 $ 12,951
Money market 82,362 74,652
NOW accounts 23,511 23,375
Time, $100,000 or more 46,363 44,897
Other time 26,024 31,273
-------- --------
$193,822 $187,148
======== ========
Aggregate annual maturities of time deposits are as follows (dollars in
thousands):
Year Ending
December 31,
------------
2003 $ 57,655
2004 8,379
2005 3,247
2006 675
2007 2,431
--------
$ 72,387
========
Interest expense recognized on interest-bearing deposits consisted of
the following (dollars in thousands):
Year Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Savings $ 51 $ 166 $ 297
Money market 901 1,849 2,587
NOW accounts 38 115 247
Time, $100,000 or more 1,022 1,917 2,318
Other time 1,156 1,995 1,881
-------- -------- --------
$ 3,168 $ 6,042 $ 7,330
======== ======== ========
53
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. SHORT-TERM BORROWING ARRANGEMENTS
The Company has a total of $26,000,000 in unsecured short-term
borrowing arrangements to purchase Federal funds with four of its
correspondent banks. An advance totaling $6,550,000 was outstanding
from one of its correspondent banks at December 31, 2002, bearing an
interest rate of 1.75% and maturing on January 1, 2003. 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) and investment securities (see Note 3). Borrowings may include
overnight advances as well as loans with a term of up to thirty years.
Advances totaling $24,000,000 were outstanding from the Federal Home
Loan Bank at December 31, 2002, bearing interest rates ranging from
1.57% to 1.87% and maturing between January 28, 2003 and October 30,
2003. There were no short-term borrowings outstanding under this line
of credit at December 31, 2001.
The Company has also been issued a total of $1,833,000 in letters of
credit by the Federal Home Loan Bank which have been pledged to secure
Local Agency Deposits. The letters of credit act as a guarantee of
payment to certain third parties in accordance with specified terms and
conditions. The letters of credit were not drawn upon in 2002 and
management does not expect to draw upon these lines in the future.
9. LONG-TERM DEBT
The Company can borrow up to $7,716,000 from the Federal Home Loan Bank
on either a short-term or long-term basis, secured by qualifying
mortgage loans with unpaid balances of $18,034,000 at December 31,
2002. Long-term debt consisted of an advance from the Federal Home Loan
Bank totaling $1,992,000 and $2,039,000 at December 31, 2002 and 2001,
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.
Future minimum principal payments on long-term debt are as follows
(dollars in thousands):
Year Ending
December 31,
------------
2003 $ 50
2004 54
2005 57
2006 60
2007 1,771
--------
$ 1,992
========
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 2002,
2001 and 2000 consisted of the following (dollars in thousands):
Federal State Total
-------- -------- --------
2002
----
Current $ 2,388 $ 820 $ 3,208
Deferred (229) (75) (304)
-------- -------- --------
Income tax expense $ 2,159 $ 745 $ 2,904
======== ======== ========
54
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. INCOME TAXES (Continued)
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
======== ======== ========
Deferred tax assets (liabilities) consisted of the following (dollars
in thousands):
December 31,
-----------------
2002 2001
------- -------
Deferred tax assets:
Allowance for loan losses $ 1,207 $ 940
Future benefit of State tax deduction 280 244
Deferred compensation 175 152
Other 27 23
------- -------
Total deferred tax assets 1,689 1,359
------- -------
Deferred tax liabilities:
Discount on purchased loans (21) (31)
Future liability of State deferred tax assets (110) (84)
Unrealized gain on available-for-sale investment
securities (845) (311)
Federal Home Loan Bank stock dividends (36) (26)
------- -------
Total deferred tax liabilities (1,012) (452)
------- -------
Net deferred tax assets $ 677 $ 907
======= =======
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,
-------------------------
2002 2001 2000
----- ----- -----
Federal income tax statutory rate 34.0% 34.0% 34.0%
State franchise tax, net of Federal tax effect 6.8% 7.0% 7.3%
Tax benefit of interest on obligations of
states and political subdivisions (2.1)% (2.2)% (2.4)%
Other .7% .5% (.4)%
----- ----- -----
Total income tax expense 39.4% 39.3% 38.5%
===== ===== =====
55
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases branch facilities, administrative offices and
various equipment under noncancelable operating leases which expire on
various dates through the year 2009. Certain of the leases have five
year renewal options. Two of the branch facilities are leased from
members of the Company's Board of Directors (see Note 16).
Future minimum lease payments are as follows (dollars in thousands):
Year Ending
December 31,
------------
2003 $ 551
2004 562
2005 572
2006 547
2007 389
Thereafter 754
--------
$ 3,375
========
Rental expense included in occupancy, furniture and equipment expense,
net of related rental income, totaled $616,000, $631,000 and $564,000
for the years ended December 31, 2002, 2001 and 2000, 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.
56
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
-------------------------------------------------
The following financial instruments represent off-balance-sheet credit
risk (dollars in thousands):
December 31,
-------------------
2002 2001
-------- --------
Commitments to extend credit:
Revolving lines of credit secured by
1-4 family residences $ 2,431 $ 2,430
Commercial real estate, construction and land
development commitments:
Secured by real estate 18,281 15,553
Not secured by real estate 1,821 2,157
Credit card arrangements 460 383
Other unused commitments, principally commercial loans 38,721 40,317
-------- --------
$ 61,714 $ 60,840
======== ========
Letters of credit $ 3,668 $ 3,776
======== ========
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.
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.
In management's judgment, a concentration exists in real estate-related
loans which represented approximately 70% and 69% of the Company's loan
portfolio at December 31, 2002 and 2001, respectively. Although
management believes such concentrations to have no more than the normal
risk of collectibility, 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
collectibility of these loans. However, personal and business income
represent the primary source of repayment for a majority of these
loans.
57
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (Continued)
Correspondent Banking Agreements
--------------------------------
The Company maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements.
Uninsured deposits totaled $3,519,000 at December 31, 2002.
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 $533,000 and $3,688,000 at
December 31, 2002 and 2001, 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, 2002
-----------------
Basic earnings per share $ 4,459 2,634 $ 1.69
========
Effect of dilutive stock options 199
-------- --------
Diluted earnings per share $ 4,459 2,833 $ 1.57
======== ======== ========
December 31, 2001
-----------------
Basic earnings per share $ 4,037 2,662 $ 1.52
========
Effect of dilutive stock options 169
-------- --------
Diluted earnings per share $ 4,037 2,831 $ 1.43
======== ======== ========
December 31, 2000
-----------------
Basic earnings per share $ 3,546 2,620 $ 1.35
========
Effect of dilutive stock options 135
-------- --------
Diluted earnings per share $ 3,546 2,755 $ 1.29
======== ======== ========
58
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. SHAREHOLDERS' EQUITY (Continued)
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, 2002, grants
outstanding combined with shares available for future grants totaled
730,864 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.
A summary of the combined activity within the plans follows:
2002 2001 2000
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Options outstanding,
beginning of year 443,198 $ 7.50 488,544 $ 7.54 549,539 $ 7.77
Options granted
Options exercised (26,753) $ 6.87 (27,894) $ 6.72 (38,970) $ 6.40
Options canceled (17,452) $ 15.35 (22,025) $ 14.62
-------- -------- --------
Options outstanding,
end of year 416,445 $ 7.47 443,198 $ 7.50 488,544 $ 7.54
======== ======== ========
Options exercisable,
end of year 391,516 $ 7.21 374,004 $ 6.91 345,297 $ 6.52
======== ======== ========
A summary of options outstanding at December 31, 2002 follows:
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 2002 Life 2002
------------------------ ------------ ------------ ------------
$ 5.02 40,256 3.8 years 40,256
$ 5.22 180,911 2.6 years 180,911
$ 5.56 6,970 1.2 years 6,970
$ 6.85 6,610 3.0 years 6,610
$ 7.84 44,107 7.0 years 34,055
$ 8.30 47,596 5.7 years 47,596
$ 9.20 28,141 4.4 years 28,141
$ 13.28 11,576 6.9 years 6,946
$ 13.58 9,116 6.0 years 7,293
$ 14.63 41,162 5.7 years 32,738
------------ ------------
416,445 391,516
============ ============
59
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 Office of the Comptroller of the Currency
(the "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, 2002,
the subsidiaries had $10,013,000 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 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, 2002 and 2001.
60
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,
-----------------------------------
2002 2001
---------------- ----------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
(dollars in thousands)
Leverage Ratio
--------------
American River Holdings and Subsidiaries $ 30,350 9.8% $ 27,380 9.8%
Minimum regulatory requirement $ 12,328 4.0% $ 11,139 4.0%
American River Bank $ 24,986 10.0% $ 22,226 10.0%
Minimum requirement for "Well-Capitalized" institution $ 12,521 5.0% $ 11,080 5.0%
Minimum regulatory requirement $ 10,017 4.0% $ 8,864 4.0%
North Coast Bank $ 5,168 9.0% $ 4,843 8.6%
Minimum requirement for "Well-Capitalized" institution $ 2,861 5.0% $ 2,832 5.0%
Minimum regulatory requirement $ 2,289 4.0% $ 2,265 4.0%
Tier 1 Risk-Based Capital Ratio
-------------------------------
American River Holdings and Subsidiaries $ 30,350 11.8% $ 27,380 12.4%
Minimum regulatory requirement $ 10,284 4.0% $ 8,827 4.0%
American River Bank $ 24,986 11.8% $ 22,226 12.5%
Minimum requirement for "Well-Capitalized" institution $ 12,701 6.0% $ 10,677 6.0%
Minimum regulatory requirement $ 8,467 4.0% $ 7,118 4.0%
North Coast Bank $ 5,168 11.2% $ 4,843 11.5%
Minimum requirement for "Well-Capitalized" institution $ 2,773 6.0% $ 2,535 6.0%
Minimum regulatory requirement $ 1,849 4.0% $ 1,690 4.0%
Total Risk-Based Capital Ratio
------------------------------
American River Holdings and Subsidiaries $ 33,547 13.0% $ 29,994 13.6%
Minimum regulatory requirement $ 20,568 8.0% $ 17,653 8.0%
American River Bank $ 27,555 13.0% $ 24,298 13.7%
Minimum requirement for "Well-Capitalized" institution $ 21,169 10.0% $ 17,795 10.0%
Minimum regulatory requirement $ 16,935 8.0% $ 14,236 8.0%
North Coast Bank $ 5,746 12.4% $ 5,371 12.7%
Minimum requirement for "Well-Capitalized" institution $ 4,627 10.0% $ 4,225 10.0%
Minimum regulatory requirement $ 3,702 8.0% $ 3,380 8.0%
61
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income consisted of the following (dollars in
thousands):
Year Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Accounts receivable servicing fees (Note 6) $ 294 $ 459 $ 430
Merchant fee income 344 277 202
Income from residential lending division 278 274 142
Fees from lease brokerage services 459 264 177
Financial services income 71 90 203
Other 314 439 414
-------- -------- --------
$ 1,760 $ 1,803 $ 1,568
======== ======== ========
Noninterest expense consisted of the following (dollars in thousands):
Year Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Professional fees $ 262 $ 411 $ 296
Outsourced item processing 359 385 358
Telephone and postage 278 313 268
Advertising and promotion 200 275 295
Stationery and supplies 212 203 185
Directors' compensation 248 209 175
Merger, NASDAQ listing and SEC
registration expenses 693
Other operating expenses 775 998 880
-------- -------- --------
$ 2,334 $ 2,794 $ 3,150
======== ======== ========
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 Company 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 $109,000, $111,000 and $77,000
for the years ended December 31, 2002, 2001 and 2000, 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.
62
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
$437,000, $351,000 and $195,000 at December 31, 2002, 2001 and 2000,
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 2002 (dollars in
thousands):
Balance, January 1, 2002 $ 3,789
Disbursements 493
Amounts repaid 190
--------
Balance, December 31, 2002 $ 4,092
========
Undisbursed commitments to related parties,
December 31, 2002 $ 819
========
The Company also leases two branch facilities from members of the
Company's Board of Directors. Rental payments to the Directors totaled
$106,000, $105,000 and $105,000 for the years ended December 31, 2002,
2001 and 2000, 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 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. Total comprehensive income and the components of
accumulated other comprehensive income or loss are presented in the
Statement of Changes in Shareholders' Equity.
63
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. COMPREHENSIVE INCOME (Continued)
At December 31, 2002, 2001 and 2000, the Company held securities
classified as available-for-sale which had unrealized gains as follows
(dollars in thousands):
Before Tax After
Tax Expense Tax
-------- -------- --------
For the Year Ended December 31, 2002
------------------------------------
Other comprehensive income:
Unrealized holding gains $ 1,353 $ (534) $ 819
======== ======== ========
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
======== ======== ========
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,
2002 and 2001:
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.
64
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, 2002 December 31, 2001
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets:
Cash and due from banks $ 25,899 $ 25,899 $ 20,342 $ 20,342
Federal funds sold 7,814 7,814
Interest-bearing deposits in banks 5,938 5,988 5,740 5,790
Investment securities 74,061 74,262 48,572 48,697
Loans and leases 229,008 229,904 195,026 197,947
FHLB and FRB stock 1,562 1,562 340 340
Accounts receivable servicing
receivables 1,396 1,396 2,869 2,869
Accrued interest receivable 1,486 1,486 1,468 1,468
65
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
December 31, 2002 December 31, 2001
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial liabilities:
Deposits $275,796 $276,238 $254,888 $255,983
Short-term debt 30,550 30,550
Long-term debt 1,992 2,089 2,039 2,129
Accrued interest payable 303 303 264 264
Off-balance-sheet financial instruments:
Commitments to extend credit $ 61,714 $ 61,714 $ 60,840 $ 60,840
Letters of credit 3,668 3,668 3,776 3,776
66
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
December 31, 2002 and 2001
(Dollars in thousands)
2002 2001
--------- ---------
ASSETS
Cash and due from banks $ 342 $ 470
Investment in subsidiaries 31,684 27,695
Dividends receivable from subsidiaries 851 355
Other assets 126 91
--------- ---------
$ 33,003 $ 28,611
========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable to shareholders $ 551 $ 353
Other liabilities 726 316
--------- ---------
Total liabilities 1,277 669
--------- ---------
Shareholders' equity:
Common stock 16,064 14,167
Retained earnings 14,358 13,290
Accumulated other comprehensive income 1,304 485
--------- ---------
Total shareholders' equity 31,726 27,942
--------- ---------
$ 33,003 $ 28,611
========= =========
67
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, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Income:
Dividends declared by subsidiaries -
eliminated in consolidation $ 1,815 $ 1,282 $ 887
Management fee from subsidiaries - eliminated
in consolidation 1,242 1,199
-------- -------- --------
Total income 3,057 2,481 887
-------- -------- --------
Expenses:
Salaries and employee benefits 1,437 1,228 221
Professional fees 72 100 26
Directors' compensation 176 144 62
Merger, NASDAQ and SEC registration
expenses 460
Other expenses 393 315 42
-------- -------- --------
Total expenses 2,078 1,787 811
-------- -------- --------
Income before equity in undistributed
income of subsidiaries 979 694 76
Equity in undistributed income of subsidiaries 3,169 3,115 3,158
-------- -------- --------
Income before income taxes 4,148 3,809 3,234
Income tax benefit 311 228 312
-------- -------- --------
Net income $ 4,459 $ 4,037 $ 3,546
======== ======== ========
68
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, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income $ 4,459 $ 4,037 $ 3,546
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiaries (3,169) (3,115) (3,255)
Increase in other assets (532) (239) (1)
Increase in other liabilities 410 186 156
-------- -------- --------
Net cash provided by operating activities 1,168 869 446
-------- -------- --------
Cash flows from financing activities:
Cash dividends paid (716) (641) (438)
Exercise of stock options 236 247 8
Cash paid to repurchase common stock (808) (335)
Cash paid for fractional shares in connection
with stock dividends (8) (7) (6)
-------- -------- --------
Net cash used in financing activities (1,296) (736) (436)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents (128) 133 10
Cash and cash equivalents at beginning of year 470 337 327
-------- -------- --------
Cash and cash equivalents at end of year $ 342 $ 470 $ 337
======== ======== ========
Supplemental disclosures of cash flow
information:
Non-cash investing activities:
Net change in unrealized gain on available-
for-sale investment securities $ 1,353 $ 446 $ 824
Non-cash financing activities:
Dividends declared and unpaid $ 551 $ 353 $ 312
69
Selected Quarterly Information (Unaudited)
- ---------------------------------------------------------------------------------------------------
(In thousands, except per share and price range of common stock)
- ---------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
- ---------------------------------------------------------------------------------------------------
2002
Interest income $ 4,465 $ 4,486 $ 4,732 $ 4,902
Net interest income 3,583 3,623 3,820 4,047
Provision for loan and lease loss 148 186 160 150
Noninterest income 492 552 619 660
Noninterest expense 2,344 2,288 2,285 2,472
Income before taxes 1,583 1,701 1,994 2,085
Net income 961 1,027 1,200 1,271
- -------------------------------------------------------------------------------------------------
Basic earnings per share $ .36 $ .39 $ .46 $ .48
Diluted earnings per share .34 .36 .42 .45
Cash dividends per share -- .14 -- .21
- -------------------------------------------------------------------------------------------------
Price range, common stock $14.95-18.33 $17.81-20.22 $17.38-20.17 $16.75-23.83
- -------------------------------------------------------------------------------------------------
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
Noninterest income 579 556 656 574
Noninterest 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 $ .38 $ .34 $ .42 $ .38
Diluted earnings per share .36 .33 .39 .35
Cash dividends per share -- .13 -- .13
- -------------------------------------------------------------------------------------------------
Price range, common stock $12.81-14.51 $13.33-15.19 $11.56-17.69 $13.23-15.90
=================================================================================================
The earnings per share and price range have been adjusted for 5% stock dividends
in 2002 and 2001.
70
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, 2002. There have been no disagreements
with such independent accountants during the last two fiscal years ended
December 31, 2002, 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
2003 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
2003 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
2003 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
2003 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 14. Controls and Procedures
Disclosure Controls are procedures that are designed with the objective
of ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 ("Exchange Act"), such as this Annual
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's ("SEC") rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as
appropriate to allow timely decisions regarding required disclosure. Internal
Controls are procedures which are designed with the objective of providing
management with reasonable, but not absolute, assurance that assets are
safeguarded against loss from unauthorized use or disposition and that
transactions are executed in accordance with management's authorization and
recorded properly to permit the preparation of consolidated financial statements
in accordance with accounting principles generally accepted in the United States
of America. Management of the Company is responsible for establishing and
maintaining internal controls. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and related
costs of internal control policies and procedures. Because of inherent
limitations in any internal controls, errors or irregularities may nevertheless
occur and not be detected. Also, projection of any evaluation of internal
controls to future periods is subject to the risk that procedures may become
inadequate because of changes in conditions or that the effectiveness of the
design and operation of policies and procedures may deteriorate.
71
Both Disclosure Controls and Internal Controls have limitations, with
regards to the cost and benefit of the system, human error, collusion or
complete disregard for the systems by employees. No matter how well designed and
managed, there is no assurance that these controls and procedures will prevent
all error or fraud.
Based upon an evaluation made within 90 days prior to the date of this
report, the Company's CEO and CFO have concluded that, subject to the
limitations described above, the Company's disclosure controls and procedures
(as defined in Exchange Act Rule13a--14(c)) are adequate and effective in timely
alerting them to material information relating to the Company required to be
included in the Company's filings with the SEC under the Securities Exchange Act
of 1934.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of their evaluation.
PART IV
ITEM 15. 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. **
72
*(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. **
*(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, incorporated by reference from Exhibit
10.24 to the Company's Annual Report on Form 10-K for the
period ended December 31, 2001, filed with the Commission on
March 26, 2002.
73
(10.25) Amendment No. 2 dated March 20, 2002, 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 10.25 to the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 2002, filed with
the Commission on May 3, 2002.
(10.26) Lease agreement and addenda between Windsor Oaks National Bank
(predecessor to North Coast bank, N.A.) and Hotel St. Paul
Partnership, each dated April 30, 1992, related to 8733
Lakewood Drive, Windsor, California. **
(10.27) Lease agreement and addenda between North Coast bank, N.A. and
Rosario LLC, each dated September 1, 1998, related to 50 Santa
Rosa Avenue, Santa Rosa, California. **
(14.1) American River Holdings Code of Ethical Conduct
(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
(99.1) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
*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 15, 2002, the Company filed a Report on Form 8-K announcing
its financial results for the third quarter of 2002.
On December 19, 2002, the Company filed a Report on Form 8-K announcing
a $.21 per share cash dividend.
An Annual Report for the fiscal year ended December 31, 2002 and Notice
of Annual Meeting and Proxy Statement for the Company's 2003 Annual Meeting will
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.
74
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 19, 2003 By: /s/ DAVID T. TABER
- -------------- ------------------
David T. Taber
Chief Executive Officer
(Principal Executive Officer)
March 19, 2003 By: /s/ MITCHELL A. DERENZO
- -------------- -----------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting
Officer)
75
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 3/19/03
- ------------------------------
Charles D. Fite
/s/ ROGER J. TAYLOR Director, Vice Chairman 3/19/03
- ------------------------------
Roger J. Taylor
/s/ M. EDGAR DEAS Director 3/17/03
- ------------------------------
M. Edgar Deas
/s/ SAM J. GALLINA Director 3/19/03
- ------------------------------
Sam J. Gallina
/s/ WAYNE C. MATTHEWS Director 3/19/03
- ------------------------------
Wayne C. Matthews
/s/ DAVID T. TABER Director 3/19/03
- ------------------------------
David T. Taber
/s/ MARJORIE G. TAYLOR Director 3/19/03
- ------------------------------
Marjorie G. Taylor
/s/ STEPHEN H. WAKS Director 3/19/03
- ------------------------------
Stephen H. Waks
/s/ LARRY L. WASEM Director 3/19/03
- ------------------------------
Larry L. Wasem
/s/ WILLIAM L. YOUNG Director 3/19/03
- ------------------------------
William L. Young
/s/ MICHAEL A. ZIEGLER Director 3/19/03
- ------------------------------
Michael A. Ziegler
76
Certifications under Section 302 of the Sarbanes-Oxley Act of 2002
I, David T. Taber, certify that:
1. I have reviewed this annual report on Form 10-K of American River
Holdings;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 19, 2003
--------------------
By: /s/DAVID T. TABER
---------------------
President and Chief Executive Officer
77
I, Mitchell A. Derenzo, certify that:
1. I have reviewed this annual report on Form 10-K of American River
Holdings;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 19, 2003
--------------------
By: /s/MITCHELL A. DERENZO
--------------------------
Executive Vice President and Chief Financial Officer
78
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
14.1 American River Holdings Code of Processional Ethics 80
23.1 Consent of Perry-Smith LLP 81
99.1 Certification of American River Holdings pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 82
79