UNITED STATES
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, 2004
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[ ] Transition report pursuant to Section 13 or 15 (d) of Securities Exchange
Act of 1934
Commission File No. 0-31525
AMERICAN RIVER BANKSHARES
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(Exact name of registrant as specified in its charter)
California 68-0352144
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(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 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: $74,731,000
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 15, 2005
No par value Common Stock - 5,351,161 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K: Part
III, Items 10 through 14 from Registrant's definitive proxy statement for the
2005 annual meeting of shareholders.
AMERICAN RIVER BANKSHARES
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2004
Part I. Page
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Part II.
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 17
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 80
Item 9A. Controls and Procedures 80
Item 9B. Other Information 80
Part III.
Item 10. Directors and Executive Officers of the Registrant 80
Item 11. Executive Compensation 80
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 80
Item 13. Certain Relationships and Related Transactions 81
Item 14. Principal Accounting Fees and Services 81
Part IV.
Item 15. Exhibits and Financial Statement Schedules 81
Signatures 85
Exhibit Index 87
23.1 Consent of Independent Registered Accounting Firm 88
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 89
31.2 Certifications of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 90
32.1 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 91
2
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 and lease 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 the current military conflict in Iraq 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 Bankshares (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 its
banking subsidiary, American River Bank, and American River Financial, a
California corporation which has been inactive since its incorporation in 2003.
American River Bank was incorporated and commenced business in Fair Oaks,
California, in 1983 and thereafter moved its headquarters office to Sacramento,
California in 1985. American River Bank operates five full service offices in
Sacramento and Placer Counties including the head office located at 1545 River
Park Drive, Suite 107, Sacramento, and branch offices located at 520 Capitol
Mall, Suite 100, Sacramento, 9750 Business Park Drive, Sacramento, 10123 Fair
Oaks Boulevard, Fair Oaks and 2240 Douglas Boulevard, Roseville, and three full
service offices in Sonoma County located at 412 Center Street, Healdsburg, 8733
Lakewood Drive, Windsor, and 50 Santa Rosa Avenue, Suite 100, Santa Rosa,
operated under the name "North Coast Bank, a division of American River Bank."
North Coast Bank was incorporated and commenced business in 1990 as Windsor Oaks
National Bank in Windsor, California. In 1997, the name was changed to North
Coast Bank. In 2000, North Coast Bank was acquired by the Company as a separate
bank subsidiary. Effective December 31, 2003, North Coast Bank was merged with
and into American River Bank.
On December 3, 2004, the Company acquired Bank of Amador located in
Jackson, California. Under terms of the merger agreement, the Company paid $12.7
million in cash (subject to a holdback provision under which $1,362,000 was
withheld from distribution to Bank of Amador shareholders upon resolution of a
loan in the future) and issued 775,548 shares of its common stock in exchange
for all of Bank of Amador's common stock. Bank of Amador was merged with and
into American River Bank and now operates three full service banking offices as
"Bank of Amador, a division of American River Bank" within its primary service
area of Amador County, in the cities of Jackson, Pioneer and Ione. The business
combination was accounted for under the purchase method of accounting and
accordingly the results of their operations have been included in the
consolidated financial statements of the Company since the date of acquisition.
American River Bank's deposits are insured by the Federal Deposit Insurance
Corporation 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. American River Bank's primary business is serving the
commercial banking needs of small to mid-sized businesses within those counties
listed above. American River Bank accepts checking and savings deposits, offers
money market deposit accounts and certificates of deposit, makes secured and
unsecured commercial, secured real estate, and other installment and term loans
and offers other customary banking services. American River Bank also conducts
lease financing for most types of business equipment, from computer software to
heavy earth-moving equipment.
3
American River Bank owns 100% of two inactive companies, ARBCO and American
River Mortgage. ARBCO was formed in 1984 to conduct real estate development and
has been inactive since 1995. American River Mortgage has been inactive since
its formation in 1994.
During 2004, the Company conducted no significant activities other than
holding the shares of its subsidiaries. However, it is authorized, with the
prior approval of the Board of Governors of the Federal Reserve System (the
"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.
The common stock of the Company is registered under the Securities Exchange
Act of 1934, as amended, and is listed and traded on the Nasdaq National Market
under the symbol "AMRB."
At December 31, 2004, the Company had consolidated assets of $587 million,
deposits of $475 million and shareholders' equity of $59 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, Mendocino, and Amador
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 revenue comes from interest income. Interest
income is derived from: (i) interest and fees on loans and leases; (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, 2004, these sources comprised 80.0%, 19.7%, and 0.3%,
respectively, of the Company's interest income.
American River Bank's 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
American River Bank's deposits are not concentrated within a single industry or
group of related industries.
As of December 31, 2004 and December 31, 2003, American River Bank held
$11,500,000 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 34 other banking or savings
institutions in Sacramento County and 25 in Placer County. American River Bank's
market share of FDIC insured deposits in the service areas of Sacramento County
and Placer County was approximately 1.3% and 1.5%, respectively (based upon the
most recent information made available by the FDIC through June 30, 2004). North
Coast Bank, a division of American River Bank, competes with approximately 20
other banking or savings institutions in its service areas and its market share
of FDIC insured deposits in the service area of Sonoma County was approximately
..8% (based upon the most recent information made available by the FDIC through
June 30, 2004). Bank of Amador, a division of American River Bank competes with
approximately 7 other banking or savings institutions in its service areas and
its market share of FDIC insured deposits in the service area of Amador County
was approximately 19.0% (based upon the most recent information made available
by the FDIC through June 30, 2004).
Employees
At December 31, 2004, the Company and its subsidiaries employed 123 persons
on a full-time equivalent basis. The Company believes its employee relations are
good.
Website Access
The Company maintains a website where certain information about the Company
is posted. Through the website, its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments thereto, as
well as Section 16 Reports and amendments thereto, are available as soon as
reasonably practicable after such material is electronically filed with or
furnished to the SEC. These reports are free of charge and can be accessed
through the address www.amrb.com by selecting the SEC Filings link located at
4
that address. Once you have selected the SEC Filings link you will have the
option to access the Section 16 Reports or the Reports filed by the Company by
selecting the appropriate link.
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 and lease losses and other factors.
However, no inference should be drawn that such authorities have approved any
such factors. American River Bankshares 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.
American River Bankshares 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 American River Bank to affiliates, and (b) on investments by American
River Bank 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 American River Bank 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
American River Bank for use in its banking business, or to maintain the
availability of such funds.
Capital Standards
The Board of Governors and the FDIC 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 Bankshares and
American River 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 and lease loss reserves.
5
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of those loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which includes,
among other items, limited life (and in the case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses. Tier 2 capital may also include up to 45% of the
pretax net unrealized gains on certain available-for-sale equity securities
having readily determinable fair values (i.e. the excess, if any, of fair market
value over the book value or historical cost of the investment security). The
federal regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier 2
capital, but may be taken into account in the evaluation of overall capital
adequacy and net unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against risk. Each
institution is required to maintain a minimum risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
A leverage capital standard was adopted as a supplement to the
risk-weighted capital guidelines. Under the leverage capital standard, an
institution is required to maintain a minimum ratio of Tier 1 capital to the sum
of its quarterly average total assets and quarterly average reserve for loan
losses, less 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, 2004, American River Bankshares and American River Bank
were in compliance with the risk-weighted capital and leverage ratio guidelines.
Prompt Corrective Action
The Board of Governors and the FDIC 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
6
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitations upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without prior
regulatory approval and regulators must prohibit a critically undercapitalized
institution from taking certain other actions without prior approval, including
(1) entering into any material transaction other than in the usual course of
business, including investment expansion, acquisition, sale of assets or other
similar actions; (2) extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply with any law,
regulation or order; (4) making any material change in accounting methods; (5)
engaging in certain affiliate transactions; (6) paying excessive compensation or
bonuses; and (7) paying interest on new or renewed liabilities at rates which
would increase the weighted average costs of funds beyond prevailing rates in
the institution's normal market areas.
Additional Regulations
Under the FDICIA, the federal financial institution agencies have adopted
regulations which require institutions to establish and maintain comprehensive
written real estate policies which address certain lending considerations,
including loan-to-value limits, loan administrative policies, portfolio
diversification standards, and documentation, approval and reporting
requirements. The FDICIA further generally prohibits an insured state bank from
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.
Effective January 1, 2005, bank holding companies such as the Company, will be
subject to evaluation and examination under a revised bank holding company
rating system. The so-called BOPEC rating system implemented in 1979 was
primarily focused on financial condition, consolidated capital and consolidated
earnings. The new rating system reflects the change toward analysis of risk
management (as reflected in bank examination under the CAMELS measurements), in
addition to financial factors and the potential impact of nondepository
subsidiaries upon depository institution subsidiaries.
7
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 has a rating of "satisfactory" for CRA compliance.
Limitations on Dividends
The Company's ability to pay cash dividends is subject to restrictions set
forth in the California General Corporation Law. Funds for payment of any cash
dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from its subsidiaries. The payment of cash
dividends and/or management fees by American River Bank is subject to
restrictions set forth in the California Financial Code, as well as restrictions
established by the FDIC. 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, 2004, 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 155 offices in the cities
of Fair Oaks, Rancho Cordova, Roseville and Sacramento, California, where
American River Bank has its 5 Sacramento area offices, 56 offices in the cities
of Healdsburg, Santa Rosa and Windsor, California, where American River Bank has
its 3 Sonoma County offices, and 4 offices in the cities of Jackson, Pioneer and
Ione, California, where American River Bank has its 3 Amador County 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, retaining the portion of such loans which is within
its lending limits. As of December 31, 2004, American River Bank's aggregate
legal lending limits to a single borrower and such borrower's related parties
were $9,902,000 on an unsecured basis and $16,504,000 on a fully secured basis
based on capital and allowable reserves of $66,017,000.
American River Bank's business is concentrated in its service area, which
primarily encompasses Sacramento County, South Western Placer County, Sonoma
County, and Amador County. The economy of American River Bank's service area is
dependent upon government, manufacturing, tourism, retail sales, agriculture,
population growth and smaller service oriented businesses.
8
Based upon the most recent "Data Book Summary of Deposits in FDIC Insured
Commercial and Savings Banks" report dated June 30, 2004, there were 193
operating commercial and savings bank offices in Sacramento County with total
deposits of $16,689,476,000. This was an increase of $1,970,849,000 over the
June 30, 2003 balances. American River Bank held a total of $216,257,000 in
deposits, representing approximately 1.3% of total commercial and savings banks
deposits in Sacramento County as of June 30, 2004.
Based upon the most recent "Data Book Summary of Deposits in FDIC Insured
Commercial and Savings Banks" report dated June 30, 2004, there were 92
operating commercial and savings bank offices in Placer County with total
deposits of $4,386,152,000. This was an increase of $575,989,000 over the June
30, 2003 balances. American River Bank held a total of $67,546,000 in deposits,
representing approximately 1.5% of total commercial and savings banks deposits
in Placer County as of June 30, 2004.
Based upon the most recent "Data Book Summary of Deposits in FDIC Insured
Commercial and Savings Banks" report dated June 30, 2004, there were 119
operating commercial and savings bank offices in Sonoma County with total
deposits of $8,392,341,000. This was an increase of $626,525,000 over the June
30, 2003 balances. American River Bank held a total of $67,597,000 in deposits,
representing approximately 0.8% of total commercial and savings banks deposits
in Sonoma County as of June 30, 2004.
Based upon the most recent "Data Book Summary of Deposits in FDIC Insured
Commercial and Savings Banks" report dated June 30, 2004, there were 13
operating commercial and savings bank offices in Amador County with total
deposits of $594,147,000. This was an increase of $42,569,000 over the June 30,
2003 balances. American River Bank held a total of $113,009,000 in deposits,
representing approximately 19.0% of total commercial and savings banks deposits
in Amador County as of June 30, 2004.
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 2005 from that in 2004.
General Competitive Factors
In order to compete with the major financial institutions in their primary
service areas, American River Bank uses 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 revenues.
The interest rate differentials of a bank, and therefore their revenues,
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 is not
predictable.
9
Impact of Legislative and Regulatory Proposals
Since 1996, California law implementing certain provisions of prior federal
law has (1) permitted interstate merger transactions; (2) prohibited interstate
branching through the acquisition of a branch business unit located in
California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank which has been in existence for at least five years.
The federal financial institution agencies, especially the Board of
Governors, have taken steps to increase the types of activities in which bank
holding companies can engage, and to make it easier to engage in such
activities.
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
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)
10
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 Bankshares or American River 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 American River Bank, 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 American River Bank are not currently aware of any account
relationships between American River Bank 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. Certain surveillance provisions of the
Patriot Act are scheduled to expire on December 31, 2005, and actions to
restrict the use of the Patriot Act surveillance provisions have been filed by
the ACLU and other organizations. It is not clear whether the provisions that
are scheduled to expire will expire as scheduled, or be replaced or superseded
by alternative provisions. 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 Bankshares and American River 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 Bankshares or American River 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.
11
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.
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 became
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 became
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.
12
o A prohibition on insider trading during pension plan black-out
periods.
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
reducing the filing deadline for Form 10-K reports from 75 days
currently (formerly 90 days) after the fiscal year end to 60 days and
Form 10-Q reports from 40 days currently (formerly 45 days) after the
fiscal quarter end to 35 days, in each case to be effective for the
respective reports filed for fiscal years ending on or after December
15, 2005.
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 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
including:
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.
On November 4, 2003, the Securities and Exchange Commission adopted changes
to the standards for the listing of issuer securities by the New York Stock
Exchange and Nasdaq Stock Market. The revised standards for listing conform to
and supplement Rule 10A-3 under the Securities Exchange Act of 1934, as amended,
which the Securities and Exchange Commission adopted in April 2003 pursuant to
the Act.
The Company's securities are listed on the Nasdaq Stock Market.
Consequently, in addition to the rules promulgated by the Securities and
Exchange Commission pursuant to the Act, the Company must also comply with
revised listing standards applicable to Nasdaq listed companies. Generally,
listed companies were required to comply with the revised listing standards by
the first annual meeting of shareholders following January 15, 2004. The revised
Nasdaq listing standards applicable to the Company include the following:
o A majority of directors of a listed company must be "independent",
which excludes:
o Any director who is, or at any time in the past three years was,
employed by a listed company, its parent or a subsidiary;
o Any director or any family member who received payments in excess
of $60,000 in the current year or prior three years from a listed
company, its parent or a subsidiary;
o Any director whose family member is employed or during the last
three years was employed as an executive officer of a listed
company, its parent or a subsidiary;
o Any director or any family member who is a partner, controlling
shareholder or executive officer of an organization to which a
listed company made payments or from which a listed company
received payments, for services or property, in the current year
or prior three years in excess of the greater of $200,000 or 5%
of the recipient's consolidated gross revenues in the year of
payment;
o Any director or any family member who is employed as an executive
officer of another organization where during the current year or
prior three years an executive officer of a listed company served
on the compensation committee of such organization; and
o Any director or any family member who is a partner of the outside
auditor of a listed company or was a partner or employee of the
listed company's auditor and worked on the company's audit in the
prior three years.
13
o Independent directors of a listed company must meet alone in executive
sessions at least two times annually.
o Listed companies must certify adoption of a resolution or written
charter dealing with nominations of directors and select nominees for
election as directors either by determination of a majority of
independent directors or by a nominating committee consisting solely
of independent directors, with certain exceptions.
o Compensation of a listed company's chief executive officer must be
determined either by a majority of independent directors or by a
compensation committee consisting solely of independent directors,
with certain exceptions.
o The audit committee of a listed company, subject to certain
exceptions, must comply with requirements that include:
o The committee be comprised of at least three independent
directors who have not participated in the preparation of
financial statements for the company, its parent or subsidiaries
during the last three years;
o Each director must be able to read and understand financial
statements;
o At least one director must meet the "financial sophistication"
criteria which the company must certify;
o The committee must adopt a written charter; and
o The committee is responsible for the review and approval of all
related-party transactions, except those approved by another
board committee comprised of independent directors.
o The adoption or amendment of any equity compensation arrangement after
June 30, 2003, such as a stock option plan, requires shareholder
approval, subject to certain exemptions.
o A code of conduct had to be adopted by May 4, 2004 that (i) complies
with the code of ethics requirements of the Act and the Nasdaq
Marketplace Rules; (ii) covers all directors, officers and employees;
(iii) includes an enforcement mechanism; and (iv) permits only the
board of directors to grant waivers from or changes to the code of
conduct affecting directors and executive officers and requires prompt
disclosure thereof on a Form 8-K filing with the Securities and
Exchange Commission.
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, Nasdaq and other regulatory agencies having jurisdiction over the
Company or the issuance and listing of its securities. 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.
14
The Check Clearing for the 21st Century Act (commonly referred to as "Check
21") was signed into law in 2003 and became effective on October 28, 2004. The
law facilitates check truncation by creating a new negotiable instrument called
a "substitute check" which permits banks to truncate original checks, to process
check information electronically and to deliver "substitute checks" to banks
that want to continue receiving paper checks. Check 21 is intended to reduce the
dependence of the check payment system on physical transportation networks
(which can be disrupted by terrorist attacks of the type which occurred on
September 11, 2001) and to streamline the collection and return process. The law
does not require banks to accept checks in electronic form nor does it require
banks to use the new authority granted by the Act to create "substitute checks."
The Company does not currently anticipate that compliance with the Act will have
a material effect upon its financial position or results of its operations or
its cash flows.
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 Bankshares or American
River Bank.
Item 2. Properties.
The Company and American River Bank lease ten and own two 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 former
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.
American River Bank leases premises at 520 Capitol Mall, Sacramento,
California. The office space is leased from 520 Capitol Mall, Inc. The lease
term is 10 years and expires on June 1, 2014. The premises consist of 4,010
square feet on the ground floor.
North Coast Bank, a division of American River Bank, leases premises at
8733 Lakewood Drive, Windsor, California. The office space is leased from R. and
R. Partners. The two-year lease expires on December 31, 2005. The premises
consist of 2,200 square feet on the ground floor.
North Coast Bank, a division of American River 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 consists
of 2,620 square feet. The land consists of 10,835 square feet.
North Coast Bank, a division of American River 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 January 31, 2009. The
premises consist of 7,072 square feet on the ground floor.
Bank of Amador, a division of American River Bank, leases premises at 422
Sutter Street, Jackson, California. The office space is leased from the United
States Postal Service. The lease term is five (5) years and expires on May 31,
2006. The premises consist of 6,400 square feet on the ground floor and second
floor.
Bank of Amador, a division of American River Bank, leases land at 26675
Tiger Creek Road, Pioneer, California. The Company owns the 2,460 square foot
modular building and leases the land from Darrell D. Rice. The land lease term
is five (5) years and expires on May 31, 2007.
15
Bank of Amador, a division of American River Bank, leases premises at 933
South Highway 49, Jackson, California. The office space is leased from G.
Bryovich Development Inc. The lease term is month to month. The premises consist
of 2,500 square feet on the ground floor used primarily as a data center for the
former Bank of Amador. The Company anticipates vacating the premises in the
first quarter of 2005.
Bank of Amador, a division of American River Bank, owns premises at 66 Main
Street, Ione, California. The premises were purchased April 1, 1995. The
purchase price for the land and building was $167,500. The building consists of
2,576 square feet. The land consists of 9,700 square feet.
Bank of Amador, a division of American River Bank, leases the parking lot
at 276 North Main Street, Jackson, California. The parking lot is leased from
Wilhelmina Petkovich. The lease term is three (3) years and expires on December
31, 2007.
The leases on the premises located at 1545 River Park Drive, 9750 Business
Park Drive, 2240 Douglas Boulevard, 50 Santa Rosa Avenue, and 8733 Lakewood
Drive contain options to extend for five years. Included in the above are two
facilities leased from current or former 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 in Part
IV, Item 15 of 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.
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.
The following are the voting results of the registrant's special meeting of
the shareholders held on November 23, 2004:
PROPOSAL NO. 1: On the proposal to approve the Agreement and Plan of
Reorganization and Merger, dated as of July 8, 2004, among American River
Bankshares, American River Bank, and Bank of Amador, and the transactions
contemplated by the Agreement and Plan of Reorganization and Merger, including
the merger of Bank of Amador into American River Bank:
FOR: 2,705,076
AGAINST: 13,037
ABSTAINED: 12,538
PROPOSAL NO. 2: On the proposal to approve the adjournment of the special
meeting for any permitted purpose, including, if necessary, to solicit
additional proxies in the event that there are not sufficient votes required to
approve the merger as of the date of the special meeting:
FOR: 2,683,376
AGAINST: 14,277
ABSTAINED: 32,998
16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market Information
The Company's common stock began trading on the NASDAQ National Stock
Market ("NASDAQ") under the symbol "AMRB" on October 26, 2000. 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 a 5% stock
dividend declared in 2004 and the three for two stock split distributed in 2003.
==============================================
2004 High Low
----------------------------------------------
First quarter $20.00 $18.10
Second quarter 21.19 18.93
Third quarter 22.27 18.57
Fourth quarter 22.86 20.38
2003 High Low
----------------------------------------------
First quarter $15.17 $13.45
Second quarter 16.35 13.88
Third quarter 21.81 14.62
Fourth quarter 22.52 16.43
==============================================
The closing price for the Company's common stock on March 15, 2005 was
$21.55.
Holders
As of March 5, 2005, there were approximately 2,322 shareholders of record
of the Company's common stock.
Dividends
The Company has paid quarterly cash dividends on its common stock since the
first quarter of 2004; prior to that, the Company paid cash dividends twice a
year since 1992. It is currently the intention of the Board of Directors of the
Company to continue payment of cash dividends on a quarterly basis. In 2004 and
2003, the Company declared cash dividends in the amount of $.44 and $.28 per
common share. There is no assurance, however, that any dividends will be paid in
the future 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
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.
17
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 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, 2004, American River Bank had $2.2 million in retained
earnings available for dividend payments to the Company, which in turn could be
paid out to shareholders of the Company.
Stock Repurchases
On September 20, 2001, the Board of Directors of the Company authorized a
stock repurchase program which calls for the repurchase of up to five percent
(5%) annually of the Company's outstanding shares of common stock. Each year the
Company may repurchase up to 5% of the shares outstanding (adjusted for stock
splits or stock dividends). The 225,057 shares reported in the table as shares
that may be repurchased under the plan represent shares eligible for the
calendar year 2004. The repurchases are to be made from time to time in the open
market as conditions allow and will be structured to comply with Commission Rule
10b-18. The Board of Directors has reserved the right to suspend, terminate,
modify or cancel this repurchase program at any time for any reason. The
following table lists shares repurchased during the quarter and the maximum
amount available to repurchase under the repurchase plan.
- -----------------------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d)
Total Number of Average Price Total Number of Shares Maximum Number (or Approximate
Shares (or Paid Per Share (or Units) Purchased as Dollar Value) of Shares (or
Units) Purchased (or Unit) Part of Publicly Units) That May Yet Be
Announced Plans or Purchased Under the Plans or
Programs Programs
- -----------------------------------------------------------------------------------------------------------------------
Month #1
October 1 through None N/A None 225,057 shares
October 31, 2004
Month #2
November 1 through None N/A None 225,057 shares
November 30, 2004
Month #3
December 1 through None N/A None 225,057 shares
December 31, 2004
- -----------------------------------------------------------------------------------------------------------------------
Total None N/A None
- -----------------------------------------------------------------------------------------------------------------------
There were no repurchases of the Company's common stock during the fourth
quarter of 2004. During 2004, the Company repurchased 9,765 shares; during 2003,
the Company repurchased 1,575 shares and in 2002, the Company repurchased 68,908
shares under the repurchase plan.
18
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)
2004 2003 2002 2001 2000
STATEMENT OF OPERATIONS DATA
Net interest income $ 19,418 $ 16,866 $ 15,073 $ 14,577 $ 13,585
Provision for loan and lease losses 895 946 644 791 672
Other income 2,395 2,253 2,323 2,365 2,183
Other expenses 11,713 10,372 9,389 9,502 9,329
Income before income taxes 9,205 7,801 7,363 6,649 5,767
Income taxes 3,378 3,060 2,904 2,612 2,221
Net income $ 5,827 $ 4,741 $ 4,459 $ 4,037 $ 3,546
Earnings per share - basic $ 1.30 $ 1.13 $ 1.07 $ 0.96 $ 0.86
Earnings per share - diluted 1.24 1.05 1.00 0.91 0.82
Cash dividends per share 0.44 0.28 0.22 0.16 0.14
Book value per share 11.10 8.33 7.67 6.71 5.87
Tangible book value per share 7.65 8.31 7.65 6.69 5.84
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $ 586,666 $ 397,393 $ 342,563 $ 286,559 $ 284,126
Loans and leases, net 352,467 262,464 229,008 195,026 200,658
Deposits 475,387 322,507 275,796 254,888 239,312
Shareholders' equity 58,990 35,457 31,726 27,942 24,413
Average balance sheet amounts:
Assets $ 439,012 $ 363,175 $ 309,574 $ 279,049 $ 259,315
Loans and leases 277,647 248,342 209,133 202,624 175,134
Earning assets 400,265 333,800 280,623 255,904 238,837
Deposits 357,420 279,883 263,323 246,960 230,822
Shareholders' equity 39,163 33,461 29,509 26,316 22,258
SELECTED RATIOS:
For the year:
Return on average equity 14.88% 14.17% 15.11% 15.34% 15.93%
Return on average assets 1.33% 1.31% 1.44% 1.45% 1.37%
Efficiency ratio * 53.25% 53.77% 53.47% 55.57% 58.59%
Net interest margin * 4.90% 5.10% 5.43% 5.76% 5.75%
Net chargeoffs to average loans & leases 0.08% 0.08% 0.03% 0.31% 0.14%
At December 31:
Average equity to average assets 8.92% 9.21% 9.53% 9.43% 8.58%
Leverage capital ratio 8.35% 8.96% 8.93% 9.49% 8.78%
Allowance for loan and leases losses to 1.54% 1.48% 1.38% 1.32% 1.21%
total loans and leases
* fully taxable equivalent
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is American River Bankshares management's discussion and
analysis of the significant changes in income and expense accounts for the years
ended December 31, 2004, 2003, and 2002.
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 and lease 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 the current
military conflict in Iraq 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.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. We use
historical loss data, peer group experience and the economic environment as
factors, among others, in determining the inherent loss that may be present in
our loan and lease portfolio. Actual losses could differ significantly from the
historical factors that we use. Other estimates that we use are related to the
expected useful lives of our depreciable assets. In addition, GAAP itself may
change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of the credit loss
risk in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accounting Standards
("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be
accrued when they are probable of occurring and estimable; and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which requires that losses
be accrued based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The allowance for loan and lease losses is determined based upon estimates
that can and do change when the actual risk or loss events occur. The analysis
of the allowance uses an historical loss view as an indicator of future losses
and as a result could differ from the loss incurred in the future. However,
since our analysis of risk and loss potential is updated regularly, the errors
that might otherwise occur are mitigated. The use of factors and ranges is
inherently subjective and our actual losses could be greater or less than the
estimates. The Company's goal is to maintain an allowance for loan and lease
losses that is between the lower and upper ranges as described above. If the
allowance for loan and lease losses falls below the lower range of adequate
reserves (by reason of loan and lease growth, actual losses, the effect of
changes in risk ratings, or some combination of these factors), the Company has
a strategy for supplementing the allowance for loan and lease losses, over the
short term, so that it would again fall within the lower and upper acceptable
ranges. For further information regarding our allowance for loan and lease
losses, see "Allowance for Loan and Lease Losses Activity" discussion later in
this Item 7.
20
Stock-Based Compensation
The Company accounts for its stock-based compensation under the recognition
and measurement principles of Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. Since
the Company's stock option plan provides for the issuance of options at a price
of no less than the fair market value at the date of the grant, no compensation
expense is recognized in the financial statements unless the options are
modified after the grant date.
In December 2004, the Financial Accounting Standards Board issued Statement
Number 123 (revised 2004) ("FAS 123 (R)"), Share-Based Payments. FAS 123 (R)
requires all entities to recognize compensation expense in an amount equal to
the fair value of share-based payments such as stock options granted to
employees. The Company is required to apply FAS 123 (R) on a modified
prospective method. Under this method, the Company is required to record
compensation expense (as previous awards continue to vest) for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption. Management believes that the effect of FAS 123 (R) will be consistent
with its pro forma disclosures included in Note 2 to the Consolidated Financial
Statements in Item 8 - Financial Statements and Supplementary Data. The fair
value of each option is estimated on the date of grant and amortized over the
service period using an option pricing model. Critical assumptions that affect
the estimated fair value of each option include expected stock price volatility,
dividend yields, option life and forfeiture rates and the risk-free interest
rate.
Goodwill
Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise or the assumption of net
liabilities in an acquisition of branches constituting a business may give rise
to goodwill. Goodwill represents the excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities assumed
in transactions accounted for under the purchase method of accounting. The value
of goodwill is ultimately derived from the Company's ability to generate net
earnings after the acquisition. A decline in net earnings could be indicative of
a decline in the fair value of goodwill and result in impairment. For that
reason, goodwill is assessed for impairment at a reporting unit level at least
annually following the year of acquisition. The Company will perform an
evaluation of the goodwill, recorded as a result of the Bank of Amador
acquisition, in the fourth quarter of 2005. While the Company believes all
assumptions utilized in its assessment of goodwill for impairment are reasonable
and appropriate, changes in earnings, the effective tax rate, historical
earnings multiples and the cost of capital could all cause different results for
the calculation of the present value of future cash flows.
Overview
The Company recorded its 84th consecutive profitable quarter for the
quarter ended December 31, 2004. Net income in 2004 increased 22.9% to
$5,827,000 versus $4,741,000 in 2003. Diluted earnings per share for 2004 and
2003 were $1.24 and $1.05, respectively. For 2004, the Company realized a return
on average equity of 14.9% and a return on average assets of 1.33%, as compared
to 14.2% and 1.31% for 2003. On December 3, 2004, the Company acquired Bank of
Amador located in Jackson, California. Under terms of the merger agreement, the
Company paid $12.7 million in cash (subject to a holdback provision under which
$1,362,000 was withheld from distribution to Bank of Amador shareholders upon
resolution of a loan in the future) and issued 775,548 shares of its common
stock in exchange for all of Bank of Amador's common stock. Bank of Amador was
merged with and into American River Bank and now operates three full service
banking offices as "Bank of Amador, a division of American River Bank" within
its primary service areas of Amador County, in the communities of Jackson,
Pioneer and Ione. The business combination was accounted for under the purchase
method of accounting and accordingly the results of their operations have been
included in the consolidated financial statements of the Company since the date
of acquisition. The terms of the business combination and the estimated fair
value of the assets acquired and the liabilities assumed are included in Note 3
to the Consolidated Financial Statements in Item 8 - Financial Statements and
Supplementary Data.
Net income for 2003 was $282,000 (6.3%) higher than the $4,459,000 recorded
in 2002. Diluted earnings per share in 2002 were $1.00, return on average assets
was 1.44% and return on average equity was 15.1%. All share and per share data
for 2004, 2003 and 2002 have been adjusted for a three for two stock split
distributed on October 31, 2003 and 5 percent stock dividends distributed on
January 28, 2005 and October 18, 2002.
21
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) 2004 2003 2002
---- ---- ----
Net interest income* $ 19,602 $ 17,035 $ 15,235
Provision for loan losses (895) (946) (644)
Noninterest income 2,395 2,253 2,323
Noninterest expense (11,713) (10,372) (9,389)
Provision for income taxes (3,378) (3,060) (2,904)
Tax equivalent adjustment (184) (169) (162)
--------- --------- ---------
Net income $ 5,827 $ 4,741 $ 4,459
========= ========= =========
- --------------------------------------------------------------------------------
Average total assets $ 439,012 $ 363,175 $ 309,574
Net income as a percentage
of average total assets 1.33% 1.31% 1.44%
- --------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
During 2004, total assets of the Company increased $189,273,000 (47.6%) to a
total of $586,666,000 at year-end. At December 31, 2004, net loans totaled
$352,467,000, up $90,003,000 (34.3%) from the ending balances on December 31,
2003. Deposit growth for the year was 47.4% resulting in ending deposit balances
of $475,387,000. The Company ended 2004 with a Tier 1 capital ratio of 9.6% and
a total risk-based capital ratio of 10.9%.
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 4.90% in
2004 and 5.10% in 2003. The fully taxable equivalent net interest margin in
dollars was up $2,567,000 (15.1%) in 2004 over 2003.
The fully taxable equivalent interest income component increased from
$19,937,000 in 2003 to $22,820,000 in 2004, representing a 14.5% increase. The
increase in the fully taxable equivalent interest income for 2004 compared to
the same period in 2003 is broken down by rate (down $562,000) and volume (up
$3,445,000). The rate decrease can be attributed to decreases implemented by the
Company during 2001 and 2002 in response to the Federal Reserve Board (the
"FRB") decreases in the Federal funds and Discount rates. Recent increases by
the FRB have resulted in five 25 basis point increases since June 2004; however,
these recent increases have had only a minor effect. The overall lower interest
rate environment over the past three years has resulted in a 27 basis point drop
in the yield on average earning assets from 5.97% for 2003 to 5.70% for 2004.
The volume increase was the result of a 19.9% increase in average earning
assets. Average loan balances were up $29,305,000 (11.8%) in 2004 over the
balances in 2003, while average investment securities balances were up
$39,566,000 (52.7%). The increase in average loans is the result of a
concentrated focus on business lending, the demand for commercial real estate
and the effects of a favorable local market. The increase in investment
securities is primarily due to the Company investing its excess funds in
investment securities. The excess funds were created by an increase in deposit
balances and other borrowings. The Bank of Amador acquisition occurred late in
2004 and had a minimal impact on the average balances during 2004.
The fully taxable equivalent interest income component increased from
$18,747,000 in 2002 to $19,937,000 in 2003, representing a 6.3% increase. The
increase in the fully taxable equivalent interest income for 2003 compared to
the same period in 2002 is broken down by rate (down $2,371,000) and volume (up
$3,561,000). The rate decrease can be attributed to decreases implemented by the
Company during 2001 and 2002 in response to the FRB decreases in the Federal
22
funds and Discount rates. Although there was only one FRB rate decrease in 2003,
the effects of thirteen such rate decreases by the FRB since January 1, 2001,
resulted in a 71 basis point drop in the yield on average earning assets from
6.68% for 2002 to 5.97% for 2003. The volume increase was the result of an 18.9%
increase in average earning assets. Average loan balances were up $39,209,000
(18.7%) in 2003 over the balances in 2002, while average investment securities
balances were up $15,056,000 (25.1%). The increase in average loans is the
result of a concentrated focus on business lending, the demand for commercial
real estate and the effects of a favorable local market in addition to the
purchase of a pool of loans in the amount of $10,664,000 from a competing
financial institution.
Interest expense increased $316,000 (10.9%) in 2004 compared to 2003. The
average balances on interest bearing liabilities were $45,734,000 (19.4%) higher
in 2004 versus 2003. The higher balances accounted for a $452,000 increase in
interest expense. The higher balances were due to internal growth of average
interest bearing deposits ($33,991,000) and an increase in other borrowings
($11,743,000). The decrease in rates paid on interest bearing liabilities
partially offset the increased expense due to the volume growth. The decrease in
rates paid on interest bearing liabilities was a result of the lower interest
rate environment over the past three years; although these rates have been
increasing over the past few months, the rates paid on interest bearing
liabilities decreased nine basis points on a year-over-year basis and accounted
for a decrease in interest expense of $136,000 for the period.
Interest expense decreased $610,000 (17.4%) in 2003 compared to 2002. The
average balances on interest bearing liabilities were $33,976,000 (16.8%) higher
in 2003 versus 2002. The higher balances accounted for a $455,000 increase in
interest expense. The higher balances were due to internal growth of average
interest bearing deposits ($21,620,000) and an increase in other borrowings
($12,356,000). 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 51 basis points on a year-over-year basis and accounted for a
decrease in interest expense of $1,065,000 for the period.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and past trends
of the Company's interest income and expenses. Table Two provides an analysis of
net interest margin on earning assets setting forth average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
23
Table Two: Analysis of Net Interest Margin on Earning Assets
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2004 2003
------------------------------------------- -----------------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except Balance Interest Yield Balance Interest Yield
percentages) ----------- ----------- ----------- ----------- ----------- -----------
Assets:
Earning assets
Loans and leases (1) $ 277,647 $ 18,115 6.52% $ 248,342 $ 16,744 6.74%
Taxable investment
securities 101,728 3,751 3.69% 64,159 2,312 3.60%
Tax-exempt investment
securities (2) 12,324 713 5.79% 10,519 637 6.06%
Corporate stock 568 40 7.04% 376 28 7.45%
Federal funds sold 2,711 67 2.47% 5,595 48 0.86%
Investments in time
deposits 5,287 134 2.53% 4,809 168 3.49%
----------- ----------- ----------- -----------
Total earning assets 400,265 22,820 5.70% 333,800 19,937 5.97%
----------- -----------
Cash & due from banks 30,263 24,914
Other assets 12,836 7,993
Allowance for loan & lease
losses (4,352) (3,532)
----------- -----------
$ 439,012 $ 363,175
=========== ===========
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
NOW & MMDA $ 146,041 1,099 0.75% $ 120,772 912 0.76%
Savings 24,527 56 0.23% 16,714 35 0.21%
Time deposits 72,987 1,356 1.86% 72,078 1,443 2.00%
Other borrowings 38,223 707 1.85% 26,480 512 1.93%
----------- ----------- ----------- -----------
Total interest bearing
Liabilities 281,778 3,218 1.14% 236,044 2,902 1.23%
----------- -----------
Demand deposits 113,865 90,685
Other liabilities 4,206 2,985
----------- -----------
Total liabilities 399,849 329,714
Shareholders' equity 39,163 33,461
----------- -----------
$ 439,012 $ 363,175
=========== ===========
Net interest income &
margin (3) $ 19,602 4.90% $ 17,035 5.10%
=========== =========== =========== ===========
Year Ended December 31, 2002
----------------------------------------
(Taxable Equivalent Basis) Avg Avg
(In thousands, except Balance Interest Yield
percentages) ----------- ----------- -----------
Assets:
Earning assets
Loans and leases (1) $ 209,133 $ 15,400 7.36%
Taxable investment
securities 49,875 2,359 4.73%
Tax-exempt investment
securities (2) 9,803 616 6.28%
Corporate stock 320 25 7.81%
Federal funds sold 5,488 80 1.46%
Investments in time
deposits 6,004 267 4.45%
----------- -----------
Total earning assets 280,623 18,747 6.68%
-----------
Cash & due from banks 21,149
Other assets 10,729
Allowance for loan & lease
losses (2,927))
-----------
$ 309,574
===========
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
NOW & MMDA $ 100,406 939 0.94%
Savings 13,918 51 0.37%
Time deposits 73,620 2,178 2.96%
Other borrowings 14,124 344 2.44%
----------- -----------
Total interest bearing
Liabilities 202,068 3,512 1.74%
-----------
Demand deposits 75,379
Other liabilities 2,618
-----------
Total liabilities 280,065
Shareholders' equity 29,509
-----------
$ 309,574
===========
Net interest income &
margin (3) $ 15,235 5.43%
=========== ===========
(1) Loan and lease interest includes loan and lease fees of $741,000, $814,000
and $545,000 in 2004, 2003 and 2002, 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.
24
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
- ---------------------------------------------------------------------------------------
Year ended December 31, 2004 over 2003 (dollars in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
----------- ----------- -----------
Net loans and leases (1)(2) $ 1,976 $ (605) $ 1,371
Taxable investment securities 1,354 85 1,439
Tax-exempt investment securities (3) 109 (33) 76
Corporate stock 14 (2) 12
Federal funds sold & other (25) 44 19
Investment in time deposits 17 (51) (34)
----------- ----------- -----------
Total 3,445 (562) 2,883
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits 191 (4) 187
Savings deposits 16 5 21
Time deposits 18 (105) (87)
Other borrowings 227 (32) 195
----------- ----------- -----------
Total 452 (136) 316
----------- ----------- -----------
Interest differential $ 2,993 $ (426) $ 2,567
=========== =========== ===========
Year Ended December 31, 2003 over 2002 (in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
----------- ----------- -----------
Net loans and leases (1)(2) $ 2,887 $ (1,543) $ 1,344
Taxable investment securities 676 (723) (47)
Tax-exempt investment securities (3) 45 (24) 21
Corporate stock 4 (1) 3
Federal funds sold & other 2 (34) (32)
Investment in time deposits (53) (46) (99)
----------- ----------- -----------
Total 3,561 (2,371) 1,190
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits 190 (217) (27)
Savings deposits 10 (26) (16)
Time deposits (46) (689) (735)
Other borrowings 301 (133) 168
----------- ----------- -----------
Total 455 (1,065) (610)
----------- ----------- -----------
Interest differential $ 3,106 $ (1,306) $ 1,800
=========== =========== ===========
(1) The average balance of non-accruing loans and leases is immaterial as a
percentage of total loans and leases and, as such, has been included in net
loans and leases.
(2) Loan and lease fees of $741,000, $814,000 and $545,000 for the years ended
December 31, 2004, 2003 and 2002, 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 $895,000 for loan and lease losses in 2004 as compared
to $946,000 for 2003. Net loan charge-offs for 2004 were $209,000 as compared to
$194,000 in 2003. In both 2004 and 2003, net loan charge-offs as a percentage of
average loans outstanding were .08%. In 2002, the Company provided $644,000 for
loan and lease losses and net charge-offs were $61,000. For further information
please see the Allowance for Loan and Lease Losses Activity.
25
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,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Service charges on deposit accounts $ 551 $ 534 $ 563
Gain on life insurance death benefit 553 - -
Accounts receivable servicing fees 316 247 294
Merchant fee income 393 357 344
Fees from lease brokerage services 9 381 459
Income from residential lending division 187 366 278
Gain on sale of available-for-sale securities - 33 -
Other 386 335 385
---------- ---------- ----------
$ 2,395 $ 2,253 $ 2,323
========== ========== ==========
Noninterest income was up $142,000 (6.3%) to $2,395,000 in 2004 from the
2003 level. Much of this increase ($553,000) represents the tax-free net
proceeds from a life insurance policy the Company received in June of 2004 as a
result of the death of a former executive officer. Without the life insurance
proceeds, noninterest income would have shown a decrease of $411,000. The
decrease in noninterest income can be attributed to decreases in fees from lease
brokerage services (down $372,000 or 97.6%) and a decrease in residential
lending fee income (down $179,000 or 48.9%). The decrease in lease brokerage
services resulted from the majority of originated leases being recorded during
2004 on the books of the Company as opposed to receiving fee income for
brokering the leases to outside funding sources. In addition, overall lease
volume decreased (from $5,940,000 in 2003 to $4,967,000 in 2004) as a result of
the change from a nationwide lessor to a lessor that does business in California
counties located near American River Bank branch locations. The residential
lending division experienced a decrease in loan volume as a result of a slight
increase in mortgage rates, which caused the number of refinances to decrease.
Noninterest income was down $70,000 (3.0%) to $2,253,000 in 2003 from the
2002 level. The decrease in noninterest income can be attributed to a decrease
in accounts receivable servicing fees (down $47,000 or 16.0%) and lower fees
from lease brokerage services (down $78,000 or 17.0%). The decrease in fees from
accounts receivable servicing and lease brokerage services were offset by an
increase in fees from the residential lending division (up $88, 000 or 31.7%)
and an increase in merchant fee income (up $13,000 or 3.8%). The decrease in
accounts receivable servicing fees was a result of a decrease in average
accounts receivable balances outstanding from $2,299,000 in 2002 to $1,540,000
(33.0%) in 2003. The decrease in lease brokerage service fees resulted from an
overall slowdown in the leasing industry over the last two quarters of 2003. The
increase in fees from the residential lending division came from an increase in
loan volume as a result of low interest rates, which caused the number of
refinances to increase.
Salaries and Benefits
Salaries and benefits, which include commissions, were $6,048,000 (down
$185,000 or 3.0%) for 2004 as compared to $6,223,000 in 2003. The decrease is
primarily the result of lower incentive accruals ($156,000 or 18.5%) and lower
commissions paid in the Residential Lending Division. The lower incentive
accrual relates to an adjustment in the incentive program by reducing the
overall percentage available to employees. The decreased commissions in the
Residential Lending Division is directly related to the drop in fees generated.
At the end of 2004, the full-time equivalent staff was 123, up twenty-one from
the 101 at the end of 2003. Much of the increase in the number of employees came
as a result of the acquisition of Bank of Amador in December 2004 and did not
have a material impact on overall salary and benefit expense.
Salaries and benefits, which include commissions, were $6,233,000 (up
$638,000 or 11.4%) for 2003 as compared to $5,595,000 in 2002. The increase is
primarily the result of increased salaries ($335,000 or 7.7%) and commissions
($53,000 or 30.6%) mainly as a result of expenses related to employee
departures, normal salary adjustments, cost of living increases and higher
26
commissions paid to employees in the Residential Lending Division of American
River Bank. The remainder of the increase relates to higher incentive accruals
($122,000 or 16.9%), higher employer taxes ($26,000 or 7.4%) and an increase in
benefits ($129,000 or 23.0%), mainly due to higher health related and workers
compensation insurance premiums. At the end of 2003, the full-time equivalent
staff was 101, up two from the 99 at the end of 2002.
Occupancy, Furniture and Equipment
Occupancy expense increased $136,000 (16.6%) during 2004 to $953,000, up
from $817,000 in 2003. The majority of the increase relates to the cost
associated with the new banking office in Downtown Sacramento ($114,000) located
at 520 Capitol Mall, Suite 100, Sacramento, CA 95814 and annual rent increases
on the Company's leased facilities. Furniture and equipment expense was $752,000
in 2004 compared to $653,000 in 2003, representing a $99,000 (15.2%) increase.
The majority of the increase in furniture and equipment expense relates to the
new banking office ($51,000) and higher maintenance and repair costs associated
with technology related equipment ($44,000).
Occupancy expense decreased $23,000 (2.7%) during 2003 to $817,000, down
from $840,000 in 2002. The decrease represents new lease terms, which included
less space, at the building that houses the Company's Windsor Office. Furniture
and equipment expense was $653,000 in 2003 compared to $620,000 in 2002,
representing a $33,000 (5.3%) increase. The increase relates to the depreciation
of technology related equipment purchased by the Company over the past twelve
months.
Other Expenses
Other expenses were $3,960,000 (up $1,291,000 or 48.4%) for 2004 as
compared to $2,669,000 for 2003. Professional fees increased $143,000 (42.7%)
from $335,000 during 2003 to $478,000 in 2004. Professional fees, which includes
accounting, legal and other professional services, was up primarily due to
retainer fees paid to a deposit gathering relationship established in 2004
($172,000). Donations were $527,000 (up $501,000) for 2004 compared to $26,000
in 2003. The increase in donations results from the Company's decision to create
and fund a charitable foundation ($503,000) known as the American River
Bankshares Foundation. Director's expenses increased from $353,000 (up $165,000
or 46.7%) in 2003 to $518,000 in 2004. The increase in director fees relates to
higher amounts accrued under the Gross-Up Plan (the "Plan"). The Plan
compensates for the tax effects of the exercise of nonstatutory stock options.
The Plan named certain non-employee Directors as participants and applies only
to those options granted on August 25, 1995. The Plan encourages participating
optionees to retain shares acquired through the exercise of nonstatutory stock
options by the Company paying to the participating optionee an amount equal to
the taxable income resulting from an exercise of a nonstatutory stock option
multiplied by the Company's effective tax rate, subject to the optionee's
agreement to hold the shares acquired for a minimum of one (1) year. Other
operating expenses increased from $946,000 (up $278,000 or 29.4%) to $1,224,000
in 2004. These increases related to the benefit payments related to the death of
a former Company executive ($82,000), and normal expenses related to the overall
growth of the Company. The overhead efficiency ratio on a taxable equivalent
basis for 2004 was 53.3% as compared to 53.8% in 2003.
Other expenses were $2,669,000 (up $335,000 or 14.4%) for 2003 as compared
to $2,334,000 for 2002. Professional fees increased $73,000 (27.9%) from
$262,000 during 2002 to $336,000 in 2003. The increase in professional fees in
2003 resulted from a recovery of legal fees ($86,000) in 2002 related to the
resolution of a problem loan credit that did not reoccur in 2003. In addition,
directors expenses increased $105,000 (42.3%) from $248,000 during 2002 to
$353,000 in 2003. The increase related to higher amounts accrued under the
Gross-Up Plan. 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 and
did not reoccur in 2003. The overhead efficiency ratio on a taxable equivalent
basis for 2003 was 53.8% as compared to 53.5% in 2002.
Provision for Taxes
The effective tax rate on income was 36.7%, 39.2% and 39.4% in 2004, 2003
and 2002, respectively. The effective tax rate was greater than the federal
statutory tax rate due to state tax expense (net of federal tax effect) of
$589,000, $538,000 and $501,000 in these years. Tax-exempt income of $537,000,
$475,000 and $460,000 from investment securities in these years helped to reduce
the effective tax rate. The 2004 effective tax rate was further reduced by tax
exempt income of $553,000 from the proceeds from a life insurance policy.
27
Balance Sheet Analysis
The Company's total assets were $586,666,000 at December 31, 2004 as
compared to $397,393,000 at December 31, 2003, representing an increase of
47.6%. Approximately $143,000,000 of the increase is attributable to the Bank of
Amador acquisition in December 2004. The average balances of total assets during
2004 were $439,012,000 which represents an increase of $75,837,000 (20.9%) over
the December 31, 2003 total of $363,175,000.
Loans and Leases
The Company concentrates its lending activities in the following principal
areas: 1) commercial; 2) commercial real estate; 3) multi-family real estate; 4)
real estate construction (both commercial and residential); 5) residential real
estate; 6) lease financing receivable; 7) agriculture; and 8) consumer loans. At
December 31, 2004, these categories accounted for approximately 19%, 46%, 1%,
25%, 1%, 3%, 2% and 3%, respectively, of the Company's loan portfolio. This mix
was relatively unchanged compared to 22%, 53%, 2%, 14%, 1%, 3%, 3% and 2% at
December 31, 2003, with the exception of an increase in the percentage of real
estate construction mainly due to the Bank of Amador acquisition. Continuing
economic activity in the Company's market area, new borrowers developed through
the Company's marketing efforts, credit extensions expanded to existing
borrowers, and loans acquired from Bank of Amador, offset by normal loan and
lease paydowns and payoffs, resulted in net increases in balances for commercial
($9,518,000 or 16.6%), commercial real estate ($24,014,000 or 16.9%), real
estate construction ($52,728,000 or 140.9%), residential real estate ($3,728,000
or 247.2%), lease financing receivable ($718,000 or 7.7%), agriculture ($225,000
or 2.8%) and consumer loans ($3,467,000 or 55.3%). Despite the new borrowers,
the Company experienced a decrease in multi-family real estate ($2,641,000 or
49.8%), as a result of normal paydowns. The majority of the loans acquired from
Bank of Amador fell into the real estate construction ($47,659,000) and
residential real estate ($4,441,000) portfolios. 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,
-------------------------------------------------------------
(dollars in thousands) 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------
Commercial $ 66,864 $ 57,346 $ 49,231 $ 43,619 $ 52,726
Real estate:
Commercial 166,263 142,249 119,977 99,355 96,840
Multi-family 2,660 5,301 7,573 803 550
Construction 90,162 37,434 32,385 30,821 27,182
Residential 5,236 1,508 1,661 3,119 8,085
Agriculture 8,252 8,027 8,824 10,251 10,764
Consumer 9,417 5,950 6,371 7,598 6,413
Lease financing receivable 9,994 9,276 6,766 2,499 1,150
- ---------------------------------------------------------------------------------------------
358,848 267,091 232,788 198,065 203,710
Deferred loan fees, net (885) (678) (583) (425) (598)
Allowance for loan and
lease losses (5,496) (3,949) (3,197) (2,614) (2,454)
- ---------------------------------------------------------------------------------------------
Total net loans and leases $ 352,467 $ 262,464 $ 229,008 $ 195,026 $ 200,658
=============================================================================================
A significant portion of the Company's loans and leases are direct
loans and leases made to individuals and local businesses. The Company relies
substantially on local promotional activity and personal contacts by bank
officers, directors and employees to compete with other financial institutions.
The Company makes loans and leases to borrowers whose applications include a
sound purpose and a viable primary repayment source, generally supported by a
secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans
for equipment purchases, working capital, and various other business loan
products. Consumer loans include a range of traditional consumer loan products
such as personal lines of credit and loans to finance purchases of autos, boats,
recreational vehicles, mobile homes and various other consumer items.
Construction loans are generally comprised of commitments to customers within
the Company's service area for construction of commercial properties,
multi-family properties and custom and semi-custom single-family residences.
28
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 75%. Agriculture
loans consist primarily of vineyard loans and development loans to plant
vineyards. In general, except in the case of loans under SBA programs or Farm
Services Agency guarantees, the Company does not make long-term mortgage loans;
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 2004 were $277,647,000 which represents an
increase of $29,305,000 (11.8%) over the average in 2003. Average net loans and
leases in 2003 were $248,342,000 which represents an increase of $39,209,000
(18.7%) over the average in 2002. Loan growth in 2003 and 2002 resulted from a
favorable economy in the Company's market area, new borrowers developed through
the Company's marketing efforts and credit extensions expanded to existing
borrowers.
Risk Elements
The Company assesses and manages credit risk on an ongoing basis through a
total credit culture that emphasizes excellent credit quality, extensive
internal monitoring and established formal lending policies. Additionally, the
Company contracts with an outside loan review consultant to periodically review
the existing loan and lease portfolio. Management believes its ability to
identify and assess risk and return characteristics of the Company's loan and
lease portfolio is critical for profitability and growth. Management strives to
continue its emphasis on credit quality in the loan and lease approval process,
active credit administration and regular monitoring. With this in mind,
management has designed and implemented a comprehensive loan and lease review
and grading system that functions to continually assess the credit risk inherent
in the loan and lease portfolio.
Ultimately, underlying trends in economic and business cycles may influence
credit quality. American River Bank's business is concentrated in the Sacramento
Metropolitan Statistical Area, which is a diversified economy, but with a large
State of California government presence and employment base, in Sonoma County,
through North Coast Bank, a division of American River Bank, whose business is
focused on businesses within the three communities in which it has offices
(Santa Rosa, Windsor, and Healdsburg) and in Amador County, through Bank of
Amador, a division of American River Bank, whose business is focused on
businesses and consumers within the three communities in which it has offices
(Jackson, Pioneer, and Ione) as well as a diversified residential construction
loan business in numerous Northern California counties. The economy of Sonoma
County is diversified with professional services, manufacturing, agriculture and
real estate investment and construction, while the economy of Amador County is
reliant upon government, services, retail trade, manufacturing industries and
Indian gaming.
The Company has significant extensions of credit and commitments to extend
credit that are secured by real estate. The ultimate repayment of these loans is
generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rate and terms, absorption and sale rates; real estate values
and rates of return; operating expenses; inflation; and sufficiency of repayment
sources independent of the real estate including, in some instances, personal
guarantees.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flow or from proceeds from the sale of selected
assets of the borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the creditworthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its security interest in business assets,
obtaining deeds of trust, or outright possession among other means.
In management's judgment, a concentration exists in real estate loans which
represented approximately 73.6% of the Company's loan and lease portfolio at
December 31, 2004. Although management believes this 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
29
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 and Leases
Management generally places loans and leases on nonaccrual status when they
become 90 days past due, unless the loan or lease is well secured and in the
process of collection. Loans and leases are charged off when, in the opinion of
management, collection appears unlikely.
The recorded investments in loans and leases that were considered to be
impaired totaled $247,000 and $181,000 at December 31, 2004 and 2003,
respectively. The related allowance for losses for these loans and leases at
December 31, 2004 and December 31, 2003 was $62,000 and $59,000, respectively.
Management believes that the allowance allocations are adequate for the inherent
risk of those loans and leases. The average recorded investment in impaired
loans and leases for the years ended December 31, 2004, 2003 and 2002 was
$124,000, $148,000 and $472,000, respectively.
Interest due but excluded from interest income on nonaccrual loans and
leases was not material during 2004, 2003 and 2002. In 2004, 2003 and 2002,
interest income recognized from payments received on nonaccrual loans and leases
was also not material.
Table Six below sets forth nonaccrual loans and leases and loans and leases
past due 90 days or more as of year-end for the past five years.
Table Six: Non-Performing Loans and Leases
- --------------------------------------------------------------------------------------------
December 31,
------------------------------------------
(dollars in thousands) 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------
Past due 90 days or more and still accruing:
Commercial $ - $ 2 $ 2 $ - $ -
Real estate - - - - -
Lease financing receivable 11 - - - -
Consumer and other - - - - -
- --------------------------------------------------------------------------------------------
Nonaccrual:
Commercial 52 - 42 534 225
Real estate 113 - 160 314 449
Lease financing receivable 71 179 - - -
Consumer and other - - 2 8 -
- --------------------------------------------------------------------------------------------
Total non-performing loans and leases $ 247 $ 181 $ 206 $ 856 $ 674
============================================================================================
There were no loan or lease concentrations in excess of 10% of total loans
and leases not otherwise disclosed as a category of loans and leases as of
December 31, 2004. Management is not aware of any potential problem loans or
leases, which were accruing and current at December 31, 2003 or 2004, 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 Company maintains an allowance for loan and lease losses ("ALLL") to
cover probable losses inherent in the loan and lease portfolio, which is based
upon management's estimated range of those losses. The ALLL is established
through a provision for loan and lease losses and is increased by provisions
charged against current earnings and recoveries and reduced by charge-offs.
Actual losses for loans and leases can vary significantly from this estimate.
The methodology and assumptions used to calculate the allowance are continually
30
reviewed as to their appropriateness given the most recent losses realized and
other factors that influence the estimation process. The model assumptions and
resulting allowance level are adjusted accordingly as these factors change.
The adequacy of the ALLL and the level of the related provision for loan
and lease losses is determined based on management's judgment after
consideration of numerous factors including but not limited to: (i) local and
regional economic conditions, (ii) borrowers' financial condition, (iii) loan
impairment and the related level of expected charge-offs, (iv) evaluation of
industry trends, (v) industry and other concentrations, (vi) loans and leases
which are contractually current as to payment terms but demonstrate a higher
degree of risk as identified by management, (vii) continuing evaluations of the
performing loan portfolio, (viii) ongoing review and evaluation of problem loans
identified as having loss potential, (ix) quarterly review by the Board of
Directors, and (x) assessments by banking regulators and other third parties.
Management and the Board of Directors evaluate the ALLL and determine its
appropriate level considering objective and subjective measures, such as
knowledge of the borrowers' business, valuation of collateral, the determination
of impaired loans or leases and exposure to potential losses. The Company uses
this same methodology to evaluate the loans acquired from the Bank of Amador
acquisition.
The Company establishes general reserves in accordance with Statement of
Accounting Standards ("SFAS") No. 5., Accounting for Contingencies, and specific
reserves in accordance with SFAS No. 114, Accounting by Creditors for Impairment
of a Loan. The ALLL is maintained by categories of the loan and lease portfolio
based on loan type and loan rating; however, the entire allowance is available
to cover actual loan and lease losses. While management uses available
information to recognize possible losses on loans and leases, future additions
to the allowance may be necessary, based on changes in economic conditions and
other matters. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's ALLL. Such agencies
may require the Company to provide additions to the allowance based on their
judgment of information available to them at the time of their examination.
The adequacy of the ALLL is determined based on three components. First, is
the dollar weighted risk rating of the loan portfolio, including all outstanding
loans and leases. Every extension of credit has been assigned a risk rating
based upon a comprehensive definition intended to measure the inherent risk of
lending money. Each rating has an assigned risk factor expressed as a reserve
percentage. Second, established specific reserves consistent with SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" are assigned to individually
impaired loans. These are estimated potential losses associated with specific
borrowers based upon estimated cash flows or collateral value and events
affecting the risk rating. Third, the Company maintains a reserve for
qualitative factors that may affect the portfolio as a whole, such as those
factors described above, including a reserve for model imprecision consistent
with SFAS No. 5 "Accounting for Contingencies".
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.
Adjustments may be made based on differences from estimated loan and lease
growth, the types of loans constituting this growth, changes in risk ratings
within the portfolio, and general economic conditions. However, no prediction of
the ultimate level of loans and leases charged off in future periods can be made
with any certainty.
The allowance for loan and lease losses totaled $5,496,000 or 1.54% of
total loans and leases at December 31, 2004, $3,949,000 or 1.48% of total loans
and leases at December 31, 2003, and $3,197,000 or 1.38% at December 31, 2002.
Table Seven below summarizes, for the periods indicated, the activity in
the allowance for loan and lease losses.
31
Table Seven: Allowance for Loan and Lease Losses
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for percentages)
Year Ended December 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 277,647 $ 248,342 $ 209,133 $ 202,624 $ 175,134
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan & lease
losses at beginning of period $ 3,949 $ 3,197 $ 2,614 $ 2,454 $ 2,062
Loans and leases charged off:
Commercial - 13 44 556 265
Real estate - - 59 85 -
Consumer 1 8 48 13 1
Lease financing receivable 268 333 - 57 -
- -------------------------------------------------------------------------------------------------------------------------------
Total 269 354 151 711 266
- -------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged off:
Commercial 57 113 1 9 23
Real estate - 47 85 - -
Consumer 3 - 4 - 4
Lease financing receivable - - - 71 -
- -------------------------------------------------------------------------------------------------------------------------------
Total 60 160 90 80 27
- -------------------------------------------------------------------------------------------------------------------------------
Net loans and leases charged off 209 194 61 631 239
Amount transferred for accounts
receivable servicing valuation
reserve - - - - (41)
Allowance acquired in merger 861 - - - -
Additions to allowance charged
to operating expenses 895 946 644 791 672
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan and
lease losses at end of period $ 5,496 $ 3,949 $ 3,197 $ 2,614 $ 2,454
Ratio of net charge-offs to average
loans and leases outstanding .08% .08% .03% .31% .14%
Provision for possible loan and lease losses to
average loans and leases outstanding .32% .38% .31% .39% .38%
Allowance for possible loan and lease losses to
loans and leases, net of deferred fees, at end
of period 1.54% 1.48% 1.38% 1.32% 1.21%
As part of its loan review process, management has allocated the overall
allowance based on specific identified problem loans and leases, qualitative
factors, uncertainty inherent in the estimation process and historical loss
data. A risk exists that future losses cannot be precisely quantified or
attributed to particular loans or leases or classes of loans and leases.
Management continues to evaluate the loan and lease portfolio and assesses
current economic conditions that will affect management's conclusion as to
future allowance levels. Table Eight below summarizes the allocation of the
allowance for loan and lease losses for the five years ended December 31, 2004.
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 and
lease category represents the total amounts available for charge-offs that may
occur within these categories.
32
Table Eight: Allowance for Loan and Lease Losses by Loan Category
- ----------------------------------------------------------------------------------------------------------------
(in thousands,
except percentages) December 31, 2004 December 31, 2003 December 31, 2002
- ----------------------------------------------------------------------------------------------------------------
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 $ 1,028 18.6% $ 865 21.5% $ 660 21.1%
Real estate 3,825 73.7% 2,579 69.8% 2,173 69.5%
Agriculture 110 2.3% 201 3.0% 116 3.8%
Consumer 220 2.6% 91 2.2% 152 2.9%
Lease financing receivable 313 2.8% 213 3.5% 96 2.7%
- ----------------------------------------------------------------------------------------------------------------
Total allocated $ 5,496 100.0% $ 3,949 100.0% $ 3,197 100.0%
- ----------------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2002
- -------------------------------------------------------------------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
- -------------------------------------------------------------------------------------
Commercial $ 923 22.0% $ 781 25.9%
Real estate 1,288 67.7% 1,392 65.1%
Agriculture 147 5.3% 105 5.3%
Consumer 206 3.8% 153 3.1%
Lease financing receivable 50 1.2% 23 .6%
- -------------------------------------------------------------------------------------
Total allocated $ 2,614 100.0% $ 2,454 100.0%
- -------------------------------------------------------------------------------------
Other Real Estate
At December 31, 2004 and 2003, the Company did not have any Other Real
Estate properties.
Deposits
At December 31, 2004, total deposits were $475,387,000 representing an
increase of $152,880,000 (47.4%) over the December 31, 2003 balance of
$322,507,000. The deposit growth in 2004 can be attributed to a concentrated
effort to increase noninterest-bearing demand, interest-bearing money market and
NOW accounts and savings accounts. As a result, these accounts increased 40.7%,
42.3% and 121.4%, respectively, in 2004. In addition, of the $152,880,000
increase in deposits during 2004, $114,255,000 of the growth can be attributed
to the Bank of Amador acquisition, while $28,437,000 is related to the opening
of a new banking office in downtown Sacramento. During 2003, deposits increased
$46,711,000 (16.9%) from the total of $275,796,000 at December 31, 2002.
33
Other Borrowed Funds
Other borrowings outstanding as of December 31, 2004 consist of advances
(both long-term and short-term) from the Federal Home Loan Bank (the "FHLB") and
an overnight borrowing from a correspondent bank. The following table summarizes
these borrowings (dollars in thousands):
2004 2003 2002
--------------------- --------------------- ---------------------
Amount Rate Amount Rate Amount Rate
--------- --------- --------- --------- --------- ---------
Short-Term borrowings:
FHLB advances $ 24,457 1.85% $ 25,054 1.41% $ 24,050 1.72%
Advances from correspondent
banks - - 9,600 1.44% 6,550 1.75%
--------- --------- --------- --------- --------- ---------
Total Short-Term borrowings $ 24,457 1.85% $ 34,654 1.41% $ 30,650 1.72%
--------- --------- --------- --------- --------- ---------
Long-Term Borrowings:
FHLB advances $ 9,832 3.15% $ 1,888 6.13% $ 1,942 6.13%
--------- --------- --------- --------- --------- ---------
Total Long-Term borrowings $ 9,832 3.15% $ 1,888 6.13% $ 1,942 6.13%
--------- --------- --------- --------- --------- ---------
The maximum amount of short-term borrowings at any month-end during 2004,
2003 and 2002, was $40,855,000, $38,100,000, and $33,900,000, respectively. The
FHLB advances are collateralized by loans and securities pledged to the FHLB.
The following is a breakdown of rates and maturities on FHLB advances (dollars
in thousands):
Short Term Long Term
Amount $ 24,457 $ 9,832
Maturity 2005 2006-2007
Average rates 1.85% 3.15%
The Company has also been issued a total of $500,000 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 2004 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. During
2004, the Company repurchased 9,765 shares; during 2003, the Company repurchased
1,575 shares and in 2002, the Company repurchased 68,908 shares under the
repurchase plan. See "Stock Repurchases" under Item 5 on page 18 for more
information regarding the stock repurchase plan.
The Company and American River Bank are subject to certain regulatory
capital requirements administered by the Board of Governors of the Federal
Reserve System and the Federal Deposit Insurance Corporation. Failure to meet
these minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, banks must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and
American River Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. At December 31, 2004, shareholders' equity was $58,990,000,
34
representing an increase of $23,533,000 (66.4%) from $35,457,000 at December 31,
2003. This increase was attributable principally to the retention of earnings
after the payment of cash dividends ($3,783,000) and the fair value of common
stock issued to complete the acquisition of Bank of Amador ($18,284,000). In
2003, shareholders' equity increased $3.7 million (11.8%) from 2002. The ratio
of total risk-based capital to risk adjusted assets was 10.9% at December 31,
2004 compared to 12.9% at December 31, 2003. Tier 1 risk-based capital to
risk-adjusted assets was 9.6% at December 31, 2004 and 11.6% at December 31,
2003.
Table Nine below lists the Company's actual capital ratios at December 31,
2004 and 2003 as well as the minimum capital ratios for capital adequacy.
Table Nine: Capital Ratios
- --------------------------------------------------------------------------------
At December 31, Minimum Regulatory
Capital to Risk-Adjusted Assets 2004 2003 Capital Requirements
- --------------------------------------------------------------------------------
Leverage ratio 8.4% 9.0% 4.00%
Tier 1 Risk-Based Capital 9.6% 11.6% 4.00%
Total Risk-Based Capital 10.9% 12.9% 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.
American River Bank's ratios are in excess of the regulatory definition of "well
capitalized."
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. The Company has 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 consolidated 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 and leases, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance sheet
is processed against three interest rate scenarios. The scenarios include a 200
basis point rising rate forecast, a flat rate forecast and a 200 basis point
falling rate forecast which take place within a one year time frame. The net
interest income is measured during the year assuming a gradual change in rates
over the twelve-month horizon. The simulation modeling indicated below attempts
to estimate changes in the Company's net interest income utilizing a forecast
balance sheet projected from year-end 2004 balances.
35
Table Ten below summarizes the effect on net interest income (NII) of a
+/-200 basis point change in interest rates as measured against a constant rate
(no change) scenario.
Table Ten: Interest Rate Risk Simulation of Net Interest as of December 31, 2004
- --------------------------------------------------------------------------------
(dollars in thousands) $ Change in NII
from Current
12 Month Horizon
----------------
Variation from a constant rate scenario
+200bp $ 673
-200bp $ (466)
The simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations. Therefore,
they do not reflect likely actual results, but serve as reasonable estimates of
interest rate risk.
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, 2004, the cumulative
gap through the one-year time horizon indicates a slightly asset sensitive
position.
Table Eleven: Interest Rate Sensitivity
December 31, 2004
- -------------------------------------------------------------------------------------------------------------
Assets and Liabilities which mature or reprice within (days):
Non-
(dollars in thousands) 0-90 91-180 181-365 Over 365 repricing Total
- -------------------------------------------------------------------------------------------------------------
Assets:
Investment securities $ 14,549 $ 8,362 $ 18,233 $ 131,197 $ - $ 172,341
Loans and leases 191,823 40,778 28,361 91,505 - 352,467
Other assets - - - - 61,858 61,858
- -------------------------------------------------------------------------------------------------------------
Total assets $ 206,372 $ 49,140 $ 46,594 $ 222,702 $ 61,858 $ 586,666
=============================================================================================================
Liabilities:
Noninterest bearing $ - $ - $ - $ - $ 143,710 $ 143,710
Interest bearing:
Transaction 23,527 9,411 7,056 7,058 - 47,052
Money market 69,685 27,874 20,908 20,906 - 139,373
Savings 19,478 7,791 3,896 7,792 - 38,957
Time certificates 39,578 16,405 21,425 28,887 - 106,295
Short-term borrowings 10,515 9,915 4,027 - - 24,457
Long-term borrowings - - - 9,832 - 9,832
Other liabilities - - - - 18,000 18,000
Shareholders' equity - - - - 58,990 58,990
- -------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 162,783 $ 71,396 $ 57,312 $ 74,475 $ 220,700 $ 586,666
=============================================================================================================
Interest rate
sensitivity gap $ 43,589 $ (22,256) $ (10,718) $ 148,227 $ (158,842)
Cumulative interest
rate sensitivity gap $ 43,589 $ 21,333 $ 10,615 $ 158,842 -
36
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 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 during the periods ended December 31, 2004, 2003 and 2002.
Liquidity
Liquidity management refers to the Company's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit needs
and requirements of its clients. Both assets and liabilities contribute to the
Company's liquidity position. Federal funds lines, short-term investments and
securities, and loan and lease repayments contribute to liquidity, along with
deposit increases, while loan and lease funding and deposit withdrawals decrease
liquidity. The Company assesses the likelihood of projected funding requirements
by reviewing historical funding patterns, current and forecasted economic
conditions and individual client funding needs. Commitments to fund loans and
outstanding standby letters of credit at December 31, 2004 were approximately
$125,413,000 and $2,788,000, 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, 2004,
consolidated liquid assets totaled $96.4 million or 16.4% of total assets
compared to $56.8 million or 14.3% of total assets on December 31, 2003. In
addition to liquid assets, the Company maintains short-term lines of credit in
the amount of $48,000,000 with correspondent banks. At December 31, 2004, the
Company had $48,400,000 available under these credit lines. Additionally, the
American River Bank is a member of the FHLB. At December 31, 2004, American
River Bank could have arranged for up to $50,864,000 in secured borrowings from
the FHLB. These borrowings are secured by pledged mortgage loans and investment
securities. At December 31, 2004, the Company had $16,071,000 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. 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 can also
pledge securities to borrow from the FRB and the FHLB.
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
American River Bank to the Company will be sufficient to meet this payment
schedule. The maturity distribution of certificates of deposit is set forth in
37
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, 2004
- --------------------------------------------------------------------------------
(dollars in thousands) Over $100,000 Less than $100,000
- --------------------------------------------------------------------------------
Three months or less $ 25,110 $ 11,352
Over three months through six months 7,729 9,316
Over six months through twelve months 10,940 11,352
Over twelve months 13,258 17,238
- --------------------------------------------------------------------------------
Total $ 57,037 $ 49,258
================================================================================
Loan and lease demand also affects the Company's liquidity position. Table
Thirteen below presents the maturities of loans and leases for the period
indicated.
Table Thirteen: Loan and Lease Maturities (Gross Loans and Leases)
- --------------------------------------------------------------------------------
December 31, 2004
- --------------------------------------------------------------------------------
One year One year through Over
(dollars in thousands) or less five years five years Total
- --------------------------------------------------------------------------------
Commercial $ 36,197 $ 21,687 $ 8,980 $ 66,864
Real estate 98,602 53,416 112,303 264,321
Agriculture 6,013 867 1,372 8,252
Consumer 1,165 4,751 3,501 9,417
Leases 355 9,504 135 9,994
- --------------------------------------------------------------------------------
Total $ 142,332 $ 90,225 $ 126,291 $ 358,848
================================================================================
Loans and leases shown above with maturities greater than one year include
$178,494,000 of floating interest rate loans and $38,787,000 of fixed rate loans
and leases.
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.
38
Table Fourteen: Securities Maturities and Weighted Average Yields
December 31, 2004, 2003 and 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis)
2004 2003 2002
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
(dollars in thousands) Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Available-for-sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 7,055 3.88% $ 3,573 3.70% $ 4,907 6.46%
Maturing after 1 year but within 5 years 39,645 3.41% 17,877 3.75% 15,660 4.26%
State & political subdivisions
Maturing within 1 year 1,105 4.83% 452 6.17% 779 6.89%
Maturing after 1 year but within 5 years 6,574 4.30% 967 5.69% 1,139 6.48%
Maturing after 5 years but within 10 years 17,393 6.16% 6,188 7.18% 3,215 7.46%
Maturing after 10 years 2,168 6.83% 4,454 7.44% 5,475 7.55%
Government sponsored mortgage-backed
securities 40,359 4.30% 26,757 4.47% 29,280 4.57%
Other
Maturing within 1 year 1,115 2.23% 1,514 1.84% 254 7.40%
Maturing after 1 year but within 5 years - - 273 3.94% 816 3.55%
Non maturing 627 6.63% 631 6.64% 351 6.61%
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 116,041 4.32% $ 62,686 4.55% $ 61,876 5.13%
====================================================================================================================================
Held-to-maturity securities:
U.S. Treasury and agency securities
Maturing within 1 year $ - - $ - - $ - -
State & political subdivisions
Maturing within 1 year - - 200 6.77% 1,133 6.53%
Maturing after 1 year but within 5 years - - - - 200 6.77%
Government sponsored mortgage-backed
securities 41,203 4.16% 26,960 4.06% 10,852 5.05%
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 41,203 4.16% $ 27,160 4.08% $ 12,185 5.22%
====================================================================================================================================
The carrying values of available-for-sale securities includes net
unrealized gains of $880,000, $1,430,000 and $2,149,000 at December 31, 2004,
2003 and 2002, respectively. The carrying values of held-to-maturity securities
do not include unrealized gains, however, the net unrealized gains at December
31, 2004, 2003 and 2002 were $125,000, $56,000 and $201,000, 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, 2004, 2003 and 2002 was $2,158,000, $1,546,000 and $1,562,000,
respectively.
Off-Balance Sheet Arrangements
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.
39
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 consolidated balance sheet. The following financial
instruments represent off-balance-sheet credit:
December 31,
-----------------------
2004 2003
---------- ----------
Commitments to extend credit (dollars in thousands):
Revolving lines of credit secured by
1-4 family residences $ 2,328 $ 3,017
Commercial real estate, construction and land
development commitments:
Secured by real estate 66,066 20,268
Not secured by real estate - 1,800
Credit card arrangements - 483
Other unused commitments, principally commercial loans 57,019 46,289
---------- ----------
$ 125,413 $ 71,858
========== ==========
Letters of credit $ 2,788 $ 741
========== ==========
As of December 31, 2004, 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. 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.
Certain financial institutions have elected to use special purpose vehicles
("SPV") to dispose of problem assets. The 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. The Company does not use
those vehicles or any other structures to dispose of problem assets.
Contractual Obligations
The Company leases certain facilities at which it conducts its operations.
Future minimum lease commitments under non-cancelable operating leases are noted
in Table Fifteen below. Table Fifteen below presents certain of the Company's
contractual obligations as of December 31, 2004.
Table Fifteen: Contractual Obligations
(dollars in thousands)
Payments due by period
---------------------------------------------------------
Less
than More than
Total 1 year 1-3 years 3-5 years 5 years
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 9,832 $ - $ 9,832 $ - $ -
Capital Lease Obligations - - - - -
Operating Leases 3,636 835 1,252 881 668
Purchase Obligations - - - - -
Other Long-Term Liabilities Reflected on the
Company's Balance Sheet under GAAP 851 - - - 851
- -------------------------------------------------------------------------------------------------------------
Total $ 14,319 $ 835 $ 11,084 $ 881 $ 1,519
=============================================================================================================
Included in Table 15, above, are amounts payable under the Company's
Deferred Compensation and Deferred Fees Plans. These amounts represented
$851,000 and are anticipated to be primarily payable at least five years in the
future.
Accounting Pronouncements
In June 2004, the Financial Accounting Standards Board (the "FASB")
ratified Emerging Issues Task Force ("EITF") Issue 03-1, The Meaning of
Other-than-Temporary Impairment and Its Application to Certain Investments
("EITF 03-1"). EITF 03-1 includes additional guidance for evaluating and
recording impairment losses on debt and equity investments, as well as
40
disclosure requirements for investments that are deemed to be temporarily
impaired. The proposed guidance indicates that an investor must have the intent
and ability to hold an investment until a forecasted recovery of the fair value
up to or beyond the cost of the investment in order to determine that any
impairment is temporary. In September 2004, the FASB delayed the effective date
of the recognition and measurement guidance of EITF 03-1, pending further
deliberations. The disclosures for investments that are deemed temporarily
impaired are included in Note 5 to the Consolidated Financial Statements in Item
8 - Financial Statements and Supplementary Data. Once the FASB has reached a
final decision on the measurement and recognition provisions, the Company will
evaluate the impact of the adoption of EITF 03-1.
In December 2004 the FASB issued Statement Number 123 (revised 2004) ("FAS
123 (R)"), Share-Based Payments. FAS 123 (R) requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments such as stock options granted to employees. The Company is required to
apply FAS 123 (R) on a modified prospective method. Under this method, the
Company is required to record compensation expense (as previous awards continue
to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. In addition, the Company may elect to adopt
FAS 123 (R) by restating previously issued financial statements, basing the
expense on that previously reported in their pro forma disclosures required by
FAS 123. FAS 123 (R) is effective for the first reporting period beginning after
June 15, 2005. Management has not completed its evaluation of the effect that
FAS 123 (R) will have, but believes that the effect will be consistent with its
previous pro forma disclosures. For further information regarding the proforma
effect on reported net income and earnings per share as if the Company had
elected to recognize compensation cost based on the fair value of the options
granted at the date of grant as prescribed by FAS No. 123 (R), see Note 2
"Stock-Based Compensation" to the Consolidated Financial Statements in Item 8 -
Financial Statements and Supplementary Data.
In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer
(the "SOP"). This SOP addresses accounting for differences between contractual
cash flows and cash flows expected to be collected from an investor's initial
investment in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It also
includes such loans acquired in purchase business combinations. This SOP does
not apply to loans originated by the entity. This SOP limits the yield that may
be accreted and requires that the excess of contractual cash flows over cash
flows expected to be collected not be recognized as an adjustment of yield, loss
accrual, or valuation allowance.
This SOP prohibits "carrying over" or creation of valuation allowances in
the initial accounting for loans acquired in a transfer that are within the
scope of this SOP. The prohibition of the valuation allowance carryover applies
to the purchase of an individual loan, a pool of loans, a group of loans, and
loans acquired in a purchase business combination. This SOP is effective for
loans acquired in fiscal years beginning after December 15, 2004. In
management's opinion, the adoption of this pronouncement will not have a
material impact on the Company's financial position or results of operations.
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter and the current military conflict in Iraq 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.
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 35-37.
41
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm 43
Consolidated Balance Sheet, December 31, 2004 and 2003 44
Consolidated Statement of Income for the Years Ended
December 31, 2004, 2003 and 2002 45
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 2004, 2003 and 2002 46
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 47-48
Notes to Consolidated Financial Statements 49-78
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.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Shareholders and Board of Directors
American River Bankshares
We have audited the accompanying consolidated balance sheet of American
River Bankshares and subsidiaries as of December 31, 2004 and 2003 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,
2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). 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 Bankshares and subsidiaries as of December 31, 2004 and 2003, 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, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ PERRY-SMITH LLP
Sacramento, California
February 11, 2005
43
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2004 and 2003
(Dollars in thousands)
2004 2003
---------- ----------
ASSETS
Cash and due from banks $ 28,115 $ 29,797
Federal funds sold 7,000
---------- ----------
Total cash and cash equivalents 35,115 29,797
Interest bearing deposits in banks 5,939 4,650
Investment securities (Notes 5 and 10):
Available for sale, at fair value 116,041 62,686
Held to maturity, at amortized cost (fair value of $41,328
and $27,216 at December 31, 2004 and 2003, respectively) 41,203 27,160
Loans and leases, less allowance for loan and lease losses of
$5,496 in 2004 and $3,949 in 2003 (Notes 6, 10, 12 and 17) 352,467 262,464
Premises and equipment, net (Note 7) 1,876 1,505
Federal Home Loan Bank and Federal Reserve Bank stock 2,158 1,546
Accounts receivable servicing receivables, net (Note 8) 2,409 1,778
Goodwill (Notes 3 and 4) 16,146 63
Intangible assets (Notes 3 and 4) 2,183
Accrued interest receivable and other assets (Notes 11 and 16) 11,129 5,744
---------- ----------
$ 586,666 $ 397,393
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 143,710 $ 102,308
Interest bearing (Note 9) 331,677 220,199
---------- ----------
Total deposits 475,387 322,507
Short-term borrowings (Note 10) 24,457 34,654
Long-term borrowings (Note 10) 9,832 1,888
Accrued interest payable and other liabilities (Note 16) 18,000 2,887
---------- ----------
Total liabilities 527,676 361,936
---------- ----------
Commitments and contingencies (Note 12)
Shareholders' equity (Notes 13 and 14):
Common stock - no par value; 20,000,000 shares authorized; issued and
outstanding - 5,314,732 shares in 2004 and
4,055,260 shares in 2003 42,557 16,693
Retained earnings 15,878 17,900
Accumulated other comprehensive income, net of taxes
(Notes 5 and 18) 555 864
---------- ----------
Total shareholders' equity 58,990 35,457
---------- ----------
$ 586,666 $ 397,393
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
44
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except per share data)
2004 2003 2002
---------- ---------- ----------
Interest income:
Interest and fees on loans and leases $ 18,115 $ 16,744 $ 15,400
Interest on Federal funds sold 67 48 80
Interest on deposits in banks 134 168 267
Interest and dividends on investment securities:
Taxable 3,751 2,312 2,359
Exempt from Federal income taxes 537 475 460
Dividends 32 21 19
---------- ---------- ----------
Total interest income 22,636 19,768 18,585
---------- ---------- ----------
Interest expense:
Interest on deposits (Note 9) 2,511 2,390 3,168
Interest on borrowings (Note 10) 707 512 344
---------- ---------- ----------
Total interest expense 3,218 2,902 3,512
---------- ---------- ----------
Net interest income 19,418 16,866 15,073
Provision for loan and lease losses (Note 6) 895 946 644
---------- ---------- ----------
Net interest income after provision for loan
and lease losses 18,523 15,920 14,429
---------- ---------- ----------
Noninterest income:
Service charges 551 534 563
Gain on sale of available-for-sale investment securities
(Note 5) 33
Other income (Note 15) 1,844 1,686 1,760
---------- ---------- ----------
Total noninterest income 2,395 2,253 2,323
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits (Notes 6 and 16) 6,048 6,233 5,595
Occupancy (Notes 7 and 12) 953 817 840
Furniture and equipment (Notes 7 and 12) 752 653 620
Loss on sale of available-for-sale investment securities
(Note 5) 38
Other expense (Note 15) 3,922 2,669 2,334
---------- ---------- ----------
Total noninterest expense 11,713 10,372 9,389
---------- ---------- ----------
Income before provision for income taxes 9,205 7,801 7,363
Provision for income taxes (Note 11) 3,378 3,060 2,904
---------- ---------- ----------
Net income $ 5,827 $ 4,741 $ 4,459
========== ========== ==========
Basic earnings per share (Note 13) $ 1.30 $ 1.13 $ 1.07
========== ========== ==========
Diluted earnings per share (Note 13) $ 1.24 $ 1.05 $ 1.00
========== ========== ==========
Cash dividends per share of issued and outstanding common
stock, adjusted for stock dividends $ .44 $ .28 $ .22
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
45
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
Accum-
ulated
Other
Compre-
hensive Total Total
Common Stock Income- Share- Compre-
------------------------- Retained (Net of holders' hensive
Shares Amount Earnings Taxes) Equity Income
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2002 3,779,576 $ 14,167 $ 13,290 $ 485 $ 27,942
Comprehensive income (Note 18):
Net income 4,459 4,459 $ 4,459
Other comprehensive income, net of tax:
Net change in unrealized gains on available-
for-sale investment securities 819 819 819
-----------
Total comprehensive income $ 5,278
===========
Cash dividend ($.22 per share) (914) (914)
5% stock dividend 186,906 2,469 (2,469)
Fractional shares redeemed (8) (8)
Stock options exercised 38,911 236 236
Retirement of common stock (Note 13) (66,510) (808) (808)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 3,938,883 16,064 14,358 1,304 31,726
Comprehensive income (Note 18):
Net income 4,741 4,741 $ 4,741
Other comprehensive loss, net of tax:
Net change in unrealized gains on available-
for-sale investment securities (440) (440) (440)
-----------
Total comprehensive income $ 4,301
===========
Cash dividend ($.28 per share) (1,192) (1,192)
Fractional shares redeemed (225) (7) (7)
Stock options exercised 135,704 653 653
Retirement of common stock (Note 13) (19,102) (24) (24)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 4,055,260 16,693 17,900 864 35,457
Comprehensive income (Note 18):
Net income 5,827 5,827 5,827
Other comprehensive loss, net of tax:
Net change in unrealized gains on available-
for-sale investment securities (309) (309) (309)
-----------
Total comprehensive income $ 5,518
===========
Stock issued in acquisition (Note 3) 775,548 18,284 18,284
Cash dividend ($.44 per share) (2,044) (2,044)
5% stock dividend 252,392 5,805 (5,805)
Stock options exercised 263,446 1,959 1,959
Retirement of common stock (Note 13) (31,914) (184) (184)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 5,314,732 $ 42,557 $ 15,878 $ 555 $ 58,990
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
46
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 5,827 $ 4,741 $ 4,459
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 895 946 644
(Decrease) increase in deferred loan and lease origination
fees, net (79) 95 158
Depreciation and amortization 575 484 464
Amortization of investment security premiums
and discounts, net 1,249 936 394
Provision for (reduction in) accounts receivable servicing
receivable allowance for losses 1 (27)
Loss (gain) on sale of available-for-sale investment
securities 38 (33)
Gain on sale of other real estate (13)
Gain on life insurance death benefit (553)
Increase in cash surrender value of life insurance policies (69) (27)
Provision for deferred income taxes (82) (474) (304)
(Increase) decrease in accrued interest receivable and
other assets (1,136) (389) 679
Increase in accrued interest payable and other liabilities 1,920 331 611
---------- ---------- ----------
Net cash provided by operating activities 8,585 6,611 7,065
---------- ---------- ----------
Cash flows from investing activities:
Cash acquired in acquisition 26,294
Proceeds from the sale of available-for-sale investment
securities 5,019 6,274 252
Proceeds from called available-for-sale investment
securities 250
Proceeds from matured available-for-sale investment
securities 5,435 6,840 10,880
Proceeds from matured held-to-maturity investment
securities 200 1,125
Purchases of available-for-sale investment securities (50,875) (24,015) (39,112)
Purchases of held-to-maturity investment securities (23,737) (25,432) (4,249)
Proceeds from principal repayments for available-for-sale
mortgage-backed securities 8,507 8,911 2,399
Proceeds from principal repayments for held-to-maturity
mortgage-backed securities 8,758 8,890 5,050
Net (increase) decrease in interest-bearing deposits in banks (1,189) 1,288 (198)
Net (increase) decrease in loans and leases (12,064) (34,491) (34,826)
Net (increase) decrease in accounts receivable servicing
receivables (631) (383) 1,500
Death benefit from life insurance policy 1,236
Purchases of equipment (704) (320) (222)
Net (increase) decrease in FHLB and FRB stock (612) 16 (1,222)
Proceeds from the sale of other real estate 61
Purchase of life insurance policies (1,614)
---------- ---------- ----------
Net cash used in investing activities (34,363) (52,911) (59,437)
---------- ---------- ----------
(Continued)
47
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
---------- ---------- ----------
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings
deposits $ 37,341 $ 47,477 $ 24,691
Net decrease in time deposits (3,697) (766) (3,783)
Repayment of long-term debt (53) (50) (47)
(Decrease) increase in other borrowings (2,200) 4,050 30,550
Exercise of stock options 1,959 653 236
Cash paid to repurchase common stock (184) (24) (808)
Payment of cash dividends (2,070) (1,135) (716)
Cash paid for fractional shares in connection with stock
dividends and stock splits (7) (8)
---------- ---------- ----------
Net cash provided by financing activities 31,096 50,198 50,115
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents 5,318 3,898 (2,257)
Cash and cash equivalents at beginning of year 29,797 25,899 28,156
---------- ---------- ----------
Cash and cash equivalents at end of year $ 35,115 $ 29,797 $ 25,899
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 3,149 $ 2,980 $ 3,473
Income taxes $ 1,765 $ 3,242 $ 2,753
Non-cash investing activities:
Net change in unrealized gain on available-for-sale
investment securities $ (550) $ (719) $ 1,353
Other real estate acquired $ $ $ 48
Non-cash financing activities:
Dividends declared and unpaid $ 582 $ 608 $ 551
Supplemental schedule related to acquisition (Notes 3 and 4):
Deposits $ 119,236
Other liabilities 489
Payable to Bank of Amador shareholders 12,730
Interest bearing deposits in banks (100)
Available-for-sale investment securities (22,542)
Loans, net (78,737)
Premise and equipment (226)
Intangible assets (18,296)
Other assets (4,544)
Stock issued 18,284
----------
Cash acquired $ 26,294
==========
The accompanying notes are an integral part of these consolidated financial statements.
48
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS OF THE COMPANY
American River Bankshares (the "Company") was incorporated under the laws
of the State of California in 1995 under the name of American River
Holdings and changed its name in 2004 to American River Bankshares. 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. As a community oriented bank holding company, the
principal communities served are located in Sacramento, Placer, Yolo, El
Dorado, Amador, Sonoma, Napa, Marin and Mendocino counties.
The Company owns 100% of the issued and outstanding common shares of its
banking subsidiary, American River Bank (ARB). 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 five banking offices
in Sacramento and Placer counties, three banking offices in Sonoma County
under the name North Coast Bank (NCB), a division of ARB, and three banking
offices in Amador County under the name Bank of Amador, a division of ARB.
On December 3, 2004, the Company acquired Bank of Amador located in
Jackson, California (more fully described in Note 3). Bank of Amador was
merged with and into American River Bank and now operates as Bank of
Amador, a division of American River Bank. The merger transaction was
accounted under the purchase method of accounting and accordingly the
results of their operations have been included in the consolidated
financial statements since the date of acquisition.
In January 2004, NCB was merged with and into ARB. NCB will now operate as
a division of ARB with three full service banking offices within its
primary service area of Sonoma County, in the cities of Healdsburg, Santa
Rosa and Windsor.
The Company also owns one inactive subsidiary, American River Financial.
The deposits of ARB are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to applicable legal limits. ARB does not offer
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 2003.
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
accounting principles generally accepted in the United States of America
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.
49
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and 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.
Investment securities are evaluated for impairment on at least a quarterly
basis and more frequently when economic or market conditions warrant such
an evaluation to determine whether a decline in their value is other than
temporary. Management utilizes criteria such as the magnitude and duration
of the decline and the intent and ability of the Company to retain its
investment in the securities for a period of time sufficient to allow for
an anticipated recovery in fair value, in addition to the reasons
underlying the decline, to determine whether the loss in value is other
than temporary. The term "other than temporary" is not intended to indicate
that the decline is permanent, but indicates that the prospects for a
near-term recovery of value is not necessarily favorable, or that there is
a lack of evidence to support a realizable value equal to or greater than
the carrying value of the investment. Once a decline in value is determined
to be other than temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized.
Federal Reserve Bank and Federal Home Loan Bank Stock
-----------------------------------------------------
Investments in Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB)
stock are carried at cost and are redeemable at par with certain
restrictions. Members of the FRB are required to purchase restricted stock
in the FRB. Investments in FHLB are required to participate in FHLB
programs. The FRB stock was surrendered in 2004 when the Company
discontinued its membership in the FRB.
Loans and Leases
----------------
Loans and leases are reported at the principal amounts outstanding,
adjusted for unearned income, deferred loan origination fees and costs,
purchase premiums and discounts, write-downs and the allowance for loan and
lease losses. Loan and lease origination fees, net of certain deferred
origination costs, and purchase premiums and discounts are recognized as an
adjustment to the yield of the related loans and leases.
50
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans and Leases (Continued)
----------------
The accrual of interest on loans and leases is discontinued when, in the
opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all
unpaid accrued interest is reversed against current income unless the loan
or lease is in the process of collection. Interest received on nonaccrual
loans and leases is either applied against principal or reported as
interest income, according to management's judgment as to the
collectibility of principal. Generally, loans and leases are restored to
accrual status when the obligation is brought current and has performed in
accordance with the contractual terms for a reasonable period of time and
the ultimate collectibility of the total contractual principal and interest
is no longer in doubt.
Direct financing leases are carried net of unearned income. Income from
leases is recognized by a method that approximates a level yield on the
outstanding net investment in the lease.
Loan Sales and Servicing
------------------------
Included in the portfolio are Small Business Administration (SBA) loans 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. There were no
sales of loans subject to these recourse provisions at December 31, 2004,
2003 and 2002. 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, 2004 and 2003.
SBA and Farmer Mac loans with unpaid balances of $2,640,000 and $2,619,000
were being serviced for others as of December 31, 2004 and 2003,
respectively. The Company also serviced loans that are participated with
other financial institutions totaling $12,329,000 and $7,355,000 as of
December 31, 2004 and 2003, respectively.
Servicing rights acquired through 1) a purchase or 2) the origination of
loans which are sold or securitized with servicing rights retained are
recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing, and
are subsequently amortized in proportion to and over the period of the
related net servicing income or expense. Servicing assets are periodically
evaluated for impairment. Servicing assets were not considered material for
disclosure purposes.
Allowance for Loan and Lease Losses
-----------------------------------
The allowance for loan and lease losses is maintained to provide for
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.
51
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan and Lease Losses (Continued)
-----------------------------------
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.
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
and lease growth. The allowance for loan and lease losses at December 31,
2004 and 2003, 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 less estimated selling
costs 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, 2004 and 2003.
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 the 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 balance sheet method, under
which deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment. On the consolidated balance sheet, net deferred
tax assets are included in accrued interest receivable and other assets.
52
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
--------------------
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of other comprehensive income (loss)
that historically has not been recognized in the calculation of net income.
Unrealized gains and losses on the Company's available-for-sale investment
securities are included in other comprehensive income (loss), adjusted for
realized gains or losses included in net income. Total comprehensive income
and the components of accumulated other comprehensive income (loss) are
presented in the consolidated statement of changes in shareholders' equity.
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. EPS is retroactively adjusted for stock splits
and stock dividends for all periods presented.
Stock-Based Compensation
------------------------
At December 31, 2004, the Company has two stock-based compensation plans,
which are described more fully in Note 14. 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.
Generally, stock-based compensation cost is not 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 income 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 compensation.
Year Ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
(Dollars in thousands, except
per share data)
Net income, as reported $ 5,827 $ 4,741 $ 4,459
Add: Stock-based compensation expense included in
reported net income, net of tax effect 20
Deduct: Total stock-based compensation expense
determined under the fair value based method for
all awards, net of related tax effects (68) (150) (174)
---------- ---------- ----------
Pro forma net income $ 5,759 $ 4,611 $ 4,285
========== ========== ==========
Basic earnings per share - as reported $ 1.30 $ 1.13 $ 1.07
Basic earnings per share - pro forma $ 1.28 $ 1.10 $ 1.03
Diluted earnings per share - as reported $ 1.24 $ 1.05 $ 1.00
Diluted earnings per share - pro forma $ 1.23 $ 1.02 $ .97
Weighted average fair value of options granted
during the year $ 4.92 $ 3.33
53
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (Continued)
------------------------
The fair value of each option is estimated on the date of grant using an
option-pricing model. No options were granted for the year ended December
31, 2002.
2004 2003
-------------- --------------
Dividend yield 2.15% 1.74% to 1.88%
Expected volatility 22.0% 19.4% to 19.6%
Risk-free interest rate 4.01% 2.91% to 3.52%
Expected option life 7 years 7 years
Impact of New Financial Accounting Standards
--------------------------------------------
Other-Than-Temporary Impairment of Securities
In June 2004, the Financial Accounting Standards Board (FASB) ratified
Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of
Other-than-Temporary Impairment and Its Application to Certain Investments
(EITF 03-1). EITF 03-1 includes additional guidance for evaluating and
recording impairment losses on debt and equity investments, as well as
disclosure requirements for investments that are deemed to be temporarily
impaired. The proposed guidance indicates that an investor must have the
intent and ability to hold an investment until a forecasted recovery of the
fair value up to or beyond the cost of the investment in order to determine
that any impairment is temporary. In September 2004, the FASB delayed the
effective date of the recognition and measurement guidance of EITF 03-1,
pending further deliberations. The disclosures for investments that are
deemed temporarily impaired are included in Note 5 to the consolidated
financial statements. Once the FASB has reached a final decision on the
measurement and recognition provisions, the Company will evaluate the
impact of the adoption of EITF 03-1.
Share-Based Payments
In December 2004, the FASB issued Statement Number 123 (revised 2004) (FAS
123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments such as stock options granted to employees. The
Company is required to apply FAS 123 (R) on a modified prospective method.
Under this method, the Company is required to record compensation expense
(as previous awards continue to vest) for the unvested portion of
previously granted awards that remain outstanding at the date of adoption.
In addition, the Company may elect to adopt FAS 123 (R) by restating
previously issued financial statements, basing the expense on that
previously reported in their pro forma disclosures required by FAS 123. FAS
123 (R) is effective for the first reporting period beginning after June
15, 2005. Management has not completed its evaluation of the effect that
FAS 123 (R) will have, but believes that the effect will be consistent with
its previous pro forma disclosures.
Accounting for Loans or Debt Securities Acquired in a Transfer
In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in
a Transfer (SOP). This SOP addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an
investor's initial investment in loans or debt securities (loans) acquired
in a transfer if those differences are attributable, at least in part, to
credit quality. It also includes such loans acquired in purchase business
combinations. This SOP does not apply to loans originated by the entity.
This SOP limits the yield that may be accreted and requires that the excess
of contractual cash flows over cash flows expected to be collected not be
recognized as an adjustment of yield, loss accrual, or valuation allowance.
54
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards (Continued)
--------------------------------------------
Accounting for Loans or Debt Securities Acquired in a Transfer (Continued)
This SOP prohibits "carrying over" or creation of valuation allowances in
the initial accounting for loans acquired in a transfer that are within the
scope of this SOP. The prohibition of the valuation allowance carryover
applies to the purchase of an individual loan, a pool of loans, a group of
loans, and loans acquired in a purchase business combination.
This SOP is effective for loans acquired in fiscal years beginning after
December 15, 2004. In management's opinion, the adoption of this
pronouncement will not have a material impact on the Company's financial
position or results of operations.
3. MERGER TRANSACTION WITH BANK OF AMADOR
On December 3, 2004, the Company completed an acquisition of Bank of Amador
(BNKA) through a merger and tax-free reorganization. The Company acquired
BNKA and merged BNKA with and into ARB. The acquisition was completed
because the Board of Directors and management of both organizations believe
the combination is in the best interests of shareholders of the Company and
BNKA and that the combined companies can offer a broader array of services
and products than each could offer on its own. Total consideration paid
BNKA shareholders was determined through extensive negotiations supported
by internal modeling, which management believes will result in earnings per
share accretion to the Company's shareholders in 2005. These factors
contributed to the purchase price which resulted in the recognition of
goodwill.
The following table summarizes the terms of the acquisition (dollars in
thousands):
Shares of common stock 775,548
Value of common stock issued $ 18,284
Cash to be paid to Bank of Amador shareholders $ 12,730
Total consideration paid $ 31,014
Goodwill recorded $ 16,083
Core deposit intangible recorded $ 2,213
The following supplemental pro forma information discloses selected
financial information for the periods indicated as though the merger had
been completed at the beginning of each year presented (dollars in
thousands, except per share data):
Year Ended December 31,
-----------------------
2004 2003
--------- ---------
Earnings as reported:
Revenue $ 25,031 $ 22,021
Net income $ 5,827 $ 4,741
Basic EPS $ 1.30 $ 1.13
Diluted EPS $ 1.24 $ 1.05
Pro forma merger adjustments:
Revenue $ 6,905 $ 7,043
Net income $ 1,584 $ 1,817
Pro forma earnings after merger adjustments:
Revenue $ 31,936 $ 29,064
Net income $ 7,411 $ 6,558
Basic EPS $ 1.42 $ 1.32
Diluted EPS $ 1.37 $ 1.24
55
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. MERGER TRANSACTION WITH BANK OF AMADOR (Continued)
Pro forma net income for the year ended December 31, 2004 excludes
nonrecurring charges of approximately $2,086,000 on an after-tax basis,
representing merger-related expenses and the cost of retiring outstanding
stock options.
The estimated fair value of assets acquired and liabilities assumed are as
follows (dollars in thousands):
Cash and cash equivalents $ 26,294
Interest-bearing deposits in banks 100
Available-for-sale investment securities 22,542
Gross loans 79,598
Allowance for loan and lease losses (861)
Premises and equipment 226
Core deposit intangible 2,213
Goodwill 16,083
Other assets 4,544
-----------
Total assets acquired 150,739
-----------
Deposits 119,236
Other liabilities 489
-----------
Total liabilities assumed 119,725
-----------
Purchase price $ 31,014
===========
4. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2004 and 2003, goodwill totaled $16,146,000 and $63,000,
respectively. Goodwill is evaluated annually for impairment under the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, and the
Company determined that no impairment recognition was required for the
years ended December 31, 2004 and 2003. Goodwill is not deductible for tax
purposes.
Other intangible assets are comprised of core deposit intangibles totaling
$2,183,000 and $0, net of accumulated amortization of $30,000 at December
31, 2004. There were no other intangible assets at December 31, 2003. The
remaining balance will be amortized over 7.9 years. Amortization expense
for the next five years is estimated as follows (dollars in thousands):
Year Ending
December 31,
------------
2005 $ 352
2006 330
2007 308
2008 286
2009 264
56
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at
December 31, 2004 and 2003 consisted of the following (dollars in
thousands):
Available-for-Sale:
-------------------
2004
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Debt securities:
U.S. Government agencies $ 46,610 $ 181 $ (90) $ 46,701
Mortgage-backed securities 40,309 137 (87) 40,359
Obligations of states and
political subdivisions 26,541 744 (45) 27,240
Corporate debt securities 1,115 1 (2) 1,114
Corporate stock 586 62 (21) 627
----------- ----------- ----------- -----------
$ 115,161 $ 1,125 $ (245) $ 116,041
=========== =========== =========== ===========
2003
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Debt securities:
U.S. Government agencies $ 20,929 $ 535 $ (14) $ 21,450
Mortgage-backed securities 26,746 117 (106) 26,757
Obligations of states and
political subdivisions 11,223 838 12,061
Commercial paper 1,000 1,000
Corporate debt securities 772 15 787
Corporate stock 586 50 (5) 631
----------- ----------- ----------- -----------
$ 61,256 $ 1,555 $ (125) $ 62,686
=========== =========== =========== ===========
Net unrealized gains on available-for-sale investment securities totaling
$880,000 were recorded, net of $325,000 in tax liabilities, as accumulated
other comprehensive income within shareholders' equity at December 31,
2004. Proceeds and gross realized losses from the sale of
available-for-sale investment securities for the year ended December 31,
2004 totaled $5,019,000 and ($38,000), respectively. There were no
transfers of available-for-sale investment securities during the year ended
December 31, 2004.
Net unrealized gains on available-for-sale investment securities totaling
$1,430,000 were recorded, net of $566,000 in tax liabilities, as
accumulated other comprehensive income within shareholders' equity at
December 31, 2003. Proceeds and gross realized gains from the sale of
available-for-sale investment securities for the year ended December 31,
2003 totaled $6,274,000 and $33,000, respectively. There were no transfers
of available-for-sale investment securities during the years ended December
31, 2003 and 2002.
57
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT SECURITIES (Continued)
Held-to-Maturity:
-----------------
2004
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Debt securities:
Mortgage-backed securities $ 41,203 $ 216 (91) $ 41,328
========== ========== ========== ==========
2003
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Debt securities:
Obligations of states and
political subdivisions $ 200 $ 4 $ 204
Mortgage-backed securities 26,960 135 $ (83) 27,012
---------- ---------- ---------- ----------
$ 27,160 $ 139 (83) $ 27,216
========== ========== ========== ==========
There were no sales or transfers of held-to-maturity investment securities
for the years ended December 31, 2004, 2003 and 2002.
The amortized cost and estimated fair value of investment securities at
December 31, 2004 by contractual maturity are shown below (dollars in
thousands).
Available-for-Sale Held-to-Maturity
----------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
Within one year $ 9,213 $ 9,275
After one year through five years 46,159 46,219
After five years through ten years 16,834 17,393
After ten years 2,060 2,168
---------- ----------
74,266 75,055
Investment securities not due at
a single maturity date:
Mortgage-backed securities 40,309 40,359 $ 41,203 $ 41,328
Corporate stock 586 627
---------- ---------- ---------- ----------
$ 115,161 $ 116,041 $ 41,203 $ 41,328
========== ========== ========== ==========
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.
58
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT SECURITIES (Continued)
Investment securities with amortized costs totaling $57,481,000 and
$36,484,000 and estimated fair values totaling $57,599,000 and $36,811,000
were pledged to secure treasury tax and loan accounts, State Treasury funds
on deposit, public agency and bankruptcy trustee deposits and borrowing
arrangements (see Note 10) at December 31, 2004 and 2003, respectively.
Investment securities with unrealized losses at December 31, 2004 are
summarized and classified according to the duration of the loss period as
follows (dollars in thousands):
Less than 12 Months 12 Months or More Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- -----------
Available-for-Sale
------------------
Debt securities:
U.S. Government
agencies $ 23,653 $ (90) $ 23,653 $ (90)
Mortgage-backed
securities 19,094 (86) $ 409 $ (1) 19,503 (87)
Obligations of states
and political sub-
divisions 7,920 (45) 7,920 (45)
Corporate debt
securities 859 (2) 859 (2)
Corporate stock 231 (21) 231 (21)
----------- ----------- ----------- ----------- ----------- -----------
$ 51,757 $ (244) $ 409 $ (1) $ 52,166 $ (245)
=========== =========== =========== =========== =========== ===========
Held-to-Maturity
----------------
Debt securities:
Mortgage-backed
securities $ 12,465 $ (86) $ 164 $ (5) $ 12,629 $ (91)
=========== =========== =========== =========== =========== ===========
At December 31, 2004, the Company held 252 investment securities of which
82 were in a loss position for less than twelve months and 4 were in a loss
position and had been in a loss position for twelve months or more.
Management periodically evaluates each investment security in a loss
position for other-than-temporary impairment, relying primarily on industry
analyst reports and observation of market conditions and interest rate
fluctuations. Management believes it will be able to collect all amounts
due according to the contractual terms of the underlying investment
securities and that the noted decline in fair value is considered temporary
and due only to interest rate fluctuations.
59
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. LOANS AND LEASES
Outstanding loans and leases are summarized as follows (dollars in
thousands):
December 31,
-------------------------
2004 2003
----------- -----------
Real estate - commercial $ 166,263 $ 142,249
Real estate - construction 90,162 37,434
Real estate - multi-family 2,660 5,301
Real estate - residential 5,236 1,508
Commercial 66,864 57,346
Lease financing receivable 9,994 9,276
Agriculture 8,252 8,027
Consumer 9,417 5,950
----------- -----------
358,848 267,091
Deferred loan and lease origination fees, net (885) (678)
Allowance for loan and lease losses (5,496) (3,949)
----------- -----------
$ 352,467 $ 262,464
=========== ===========
Certain loans have been pledged to secure borrowing arrangements (see Note
10).
The components of the Company's leases receivable as of December 31 are
summarized below (dollars in thousands):
2004 2003
----------- -----------
Future minimum lease payments $ 10,709 $ 9,828
Residual interests 276 218
Unearned income (991) (770)
----------- -----------
$ 9,994 $ 9,276
=========== ===========
Future minimum lease payments are as follows (dollars in thousands):
Year Ending
December 31,
----------------
2005 $ 4,867
2006 2,838
2007 1,814
2008 962
2009 202
Thereafter 26
----------
$ 10,709
==========
60
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows (dollars
in thousands):
Year Ended December 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
Balance, beginning of year $ 3,949 $ 3,197 $ 2,614
Allowance acquired (Note 3) 861
Provision charged to operations 895 946 644
Losses charged to allowance (269) (354) (151)
Recoveries 60 160 90
--------- --------- ---------
Balance, end of year $ 5,496 $ 3,949 $ 3,197
========= ========= =========
At December 31, 2004 and 2003, nonaccrual loans and leases totaled $236,000
and $179,000, respectively. Interest foregone on nonaccrual loans for the
years ended December 31, 2004, 2003 and 2002 was not material.
The recorded investment in loans and leases that were considered to be
impaired totaled $247,000 and $181,000 at December 31, 2004 and 2003,
respectively. The related allowance for loan and lease losses for these
loans and leases as determined under loan impairment standards at December
31, 2004 and 2003 was $62,000 and $59,000, respectively. The average
recorded investment in impaired loans and leases for the years ended
December 31, 2004, 2003 and 2002 was $124,000, $148,000 and $472,000,
respectively. Interest income recognized on impaired loans and leases using
a cash-basis method for the years ended December 31, 2004, 2003 and 2002
was not material.
Salaries and employee benefits totaling $706,000, $570,000 and $543,000
have been deferred as loan and lease origination costs for the years ended
December 31, 2004, 2003 and 2002, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (dollars in thousands):
December 31,
----------------------
2004 2003
--------- ---------
Land $ 206 $ 149
Building and improvements 597 219
Furniture, fixtures and equipment 5,378 4,346
Leasehold improvements 1,123 802
--------- ---------
7,304 5,516
Less accumulated depreciation
and amortization (5,428) (4,011)
--------- ---------
$ 1,876 $ 1,505
========= =========
Depreciation and amortization included in occupancy and furniture and
equipment expense totaled $562,000, $480,000 and $464,000 for the years
ended December 31, 2004, 2003 and 2002, respectively.
61
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. ACCOUNTS RECEIVABLE SERVICING RECEIVABLES
The Company purchases existing accounts receivable on a discounted basis
from selected merchants and assumes the related billing and collection
responsibilities on a recourse basis. Accounts receivable servicing fees
included in other income totaled $316,000, $247,000 and $294,000 for the
years ended December 31, 2004, 2003 and 2002, respectively. The valuation
allowance for these receivables is not significant.
9. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following (dollars in
thousands):
December 31,
----------------------
2004 2003
--------- ---------
Savings $ 38,957 $ 17,594
Money market 139,373 102,578
NOW accounts 47,052 28,406
Time, $100,000 or more 57,037 49,083
Other time 49,258 22,538
--------- ---------
$ 331,677 $ 220,199
========= =========
Aggregate annual maturities of time deposits are as follows (dollars in
thousands):
Year Ending
December 31,
----------------
2005 $ 75,698
2006 17,752
2007 7,375
2008 3,179
2009 2,156
Thereafter 135
----------
$ 106,295
==========
Interest expense recognized on interest-bearing deposits consisted of the
following (dollars in thousands):
Year Ended December 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Savings $ 56 $ 35 $ 51
Money market 1,057 884 901
NOW accounts 43 28 38
Time, $100,000 or more 836 743 1,022
Other time 519 700 1,156
--------- --------- ---------
$ 2,511 $ 2,390 $ 3,168
========= ========= =========
62
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. BORROWING ARRANGEMENTS
The Company has a total of $48,000,000 in unsecured short-term borrowing
arrangements to purchase Federal funds with four of its correspondent
banks. An advance totaling $9,600,000 was outstanding from one of its
correspondent banks at December 31, 2003, bearing an interest rate of 1.44%
and maturing on January 1, 2004. There were no advances under the borrowing
arrangements as of December 31, 2004.
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 6) and
investment securities (see Note 5). Borrowings may include overnight
advances as well as loans with a term of up to thirty years. Advances
totaling $34,289,000 were outstanding from the Federal Home Loan Bank at
December 31, 2004, bearing interest rates ranging from 1.29% to 6.13% and
maturing between January 24, 2005 and December 21, 2007. Advances totaling
$26,942,000 were outstanding from the Federal Home Loan Bank at December
31, 2003, bearing interest rates ranging from 1.03% to 6.13% and maturing
between January 2, 2004 and December 21, 2007. Amounts available under the
borrowing arrangement with the Federal Home Loan Bank at December 31, 2004
and 2003 totaled $16,071,000 and $13,077,000, respectively.
The following table summarizes these borrowings at December 31 (in
thousands):
2004 2003
---------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- --------- --------- ---------
FHLB advances $ 34,289 2.22% $ 26,942 1.58%
Advances from correspondent banks 9,600 1.44%
--------- ---------
34,289 2.22% 36,542 1.55%
Short-term portion of borrowings 24,457 1.85% 34,654 1.29%
--------- ---------
Long-term borrowings $ 9,832 3.15% $ 1,888 6.13%
========= =========
Future minimum principal payments on outstanding borrowings are as follows
(dollars in thousands):
Year Ending
December 31,
----------------
2005 $ 24,457
2006 5,561
2007 4,271
---------
$ 34,289
=========
The Company has also been issued $500,000 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 2004 and management does not
expect to draw upon these lines in the future.
63
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. INCOME TAXES
The provision for income taxes for the years ended December 31, 2004, 2003
and 2002 consisted of the following (dollars in thousands):
Federal State Total
---------- ---------- ----------
2004
----
Current $ 2,504 $ 956 $ 3,460
Deferred (25) (57) (82)
---------- ---------- ----------
Provision for income taxes $ 2,479 $ 899 $ 3,378
========== ========== ==========
2003
----
Current $ 2,566 $ 968 $ 3,534
Deferred (332) (142) (474)
---------- ---------- ----------
Provision for income taxes $ 2,234 $ 826 $ 3,060
========== ========== ==========
2002
----
Current $ 2,388 $ 820 $ 3,208
Deferred (229) (75) (304)
---------- ---------- ----------
Provision for income taxes $ 2,159 $ 745 $ 2,904
========== ========== ==========
Deferred tax assets (liabilities) consisted of the following (dollars in
thousands):
December 31,
------------------------
2004 2003
---------- ----------
Deferred tax assets:
Allowance for loan and lease losses $ 2,295 $ 1,561
Future benefit of State tax deduction 214 292
Deferred compensation 484 390
Other 10 12
---------- ----------
Total deferred tax assets 3,003 2,255
---------- ----------
Deferred tax liabilities:
Discount on purchased loans (10)
Future liability of State deferred tax assets (211) (158)
Unrealized gain on available-for-sale
investment securities (470) (566)
Federal Home Loan Bank stock dividends (88) (63)
Other (167) (28)
---------- ----------
Total deferred tax liabilities (936) (825)
---------- ----------
Net deferred tax assets $ 2,067 $ 1,430
========== ==========
64
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. INCOME TAXES (Continued)
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,
----------------------------------------
2004 2003 2002
---------- ---------- ----------
Federal income tax statutory rate 34.0% 34.0% 34.0%
State franchise tax, net of Federal tax effect 6.4% 6.9% 6.8%
Tax benefit of interest on obligations of
states and political subdivisions (2.0)% (2.1)% (2.1)%
Tax-exempt income from life insurance
policies (2.2)%
Other .5% .4% .7%
---------- ---------- ----------
Effective tax rate 36.7% 39.2% 39.4%
========== ========== ==========
12. 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 2014. Certain of the leases have five year renewal
options. Two of the branch facilities are leased from current or former
members of the Company's Board of Directors (see Note 17).
Future minimum lease payments are as follows (dollars in thousands):
Year Ending
December 31,
-------------------
2005 $ 835
2006 723
2007 529
2008 506
2009 375
Thereafter 668
---------
$ 3,636
=========
Rental expense included in occupancy, furniture and equipment expense
totaled $718,000, $600,000 and $616,000 for the years ended December 31,
2004, 2003 and 2002, 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
standby 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.
65
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
-------------------------------------------------
The Company's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and standby letters of credit
is represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and standby letters of
credit as it does for loans included on the consolidated balance sheet.
The following financial instruments represent off-balance-sheet credit risk
(dollars in thousands):
December 31,
-----------------------
2004 2003
---------- ----------
Commitments to extend credit:
Revolving lines of credit secured by
1-4 family residences $ 2,328 $ 3,017
Commercial real estate, construction and land
development commitments:
Secured by real estate 66,066 20,269
Not secured by real estate 1,800
Credit card arrangements 483
Other unused commitments, principally commercial loans 57,019 46,289
---------- ----------
$ 125,413 $ 71,858
========== ==========
Standby letters of credit $ 2,788 $ 741
========== ==========
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.
Standby 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. The fair value of the
liability related to these standby letters of credit, which represents the
fees received for issuing the guarantees, was not significant at December
31, 2004 and 2003. The Company recognizes these fees as revenue over the
term of the commitment or when the commitment is used.
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, Amador, El Dorado, Sonoma, Napa, Marin and
Mendocino counties.
66
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
Significant Concentrations of Credit Risk (Continued)
-----------------------------------------
In management's judgment, a concentration exists in real estate-related
loans which represented approximately 74% and 70% of the Company's loan
portfolio at December 31, 2004 and 2003, 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.
Correspondent Banking Agreements
--------------------------------
The Company maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements. Uninsured
deposits totaled $14,193,000 at December 31, 2004.
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 consolidated financial position or results of operations of the
Company.
13. 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 shares
in thousands, except per share data):
Weighted
Average
Number of
Net Shares Per-Share
For the Year Ended Income Outstanding Amount
---------------------------------- ----------- ----------- -----------
December 31, 2004
-----------------
Basic earnings per share $ 5,827 4,492 $ 1.30
===========
Effect of dilutive stock options 205
----------- -----------
Diluted earnings per share $ 5,827 4,697 $ 1.24
=========== =========== ===========
December 31, 2003
-----------------
Basic earnings per share $ 4,741 4,188 $ 1.13
===========
Effect of dilutive stock options 345
----------- -----------
Diluted earnings per share $ 4,741 4,533 $ 1.05
=========== =========== ===========
67
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. SHAREHOLDERS' EQUITY (Continued)
Earnings Per Share (Continued)
------------------
Weighted
Average
Number of
Net Shares Per-Share
For the Year Ended Income Outstanding Amount
---------------------------------- ----------- ----------- -----------
December 31, 2002
-----------------
Basic earnings per share $ 4,459 4,149 $ 1.07
===========
Effect of dilutive stock options 313
----------- -----------
Diluted earnings per share $ 4,459 4,462 $ 1.00
=========== =========== ===========
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, 2004, grants outstanding combined
with shares available for future grants totaled 732,003 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:
2004 2003 2002
---------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding,
beginning of year 576,816 $ 6.09 655,900 $ 4.74 698,037 $ 4.76
Options granted 66,524 $ 20.40 65,171 $ 14.20
Options exercised (276,618) $ 4.28 (142,489) $ 4.16 (42,137) $ 4.36
Options canceled (24,150) $ 15.75 (1,766) $ 4.98
---------- ---------- ----------
Options outstanding,
end of year 342,572 $ 9.43 576,816 $ 6.09 655,900 $ 4.74
========== ========== ==========
Options exercisable,
end of year 245,217 $ 5.99 507,997 $ 5.00 616,638 $ 4.58
========== ========== ==========
68
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
------------------
A summary of options outstanding at December 31, 2004 follows:
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 2004 Life 2004
------------------------ --------------- ------------- -------------
$ 3.19 13,186 1.8 years 13,186
$ 3.32 87,803 .6 years 87,803
$ 4.35 1,918 1.6 years 1,918
$ 4.98 14,851 5.0 years 14,851
$ 5.27 10,710 3.7 years 10,710
$ 5.84 30,671 2.4 years 30,671
$ 8.43 18,232 4.9 years 18,232
$ 8.62 14,357 4.0 years 14,357
$ 9.29 44,422 3.7 years 44,422
$ 14.19 45,000 8.4 years 8,899
$ 15.38 763 8.5 years 168
$ 20.40 60,659 9.4 years
------------- -------------
342,572 245,217
============= =============
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. Repurchases are generally
made in the open market at market prices.
Stock Dividend
--------------
On December 15, 2004, the Board of Directors declared a 5% stock dividend
payable on January 28, 2005 to shareholders of record on January 14, 2005.
All per share and stock option data included on the consolidated financial
statements have been retroactively restated to reflect the stock dividend.
Stock Split
-----------
On September 17, 2003, the Board of Directors declared a three-for-two
stock split, payable on October 31, 2003 to shareholders of record on
October 17, 2003. All per share, shares outstanding and stock option data
in the consolidated financial statements have been retroactively restated
to reflect the stock split.
14. REGULATORY MATTERS
Dividends
---------
Upon declaration by the Board of Directors of the Company, all shareholders
of record will be entitled to receive dividends. 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, 2004, the subsidiaries had $2,179,000 in retained earnings
available for dividend payments to the Company.
69
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. REGULATORY MATTERS (Continued)
Regulatory Capital
------------------
The Company and its banking subsidiary are subject to certain regulatory
capital requirements administered by the Board of Governors of the Federal
Reserve System and the FDIC. Failure to meet these minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, 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 subsidiary's 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 subsidiary 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
subsidiary met all their capital adequacy requirements as of December 31,
2004 and 2003.
In addition, the most recent notifications from the FDIC categorized ARB as
well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, ARB 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,
---------------------------------------------
2004 2003
--------------------- ---------------------
Amount Ratio Amount Ratio
--------- --------- --------- ---------
(dollars in thousands)
Leverage Ratio
--------------
American River Bankshares and Subsidiaries $ 40,106 8.4% $ 34,529 9.0%
Minimum regulatory requirement $ 19,222 4.0% $ 15,419 4.0%
American River Bank $ 42,191 8.8% $ 28,955 9.5%
Minimum requirement for "Well-Capitalized" institution $ 23,986 5.0% $ 15,251 5.0%
Minimum regulatory requirement $ 19,189 4.0% $ 12,201 4.0%
Tier 1 Risk-Based Capital Ratio
-------------------------------
American River Bankshares and Subsidiaries $ 40,106 9.6% $ 34,529 11.6%
Minimum regulatory requirement $ 16,631 4.0% $ 11,877 4.0%
American River Bank $ 42,191 10.2% $ 28,955 12.2%
Minimum requirement for "Well-Capitalized" institution $ 24,898 6.0% $ 14,267 6.0%
Minimum regulatory requirement $ 16,599 4.0% $ 9,511 4.0%
Total Risk-Based Capital Ratio
------------------------------
American River Bankshares and Subsidiaries $ 45,307 10.9% $ 38,244 12.9%
Minimum regulatory requirement $ 33,263 8.0% $ 23,773 8.0%
American River Bank $ 47,382 11.4% $ 31,928 13.4%
Minimum requirement for "Well-Capitalized" institution $ 41,497 10.0% $ 23,785 10.0%
Minimum regulatory requirement $ 33,198 8.0% $ 19,028 8.0%
70
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income consisted of the following (dollars in thousands):
Year Ended December 31,
-------------------------------
2004 2003 2002
--------- --------- ---------
Gain on life insurance death benefit $ 553
Accounts receivable servicing fees (Note 8) 316 $ 247 $ 294
Merchant fee income 393 357 344
Income from residential lending division 187 366 278
Fees from lease brokerage services 9 381 459
Financial services income 49 69 71
Other 337 266 314
--------- --------- ---------
$ 1,844 $ 1,686 $ 1,760
========= ========= =========
Other noninterest expense consisted of the following (dollars in
thousands):
Year Ended December 31,
-------------------------------
2004 2003 2002
--------- --------- ---------
Professional fees $ 478 $ 335 $ 262
Outsourced item processing 383 361 359
Telephone and postage 280 275 278
Advertising and promotion 288 198 200
Donations 527 26 18
Stationery and supplies 262 175 212
Directors' compensation 518 353 248
Other operating expenses 1,186 946 757
--------- --------- ---------
$ 3,922 $ 2,669 $ 2,334
========= ========= =========
16. EMPLOYEE BENEFIT PLANS
American River Bankshares 401(k) Plan
-------------------------------------
The American River Bankshares 401(k) Plan commenced January 1, 1993 and is
available to all employees. Under the plan, the Company will match 100% of
each participants' contribution up to 3% of annual compensation plus 50% of
the next 2% of annual compensation. Employer Safe Harbor matching
contributions (made after January 1, 2004) are 100% vested upon entering
the plan. Employer contributions made prior to January 1, 2004 vest at a
rate of 20% per year over a five year period. Employer contributions
totaled $169,000, $116,000 and $109,000 for the years ended December 31,
2004, 2003 and 2002, 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.
71
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. EMPLOYEE BENEFIT PLANS (Continued)
American River Bankshares Deferred Compensation Plan
----------------------------------------------------
The Company has established a Deferred Compensation Plan for certain
members of the management team and a Deferred Fee Agreement for
Non-Employee Directors for the purpose of providing the opportunity for
participants to defer compensation. Participants of the management team,
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 $851,000, $615,000 and
$437,000 at December 31, 2004, 2003 and 2002, respectively.
Salary Continuation Plan
------------------------
In 2003, the Company entered into agreements to provide certain current
executives, or their designated beneficiaries, with annual benefits for up
to 15 years after retirement or death. These benefits are substantially
equivalent to those available under life insurance policies purchased by
the Company on the lives of the executives. The Company accrues for these
future benefits from the effective date of the agreements until the
executives' expected final payment dates in a systematic and rational
manner. At the balance sheet date, the amount of accrued benefits
approximates the then present value of the benefits expected to be provided
at retirement. The expense recognized under this plan totaled $29,000 and
$42,000 for the years ended December 31, 2004 and 2003, respectively.
Under these plans, the Company invested in single premium life insurance
policies with cash surrender values totaling $4,895,000 and $1,641,000 at
December 31, 2004 and 2003, respectively. On the consolidated balance
sheet, the cash surrender value of life insurance policies is included in
accrued interest receivable and other assets. Income on these policies, net
of expense, totaled approximately $69,000 and $27,000 for the years ended
December 31, 2004 and 2003, respectively.
17. 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 2004 (dollars in thousands):
Balance, January 1, 2004 $ 8,538
Disbursements 699
Amounts repaid 2,189
----------
Balance, December 31, 2004 $ 7,048
==========
Undisbursed commitments to related parties,
December 31, 2004 $ 61
==========
The Company also leases two branch facilities from current and former
members of the Company's Board of Directors. Rental payments to the
Directors totaled $112,000, $109,000 and $106,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
72
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. OTHER COMPREHENSIVE (LOSS) INCOME
At December 31, 2004, 2003 and 2002, the Company had other comprehensive
loss or income as follows (dollars in thousands):
Tax
Before Benefit After
Tax (Expense) Tax
---------- ---------- ----------
For the Year Ended December 31, 2004
------------------------------------
Other comprehensive loss:
Unrealized holding losses $ (588) $ 256 $ (332)
Less reclassification adjustment for realized
losses included in net income (38) 15 (23)
---------- ---------- ----------
$ (550) $ 241 $ (309)
========== ========== ==========
For the Year Ended December 31, 2003
------------------------------------
Other comprehensive loss:
Unrealized holding losses $ (686) $ 266 $ (420)
Less reclassification adjustment for realized
gains included in net income 33 (13) 20
---------- ---------- ----------
$ (719) $ 279 $ (440)
========== ========== ==========
For the Year Ended December 31, 2002
------------------------------------
Other comprehensive income:
Unrealized holding gains $ 1,353 $ (534) $ 819
========== ========== ==========
19. 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, 2004 and 2003:
Cash and cash equivalents: For cash and cash equivalents, 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.
73
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. 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.
FHLB and FRB stock: The carrying amount of FHLB and FRB stock approximates
their fair value. These investments are carried at cost and are redeemable
at par with certain restrictions.
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.
Cash surrender value of life insurance policies: The fair value of life
insurance policies are based on cash surrender values at each reporting
date as provided by insurers.
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.
Short-term and long-term borrowings: The fair value of short-term
borrowings is estimated to be the carrying amount. The fair value of
long-term borrowings is estimated using a discounted cash flow analysis
using interest rates currently available for similar debt instruments.
Commitments to extend credit: The fair value of commitments are based on
fees currently charged to enter into similar agreements, net of origination
fees. These fees were not material at December 31, 2004 and 2003.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows (dollars in thousands):
December 31, 2004 December 31, 2003
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 28,115 $ 28,115 $ 29,797 $ 29,797
Federal Funds sold 7,000 7,000
Interest-bearing deposits in banks 5,939 5,901 4,650 4,656
Investment securities 157,244 157,369 89,846 89,902
Loans and leases 352,467 352,768 262,464 262,360
FHLB and FRB stock 2,158 2,158 1,546 1,546
Accounts receivable servicing
receivables 2,409 2,409 1,778 1,778
Accrued interest receivable 2,504 2,504 1,557 1,557
Cash surrender value of life
insurance policies 4,895 4,895 1,641 1,641
74
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
December 31, 2004 December 31, 2003
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial liabilities:
Deposits $ 475,387 $ 476,139 $ 322,507 $ 322,792
Short-term borrowings 24,457 24,457 34,654 34,654
Long-term debt 9,832 10,223 1,888 2,120
Accrued interest payable 553 553 225 225
75
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
20. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
December 31, 2004 and 2003
(Dollars in thousands)
2004 2003
---------- ----------
ASSETS
Cash and due from banks $ 2,654 $ 402
Investment in subsidiaries 61,075 35,731
Dividends receivable from subsidiaries 9,985 350
Other assets 822 674
---------- ----------
$ 74,536 $ 37,157
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable to shareholders $ 582 $ 608
Other liabilities 14,964 1,092
---------- ----------
Total liabilities 15,546 1,700
---------- ----------
Shareholders' equity:
Common stock 42,557 16,693
Retained earnings 15,878 17,900
Accumulated other comprehensive income,
net of taxes 555 864
---------- ----------
Total shareholders' equity 58,990 35,457
---------- ----------
$ 74,536 $ 37,157
========== ==========
76
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
20. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF INCOME
For the Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
---------- ---------- ----------
Income:
Dividends declared by subsidiaries -
eliminated in consolidation $ 12,035 $ 950 $ 1,815
Management fee from subsidiaries - eliminated
in consolidation 2,193 1,781 1,242
Other income 20 10
---------- ---------- ----------
Total income 14,248 2,741 3,057
---------- ---------- ----------
Expenses:
Salaries and employee benefits 2,042 2,104 1,437
Professional fees 107 93 72
Directors' compensation 433 274 176
Donations 503
Other expenses 524 454 393
---------- ---------- ----------
Total expenses 3,609 2,925 2,078
---------- ---------- ----------
Income (loss) before equity in undistributed
income of subsidiaries 10,639 (184) 979
Equity in undistributed (loss) income of subsidiaries (5,355) 4,487 3,169
---------- ---------- ----------
Income before income taxes 5,284 4,303 4,148
Income tax benefit 543 438 311
---------- ---------- ----------
Net income $ 5,827 $ 4,741 $ 4,459
========== ========== ==========
77
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
20. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 5,827 $ 4,741 $ 4,459
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed losses (earnings) of subsidiaries 5,355 (4,487) (3,169)
Increase in dividends receivable from subsidiaries (9,635)
Increase in other assets (149) (47) (532)
Increase in other liabilities 1,149 366 410
---------- ---------- ----------
Net cash provided by operating activities 2,547 573 1,168
---------- ---------- ----------
Cash flows from financing activities:
Cash dividends paid (2,070) (1,135) (716)
Exercise of stock options 1,959 653 236
Cash paid to repurchase common stock (184) (24) (808)
Cash paid for fractional shares in connection
with stock dividends and stock splits (7) (8)
---------- ---------- ----------
Net cash used in financing activities (295) (513) (1,296)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,252 60 (128)
Cash and cash equivalents at beginning of year 402 342 470
---------- ---------- ----------
Cash and cash equivalents at end of year $ 2,654 $ 402 $ 342
========== ========== ==========
Non-cash investing activities:
Payable to Bank of Amador shareholders $ 12,730
Common stock issued in acquisition $ 18,284
Non-cash financing activities:
Dividends declared and unpaid $ 582 $ 608 $ 551
78
Selected Quarterly Information (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share and price range of common stock)
- ------------------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
- ------------------------------------------------------------------------------------------------------------------
2004
Interest income $5,113 $5,356 $5,672 $6,495
Net interest income 4,422 4,638 4,869 5,489
Provision for loan and lease losses 198 231 266 200
Noninterest income 429 1,022 441 503
Noninterest expense 2,749 3,463 2,814 2,687
Income before taxes 1,904 1,966 2,230 3,105
Net income 1,160 1,427 1,339 1,901
- ------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .27 $ .32 $ .30 $ .40
Diluted earnings per share .25 .31 .29 .39
Cash dividends per share .11 .11 .11 .11
- ------------------------------------------------------------------------------------------------------------------
Price range, common stock $20.38-22.86 $18.57-22.27 $18.93-21.19 $18.10-20.00
==================================================================================================================
2003
Interest income $4,810 $5,062 $4,953 $4,943
Net interest income 4,057 4,299 4,266 4,244
Provision for loan and lease losses 189 223 252 282
Noninterest income 526 565 645 517
Noninterest expense 2,659 2,456 2,587 2,670
Income before taxes 1,735 2,185 2,072 1,809
Net income 1,049 1,303 1,260 1,129
- ------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .26 $ .31 $ .29 $ .27
Diluted earnings per share .24 .29 .27 .25
Cash dividends per share - .14 - .14
- ------------------------------------------------------------------------------------------------------------------
Price range, common stock $13.45-15.17 $13.88-16.35 $14.62-21.81 $16.43-22.52
==================================================================================================================
The earnings per share and price range have been adjusted for a 5% stock
dividend in 2004 and for a 3 for 2 stock split in 2003.
79
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, 2004. There have been no disagreements with such
independent accountants during the last two fiscal years ended December 31,
2004, on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
Item 9A. Controls and Procedures.
(a) Disclosure Controls and Procedures: An evaluation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) was carried out under the supervision and with the participation
of the Company's Chief Executive Officer, Chief Financial Officer and other
members of the Company's senior management as of the end of the period covered
by this annual report on Form 10-K. The Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures as currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) to allow
timely decisions regarding required disclosure, and (ii) recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms.
(b) Internal Control Over Financial Reporting: An evaluation of any changes
in the Company's internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company's
fiscal quarter ended December 31, 2004, was carried out under the supervision
and with the participation of the Company's Chief Executive Officer, Chief
Financial Officer and other members of the Company's senior management. The
Company's Chief Executive Officer and Chief Financial Officer concluded that no
change identified in connection with such evaluation has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
Item 9B. Other Information.
None.
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
2005 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
2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
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
2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
80
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
2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2005 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(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).
**
(2.2) Agreement and Plan of Reorganization and Merger by and among
the Registrant, American River Bank and Bank of Amador,
dated as of July 8, 2004 (included as Annex A). ***
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2004,
filed with the Commission on August 11, 2004.
(3.2) Bylaws, as amended, incorporated by reference from Exhibit
3.2 to the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 2004, filed with the Commission on
August 11, 2004.
(4.1) Specimen of the Registrant's common stock certificate,
incorporated by reference from Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2004, filed with the Commission on August 11,
2004.
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership, dated
April 1, 2000, related to 1545 River Park Drive, Suite 107,
Sacramento, California. **
(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. **
81
(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) Registrant's 1995 Stock Option Plan. **
*(10.6) Form of Nonqualified Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.7) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.8) Registrant's Stock Option Gross-Up Plan and Agreement, as
amended, dated May 20, 1998. **
*(10.9) Registrant's Deferred Compensation Plan dated May 1, 1998.
**
*(10.10) Registrant's Deferred Fee Plan dated April 1, 1998. **
*(10.11) American River Bank Employee Severance Policy dated March
18, 1998. **
*(10.12) Registrant's Incentive Compensation Plan for the Year Ended
December 31, 2000, incorporated by reference from Exhibit
10.20 to the Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 2000, filed with the
Commission on November 14, 2000.
*(10.13) First Amendment dated December 20, 2000, to the
Registrant's Deferred Compensation Plan dated May 1, 1998,
incorporated by reference from Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the period ended
December 31, 2000, filed with the Commission on April 2,
2001.
*(10.14) Amendment No. 1 to the Registrant's Incentive Compensation
Plan, incorporated by reference from Exhibit 10.23 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2001, filed with the Commission on August 14,
2001.
(10.15) Lease agreement and addendum between North Coast Bank, N.A.
and Rosario LLC, each dated September 1, 1998, related to 50
Santa Rosa Avenue, Santa Rosa, California. **
(10.16) Lease agreement between American River Bank and 520 Capitol
Mall, Inc., dated August 19, 2003, related to 520 Capitol
Mall, Suite 100, Sacramento, California, incorporated by
reference from Exhibit 10.29 to the Registrant's Form 10-Q
for the period ended September 30, 2003, filed with the
Commission on November 7, 2003.
*(10.17) Employment Agreement between Registrant and David T. Taber
dated August 22, 2003, incorporated by reference from
Exhibit 10.30 to the Registrant's Form 10-Q for the period
ended September 30, 2003, filed with the Commission on
November 7, 2003.
(10.18) Lease agreement between R & R Partners, A California General
Partnership and North Coast Bank, N.A., dated July 1, 2003,
related to 8733 Lakewood Drive, Suite A, Windsor,
California, incorporated by reference from Exhibit 10.32 to
the Company's Form 10-Q for the period ended September 30,
2003, filed with the Commission on November 7, 2003.
*(10.19) Salary Continuation Agreement between American River Bank
and Mitchell A. Derenzo dated August 22, 2003, incorporated
by reference from Exhibit 10.33 to the Company's Form 10-Q
for the period ended September 30, 2003, filed with the
Commission on November 7, 2003.
*(10.20) Salary Continuation Agreement between the Registrant and
David T. Taber dated August 22, 2003, incorporated by
reference from Exhibit 10.34 to the Company's Form 10-Q for
the period ended September 30, 2003, filed with the
Commission on November 7, 2003.
82
*(10.21) Salary Continuation Agreement between American River Bank
and Douglas E. Tow dated August 22, 2003, incorporated by
reference from Exhibit 10.35 to the Company's Form 10-Q for
the period ended September 30, 2003, filed with the
Commission on November 7, 2003.
*(10.22) Registrant's 2000 Stock Option Plan with forms of
Nonqualified Stock Option Agreement and Incentive Stock
Option Agreement. **
(10.23) First Amendment dated April 21, 2004, to the lease agreement
between American River Bank and 520 Capitol Mall, Inc. dated
August 19, 2003, related to 520 Capitol Mall, Suite 100
Sacramento, California, incorporated by reference from
Exhibit 10.37 to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2004, filed with the
Commission on August 11, 2004.
*(10.24) Registrant's 401(k) Plan dated September 20, 2004,
incorporated by reference from Exhibit 10.38 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2004, filed with the Commission on
November 12, 2004.
(10.25) Agreement between Bank of Amador and the United States
Postal Service, dated April 24, 2001, related to 424 Sutter
Street, Jackson, California. ***
(10.26) Ground lease agreement between Bank of Amador and the James
B. Newman and Helen M. Newman, dated June 1, 1992, related
to 26675 Tiger Creek Road, Pioneer, California. ***
*(10.27) Salary Continuation Agreement between Bank of Amador and
Larry D. Standing dated April 1, 2004, and related
Endorsement Split Dollar Agreement dated April 1, 2004. ***
*(10.28) Amended and Restated Director Retirement Agreement dated as
of August 1, 2003, between Bank of Amador and Larry D.
Standing. ***
*(10.29) Employment Agreement between Registrant and Larry D.
Standing dated December 3, 2004. ***
(14.1) Registrant's Code of Ethics, incorporated by reference from
Exhibit 14.1 to the Registrant's Annual Report on Form 10-K
for the period ended December 31, 2003, filed with the
Commission on March 19, 2004.
(21.1) The Registrant's only subsidiaries are American River Bank
and American River Financial.
(23.1) Consent of Perry-Smith LLP.
(31.1) Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Registrant by its Chief Executive Officer
and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*Denotes management contracts, compensatory plans or arrangements.
**Incorporated by reference to registrant's Registration Statement on
Form S-4 (No. 333-36326) filed with the Commission on May 5, 2000.
***Incorporated by reference to registrant's Registration Statement on
Form S-4 (No. 333-119085) filed with the Commission on September 17,
2004.
83
An Annual Report for the fiscal year ended December 31, 2004 and Notice of
Annual Meeting and Proxy Statement for the Company's 2005 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.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN RIVER BANKSHARES
March 16, 2005 By: /s/ DAVID T. TABER
- -------------- ----------------------
David T. Taber
Chief Executive Officer
(Principal Executive Officer)
March 16, 2005 By: /s/ MITCHELL A. DERENZO
- -------------- ---------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting Officer)
85
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 3/16/05
- ---------------------------------
Charles D. Fite
/s/ ROGER J. TAYLOR Director, Vice Chairman 3/16/05
- ---------------------------------
Roger J. Taylor
/s/ AMADOR S. BUSTOS Director 3/17/05
- ---------------------------------
Amador S. Bustos
/s/ ROBERT J. FOX Director 3/16/05
- ---------------------------------
Amador S. Bustos
/s/ SAM J. GALLINA Director 3/16/05
- ---------------------------------
Sam J. Gallina
/s/ WILLIAM A. ROBOTHAM Director 3/16/05
- ---------------------------------
William A. Robotham
/s/ DAVID T. TABER Director 3/16/05
- ---------------------------------
David T. Taber
/s/ STEPHEN H. WAKS Director 3/16/05
- ---------------------------------
Stephen H. Waks
/s/ MICHAEL A. ZIEGLER Director 3/16/05
- ---------------------------------
Michael A. Ziegler
86
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
23.1 Consent of Perry-Smith LLP 88
31.1 Certifications of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 89
31.2 Certifications of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 90
32.1 Certification of American River Bankshares
Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 91
87