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, 2003
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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 HOLDINGS
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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 (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter: $55,111,000
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 15, 2004
No par value Common Stock - 4,188,007 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
2004 annual meeting of shareholders.
The Index to the Exhibits is located at Page 84 Page 1 of 90
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 Holdings (the "Company") is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. The Company
was incorporated under the laws of the State of California in 1995. As a bank
holding company, the Company is authorized to engage in the activities permitted
under the Bank Holding Company Act of 1956, as amended, and regulations
thereunder. Its principal office is located at 1545 River Park Drive, Suite 107,
Sacramento, California 95815 and its telephone number is (916) 565-6100.
The Company owns 100% of the issued and outstanding common shares of
American River Bank. American River Bank was incorporated and commenced business
in Fair Oaks, California, in 1983 and thereafter moved its headquarters office
to Sacramento, California in 1985. American River Bank accepts checking and
savings deposits, offers money market deposit accounts and certificates of
deposit, makes secured and unsecured commercial, secured real estate, and other
installment and term loans and offers other customary banking services.
American River Bank owns 100% of two inactive companies, ARBCO and
American River Mortgage. ARBCO was formed in 1984 to conduct real estate
development and has been inactive since 1995. American River Mortgage has been
inactive since its formation in 1994. American River Bank operates four banking
offices in Placer and Sacramento Counties including the head office at 1545
River Park Drive, Suite 107, Sacramento, and branch offices at 9750 Business
Park Drive, Sacramento, 10123 Fair Oaks Boulevard, Fair Oaks and 2240 Douglas
Boulevard, Roseville. American River Bank was approved for a fifth location at
520 Capitol Mall, Suite 100, Sacramento, which opened for business on March 8,
2004. American River Bank's deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC") up to applicable legal limits. American River
Bank does not offer trust services or international banking services and does
not plan to do so in the near future.
The Company also owns 100% of First Source Capital formed in July 1999
to conduct lease financing for most types of business assets, from computer
software to heavy earth-moving equipment. Specific leasing programs are tailored
for vendors of equipment in order to increase their sales. First Source Capital
acts as a lease broker and receives a fee for each lease recorded on the books
of the party acting as the funding source. Various funding sources (including
American River Bank) are utilized in connection with multiple leasing programs
made available by First Source Capital. Effective January 7, 2004, the Company
announced that First Source Capital discontinued operations as a subsidiary of
the Company. Similar leasing operations have commenced at American River Bank
through a division identified as "First Source Capital, a division of American
River Bank."
The Company also owns 100% of North Coast Bank, National Association
("North Coast Bank"). North Coast Bank was incorporated and commenced business
in 1990 as Windsor Oaks National Bank in Windsor, California. In 1997, the name
was changed to North Coast Bank. North Coast Bank is headquartered in Santa
Rosa, California and operates three full service-banking offices within its
primary service areas of Sonoma County, in the cities of Healdsburg, Santa Rosa
and Windsor. North Coast Bank's primary business is serving the business or
commercial banking needs of small to mid-sized businesses within Sonoma County.
On January 8, 2004, the Company announced the consummation of the merger of
North Coast Bank, National Association with and into the Company's subsidiary,
American River Bank, effective at the close of business on December 31, 2003.
North Coast Bank operates as division of American River Bank identified as
"North Coast Bank, a division of American River Bank."
2
The Company also owns 100% of an inactive subsidiary, American River
Financial. American River Financial was incorporated on August 26, 2003 and has
been inactive since its formation.
During 2003, 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.
At December 31, 2003, the Company had consolidated assets of $397
million, deposits of $323 million and shareholders' equity of $35 million.
General
The Company is a community-oriented bank holding company headquartered
in Sacramento, California. The principal communities served are located in
Sacramento, Placer, Yolo, El Dorado, Sonoma, Napa, Marin and Mendocino counties.
The Company generates most of its revenue by providing a wide range of products
and services to small and middle-market businesses and individuals. The
Company's principal source of 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, 2003, these sources comprised 84.7%, 15.1%, and 0.2%,
respectively, of the Company's interest income.
The Subsidiary Banks' deposits are not received from a single depositor
or group of affiliated depositors, the loss of any one of which would have a
materially adverse effect on the business of the Company. A material portion of
the Subsidiary Banks' deposits are not concentrated within a single industry or
group of related industries.
As of December 31, 2003 and December 31, 2002, American River Bank held
$9,000,000 in certificates of deposit for the State of California. As of
December 31, 2003, North Coast Bank held $2,500,000 in certificates of deposit
for the State of California; there were no State of California deposits at North
Coast Bank on December 31, 2002. In connection with these deposits, the
Subsidiary Banks are generally required to pledge securities to secure such
deposits, except for the first $100,000, which are insured by the FDIC.
American River Bank competes with approximately 32 and 24 other banking
or savings institutions in Sacramento County and Placer County, respectively.
American River Bank's market share of FDIC insured deposits in the service areas
of Sacramento County and Placer County was approximately 1.2% and 1.5%,
respectively (based upon the most recent information made available by the FDIC
through June 30, 2003). North Coast Bank competes with approximately 20 other
banking or savings institutions in its service areas. North Coast Bank's market
share of FDIC insured deposits in the service area of Sonoma County was
approximately .8% (based upon the most recent information made available by the
FDIC through June 30, 2003).
Employees
At December 31, 2003, the Company and its subsidiaries employed 101
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
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.
3
Regulation and Supervision
General
The following discussion pertains to operations of North Coast Bank and
First Source Capital prior to becoming divisions of American River Bank as
previously discussed on page 2 above. The common stock of the Company is subject
to the registration requirements of the Securities Act of 1933, as amended, and
the qualification requirements of the California Corporate Securities Law of
1968, as amended. The Company is also subject to the periodic reporting
requirements of Section 13 of the Securities Exchange Act of 1934, as amended,
which include, but are not limited to, annual, quarterly and other current
reports with the Securities and Exchange Commission (the "SEC").
American River Bank is licensed by the California Commissioner of
Financial Institutions, its deposits are insured by the FDIC up to the
applicable legal limits, and it has chosen not to become a member of the Federal
Reserve System. Consequently, American River Bank is subject to the supervision
of, and is regularly examined by, the California Commissioner of Financial
Institutions and the FDIC. The supervision and regulation includes comprehensive
reviews of all major aspects of American River Bank's business and condition,
including its capital ratios, allowance for possible loan losses and other
factors. However, no inference should be drawn that such authorities have
approved any such factors. American River Holdings and American River Bank are
required to file reports with the Board of Governors, the California
Commissioner of Financial Institutions, and the FDIC and provide the additional
information that the Board of Governors, California Commissioner of Financial
Institutions, and FDIC may require.
North Coast Bank is a national bank licensed under the national banking
laws of the United States. North Coast Bank is regularly examined by the Office
of the Comptroller of the Currency (the "OCC") and is subject to the supervision
of the FDIC and the OCC, and is a member of the Federal Reserve System. The
supervision and regulation includes comprehensive reviews of all major aspects
of North Coast Bank's business and condition, including its capital ratios,
allowance for possible loan losses and other factors. However, no inference
should be drawn that such authorities have approved any such factors. North
Coast Bank is required to file reports with the OCC and the FDIC. North Coast
Bank's deposits are insured by the FDIC up to the applicable legal limits.
First Source Capital is a California corporation which conducts a lease
brokerage business as a permissible non-banking activity under the Federal
Reserve Act. First Source Capital is subject to regulatory supervision by the
Board of Governors and the California Commissioner of Corporations.
American River Holdings is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company
Act"), and is registered as such with, and subject to the supervision of, the
Board of Governors. The Company is required to obtain the approval of the Board
of Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.
The Company, and any subsidiaries which it may acquire or organize, are
deemed to be "affiliates" within the meaning of that term as defined in the
Federal Reserve Act. This means, for example, that there are limitations (a) on
loans by the Subsidiary Banks to affiliates, and (b) on investments by the
Subsidiary Banks in affiliates' stock as collateral for loans to any borrower.
The Company and its subsidiaries are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
In addition, regulations of the Board of Governors under the Federal
Reserve Act require that reserves be maintained by the Subsidiary Banks in
conjunction with any liability of the Company under any obligation (promissory
note, acknowledgement of advance, banker's acceptance or similar obligation)
with a weighted average maturity of less than seven (7) years to the extent that
the proceeds of such obligations are used for the purpose of supplying funds to
the Subsidiary Banks for use in its banking business, or to maintain the
availability of such funds.
4
Capital Standards
The Board of Governors, the FDIC, and the OCC have adopted risk-based
capital guidelines for evaluating the capital adequacy of bank holding companies
and banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, American River Holdings, American
River Bank, and North Coast Bank are required to maintain capital equal to at
least 8.0% of its assets and commitments to extend credit, weighted by risk, of
which at least 4.0% must consist primarily of common equity (including retained
earnings) and the remainder may consist of subordinated debt, cumulative
preferred stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of those loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which includes,
among other items, limited life (and in the case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses. Tier 2 capital may also include up to 45% of the
pretax net unrealized gains on certain available-for-sale equity securities
having readily determinable fair values (i.e. the excess, if any, of fair market
value over the book value or historical cost of the investment security). The
federal regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier 2
capital, but may be taken into account in the evaluation of overall capital
adequacy and net unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against risk. Each
institution is required to maintain a minimum risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
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, 2003, American River Holdings, American River Bank and
North Coast Bank were in compliance with the risk-weighted capital and leverage
ratio guidelines.
Prompt Corrective Action
The Board of Governors, FDIC, and OCC have adopted regulations
implementing a system of prompt corrective action pursuant to Section 38 of the
Federal Deposit Insurance Act and Section 131 of the FDIC Improvement Act of
1991 ("FDICIA"). The regulations establish five capital categories with the
following characteristics: (1) "Well capitalized" - consisting of institutions
with a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "Adequately capitalized" - consisting of
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized" - consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less
5
than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting
of an institution with a ratio of tangible equity to total assets that is equal
to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitations upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
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.
6
The Federal Financial Institution Examination Counsel ("FFIEC")
utilizes the Uniform Financial Institutions Rating System ("UFIRS") commonly
referred to as "CAMELS" to classify and evaluate the soundness of financial
institutions. Bank examiners use the CAMELS measurements to evaluate capital
adequacy, asset quality, management, earnings, liquidity and sensitivity to
market risk.
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital adequacy
in conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings. American
River Bank and North Coast Bank each have ratings of "satisfactory" for CRA
compliance.
Limitations on Dividends
The Company's ability to pay cash dividends is subject to restrictions
set forth in the California General Corporation Law. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from its subsidiaries. The payment of cash
dividends and/or management fees by American River Bank is subject to
restrictions set forth in the California Financial Code, as well as restrictions
established by the FDIC. North Coast Bank's ability to pay cash dividends is
subject to restrictions imposed under the National Bank Act and regulations
promulgated by the OCC. See Item 5. "Market for Registrant's Common Equity and
Related Stockholder Matters" for more information regarding cash dividends.
Competition
Competitive Data
American River Bank. At June 30, 2003, based on the most recent "Data
Book Summary of Deposits in FDIC Insured Commercial and Savings Banks" report at
that date, the competing commercial and savings banks had 145 offices in the
cities of Fair Oaks, Rancho Cordova, Roseville and Sacramento, California, where
American River Bank has its 4 offices. Additionally, American River Bank
competes with thrifts and, to a lesser extent, credit unions, finance companies
and other financial service providers for deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which American River Bank is not authorized nor prepared to
offer currently. American River Bank has made arrangements with its
correspondent banks and with others to provide some of these services for its
customers. For borrowers requiring loans in excess of American River Bank's
legal lending limits, American River Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other community banks, retaining the portion of such loans which is within
its lending limits. As of December 31, 2003, American River Bank's aggregate
legal lending limits to a single borrower and such borrower's related parties
were $4,598,000 on an unsecured basis and $7,663,000 on a fully secured basis
based on capital and reserves of $30,651,000.
American River Bank's business is concentrated in its service area,
which primarily encompasses Sacramento County and South Western Placer County.
The economy of American River Bank's service area is dependent upon government,
manufacturing, tourism, retail sales, population growth and smaller service
oriented businesses.
7
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2003, there were 181
operating commercial and savings bank offices in Sacramento County with total
deposits of $14,718,627,000. This was an increase of $1,319,365,000 over the
June 30, 2002 balances. American River Bank held a total of $172,457,000 in
deposits, representing approximately 1.2% of total commercial and savings banks
deposits in Sacramento County as of June 30, 2003.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2003, there were 86
operating commercial and savings bank offices in Placer County with total
deposits of $3,810,163,000. This was an increase of $494,352,000 over the June
30, 2002 balances. American River Bank held a total of $58,732,000 in deposits,
representing approximately 1.5% of total commercial and savings banks deposits
in Placer County as of June 30, 2003.
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 2004 from that in 2003.
North Coast Bank. The following discussion pertains to operations of
North Coast Bank prior to becoming a division of American River Bank as
previously discussed on page 2 above. At June 30, 2003, 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 55 offices
in the cities of Healdsburg, Santa Rosa and Windsor, California, where North
Coast Bank has its 3 offices. Additionally, North Coast Bank competes with
thrifts and, to a lesser extent, credit unions, finance companies and other
financial service providers for deposit and loan customers.
North Coast Bank has also made arrangements with its correspondent
banks and with others to provide some of the services for its customers,
international banking, discount brokerage and insurance services, which North
Coast Bank is not authorized nor prepared to offer currently. For borrowers
requiring loans in excess of North Coast Bank's legal lending limits, North
Coast Bank has offered, and intends to offer in the future, such loans on a
participating basis with its correspondent banks and with other independent
banks, including American River Bank, retaining the portion of such loans which
is within its lending limits. As of December 31, 2003, North Coast Bank's
aggregate legal lending limits to a single borrower and such borrower's related
parties were $946,000 based on capital and reserves of $6,308,000. On March 13,
2002, North Coast Bank was approved by the OCC to participate in a pilot
program, whereby, North Coast Bank's lending limit would be increased to
$1,577,000 for certain 1-4 family residential real estate and loans to small
businesses on an exception basis. The aggregate amount of loans under the
exception shall not exceed 100% of North Coast Bank's regulatory capital. The
OCC defines the exception amount as that portion of a loan that is greater than
the basic lending limit of $946,000 and less than the pilot program aggregate
maximum of $1,577,000. These exceptions made under the pilot program are
monitored by North Coast Bank's Board of Directors on a monthly basis.
North Coast Bank's business is concentrated in its service area, which
primarily encompasses Sonoma County. The economy of North Coast Bank's service
area is dependent upon government, manufacturing, agriculture, tourism, retail
sales, population growth and smaller service oriented businesses.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2003, there were 116
operating commercial and savings bank offices in Sonoma County with total
deposits of $7,765,816,000. This was an increase of $494,394,000 over the June
30, 2002 balances. North Coast Bank held a total of $63,892,000 in deposits,
representing approximately .8% of total commercial and savings banks deposits in
Sonoma County as of June 30, 2003.
General Competitive Factors
In order to compete with the major financial institutions in their
primary service areas, American River Bank and North Coast Bank use to the
fullest extent possible the flexibility which is accorded by their community
banks status. This includes an emphasis on specialized services, local
promotional activity, and personal contacts by their respective officers,
directors and employees. They also seek to provide special services and programs
8
for individuals in their primary service area who are employed in the
agricultural, professional and business fields, such as loans for equipment,
furniture, tools of the trade or expansion of practices or businesses. In the
event there are customers whose loan demands exceed their respective lending
limits, they seek to arrange for such loans on a participation basis with other
financial institutions. They also assist those customers requiring services not
offered by either bank to obtain such services from correspondent banks.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by a bank to obtain their
deposits and other borrowings and the interest rate received by a bank on loans
extended to customers and on securities held in a bank's portfolio comprise the
major portion of a bank's earnings.
The interest rate differentials of a bank, and therefore their
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on American River Bank and North
Coast Bank are not predictable.
Impact of Legislative and Regulatory Proposals
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank which has been in existence for at least five years.
The federal financial institution agencies, especially the OCC and the
Board of Governors, have taken steps to increase the types of activities in
which national banks and bank holding companies can engage, and to make it
easier to engage in such activities. The OCC has issued regulations permitting
national banks to engage in a wider range of activities through subsidiaries.
"Eligible institutions" (those national banks that are well capitalized, have a
high overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through operating
subsidiaries subject to an expedited application process. In addition, a
national bank may apply to the OCC to engage in an activity through a subsidiary
in which American River Bank itself may not engage.
In 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was signed into
law. The GLB Act eliminates most of the remaining depression-era "firewalls"
between banks, securities firms and insurance companies which was established by
The Banking Act of 1933, also known as the Glass-Steagall Act
("Glass-Steagall"). Glass-Steagall sought to insulate banks as depository
institutions from the perceived risks of securities dealing and underwriting,
and related activities. The GLB Act repeals Section 20 of Glass-Steagall which
prohibited banks from affiliating with securities firms. Bank holding companies
that can qualify as "financial holding companies" can now acquire securities
firms or create them as subsidiaries, and securities firms can now acquire banks
or start banking activities through a financial holding company. The GLB Act
includes provisions which permit national banks to conduct financial activities
through a subsidiary that are permissible for a national bank to engage in
directly, as well as certain activities authorized by statute, or that are
financial in nature or incidental to financial activities to the same extent as
permitted to a "financial holding company" or its affiliates. This
liberalization of United States banking and financial services regulation
applies both to domestic institutions and foreign institutions conducting
9
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)
may not disclose customer account numbers except to consumer reporting agencies;
and (3) must give prior disclosure of their privacy policies before establishing
new customer relationships.
Neither American River Holdings, American River Bank nor North Coast
Bank have determined whether or when they may seek to acquire and exercise
powers or activities under the GLB Act, and the extent to which competition will
change among financial institutions affected by the GLB Act has not yet become
clear.
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act
prohibits any insured financial institution such as the Subsidiary Banks, from
providing correspondent accounts to foreign banks which do not have a physical
presence in any country (designated as "shell banks"), subject to certain
exceptions for regulated affiliates of foreign banks. Section 313(a) also
requires financial institutions to take reasonable steps to ensure that foreign
bank correspondent accounts are not being used to indirectly provide banking
services to foreign shell banks, and Section 319(b) requires financial
institutions to maintain records of the owners and agent for service of process
of any such foreign banks with whom correspondent accounts have been
established.
Effective July 23, 2002, Section 312 of the Patriot Act created a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
10
The Company and the Subsidiary Banks are not currently aware of any
account relationships between the Subsidiary Banks and any foreign bank or other
person or entity as described above under Sections 313(a) or 312 of the Patriot
Act. The terrorist attacks on September 11, 2001 have realigned national
security priorities of the United States and it is reasonable to anticipate that
the United States Congress may enact additional legislation in the future to
combat terrorism including modifications to existing laws such as the Patriot
Act to expand powers as deemed necessary. The effects which the Patriot Act and
any additional legislation enacted by Congress may have upon financial
institutions is uncertain; however, such legislation could increase compliance
costs and thereby potentially may have an adverse effect upon the Company's
results of operations.
Certain legislative and regulatory proposals that could affect American
River Holdings, American River Bank, North Coast Bank and the banking business
in general are periodically introduced before the United States Congress, the
California State Legislature and Federal and state government agencies. It is
not known to what extent, if any, legislative proposals will be enacted and what
effect such legislation would have on the structure, regulation and competitive
relationships of financial institutions. It is likely, however, that such
legislation could subject American River Holdings, American River Bank and North
Coast Bank to increased regulation, disclosure and reporting requirements,
competition, and costs of doing business.
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002 (the "Act") which responds to recent issues in
corporate governance and accountability. Among other matters, key provisions of
the Act and rules promulgated by the SEC pursuant to the Act include the
following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
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;
11
o The ability to assess the general application of such
principles in connection with the accounting for estimates,
accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable
to the breadth and complexity of issues that can reasonably be
expected to be raised by the registrant's financial
statements, or experience actively supervising one or more
persons engaged in such activities;
o An understanding of internal controls and procedures for
financial reporting; and
o An understanding of audit committee functions.
A person must have acquired the above listed attributes to be
deemed to qualify as an "audit committee financial expert" through any
one or more of the following:
o Education and experience as a principal financial officer,
principal accounting officer, controller, public accountant or
auditor or experience in one or more positions that involve
the performance of similar functions;
o Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant,
auditor or person performing similar functions;
o Experience overseeing or assessing the performance of
companies or public accountants with respect to the
preparation, auditing or evaluation of financial statements;
or
o Other relevant experience.
The rule contains a specific safe harbor provision to clarify
that the designation of a person as an "audit committee financial
expert" does not cause that person to be deemed to be an "expert" for
any purpose under Section 11 of the Securities Act of 1933, as amended,
or impose on such person any duties, obligations or liability greater
that the duties, obligations and liability imposed on such person as a
member of the audit committee and the board of directors, absent such
designation. Such a designation also does not affect the duties,
obligations or liability of any other member of the audit committee or
board of directors.
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, another
board committee or the entire board of directors certain material
violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to
within 2 business days of the date a transaction triggers an obligation
to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to be phased-in over a
four year period reducing the filing deadline for Form 10-K reports
from 90 days after the fiscal year end to 60 days and Form 10-Q reports
from 45 days after the fiscal quarter end to 35 days.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as
soon as reasonably practicable after such reports and material are
filed with or furnished to the Securities and Exchange Commission.
o 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
12
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 must 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.
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 must be adopted by May 4, 2004 that (i) complies with
the code of ethics requirements of the Act; (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.
13
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.
In addition to legislative changes, the various Federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such regulations may have on American River Holdings,
American River Bank and North Coast Bank.
ITEM 2. Properties
The Company and its subsidiaries lease eight and own one of their
respective premises. American River Bank's head office is located at 1545 River
Park Drive, Suite 107, Sacramento, California, in a modern, five floor building
which has offstreet parking for its clients. American River Bank leases premises
in the building from EOP-Point West, L.L.C. The lease term is ten years and
expires on March 31, 2010. The premises consist of 9,498 square feet on the
ground floor.
American River Bank leases premises at 9750 Business Park Drive,
Sacramento, California. The office space is leased from Bradshaw Plaza Group,
which is owned in part by Charles D. Fite, a director of the Company. The lease
term is seven years and expires on November 30, 2006. The premises consist of
4,590 square feet on the ground floor.
American River Bank leases premises at 10123 Fair Oaks Boulevard, Fair
Oaks, California. The office space is leased from Marjorie Taylor, a 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.
14
The Company leases premises (used by First Source Capital) at 1540
River Park Drive, Suite 106, Sacramento California. The office space is leased
from Cerini & Smith, LLC. The one-year lease term expired on February 14, 2004.
Management has negotiated a month-to-month agreement of similar terms. The
premises consist of 847 square feet on the ground floor.
North Coast Bank leases premises at 8733 Lakewood Drive, Windsor,
California. The office space is leased from R. and R. Partners. The two-year
lease expires on December 31, 2005. The premises consist of 2,200 square feet on
the ground floor.
North Coast Bank owns premises at 412 Center Street, Healdsburg,
California. The premises were purchased June 1, 1993. The purchase price for the
land and building was $343,849. The building is 2,620 square feet sitting on
10,835 square feet of land.
North Coast Bank leases premises at 50 Santa Rosa Avenue, Santa Rosa,
California. The office space is leased from HSG Trust. The lease term is ten
(10) years and expires on January 31, 2009. The premises consist of 7,072 square
feet on the ground floor.
The leases on the premises located at 1545 River Park Drive, 9750
Business Park Drive, 2240 Douglas Boulevard, 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
There were no matters submitted to a vote of the shareholders during
the fourth quarter of 2003.
15
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 the three for
two stock split distributed in 2003 and a 5% stock dividend distributed in 2002.
==========================================
2003 High Low
------------------------------------------
First quarter $15.93 $14.12
Second quarter 17.17 14.57
Third quarter 22.90 15.35
Fourth quarter 23.65 17.25
2002 High Low
------------------------------------------
First quarter $12.22 $ 9.97
Second quarter 13.48 11.87
Third quarter 13.45 11.59
Fourth quarter 15.89 11.17
==========================================
The closing price for the Company's common stock on March 15, 2004 was
$20.00.
Holders
As of March 5, 2004, there were approximately 1,336 shareholders of
record of the Company's common stock.
Dividends
The Company has paid cash dividends on its common stock twice a year
since 1992, and it is currently the intention of the Board of Directors of the
Company to continue payment of cash dividends on a twice a year basis. In 2003
and 2002, the Company declared cash dividends in the amount of $.30 and $.23 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.
16
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, 2003, the Subsidiary Banks had $10.6 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 Company announced a plan to repurchase, as
conditions warrant, up to 5% annually of the Company's common stock. There were
no repurchases of the Company's common stock during the fourth quarter of 2003.
During 2003, the Company repurchased 1,500 shares; during 2002, the Company
repurchased 65,627 shares and in 2001, the Company repurchased 33,705 shares
under the repurchase plan.
17
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)
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA
Net interest income $ 16,866 $ 15,073 $ 14,577 $ 13,585 $ 11,754
Provision for loan and lease losses 946 644 791 672 582
Other income 2,253 2,323 2,365 2,183 1,647
Other expenses 10,372 9,389 9,502 9,329 7,770
Income before income taxes 7,801 7,363 6,649 5,767 5,049
Income taxes 3,060 2,904 2,612 2,221 1,921
Net income $ 4,741 $ 4,459 $ 4,037 $ 3,546 $ 3,128
Earnings per share - basic $ 1.19 $ 1.13 $ 1.01 $ 0.90 $ 0.79
Earnings per share - diluted 1.10 1.05 0.95 0.86 0.75
Cash dividends per share 0.30 0.23 0.17 0.15 0.13
Book value per share 8.74 8.05 7.04 6.16 5.52
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $ 397,393 $ 342,563 $ 286,559 $ 284,126 $ 248,540
Loans and leases, net 262,464 229,008 195,026 200,658 157,044
Deposits 322,507 275,796 254,888 239,312 223,077
Shareholders' equity 35,457 31,726 27,942 24,413 20,611
Average balance sheet amounts:
Assets $ 363,175 $ 309,574 $ 279,049 $ 259,315 $ 224,960
Loans and leases 248,342 209,133 202,624 175,134 148,369
Earning assets 333,800 280,623 255,904 238,837 207,388
Deposits 279,883 263,323 246,960 230,822 201,180
Shareholders' equity 33,461 29,509 26,316 22,258 19,916
SELECTED RATIOS:
For the year:
Return on average equity 14.17% 15.11% 15.34% 15.93% 15.71%
Return on average assets 1.31% 1.44% 1.45% 1.37% 1.39%
Efficiency ratio * 53.77% 53.47% 55.57% 58.59% 57.48%
Net interest margin * 5.10% 5.43% 5.76% 5.75% 5.72%
Net chargeoffs to average loans & 0.08% 0.03% 0.31% 0.14% 0.14%
leases
At December 31:
Average equity to average assets 9.21% 9.53% 9.43% 8.58% 8.85%
Leverage capital ratio 8.96% 8.93% 9.49% 8.78% 9.21%
Allowance for loan and leases losses to 1.48% 1.38% 1.32% 1.21% 1.30%
total loans and leases
* fully taxable equivalent
18
ITEM 7. MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is American River Holdings management's discussion and
analysis of the significant changes in income and expense accounts for the years
ended December 31, 2003, 2002 and 2001.
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 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 Accountings 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.
19
Stock Based Awards
The Company accounts for its stock based awards using the intrinsic
value method in accordance with Accounting Principles Board ("APB") Opinion No.
25 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.
Overview
The Company recorded its 80th consecutive profitable quarter for the
quarter ended December 31, 2003. Net income in 2003 increased 6.3% to $4,741,000
versus $4,459,000 in 2002. Diluted earnings per share for the two years were
$1.10 and $1.05, respectively. For 2003, the Company realized a return on
average equity of 14.2% and a return on average assets of 1.31%, as compared to
15.1% and 1.44% for 2002. The net income for 2002 was $422,000 (10.5%) higher
than the $4,037,000 recorded in 2001. Diluted earnings per share in 2001 were
$0.95, return on average assets was 1.45% and return on average equity was
15.3%. All share and per share data for 2003, 2002 and 2001 have been adjusted
for a 3 for 2 stock split distributed on October 31, 2003 and 5 percent stock
dividends distributed on October 18, 2002 and October 19, 2001.
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) 2003 2002 2001
---------- ---------- ----------
Net interest income* $ 17,035 $ 15,235 $ 4,733
Provision for loan losses (946) (644) (791)
Noninterest income 2,253 2,323 2,365
Noninterest expense (10,372) (9,389) (9,502)
Provision for income taxes (3,060) (2,904) (2,612)
Tax equivalent adjustment (169) (162) (156)
---------- ---------- ----------
Net income $ 4,741 $ 4,459 $ 4,037
========== ========== ==========
- --------------------------------------------------------------------------------
Average total assets $ 363,175 $ 309,574 $ 279,049
Net income as a percentage
of average total assets 1.31% 1.44% 1.45%
- --------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
During 2003, total assets of the Company increased $54,830,000 (16.0%) to a
total of $397,393,000 at year-end. At December 31, 2003, net loans totaled
$262,464,000, up $33,456,000 (14.6%) from the ending balances on December 31,
2002. Deposit growth for the year was 16.9% resulting in ending deposit balances
of $322,507,000. The Company ended 2003 with a Tier 1 capital ratio of 11.6% and
a total risk-based capital ratio of 12.9%.
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 5.43% in
2002, and 5.10% in 2003. The fully taxable equivalent net interest margin in
dollars was up $1,800,000 (11.8%) in 2003 over 2002.
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
20
Company during 2001 and 2002 in response to Federal Reserve Board (the "FRB")
decreases in the Federal 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.
The fully taxable equivalent interest income component decreased from
$20,999,000 in 2001 to $18,747,000 in 2002, representing a 10.7% decrease. The
decrease in the fully taxable equivalent interest income for 2002 compared to
the same period in 2001 is broken down by rate (down $3,955,000) and volume (up
$1,703,000). The rate decrease can be attributed to decreases implemented by the
Company during 2001 and 2002 in response to FRB decreases in the Federal funds
and Discount rates. During the two years there were twelve such rate decreases
by the FRB resulting in a 525 basis point drop in the prime rate, which
contributed to the drop in the yield on average earning assets from 8.21% for
2001 to 6.68% for 2002. The volume increase was the result of a 9.7% increase in
average earning assets. Average loan balances were up $6,509,000 (3.2%) in 2002
over the balances in 2001, while average investment securities balances were up
$19,449,000 (41.8%). The increase in investment securities is primarily due to a
change in investment strategy whereby the Company has invested its excess funds
in investment securities rather than Federal funds sold and the adoption of an
investment strategy that allowed the Company to take advantage of a relatively
steep yield curve, to utilize excess capital and to reduce exposure to further
declines in intermediate term interest rates by purchasing mortgage-backed
securities with average lives of 3 to 5 years and funding them with wholesale
Federal Home Loan Bank advances that mature in one year or less.
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.
Interest expense decreased $2,754,000 (44.0%) in 2002 compared to 2001.
The average balances on interest bearing liabilities were $14,936,000 (8.0%)
higher in 2002 versus 2001. The higher balances accounted for a $556,000
increase in interest expense. The higher balances were due to internal growth of
average deposits ($4,570,000) and an increase in other borrowings ($10,366,000).
The decrease in rates paid on interest bearing liabilities more than offset the
increased expense due to the volume growth as the average rate paid decreased
161 basis points on a year-over-year basis and accounted for a decrease in
interest expense of $3,310,000 for the period.
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.
21
Table Two: Analysis of Net Interest Margin on Earning Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003 2002 2001
------------------------------ ------------------------------ ------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg Avg Avg
(In thousands, except Balance Interest Yield Balance Interest Yield Balance Interest Yield
percentages) -------- -------- -------- -------- -------- -------- -------- -------- --------
Assets:
Earning assets
Loans and leases (1) $248,342 $ 16,744 6.74% $209,133 $ 15,400 7.36% $202,624 $ 17,883 8.83%
Taxable investment
Securities 64,159 2,312 3.60% 49,875 2,359 4.73% 30,511 1,871 6.13%
Tax-exempt investment
securities (2) 10,519 637 6.06% 9,803 616 6.28% 9,656 608 6.30%
Corporate stock 376 28 7.45% 320 25 7.81% 820 93 11.34%
Federal funds sold 5,595 48 0.86% 5,488 80 1.46% 6,727 202 3.00%
Investments in time
deposits 4,809 168 3.49% 6,004 267 4.45% 5,566 342 6.14%
-------- -------- -------- -------- -------- --------
Total earning assets 333,800 19,937 5.97% 280,623 18,747 6.68% 255,904 20,999 8.21%
-------- -------- --------
Cash & due from banks 24,914 21,149 17,023
Other assets 7,993 10,729 8,774
Allowance for loan &
lease losses (3,532) (2,927) (2,652)
-------- -------- --------
$363,175 $309,574 $279,049
======== ======== ========
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
NOW & MMDA $120,772 912 0.76% $100,406 939 0.94% $ 90,440 1,964 2.17%
Savings 16,714 35 0.21% 13,918 51 0.37% 13,602 166 1.22%
Time deposits 72,078 1,443 2.00% 73,620 2,178 2.96% 79,332 3,912 4.93%
Other borrowings 26,480 512 1.93% 14,124 344 2.44% 3,758 224 5.96%
-------- -------- -------- -------- -------- --------
Total interest bearing
Liabilities 236,044 2,902 1.23% 202,068 3,512 1.74% 187,132 6,266 3.35%
-------- -------- --------
Demand deposits 90,685 75,379 63,586
Other liabilities 2,985 2,618 2,015
-------- -------- --------
Total liabilities 329,714 280,065 252,733
Shareholders' equity 33,461 29,509 26,316
-------- -------- --------
$363,175 $309,574 $279,049
======== ======== ========
Net interest income &
margin (3) $ 17,035 5.10% $ 15,235 5.43% $ 14,733 5.76%
======== ======== ======== ======== ======== ========
(1) Loan and lease interest includes loan and lease fees of $814,000, $545,000
and $506,000 in 2003, 2002 and 2001, 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.
22
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and
Expenses
- --------------------------------------------------------------------------------
Year ended December 31, 2003 over 2002 (dollars in thousands)
Increase (decrease) due to change in:
Volume Rate (4) Net Change
---------- ---------- ----------
Interest-earning assets:
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
========== ========== ==========
Year Ended December 31, 2002 over 2001 (in thousands)
Increase (decrease) due to change in:
Volume Rate (4) Net Change
---------- ---------- ----------
Interest-earning assets:
Net loans and leases (1)(2) $ 574 $ (3,057) $ (2,483)
Taxable investment securities 1,187 (699) 488
Tax-exempt investment securities (3) 9 (1) 8
Corporate stock (57) (11) (68)
Federal funds sold & other (37) (85) (122)
Investment in time deposits 27 (102) (75)
---------- ---------- ----------
Total 1,703 (3,955) (2,252)
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 216 (1,241) (1,025)
Savings deposits 4 (119) (115)
Time deposits (282) (1,452) (1,734)
Other borrowings 618 (498) 120
---------- ---------- ----------
Total 556 (3,310) (2,754)
---------- ---------- ----------
Interest differential $ 1,147 $ (645) $ 502
========== ========== ==========
(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 $814,000, $545,000 and $506,000 for the years ended
December 31, 2003, 2002 and 2001, 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 $946,000 for loan and lease losses in 2003 as
compared to $644,000 for 2002. Net loan charge-offs for 2003 were $194,000 as
compared to $61,000 in 2002. In 2003 and 2002, net loan charge-offs as a
percentage of average loans outstanding was .08% and .03%, respectively. In
2001, the Company provided $791,000 for loan and lease losses and net
charge-offs were $631,000. For further information please see the Allowance for
Loan and Lease Losses Activity.
23
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,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Service charges on deposit accounts $ 534 $ 563 $ 562
Accounts receivable servicing fees 247 294 459
Merchant fee income 357 344 277
Fees from lease brokerage services 381 459 264
Income from residential lending division 366 278 274
Gain on sale of available-for-sale securities 33 -- --
Other 335 385 529
---------- ---------- ----------
$ 2,253 $ 2,323 $ 2,365
========== ========== ==========
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.
Noninterest income was down $42,000 (1.8%) to $2,323,000 in 2002 from
the 2001 level. The decrease in noninterest income can be attributed to a
decrease in accounts receivable servicing fees (down $165,000 or 35.9%) and
lower brokerage fees from the Real Estate Division at North Coast Bank (the
"REDNCB") (down $92,000 or 89.3%). The decrease in fees from accounts receivable
servicing and brokerage fees from the REDNCB were offset by increases in fees
from lease brokerage services (up $195,000 or 73.9%) and an increase in merchant
fee income (up $67,000 or 24.2%). The decrease in accounts receivable servicing
fees was a result of a decrease in average accounts receivable balances
outstanding from $3,467,000 in 2001 to $2,299,000 (33.7%) in 2002. The decrease
in brokerage fees from the REDNCB (which were recorded in "Other" in Table Four)
resulted from the decision to shut down the REDNCB in the first quarter of 2002.
The increase in lease brokerage services resulted from an increase in business
at First Source Capital, the Company's lease brokerage subsidiary, due to the
development of new relationships and a general positive increase in the
businesses it serviced.
Salaries and Benefits
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
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.
Salaries and benefits were $5,595,000 (up $261,000 or 4.9%) for 2002 as
compared to $5,334,000 in 2001. The increase is primarily the result of higher
incentive accruals ($720,000 in 2002 as compared to $277,000 in 2001). The
increased incentive was due to the Company exceeding its performance goals by a
greater margin for 2002 than in 2001. The increased incentive was offset by
lower commissions paid to employees in the REDNCB (down $115,000). At the end of
2002, the full-time equivalent staff was 99, down one from the 100 at the end of
2001.
24
Occupancy, Furniture and Equipment
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.
Occupancy expense increased $30,000 (3.7%) during 2002 to $840,000, up
from $810,000 in 2001. The increase represents annual rent adjustments under the
existing lease agreements and higher utility costs passed on to the Company from
its landlords. Furniture and equipment expense was $620,000 in 2002 compared to
$564,000 in 2001, representing a $56,000 (9.9%) increase. This increase relates
to technology upgrades made during 2002, including upgrades to the network and
improvements to the network and internet security and the network power
stability system. In addition the expense includes a full year of depreciation
related to the purchase of a new core banking system in the second quarter of
2001.
Other Expenses
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 "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. 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.
Other expenses were $2,334,000 (down $460,000 or 16.5%) for 2002 as
compared to $2,794,000 for 2001. Professional fees accounted for $149,000
(32.4%) of the decrease in other expense. The decrease in professional fees
results from a recovery of legal fees ($48,000) related to the resolution of a
problem loan credit and lower legal fees paid to resolve problem loan credits.
The Company also recognized a recovery of an operating loss in 2002 in the
amount of $80,000. The loss was originally recognized in 2001. The overhead
efficiency ratio on a taxable equivalent basis for 2002 was 53.5% as compared to
55.6% in 2001.
Provision for Taxes
The effective tax rate on income was 39.2%, 39.4% and 39.3% in 2003,
2002 and 2001, respectively. The effective tax rate was greater than the federal
statutory tax rate due to state tax expense (net of federal tax effect) of
$538,000, $501,000 and $465,000 in these years. Tax-exempt income of $475,000,
$460,000 and $464,000 from investment securities in these years helped to reduce
the effective tax rate.
Balance Sheet Analysis
The Company's total assets were $397,393,000 at December 31, 2003 as
compared to $342,563,000 at December 31, 2002, representing an increase of
16.0%. The average balances of total assets during 2003 were $363,175,000 which
represents an increase of $53,601,000 (17.3%) over the December 31, 2002 total
of $309,574,000.
25
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, 2003, these categories accounted for
approximately 22%, 53%, 2%, 14%, 1%, 3%, 3% and 2%, respectively, of the
Company's loan portfolio. This mix was relatively unchanged compared to 21%,
52%, 3%, 14%, 1%, 3%, 4% and 2% at December 31, 2002. Continuing economic
activity in the Company's market area, new borrowers developed through the
Company's marketing efforts and credit extensions expanded to existing
borrowers, offset by normal loan and lease paydowns and payoffs, resulted in net
increases in balances for commercial ($8,115,000 or 15.5%), commercial real
estate ($22,272,000 or 18.6%), real estate construction ($5,049,000 or 15.6%),
and lease financing receivable ($2,510,000 or 37.1%). Despite the new borrowers,
the Company experienced decreases in multi-family real estate ($2,272,000 or
30.0%), residential real estate ($153,000 or 9.2%), agriculture ($797,000 or
9.0%) and consumer loans ($421,000 or 6.6%) as a result of normal paydowns.
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) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------
Commercial $ 57,346 $ 49,231 $ 43,619 $ 52,726 $ 42,148
Real estate:
Commercial 142,249 119,977 99,355 96,840 71,655
Multi-family 5,301 7,573 803 550 487
Construction 37,434 32,385 30,821 27,182 25,784
Residential 1,508 1,661 3,119 8,085 6,234
Agriculture 8,027 8,824 10,251 10,764 7,200
Consumer 5,950 6,371 7,598 6,413 5,896
Lease financing receivable 9,276 6,766 2,499 1,150 122
- -----------------------------------------------------------------------------------------------
267,091 232,788 198,065 203,710 159,526
Deferred loan fees, net (678) (583) (425) (598) (420)
Allowance for loan and
lease losses (3,949) (3,197) (2,614) (2,454) (2,062)
- -----------------------------------------------------------------------------------------------
Total net loans and leases $ 262,464 $ 229,008 $ 195,026 $ 200,658 $ 157,044
===============================================================================================
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.
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 2003 were $248,342,000 which represents
an increase of $39,209,000 (18.7%) over the average in 2002. Average net loans
and leases in 2002 were $209,133,000 which represents an increase of $6,509,000
(3.2%) over the average in 2001. Loan growth in 2003 and 2002 resulted from a
26
favorable economy in the Company's market area, new borrowers developed through
the Company's marketing efforts and credit extensions expanded to existing
borrowers.
Risk Elements
The Company assesses and manages credit risk on an ongoing basis
through a total credit culture that emphasizes excellent credit quality,
extensive internal monitoring and established formal lending policies.
Additionally, the Company contracts with an outside loan review consultant to
periodically review the existing loan and lease portfolio. Management believes
its ability to identify and assess risk and return characteristics of the
Company's loan and lease portfolio is critical for profitability and growth.
Management strives to continue its emphasis on credit quality in the loan and
lease approval process, active credit administration and regular monitoring.
With this in mind, management has designed and implemented a comprehensive loan
and lease review and grading system that functions to continually assess the
credit risk inherent in the loan and lease portfolio.
Ultimately, underlying trends in economic and business cycles may
influence credit quality. American River Bank's business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base. North
Coast Bank business is focused in Sonoma County with most of its business within
the three communities in which North Coast Bank has offices (Santa Rosa,
Windsor, and Healdsburg). The economy of Sonoma County is diversified with
professional services, manufacturing, agriculture and real estate investment and
construction.
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rate and terms, absorption and sale rates; real estate values
and rates of return; operating expenses; inflation; and sufficiency of 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 69.8% of the Company's loan and lease portfolio
at December 31, 2003. 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
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.
27
The recorded investments in loans and leases that were considered to be
impaired totaled $181,000 and $206,000 at December 31, 2003 and 2002,
respectively. The related allowance for losses for these loans and leases at
December 31, 2003 and December 31, 2002 was $59,000 and $51,000, 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, 2003, 2002 and 2001 was
$148,000, $472,000 and $733,000, respectively.
Interest due but excluded from interest income on nonaccrual loans and
leases was not material during 2003, 2002 and 2001. In 2003, 2002 and 2001,
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) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------
Past due 90 days or more and still accruing:
Commercial $ 2 $ 2 $ -- $ -- $ --
Real estate -- -- -- -- --
Consumer and other -- -- -- -- --
- -----------------------------------------------------------------------------------------
Nonaccrual:
Commercial -- 42 534 225 30
Real estate -- 160 314 449 --
Lease financing receivable 179 -- -- -- --
Consumer and other -- 2 8 -- --
- -----------------------------------------------------------------------------------------
Total non-performing loans and leases $ 181 $ 206 $ 856 $ 674 $ 30
=========================================================================================
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, 2003. Management is not aware of any potential problem loans or
leases, which were accruing and current at December 31, 2002 or 2003, 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
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 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
28
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.
Table Seven below summarizes, for the periods indicated, the activity
in the allowance for loan and lease losses.
Table Seven: Allowance for Loan and Lease Losses
- -------------------------------------------------------------------------------------------------------------
(in thousands, except for
percentages) Year Ended December 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Average loans and leases
outstanding $ 248,342 $ 209,133 $ 202,624 $ 175,134 $ 148,369
- -------------------------------------------------------------------------------------------------------------
Allowance for possible loan & lease
losses at beginning of period $ 3,197 $ 2,614 $ 2,454 $ 2,062 $ 1,693
Loans and leases charged off:
Commercial 13 44 556 265 214
Real estate -- 59 85 -- --
Consumer 8 48 13 1 3
Lease financing receivable 333 -- 57 -- 14
- -------------------------------------------------------------------------------------------------------------
Total 354 151 711 266 231
- -------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases
previously charged off:
Commercial 113 1 9 23 15
Real estate 47 85 -- -- --
Consumer -- 4 -- 4 3
Lease financing receivable -- -- 71 -- --
- -------------------------------------------------------------------------------------------------------------
Total 160 90 80 27 18
- -------------------------------------------------------------------------------------------------------------
Net loans and leases charged off 194 61 631 239 213
Amount transferred for accounts
receivable servicing valuation
reserve -- -- -- (41) --
Additions to allowance charged
to operating expenses 946 644 791 672 582
- -------------------------------------------------------------------------------------------------------------
Allowance for possible loan and
lease losses at end of period $ 3,949 $ 3,197 $ 2,614 $ 2,454 $ 2,062
Ratio of net charge-offs to average
loans and leases outstanding .08% .03% .31% .14% .14%
Provision for possible loan and lease
losses to average loans and leases
outstanding .38% .31% .39% .38% .39%
Allowance for possible loan and
lease losses to loans and leases, net
of deferred fees, at end of period 1.48% 1.38% 1.32% 1.21% 1.30%
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
29
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 $3,949,000 or 1.48% of
total loans and leases at December 31, 2003, $3,197,000 or 1.38% of total loans
and leases at December 31, 2002, and $2,614,000 or 1.32% at December 31, 2001.
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 dictate future allowance levels.
Table Eight below summarizes the allocation of the allowance for loan and lease
losses for the five years ended December 31, 2003. 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.
Table Eight: Allowance for Loan and Lease Losses by Loan Category
- --------------------------------------------------------------------------------------------------------------------
(in thousands,
except percentages) December 31, 2003 December 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------------------------------------------
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 $ 865 21.5% $ 660 21.1% $ 923 22.0%
Real estate 2,579 69.8% 2,173 69.5% 1,288 67.7%
Agriculture 201 3.0% 116 3.8% 147 5.3%
Consumer 91 2.2% 152 2.9% 206 3.8%
Lease financing receivable 213 3.5% 96 2.7% 50 1.2%
- --------------------------------------------------------------------------------------------------------------------
Total allocated $ 3,949 100.0% $ 3,197 100.0% $ 2,614 100.0%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
(in thousands,
except percentages) December 31, 2000 December 31, 1999
- --------------------------------------------------------------------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
- --------------------------------------------------------------------------------------
Commercial $ 781 25.9% $ 642 26.4%
Real estate 1,392 65.1% 1,252 65.3%
Agriculture 105 5.3% 78 4.5%
Consumer 153 3.1% 88 3.7%
Lease financing receivable 23 .6% 2 .1%
- --------------------------------------------------------------------------------------
Total allocated $ 2,454 100.0% $ 2,062 100.0%
- --------------------------------------------------------------------------------------
Other Real Estate
At December 31, 2003 and 2002, the Company did not have any Other Real
Estate properties.
30
Deposits
At December 31, 2003, total deposits were $322,507,000 representing an
increase of $46,711,000 (16.9%) over the December 31, 2002 balance of
$275,796,000. The deposit growth in 2003 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 24.8%,
23.7% and 13.1%, respectively, in 2003. During 2002, deposits increased
$20,908,000 (8.2%) from the total of $254,888,000 at December 31, 2001.
Other Borrowed Funds
Other borrowings outstanding as of December 31, 2003 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):
2003 2002 2001
--------------------------------------------------------
Amount Rate Amount Rate Amount Rate
--------------------------------------------------------
Short-Term borrowings:
FHLB advances $ 25,000 1.40% $ 24,000 1.71% $ -- --
Advances from correspondent
banks 9,600 1.44% 6,550 1.75% -- --
--------------------------------------------------------
Total Short-Term borrowings $ 34,600 1.41% $ 30,550 1.72% $ -- --
--------------------------------------------------------
Long-Term Borrowings:
FHLB advances $ 1,942 6.13% $ 1,992 6.13% $ 2,039 6.13%
--------------------------------------------------------
Total Short-Term borrowings $ 1,942 6.13% $ 1,992 6.13% $ 2,039 6.13%
--------------------------------------------------------
The maximum amount of short-term borrowings at any month-end during
2003, 2002 and 2001, was $38,100,000, $33,900,000 and $12,390,000, respectively.
The advance from the correspondent bank at December 31, 2003, bears an interest
rate of 1.44% and matured on January 1, 2004. 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 $ 25,000 $ 1,942
Maturity 2004 2007
Average rates 1.40% 6.13%
The Company has also been issued a total of $667,000 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 2003 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
2003, the Company repurchased 1,500 shares; during 2002, the Company repurchased
65,627 shares and in 2001, the Company repurchased 33,705 shares under the
repurchase plan.
31
The Company and its banking subsidiaries are subject to certain
regulatory capital requirements administered by the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency, 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, the banking subsidiaries must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and its banking subsidiaries' capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors. At December 31, 2003, shareholders' equity was
$35,457,000, representing an increase of $3,731,000 (11.8%) from $31,726,000 at
December 31, 2002. In 2002, shareholders' equity increased $3.8 million (13.5%)
from 2001. The ratio of total risk-based capital to risk adjusted assets was
12.9% at December 31, 2003 compared to 13.0% at December 31, 2002. Tier 1
risk-based capital to risk-adjusted assets was 11.6% at December 31, 2003 and
11.8% at December 31, 2002.
Table Nine below lists the Company's actual capital ratios at December
31, 2003 and 2002 as well as the minimum capital ratios for capital adequacy.
Table Nine: Capital Ratios
- -------------------------------------------------------------------------
At December 31, Minimum Regulatory
Capital to Risk-Adjusted Assets 2003 2002 Capital Requirements
- -------------------------------------------------------------------------
Leverage ratio 9.0% 8.9% 4.00%
Tier 1 Risk-Based Capital 11.6% 11.8% 4.00%
Total Risk-Based Capital 12.9% 13.0% 8.00%
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
All of the Company's banking subsidiary 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
32
(i.e. deposits/borrowings) positions as the beginning base. The forecast balance
sheet is processed against three interest rate scenarios. The scenarios include
a 200 basis point rising rate forecast, a flat rate forecast and a 200 basis
point falling rate forecast which take place within a one year time frame. The
net interest income is measured during the year assuming a gradual change in
rates over the twelve-month horizon. The Company's 2004 net interest income, as
forecast below, was modeled utilizing a forecast balance sheet projected from
year-end 2003 balances.
Table Ten below summarizes the effect on net interest income (NII) of a
+/-200 basis point change in interest rates as measured against a constant rate
(no change) scenario.
Table Ten: Interest Rate Risk Simulation of Net Interest as of December 31, 2003
- --------------------------------------------------------------------------------
(dollars in thousands) $ Change in NII
from Current
12 Month Horizon
----------------
Variation from a constant rate scenario
+200bp $ 427
-200bp $ (592)
The simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations. Therefore,
they do not reflect likely actual results, but serve as conservative estimates
of interest rate risk.
Interest Rate Sensitivity Analysis
Interest rate sensitivity is a function of the repricing
characteristics of the portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity. Interest rate sensitivity management focuses on the
maturity of assets and liabilities and their repricing during periods of changes
in market interest rates. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the current
portfolio that are subject to repricing at various time horizons. The
differences are known as interest sensitivity gaps.
A positive cumulative gap may be equated to an asset sensitive
position. An asset sensitive position in a rising interest rate environment will
cause a bank's interest rate margin to expand. This results as floating or
variable rate loans reprice more rapidly than fixed rate certificates of deposit
that reprice as they mature over time. Conversely, a declining interest rate
environment will cause the opposite effect. A negative cumulative gap may be
equated to a liability sensitive position. A liability sensitive position in a
rising interest rate environment will cause a bank's interest rate margin to
contract, while a declining interest rate environment will have the opposite
effect.
33
As reflected in Table Eleven below, at December 31, 2003, the
cumulative gap through the one-year time horizon indicates a slightly liability
sensitive position.
Table Eleven: Interest Rate Sensitivity
December 31, 2003
- --------------------------------------------------------------------------------------------------------------
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 $ 3,657 $ 1,703 $ 6,582 $ 84,100 $ -- $ 96,042
Loans and leases 139,584 26,256 20,359 76,265 -- 262,464
Other assets -- -- -- -- 38,887 38,887
- --------------------------------------------------------------------------------------------------------------
Total assets $ 143,241 $ 27,959 $ 26,941 $ 160,365 $ 38,887 $ 397,393
==============================================================================================================
Liabilities:
Noninterest bearing $ -- $ -- $ -- $ -- $ 102,308 $ 102,308
Interest bearing:
Transaction 14,203 5,681 4,261 4,261 -- 28,406
Money market 51,213 20,547 15,409 15,409 -- 102,578
Savings 8,797 3,519 1,759 3,519 -- 17,594
Time certificates 33,350 16,020 12,229 10,022 -- 71,621
Short-term borrowings 20,600 14,000 -- -- -- 34,600
Long-term borrowings 5 5 12 1,920 -- 1,942
Other liabilities -- -- -- -- 2,887 2,887
Shareholders' equity -- -- -- -- 35,457 35,457
- --------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 128,168 $ 59,772 $ 33,670 $ 35,131 $ 140,652 $ 397,393
==============================================================================================================
Interest rate
sensitivity gap $ 15,073 $ (31,813) $ (6,729) $ 125,234 $ (101,765)
Cumulative interest
rate sensitivity gap $ 15,073 $ (16,740) $ (23,469) $ 101,765 --
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, 2003, 2002 and 2001.
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, 2003 were
approximately $71,858,000 and $741,000, 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.
34
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, 2003,
consolidated liquid assets totaled $56.8 million or 14.3% of total assets
compared to $49.7 million or 14.5% of total assets on December 31, 2002. In
addition to liquid assets, the Company maintains short-term lines of credit in
the amount of $31,000,000 with correspondent banks. At December 31, 2003, the
Company had $21,400,000 available under these credit lines. Additionally, the
Subsidiary Banks are members of the FHLB. At December 31, 2003, the Subsidiary
Banks could have arranged for up to $34,690,000 in secured borrowings from the
FHLB. These borrowings are secured by pledged mortgage loans and investment
securities. At December 31, 2003, the Company had $13,077,000 available under
these secured borrowing arrangements. American River Bank also has informal
agreements with various other banks to sell participations in loans, if
necessary. The Company serves primarily a business and professional customer
base and, as such, its deposit base is susceptible to economic fluctuations.
Accordingly, management strives to maintain a balanced position of liquid assets
to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
Available-for-Sale category to meet liquidity needs. Due to the falling interest
rate environment throughout the last half of 2000 and continuing through the end
of 2003, much of the investment portfolio has experienced significant price
appreciation, which has resulted in unrealized gains. These unrealized gains
allow the Company the ability to sell these securities should the liquidity
needs arise. These securities are also available to pledge as collateral for
borrowings if the need should arise. American River Bank has established a
master repurchase agreement with a correspondent bank to enable such
transactions. American River Bank and North Coast Bank can also pledge
securities to borrow from the FRB and the FHLB.
The principal cash requirements of the Company are for expenses
incurred in the support of administration and operations. For nonbanking
functions, the Company is dependent upon the payment of cash dividends from its
subsidiaries to service its commitments. The Company expects that the cash
dividends paid by its subsidiaries to the Company will be sufficient to meet
this payment schedule. The maturity distribution of certificates of deposit is
set forth in Table Twelve below for the periods presented. These deposits are
generally more rate sensitive than other deposits and, therefore, are more
likely to be withdrawn to obtain higher yields elsewhere if available.
Table Twelve: Certificates of Deposit Maturities
December 31, 2003
- --------------------------------------------------------------------------------
(dollars in thousands) Over $100,000 Less than $100,000
- --------------------------------------------------------------------------------
Three months or less $ 21,668 $ 7,090
Over three months through six months 11,391 5,367
Over six months through twelve months 8,479 4,635
Over twelve months 7,545 5,446
- --------------------------------------------------------------------------------
Total $ 49,083 $ 22,538
================================================================================
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, 2003
- --------------------------------------------------------------------------------
One year One year through Over
(dollars in thousands) or less five years five years Total
- --------------------------------------------------------------------------------
Commercial $ 28,699 $ 22,345 $ 6,302 $ 57,346
Real estate 41,096 37,110 108,286 186,492
Agriculture 943 5,681 1,403 8,027
Consumer 658 2,993 2,299 5,950
Leases 3,455 5,808 13 9,276
- --------------------------------------------------------------------------------
Total $ 74,851 $ 73,937 $ 118,303 $ 267,091
================================================================================
35
Loans and leases shown above with maturities greater than one year
include $166,132,000 of floating interest rate loans and $26,108,000 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.
Table Fourteen: Securities Maturities and Weighted Average Yields
December 31, 2003, 2002 and 2001
- -----------------------------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis)
2003 2002 2001
-----------------------------------------------------------------------------
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 $ 3,573 3.70% $ 4,907 6.46% $ 6,024 6.31%
Maturing after 1 year but within 5 17,877 3.75% 15,660 4.26% 12,479 5.30%
years
State & political subdivisions
Maturing within 1 year 452 6.17% 779 6.89% -- --
Maturing after 1 year but within 5 967 5.69% 1,139 6.48% 1,889 6.65%
years
Maturing after 5 years but within 10 6,188 7.18% 3,215 7.46% 1,903 7.62%
years
Maturing after 10 years 4,454 7.44% 5,475 7.55% 6,148 7.49%
Government sponsored mortgage-backed
securities 26,757 4.47% 29,280 4.57% 1,104 5.26%
Other
Maturing within 1 year 1,514 1.84% 254 7.40% 4,533 3.67%
Maturing after 1 year but within 5 273 3.94% 816 3.55% 789 4.62%
years
Non maturing 631 6.64% 351 6.61% 594 7.54%
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities $ 62,686 4.55% $ 61,876 5.13% $ 35,463 5.86%
=======================================================================================================================
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 -- -- 200 6.77% 1,323 6.51%
years
Maturing after 5 years but within 10 -- -- -- -- 16 15.84%
years
Government sponsored mortgage-backed
securities 26,960 4.06% 10,852 5.05% 11,770 5.92%
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities $ 27,160 4.08% $ 12,185 5.22% $ 13,109 5.99%
=======================================================================================================================
The carrying values of available-for-sale securities includes net
unrealized gains of $1,430,000, $2,149,000 and $796,000 at December 31, 2003,
2002 and 2001, respectively. The carrying values of held-to-maturity securities
do not include unrealized gains, however, the net unrealized gains at December
31, 2003, 2002 and 2001 were $56,000, $201,000 and $125,000, 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, 2003, 2002 and 2001 was $1,546,000, $1,562,000 and $340,000,
respectively.
36
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.
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
risk (dollars in thousands):
December 31,
-----------------------
2002 2002
---------- ----------
Commitments to extend credit:
Revolving lines of credit secured by
1-4 family residences $ 3,017 $ 2,431
Commercial real estate, construction and land
development commitments:
Secured by real estate 20,269 18,281
Not secured by real estate 1,800 1,821
Credit card arrangements 483 460
Other unused commitments, principally
commercial loans 46,289 38,721
---------- ----------
$ 71,858 $ 61,714
========== ==========
Letters of credit $ 741 $ 3,668
========== ==========
As of December 31, 2003, 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.
37
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, 2003.
Table Fifteen: Contractual Obligations Payments due by period
(dollars in thousands) ---------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
---------------------------------------------------------
Long-Term Debt $ 1,942 $ 54 $ 117 $ 1,771 $ --
Capital Lease Obligations -- -- -- -- --
Operating Leases 4,271 673 1,410 1,070 1,118
Purchase Obligations -- -- -- -- --
Other Long-Term Liabilities Reflected on the
Company's Balance Sheet under GAAP 615 -- -- -- 615
- --------------------------------------------------------------------------------------------------------
Total $ 6,828 $ 727 $ 1,527 $ 2,841 $ 1,733
========================================================================================================
Included in Table 15, above, are amounts payable under the Company's
Deferred Compensation and Deferred Fees Plans. These amounts represented
$615,000 and are anticipated to be primarily payable at least five years in the
future.
Accounting Pronouncements
On April 30, 2003, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This Statement amends and clarifies the
accounting for derivative instruments by providing guidance related to
circumstances under which a contract with a net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. The Statement also
clarifies when a derivative contains a financing component. The Statement is
intended to result in more consistent reporting for derivative contracts and
must be applied prospectively for contracts entered into or modified after June
30, 2003, except for hedging relationships designated after June 30, 2003. The
Company adopted the provisions of this Statement on July 1, 2003 and, in
management's opinion, adoption of this Statement did not have a material impact
on the Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. For mandatorily redeemable
financial instruments of a nonpublic entity, this Statement shall be effective
for existing or new contracts for fiscal periods beginning after December 15,
2004. The Company adopted the provisions of this Statement on July 1, 2003 and,
in management's opinion, adoption of this Statement did not have a material
impact on the Company's consolidated financial position or results of
operations.
In December 2003, the FASB revised FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). This interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial Statements,
addresses consolidation by business enterprises of variable interest entities
that possess certain characteristics. FIN 46 requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. The Company adopted FIN 46 on December 31, 2003. In
management's opinion, the adoption of this interpretation did not have a
material impact on the Company's consolidated financial position or results of
operations.
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
38
investment in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It includes
such loans acquired in purchase business combinations and applies to all
nongovernmental entities, including not-for-profit organizations. This SOP does
not apply to loans originated by the entity. This SOP limits the yield that may
be accreted (accretable yield) to the excess of the investor's estimate of
undiscounted expected principal, interest, and other cash flows (cash flows
expected at acquisition to be collected) over the investor's initial investment
in the loan. This SOP requires that the excess of contractual cash flows over
cash flows expected to be collected (nonaccretable difference) not be recognized
as an adjustment of yield, loss accrual, or valuation allowance. This SOP
prohibits investors from displaying accretable yield and nonaccretable
difference in the balance sheet. Subsequent increases in cash flows expected to
be collected generally should be recognized prospectively through adjustment of
the loan's yield over its remaining life. Decreases in cash flows expected to be
collected should be recognized as impairment, thereby retaining the accretable
yield on the loan as adjusted.
This SOP prohibits "carrying over" or creation of valuation allowances
in the initial accounting for all 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. Management has not completed its evaluation of the
impact this pronouncement may have 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 32-33.
39
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report 41
Consolidated Balance Sheet, December 31, 2003 and 2002 42
Consolidated Statement of Income for the Years Ended
December 31, 2003, 2002 and 2001 43
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001 44
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 45-46
Notes to Consolidated Financial Statements 47-75
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.
40
INDEPENDENT AUDITOR'S REPORT
----------------------------
The Shareholders and Board of Directors
American River Holdings and Subsidiaries
We have audited the accompanying consolidated balance sheet of American
River Holdings and subsidiaries as of December 31, 2003 and 2002 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, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American River Holdings and subsidiaries as of December 31, 2003 and 2002, 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, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ PERRY-SMITH LLP
Sacramento, California
February 4, 2004
41
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2003 and 2002
(Dollars in thousands)
2003 2002
---------- ----------
ASSETS
Cash and due from banks $ 29,797 $ 25,899
Interest-bearing deposits in banks 4,650 5,938
Investment securities (Notes 3 and 8):
Available for sale, at fair value 62,686 61,876
Held to maturity, at amortized cost (fair value of $27,216 and
$12,386 at December 31, 2003 and 2002, respectively) 27,160 12,185
Loans and leases, less allowance for loan and lease losses of
$3,949 in 2003 and $3,197 in 2002 (Notes 4, 8, 9, 11 and 16) 262,464 229,008
Premises and equipment, net (Note 5) 1,505 1,665
Federal Home Loan Bank and Federal Reserve Bank stock 1,546 1,562
Accounts receivable servicing receivables, net (Note 6) 1,778 1,396
Accrued interest receivable and other assets (Notes 10 and 15) 5,807 3,034
---------- ----------
$ 397,393 $ 342,563
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 102,308 $ 81,974
Interest-bearing (Note 7) 220,199 193,822
---------- ----------
Total deposits 322,507 275,796
Short-term borrowings (Note 8) 34,600 30,550
Long-term debt (Note 9) 1,942 1,992
Accrued interest payable and other liabilities 2,887 2,499
---------- ----------
Total liabilities 361,936 310,837
---------- ----------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 12 and 13):
Common stock - no par value; 20,000,000 shares authorized;
issued and outstanding - 4,055,260 shares in 2003 and
3,938,883 shares in 2002 16,693 16,064
Retained earnings 17,900 14,358
Accumulated other comprehensive income (Notes 3 and 17) 864 1,304
---------- ----------
Total shareholders' equity 35,457 31,726
---------- ----------
$ 397,393 $ 342,563
========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
42
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
2003 2002 2001
---------- ---------- ----------
Interest income:
Interest and fees on loans and leases $ 16,744 $ 15,400 $ 17,883
Interest on Federal funds sold 48 80 202
Interest on deposits in banks 168 267 342
Interest and dividends on investment securities:
Taxable 2,312 2,359 1,871
Exempt from Federal income taxes 475 460 464
Dividends 21 19 81
---------- ---------- ----------
Total interest income 19,768 18,585 20,843
---------- ---------- ----------
Interest expense:
Interest on deposits (Note 7) 2,390 3,168 6,042
Interest on short-term borrowings (Note 8) 391 220 97
Interest on long-term debt (Note 9) 121 124 127
---------- ---------- ----------
Total interest expense 2,902 3,512 6,266
---------- ---------- ----------
Net interest income 16,866 15,073 14,577
Provision for loan and lease losses (Note 4) 946 644 791
---------- ---------- ----------
Net interest income after provision for loan
and lease losses 15,920 14,429 13,786
---------- ---------- ----------
Noninterest income:
Service charges 534 563 562
Gain on sale of available-for-sale investment securities
(Note 3) 33
Other income (Note 14) 1,686 1,760 1,803
---------- ---------- ----------
Total noninterest income 2,253 2,323 2,365
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits (Notes 4 and 15) 6,233 5,595 5,334
Occupancy (Notes 5 and 11) 817 840 810
Furniture and equipment (Notes 5 and 11) 653 620 564
Other expense (Note 14) 2,669 2,334 2,794
---------- ---------- ----------
Total noninterest expense 10,372 9,389 9,502
---------- ---------- ----------
Income before income taxes 7,801 7,363 6,649
Income taxes (Note 10) 3,060 2,904 2,612
---------- ---------- ----------
Net income $ 4,741 $ 4,459 $ 4,037
========== ========== ==========
Basic earnings per share (Note 12) $ 1.19 $ 1.13 $ 1.01
========== ========== ==========
Diluted earnings per share (Note 12) $ 1.10 $ 1.05 $ .95
========== ========== ==========
Cash dividends per share of issued and outstanding common
stock, adjusted for stock dividends $ .30 $ .23 $ .17
========== ========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
43
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
Accum-
ulated
Common Stock Other
--------------------------- Compre- Share- Compre-
Retained hensive holders' hensive
Shares Amount Earnings Income Equity Income
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1, 2001 3,592,737 $ 12,320 $ 11,876 $ 217 $ 24,413
Comprehensive income (Note 17):
Net income 4,037 4,037 $ 4,037
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 268 268 268
------------
Total comprehensive income $ 4,305
============
Cash dividends ($.17 per share) (681) (681)
5% stock dividend 180,797 1,935 (1,935)
Fractional shares redeemed (7) (7)
Stock options exercised 39,849 265 265
Retirement of common stock (Note 12) (33,807) (353) (353)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 3,779,576 14,167 13,290 485 27,942
Comprehensive income (Note 17):
Net income 4,459 4,459 $ 4,459
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 819 819 819
------------
Total comprehensive income $ 5,278
============
Cash dividend ($.23 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 12) (66,510) (808) (808)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 3,938,883 16,064 14,358 1,304 31,726
Comprehensive income (Note 17):
Net income 4,741 4,741 $ 4,741
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (Note 3) (440) (440) (440)
------------
Total comprehensive income $ 4,301
============
Cash dividend ($.30 per share) (1,192) (1,192)
Fractional shares redeemed (225) (7) (7)
Stock options exercised 135,704 653 653
Retirement of common stock (Note 12) (19,102) (24) (24)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 4,055,260 $ 16,693 $ 17,900 $ 864 $ 35,457
============ ============ ============ ============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
44
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 4,741 $ 4,459 $ 4,037
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 946 644 791
Increase (decrease) in deferred loan and lease origination
fees, net 95 158 (173)
Depreciation and amortization 484 464 439
Amortization (accretion) of investment security premiums
and discounts, net 936 394 (46)
Provision for (reduction in) accounts receivable servicing
receivable allowance for losses 1 (27) 10
Gain on sale of available-for-sale investment securities (33)
Gain on sale of other real estate (13)
Increase in cash surrender value of life insurance policies (27)
Deferred tax benefit (474) (304) (179)
(Increase) decrease in accrued interest receivable and
other assets (389) 679 (180)
Increase (decrease) in accrued interest payable
and other liabilities 331 611 (678)
---------- ---------- ----------
Net cash provided by operating activities 6,611 7,065 4,021
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment
securities 6,274 252 1,979
Proceeds from called available-for-sale investment
securities 250 1,500
Proceeds from matured available-for-sale investment
securities 6,840 10,880 9,020
Proceeds from matured held-to-maturity investment
securities 1,125 2,050
Purchases of available-for-sale investment securities (24,015) (39,112) (13,203)
Purchases of held-to-maturity investment securities (25,432) (4,249) (5,193)
Proceeds from principal repayments for available-for-sale
mortgage-backed securities 8,911 2,399 92
Proceeds from principal repayments for held-to-maturity
mortgage-backed securities 8,890 5,050 3,378
Net decrease (increase) in interest-bearing deposits in banks 1,288 (198) (200)
Net (increase) decrease in loans and leases (34,491) (34,826) 5,023
Net (increase) decrease in accounts receivable servicing
receivables (383) 1,500 301
Purchases of equipment (320) (222) (629)
Net decrease (increase) in FHLB and FRB stock 16 (1,222) (25)
Proceeds from the sale of other real estate 61
Purchase of life insurance policies (1,614)
---------- ---------- ----------
Net cash (used in) provided by investing activities (52,911) (59,437) 4,093
---------- ---------- ----------
(Continued)
45
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
2003 2002 2001
---------- ---------- ----------
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings
deposits $ 47,477 $ 24,691 $ 7,764
Net (decrease) increase in time deposits (766) (3,783) 7,812
Repayment of long-term debt (50) (47) (45)
Increase (decrease) in short-term borrowings 4,050 30,550 (15,990)
Exercise of stock options 653 236 265
Cash paid to repurchase common stock (24) (808) (353)
Payment of cash dividends (1,135) (716) (640)
Cash paid for fractional shares in connection with stock
dividends and stock splits (7) (8) (7)
---------- ---------- ----------
Net cash provided by (used in) financing activities 50,198 50,115 (1,194)
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents 3,898 (2,257) 6,920
Cash and cash equivalents at beginning of year 25,899 28,156 21,236
---------- ---------- ----------
Cash and cash equivalents at end of year $ 29,797 $ 25,899 $ 28,156
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 2,980 $ 3,473 $ 6,299
Income taxes $ 3,242 $ 2,753 $ 2,954
Non-cash investing activities:
Net change in unrealized gain on available-for-sale
investment securities $ (719) $ 1,353 $ 446
Transfer of corporate debt securities from the held-to-
maturity category to the available-for-sale category $ 3,089
Other real estate acquired $ 48
Non-cash financing activities:
Dividends declared and unpaid $ 608 $ 551 $ 353
The accompanying notes are an integral
part of these consolidated financial statements.
46
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS OF THE COMPANY
American River Holdings (the "Company") was incorporated under the laws
of the State of California in 1995. As a bank holding company, the
Company is authorized to engage in the activities permitted under the
Bank Holding Company Act of 1956, as amended, and regulations
thereunder. As a community oriented bank holding company, the principal
communities served are located in Sacramento, Placer, Yolo, El Dorado,
Sonoma, Napa, Marin and Mendocino counties.
The Company's active wholly-owned subsidiaries include American River
Bank (ARB), First Source Capital and North Coast Bank (NCB). ARB was
incorporated in 1983. ARB accepts checking and savings deposits, offers
money market deposit accounts and certificates of deposit, makes
secured and unsecured commercial, secured real estate, and other
installment and term loans and offers other customary banking services.
ARB operates four banking offices in Sacramento and Placer counties.
First Source Capital was formed in July 1999 to conduct lease financing
activities for most types of business assets. First Source Capital acts
as a lease broker and receives a fee for each lease recorded on the
books of the party acting as the funding source.
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
generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
47
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
----------------
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one day periods. There were no
Federal funds sold on the consolidated balance sheet at December 31,
2003 or 2002.
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.
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.
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.
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.
48
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Sales and Servicing
------------------------
Included in the portfolio are Small Business Administration (SBA) 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, 2003, 2002 and
2001. 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, 2003 and 2002.
SBA and Farmer Mac loans with unpaid balances of $2,619,000 and
$3,970,000 were being serviced for others as of December 31, 2003 and
2002, respectively. The Company also serviced loans that are
participated with other financial institutions totaling $7,355,000 and
$8,102,000 as of December 31, 2003 and 2002, 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.
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.
49
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan and Lease Losses (Continued)
-----------------------------------
The allowance is established through a provision for loan and lease
losses which is charged to expense. Additions to the allowance are
expected to maintain the adequacy of the total allowance after credit
losses and loan growth. The allowance for loan and lease losses at
December 31, 2003 and 2002, respectively, reflect management's estimate
of possible losses in the portfolio.
Other Real Estate
-----------------
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the recorded investment in the loan balance and accrued interest
income over the estimated fair market value of the property is charged
against the allowance for loan and lease losses. A valuation allowance
for losses on other real estate is maintained to provide for temporary
declines in value. The allowance is established through a provision for
losses on other real estate which is included in other expenses.
Subsequent gains or losses on sales or writedowns resulting from
permanent impairments are recorded in other income or expense as
incurred. There was no other real estate held by the Company at
December 31, 2003 and 2002.
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.
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
(loss) income that historically has not been recognized in the
calculation of net income. Unrealized gains and losses on the Company's
available-for-sale investment securities are included in other
comprehensive (loss) income, adjusted for realized gains or losses
included in net income. Total comprehensive income and the components
of accumulated other comprehensive (loss) income are presented in the
consolidated statement of changes in shareholders' equity.
50
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
------------------
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method has been applied to
determine the dilutive effect of stock options in computing diluted
EPS. EPS is retroactively adjusted for stock splits and stock dividends
for all periods presented.
Stock-Based Compensation
------------------------
At December 31, 2003, the Company has two stock-based compensation
plans, which are described more fully in Note 12. The Company accounts
for these plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. 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 earnings and
earnings per share are disclosed during the years in which the options
become vested. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation.
Year Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
(Dollars in thousands, except
per share data)
Net income, as reported $ 4,741 $ 4,459 $ 4,037
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 (150) (174) (126)
---------- ---------- ----------
Pro forma net income $ 4,611 $ 4,285 $ 3,911
========== ========== ==========
Basic earnings per share - as reported $ 1.19 $ 1.13 $ 1.01
Basic earnings per share - pro forma $ 1.16 $ 1.08 $ .98
Diluted earnings per share - as reported $ 1.10 $ 1.05 $ .95
Diluted earnings per share - pro forma $ 1.07 $ 1.02 $ .92
Weighted average fair value of options granted
during the year $ 5.25
51
AMERICAN RIVER HOLDINGS 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 years ended
December 31, 2002 and 2001.
2003
--------------
Dividend yield 1.74% to 1.88%
Expected volatility 19.4% to 19.6%
Risk-free interest rate 2.91% to 3.52%
Expected option life 7 years
Impact of New Financial Accounting Standards
--------------------------------------------
In April 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This Statement amends and clarifies the accounting
for derivative instruments by providing guidance related to
circumstances under which a contract with a net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. The
Statement also clarifies when a derivative contains a financing
component. The Statement is intended to result in more consistent
reporting for derivative contracts and must be applied prospectively
for contracts entered into or modified after June 30, 2003, except for
hedging relationships designated after June 30, 2003. The Company
adopted the provisions of this Statement on July 1, 2003 and, in
management's opinion, adoption of this Statement did not have a
material impact on the Company's consolidated financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. For mandatorily
redeemable financial instruments of a nonpublic entity, this Statement
shall be effective for existing or new contracts for fiscal periods
beginning after December 15, 2004. The Company adopted the provisions
of this Statement on July 1, 2003 and, in management's opinion,
adoption of this Statement did not have a material impact on the
Company's consolidated financial position or results of operations.
In December 2003, the FASB revised FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). This
interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises
of variable interest entities that possess certain characteristics. FIN
46 requires that if a business enterprise has a controlling financial
interest in a variable interest entity, the assets, liabilities, and
results of the activities of the variable interest entity must be
included in the consolidated financial statements with those of the
business enterprise. The Company adopted FIN 46 on December 31, 2003.
In management's opinion, the adoption of this interpretation did not
have a material impact on the Company's consolidated financial position
or results of operations.
52
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards (Continued)
--------------------------------------------
In 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 includes such
loans acquired in purchase business combinations and applies to all
nongovernmental entities, including not-for-profit organizations. This
SOP does not apply to loans originated by the entity. This SOP limits
the yield that may be accreted (accretable yield) to the excess of the
investor's estimate of undiscounted expected principal, interest, and
other cash flows (cash flows expected at acquisition to be collected)
over the investor's initial investment in the loan. This SOP requires
that the excess of contractual cash flows over cash flows expected to
be collected (nonaccretable difference) not be recognized as an
adjustment of yield, loss accrual, or valuation allowance. This SOP
prohibits investors from displaying accretable yield and nonaccretable
difference in the balance sheet. Subsequent increases in cash flows
expected to be collected generally should be recognized prospectively
through adjustment of the loan's yield over its remaining life.
Decreases in cash flows expected to be collected should be recognized
as impairment, thereby retaining the accretable yield on the loan as
adjusted.
This SOP prohibits "carrying over" or creation of valuation allowances
in the initial accounting for all 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. Management has not completed its evaluation of
the impact this pronouncement may have on the Company's financial
position or results of operations.
3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at December 31, 2003 and 2002 consisted of the following (dollars in
thousands):
Available-for-Sale:
------------------
2003
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
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 and other 586 50 (5) 631
---------- ---------- ---------- ----------
$ 61,256 $ 1,555 $ (125) $ 62,686
========== ========== ========== ==========
53
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
------------------
2002
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Government agencies $ 19,735 $ 832 $ 20,567
Mortgage-backed securities 28,792 490 $ (2) 29,280
Obligations of states and
political subdivisions 9,822 786 10,608
Corporate debt securities 1,045 25 1,070
Corporate stock 333 19 (1) 351
---------- ---------- ---------- ----------
$ 59,727 $ 2,152 $ (3) $ 61,876
========== ========== ========== ==========
Net unrealized gains on available-for-sale investment securities
totaling $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 year
ended December 31, 2003.
Net unrealized gains on available-for-sale investment securities
totaling $2,149,000 were recorded, net of $845,000 in tax liabilities,
as accumulated other comprehensive income within shareholders' equity
at December 31, 2002. Proceeds from the sale of available-for-sale
investment securities for the years ended December 31, 2002 and 2001
totaled $252,000 and $1,979,000, respectively. No gains or losses were
recognized. There were no transfers of available-for-sale investment
securities during the years ended December 31, 2002 and 2001.
Held-to-Maturity:
----------------
2003
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
Obligations of states and
political subdivisions $ 200 $ 4 $ 204
Mortgage-backed securities 26,960 135 $ (83) 27,012
---------- ---------- ----------- ----------
$ 27,160 $ 139 (83) $ 27,216
========== ========== =========== ==========
54
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
Held-to-Maturity: (Continued)
----------------
2002
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
Obligations of states and
political subdivisions $ 1,333 $ 37 $ 1,370
Mortgage-backed securities 10,852 170 $ (6) 11,016
---------- ---------- ---------- ----------
$ 12,185 $ 207 $ (6) $ 12,386
========== ========== =========== ==========
On January 1, 2001, all corporate debt securities were transferred from
the held-to-maturity category to the available-for-sale category upon
the adoption of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, issued by the Financial Accounting Standards Board.
The amortized cost and market value of the transferred securities on
the date of the transfer were $3,089,000 and $3,100,000, respectively.
Accordingly, unrealized gains of $11,000 were recorded, net of $4,000
in tax liabilities, as accumulated other comprehensive income within
shareholders' equity. There were no sales or other transfers of
held-to-maturity investment securities for the years ended December 31,
2003, 2002 and 2001.
The amortized cost and estimated market value of investment securities
at December 31, 2003 by contractual maturity are shown below (dollars
in thousands). Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to
call or prepay obligations with or without call or prepayment
penalties.
Available-for-Sale Held-to-Maturity
----------------------- -----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Within one year $ 5,805 $ 5,914 $ 200 $ 204
After one year through five years 18,503 18,996
After five years through ten years 5,472 5,934
After ten years 4,144 4,454
---------- ---------- ---------- ----------
33,924 35,298 200 204
Investment securities not due at
a single maturity date:
Mortgage-backed securities 26,746 26,757 26,960 27,012
Corporate stock 586 631
---------- ---------- ---------- ----------
$ 61,256 $ 62,686 $ 27,160 $ 27,216
========== ========== ========== ==========
Investment securities with amortized costs totaling $36,484,000 and
$35,005,000 and market value totaling $36,811,000 and $35,277,000 were
pledged to secure treasury tax and loan accounts, State Treasury funds
on deposit and short-term borrowing arrangements (see Note 8) at
December 31, 2003 and 2002, respectively.
55
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
Investment securities with unrealized losses at December 31, 2003 are
summarized and classified according to the duration of the loss period
as follows (dollars in thousands):
Less than 12 Months
------------------------
Fair Unrealized
Value Losses
---------- ----------
Available-for-Sale
------------------
U.S. Treasury securities and agencies $ 7,017 $ (14)
Mortgage-backed securities 7,239 (106)
Corporate stock 247 (5)
---------- ----------
$ 14,503 $ (125)
========== ==========
Held-to-Maturity
----------------
Mortgage-backed securities $ 8,579 $ (83)
========== ==========
Management periodically evaluates each investment security relying
primarily on industry analyst reports, 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 due only to interest rate fluctuations.
4. LOANS AND LEASES
Outstanding loans and leases are summarized as follows (dollars in
thousands):
December 31,
-----------------------
2003 2002
---------- ----------
Real estate - commercial $ 142,249 $ 119,977
Real estate - construction 37,434 32,385
Real estate - multi-family 5,301 7,573
Real estate - residential 1,508 1,661
Commercial 57,346 49,231
Lease financing receivable 9,276 6,766
Agriculture 8,027 8,824
Consumer 5,950 6,371
---------- ----------
267,091 232,788
Deferred loan and lease origination fees, net (678) (583)
Allowance for loan and lease losses (3,949) (3,197)
---------- ----------
$ 262,464 $ 229,008
========== ==========
Certain loans have been pledged to secure borrowing arrangements (see
Notes 8 and 9).
56
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. LOANS AND LEASES (Continued)
The components of the Company's leases receivable as of December 31 are
summarized below (dollars in thousands):
2003 2002
---------- ----------
Future minimum lease payments $ 9,828 $ 7,226
Residual interests 218 115
Unearned income (770) (575)
---------- ----------
$ 9,276 $ 6,766
========== ==========
Future minimum lease payments are as follows (dollars in thousands):
Year Ending
December 31,
------------
2004 $ 3,564
2005 3,107
2006 1,928
2007 927
2008 289
Thereafter 13
----------
$ 9,828
==========
Changes in the allowance for loan and lease losses were as follows
(dollars in thousands):
Year Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Balance, beginning of year $ 3,197 $ 2,614 $ 2,454
Provision charged to operations 946 644 791
Losses charged to allowance (354) (151) (711)
Recoveries 160 90 80
---------- ---------- ----------
Balance, end of year $ 3,949 $ 3,197 $ 2,614
========== ========== ==========
At December 31, 2003 and 2002, nonaccrual loans and leases totaled
$179,000 and $206,000, respectively. Interest foregone on nonaccrual
loans for the years ended December 31, 2003, 2002 and 2001 was not
material.
The recorded investment in loans and leases that were considered to be
impaired totaled $181,000 and $206,000 at December 31, 2003 and 2002,
respectively. The related allowance for loan and lease losses for these
loans and leases as determined under loan impairment standards at
December 31, 2003 and 2002 was $59,000 and $51,000, respectively. The
average recorded investment in impaired loans and leases for the years
ended December 31, 2003, 2002 and 2001 was $148,000, $472,000 and
$733,000, respectively. Interest income recognized on impaired loans
and leases using a cash-basis method for the years ended December 31,
2003, 2002 and 2001 was not material.
Salaries and employee benefits totaling $570,000, $543,000 and $483,000
have been deferred as loan and lease origination costs for the years
ended December 31, 2003, 2002 and 2001, respectively.
57
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (dollars in
thousands):
December 31,
------------------------
2003 2002
---------- ----------
Land $ 149 $ 149
Building and improvements 219 213
Furniture, fixtures and equipment 4,346 4,053
Leasehold improvements 802 783
---------- ----------
5,516 5,198
Less accumulated depreciation
and amortization (4,011) (3,533)
---------- ----------
$ 1,505 $ 1,665
========== ==========
Depreciation and amortization included in occupancy and furniture and
equipment expenses totaled $480,000, $464,000 and $439,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
6. ACCOUNTS RECEIVABLE SERVICING RECEIVABLES
The Company purchases existing accounts receivable on a discounted
basis from selected borrowers and assumes the related billing and
collection responsibilities. Accounts receivable servicing fees
included in other income totaled $247,000, $294,000 and $459,000 for
the years ended December 31, 2003, 2002 and 2001, respectively (see
Note 14). The valuation allowance for these receivables is not
significant.
7. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following (dollars in
thousands):
December 31,
------------------------
2003 2002
---------- ----------
Savings $ 17,594 $ 15,562
Money market 102,578 82,362
NOW accounts 28,406 23,511
Time, $100,000 or more 49,083 46,363
Other time 22,538 26,024
---------- ----------
$ 220,199 $ 193,822
========== ==========
58
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. INTEREST-BEARING DEPOSITS (Continued)
Aggregate annual maturities of time deposits are as follows (dollars in
thousands):
Year Ending
December 31,
------------
2004 $ 58,630
2005 5,622
2006 1,577
2007 2,415
2008 3,333
Thereafter 44
----------
$ 71,621
==========
Interest expense recognized on interest-bearing deposits consisted of
the following (dollars in thousands):
Year Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Savings $ 35 $ 51 $ 166
Money market 884 901 1,849
NOW accounts 28 38 115
Time, $100,000 or more 743 1,022 1,917
Other time 700 1,156 1,995
---------- ---------- ----------
$ 2,390 $ 3,168 $ 6,042
========== ========== ==========
8. SHORT-TERM BORROWING ARRANGEMENTS
The Company has a total of $31,000,000 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. An advance
totaling $6,550,000 was outstanding from one of its correspondent banks
at December 31, 2002, bearing an interest rate of 1.75% and maturing
January 1, 2003.
In addition, the Company has a line of credit available with the
Federal Home Loan Bank which is secured by pledged mortgage loans (see
Note 9) and investment securities (see Note 3). Borrowings may include
overnight advances as well as loans with a term of up to thirty years.
Advances totaling $25,000,000 were outstanding from the Federal Home
Loan Bank at December 31, 2003, bearing interest rates ranging from
1.03% to 1.45% and maturing between January 2, 2004 and November 1,
2004. Advances totaling $24,000,000 were outstanding from the Federal
Home Loan Bank at December 31, 2002, bearing interest rates ranging
from 1.57% to 1.87% and maturing between January 28, 2003 and October
30, 2003.
The Company has also been issued $667,000 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 2003 and
management does not expect to draw upon these lines in the future.
59
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. LONG-TERM DEBT
The Company can borrow up to $14,595,000 from the Federal Home Loan
Bank on either a short-term or long-term basis, secured by qualifying
mortgage loans with unpaid balances of $26,367,000 at December 31,
2003. Long-term debt consisted of an advance from the Federal Home Loan
Bank totaling $1,942,000 and $1,992,000 at December 31, 2003 and 2002,
respectively, bearing a fixed interest rate of 6.13%, due in monthly
installments of approximately $14,000, including principal and
interest, with the final principal payment of $1,771,000 due December
21, 2007.
Future minimum principal payments on long-term debt are as follows
(dollars in thousands):
Year Ending
December 31,
------------
2004 $ 54
2005 57
2006 60
2007 1,771
----------
$ 1,942
==========
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 2003,
2002 and 2001 consisted of the following (dollars in thousands):
Federal State Total
---------- ---------- ----------
2003
----
Current $ 2,566 $ 968 $ 3,534
Deferred (332) (142) (474)
---------- ---------- ----------
Income tax expense $ 2,234 $ 826 $ 3,060
========== ========== ==========
2002
----
Current $ 2,388 $ 820 $ 3,208
Deferred (229) (75) (304)
---------- ---------- ----------
Income tax expense $ 2,159 $ 745 $ 2,904
========== ========== ==========
2001
----
Current $ 2,000 $ 791 $ 2,791
Deferred (145) (34) (179)
---------- ---------- ----------
Income tax expense $ 1,855 $ 757 $ 2,612
========== ========== ==========
60
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following (dollars
in thousands):
December 31,
------------------------
2003 2002
---------- ----------
Deferred tax assets:
Allowance for loan and lease losses $ 1,561 $ 1,207
Future benefit of State tax deduction 292 280
Deferred compensation 390 175
Other 12 27
---------- ----------
Total deferred tax assets 2,255 1,689
---------- ----------
Deferred tax liabilities:
Discount on purchased loans (10) (21)
Future liability of State deferred tax assets (158) (110)
Unrealized gain on available-for-sale investment
securities (566) (845)
Federal Home Loan Bank stock dividends (63) (36)
Other (28)
---------- ----------
Total deferred tax liabilities (825) (1,012)
---------- ----------
Net deferred tax assets $ 1,430 $ 677
========== ==========
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,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Federal income tax statutory rate 34.0% 34.0% 34.0%
State franchise tax, net of Federal tax effect 6.9% 6.8% 7.0%
Tax benefit of interest on obligations of
states and political subdivisions (2.1)% (2.1)% (2.2)%
Other .4% .7% .5%
---------- ---------- ----------
Total income tax expense 39.2% 39.4% 39.3%
========== ========== ==========
11. COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases branch facilities, administrative offices and
various equipment under noncancelable operating leases which expire on
various dates through the year 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
16).
61
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
------
Future minimum lease payments are as follows (dollars in thousands):
Year Ending
December 31,
------------
2004 $ 673
2005 736
2006 674
2007 518
2008 552
Thereafter 1,118
----------
$ 4,271
==========
Rental expense included in occupancy, furniture and equipment expense
totaled $600,000, $616,000 and $631,000 for the years ended December
31, 2003, 2002 and 2001, respectively.
Financial Instruments With Off-Balance-Sheet Risk
-------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing
needs of its customers and to reduce its exposure to fluctuations in
interest rates. These financial instruments consist of commitments to
extend credit and letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amount recognized on the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit
is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and letters
of credit as it does for loans included on the consolidated balance
sheet.
The following financial instruments represent off-balance-sheet credit
risk (dollars in thousands):
December 31,
-----------------------
2003 2002
---------- ----------
Commitments to extend credit:
Revolving lines of credit secured by
1-4 family residences $ 3,017 $ 2,431
Commercial real estate, construction and land
development commitments:
Secured by real estate 20,269 18,281
Not secured by real estate 1,800 1,821
Credit card arrangements 483 460
Other unused commitments, principally commercial loans 46,289 38,721
---------- ----------
$ 71,858 $ 61,714
========== ==========
Letters of credit $ 741 $ 3,668
========== ==========
62
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
-------------------------------------------------
Real estate commitments are generally secured by property with a
loan-to-value ratio of 65% to 80%. In addition, the majority of the
Company's commitments have variable interest rates.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any conditions established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each client's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but may include
accounts receivable, inventory, equipment and deeds of trust on
residential real estate and income-producing commercial properties.
Letters of credit are conditional commitments issued to guarantee the
performance or financial obligation of a client to a third party. The
credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to clients.
Significant Concentrations of Credit Risk
-----------------------------------------
The Company grants real estate mortgage, real estate construction,
commercial, agricultural and consumer loans to clients throughout
Sacramento, Placer, Yolo, El Dorado, Sonoma, Napa, Marin and Mendocino
counties.
In management's judgment, a concentration exists in real estate-related
loans which represented approximately 69.8% and 69.4%% of the Company's
loan portfolio at December 31, 2003 and 2002, 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 $3,552,000 at December 31, 2003.
Federal Reserve Requirements
----------------------------
Banks are required to maintain reserves with the Federal Reserve Bank
equal to a percentage of their reservable deposits. Reserve balances
held with the Federal Reserve Bank totaled $0 and $533,000 at December
31, 2003 and 2002, respectively.
Contingencies
-------------
The Company is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to such actions will not
materially affect the financial position or results of operations of
the Company.
63
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. SHAREHOLDERS' EQUITY
Earnings Per Share
------------------
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows (dollars and
shares in thousands, except per share data):
Weighted
Average
Number of
Net Shares Per-Share
For the Year Ended Income Outstanding Amount
-------------------------------- ---------- ---------- ----------
December 31, 2003
-----------------
Basic earnings per share $ 4,741 3,989 $ 1.19
==========
Effect of dilutive stock options 329
---------- ----------
Diluted earnings per share $ 4,741 4,318 $ 1.10
========== ========== ==========
December 31, 2002
-----------------
Basic earnings per share $ 4,459 3,951 $ 1.13
==========
Effect of dilutive stock options 298
---------- ----------
Diluted earnings per share $ 4,459 4,249 $ 1.05
========== ========== ==========
December 31, 2001
-----------------
Basic earnings per share $ 4,037 3,993 $ 1.01
==========
Effect of dilutive stock options 254
---------- ----------
Diluted earnings per share $ 4,037 4,247 $ .95
========== ========== ==========
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, 2003, grants
outstanding combined with shares available for future grants totaled
960,592 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.
64
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
------------------
A summary of the combined activity within the plans follows:
2003 2002 2001
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding,
beginning of year 624,667 $ 4.98 664,797 $ 5.00 732,816 $ 5.03
Options granted 62,068 $ 14.91
Options exercised (135,704) $ 4.37 (40,130) $ 4.58 (41,841) $ 4.48
Options canceled (1,682) $ 5.23 (26,178) $ 10.23
---------- ---------- ----------
Options outstanding,
end of year 549,349 $ 6.39 624,667 $ 4.98 664,797 $ 5.00
========== ========== ==========
Options exercisable,
end of year 483,807 $ 5.25 587,274 $ 4.81 561,006 $ 4.61
========== ========== ==========
A summary of options outstanding at December 31, 2003 follows:
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 2003 Life 2003
------------------------ ------------- ------------- -------------
$ 3.34 41,863 2.8 years 41,863
$ 3.48 216,035 1.6 years 216,035
$ 3.71 6,273 .2 years 6,273
$ 4.57 6,129 2.6 years 6,129
$ 5.23 50,238 6.0 years 50,238
$ 5.53 44,850 4.7 years 44,850
$ 6.14 30,211 3.4 years 30,211
$ 8.85 17,364 5.9 years 13,891
$ 9.05 13,674 5.0 years 13,674
$ 9.75 60,643 4.7 years 60,643
$ 14.89 61,342 9.4 years
$ 16.14 727 9.5 years
------------- -------------
549,349 483,807
============= =============
Common Stock Repurchase Program
-------------------------------
During 1997, the Board of Directors authorized the annual repurchase of
up to five percent of the Company's common stock in conjunction with
recurring annual distributions of a five percent common stock dividend.
Repurchases are generally made in the open market at market prices.
65
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. SHAREHOLDERS' EQUITY (Continued)
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.
13. 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. In addition, under applicable laws, the Office
of the Comptroller of the Currency (the "OCC") restricts the total
dividend payment of any national banking association in any calendar
year to the net income of the year, as defined, combined with the net
income for the two preceding years, less distributions made to
shareholders during the same three-year period. At December 31, 2003,
the subsidiaries had $10,649,000 in retained earnings available for
dividend payments to the Company.
Regulatory Capital
------------------
The Company and its banking subsidiaries are subject to certain
regulatory capital requirements administered by the Board of Governors
of the Federal Reserve System, the FDIC and OCC. Failure to meet these
minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the banking
subsidiaries must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and its banking subsidiaries' capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its banking subsidiaries to maintain
minimum amounts and ratios of total and Tier 1 capital to risk-weighted
assets and of Tier 1 capital to average assets. Each of these
components is defined in the regulations. Management believes that the
Company and its banking subsidiaries met all their capital adequacy
requirements as of December 31, 2003 and 2002.
66
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. REGULATORY MATTERS (Continued)
Regulatory Capital (Continued)
------------------
In addition, the most recent notifications from the FDIC and OCC
categorized each of the banking subsidiaries as well capitalized under
the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the banking subsidiaries must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth below. There are no conditions or events since those
notifications that management believes have changed the categories.
December 31,
--------------------------------------------------
2003 2002
----------------------- -----------------------
Amount Ratio Amount Ratio
---------- ---------- ---------- ----------
(dollars in thousands)
Leverage Ratio
--------------
American River Holdings and Subsidiaries $ 34,529 9.0% $ 30,350 8.9%
Minimum regulatory requirement $ 15,419 4.0% $ 12,328 4.0%
American River Bank $ 28,955 9.5% $ 24,986 10.0%
Minimum requirement for "Well-Capitalized" institution $ 15,251 5.0% $ 12,521 5.0%
Minimum regulatory requirement $ 12,201 4.0% $ 10,017 4.0%
North Coast Bank $ 5,663 7.1% $ 5,168 9.0%
Minimum requirement for "Well-Capitalized" institution $ 4,008 5.0% $ 2,861 5.0%
Minimum regulatory requirement $ 3,206 4.0% $ 2,289 4.0%
Tier 1 Risk-Based Capital Ratio
-------------------------------
American River Holdings and Subsidiaries $ 34,529 11.6% $ 30,350 11.8%
Minimum regulatory requirement $ 11,877 4.0% $ 10,284 4.0%
American River Bank $ 28,955 12.2% $ 24,986 11.8%
Minimum requirement for "Well-Capitalized" institution $ 14,267 6.0% $ 12,701 6.0%
Minimum regulatory requirement $ 9,511 4.0% $ 8,467 4.0%
North Coast Bank $ 5,663 9.7% $ 5,168 11.2%
Minimum requirement for "Well-Capitalized" institution $ 3,505 6.0% $ 2,773 6.0%
Minimum regulatory requirement $ 2,336 4.0% $ 1,849 4.0%
Total Risk-Based Capital Ratio
------------------------------
American River Holdings and Subsidiaries $ 38,244 12.9% $ 33,547 13.0%
Minimum regulatory requirement $ 23,773 8.0% $ 20,568 8.0%
American River Bank $ 31,928 13.4% $ 27,555 13.0%
Minimum requirement for "Well-Capitalized" institution $ 23,785 10.0% $ 21,169 10.0%
Minimum regulatory requirement $ 19,028 8.0% $ 16,935 8.0%
North Coast Bank $ 6,395 10.9% $ 5,746 12.4%
Minimum requirement for "Well-Capitalized" institution $ 5,858 10.0% $ 4,627 10.0%
Minimum regulatory requirement $ 4,687 8.0% $ 3,702 8.0%
67
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income consisted of the following (dollars in
thousands):
Year Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Accounts receivable servicing fees (Note 6) $ 247 $ 294 $ 459
Merchant fee income 357 344 277
Income from residential lending division 366 278 274
Fees from lease brokerage services 381 459 264
Financial services income 69 71 90
Other 266 314 439
---------- ---------- ----------
$ 1,686 $ 1,760 $ 1,803
========== ========== ==========
Noninterest expense consisted of the following (dollars in thousands):
Year Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Professional fees $ 335 $ 262 $ 411
Outsourced item processing 361 359 385
Telephone and postage 275 278 313
Advertising and promotion 198 200 275
Stationery and supplies 175 212 203
Directors' compensation 353 248 209
Other operating expenses 972 775 998
---------- ---------- ----------
$ 2,669 $ 2,334 $ 2,794
========== ========== ==========
15. EMPLOYEE BENEFIT PLANS
American River Holdings 401(k) Plan
-----------------------------------
The American River Holdings 401(k) Plan commenced January 1, 1993 and
is available to all employees. Under the plan, the Company will match
50% of each participants' contribution up to a maximum of 6% of their
annual compensation. Employer contributions vest at a rate of 20% per
year over a five year period and totaled $116,000, $109,000 and
$111,000 for the years ended December 31, 2003, 2002 and 2001,
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.
68
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. EMPLOYEE BENEFIT PLANS (Continued)
American River Holdings Deferred Compensation Plan
--------------------------------------------------
The Company has established a Deferred Compensation Plan for certain
members of the management 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 $615,000, $437,000 and $351,000 at December 31, 2003,
2002 and 2001, 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 $42,000 for the year ended December 31, 2003.
16. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company enters into
transactions with related parties, including Directors and affiliates.
These transactions include borrowings from the Company with
substantially the same terms, including rates and collateral, as loans
to unrelated parties. The following is a summary of the aggregate
activity involving related party borrowers during 2003 (dollars in
thousands):
Balance, January 1, 2003 $ 4,092
Disbursements 4,988
Amounts repaid 542
----------
Balance, December 31, 2003 $ 8,538
==========
Undisbursed commitments to related parties,
December 31, 2003 $ 563
==========
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 $109,000, $106,000 and $105,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
69
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. OTHER COMPREHENSIVE (LOSS) INCOME
At December 31, 2003, 2002 and 2001, 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, 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
========== ========== ==========
For the Year Ended December 31, 2001
------------------------------------
Other comprehensive income:
Unrealized holding gains $ 446 $ (178) $ 268
========== ========== ==========
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which
it is practicable to estimate fair value. These estimates are made at a
specific point in time based on relevant market data and information
about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering the Company's
entire holdings of a particular financial instrument for sale at one
time, nor do they attempt to estimate the value of anticipated future
business related to the instruments. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the fair values presented.
The following methods and assumptions were used by the Company to
estimate the fair value of its financial instruments at December 31,
2003 and 2002:
Cash and cash equivalents and short-term borrowings: For cash and cash
equivalents and short-term borrowings, the carrying amount is estimated
to be fair value.
Interest-bearing deposits in banks: The fair values of interest-bearing
deposits in banks are estimated by discounting their future cash flows
using rates at each reporting date for instruments with similar
remaining maturities offered by comparable financial institutions.
70
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Investment securities: For investment securities, fair values are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices for
similar securities and indications of value provided by brokers.
Loans and leases: For variable-rate loans and leases that reprice
frequently with no significant change in credit risk, fair values are
based on carrying values. The fair values for other loans and leases
are estimated using discounted cash flow analyses, using interest rates
being offered at each reporting date for loans and leases with similar
terms to borrowers of comparable creditworthiness. The carrying amount
of accrued interest receivable approximates its fair value.
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.
Long-term debt: The fair value of long-term debt is estimated using a
discounted cash flow analysis using interest rates currently available
for similar debt instruments.
Commitments to extend credit: Commitments to extend credit are
primarily for variable rate loans. For these commitments, there is no
difference between the committed amounts and their fair values.
Commitments to fund fixed rate loans and letters of credit are at rates
which approximate fair value at each reporting date.
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows (dollars in thousands):
December 31, 2003 December 31, 2002
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 29,797 $ 29,797 $ 25,899 $ 25,899
Interest-bearing deposits in banks 4,650 4,656 5,938 5,988
Investment securities 89,846 89,902 74,061 74,262
Loans and leases 262,464 262,360 229,008 229,904
FHLB and FRB stock 1,546 1,546 1,562 1,562
Accounts receivable servicing
receivables 1,778 1,778 1,396 1,396
Accrued interest receivable 1,557 1,557 1,486 1,486
Cash surrender value of life
insurance policies 1,641 1,641
71
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
December 31, 2003 December 31, 2002
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial liabilities:
Deposits $ 322,507 $ 322,792 $ 275,796 $ 276,238
Short-term borrowings 34,600 34,600 30,550 30,550
Long-term debt 1,942 2,174 1,992 2,089
Accrued interest payable 225 225 303 303
72
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
December 31, 2003 and 2002
(Dollars in thousands)
2003 2002
---------- ----------
ASSETS
Cash and due from banks $ 402 $ 342
Investment in subsidiaries 35,731 31,684
Dividends receivable from subsidiaries 350 851
Other assets 674 126
---------- ----------
$ 37,157 $ 33,003
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable to shareholders $ 608 $ 551
Other liabilities 1,092 726
---------- ----------
Total liabilities 1,700 1,277
---------- ----------
Shareholders' equity:
Common stock 16,693 16,064
Retained earnings 17,900 14,358
Accumulated other comprehensive income 864 1,304
---------- ----------
Total shareholders' equity 35,457 31,726
---------- ----------
$ 37,157 $ 33,003
========== ==========
73
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
2003 2002 2001
---------- ---------- ----------
Income:
Dividends declared by subsidiaries -
eliminated in consolidation $ 950 $ 1,815 $ 1,282
Management fee from subsidiaries - eliminated
in consolidation 1,781 1,242 1,199
Other income 10
---------- ---------- ----------
Total income 2,741 3,057 2,481
---------- ---------- ----------
Expenses:
Salaries and employee benefits 2,104 1,437 1,228
Professional fees 93 72 100
Directors' compensation 274 176 144
Other expenses 454 393 315
---------- ---------- ----------
Total expenses 2,925 2,078 1,787
---------- ---------- ----------
(Loss) income before equity in undistributed
income of subsidiaries (184) 979 694
Equity in undistributed income of subsidiaries 4,487 3,169 3,115
---------- ---------- ----------
Income before income taxes 4,303 4,148 3,809
Income tax benefit 438 311 228
---------- ---------- ----------
Net income $ 4,741 $ 4,459 $ 4,037
========== ========== ==========
74
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 4,741 $ 4,459 $ 4,037
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiaries (4,487) (3,169) (3,115)
Increase in other assets (47) (532) (240)
Increase in other liabilities 366 410 186
---------- ---------- ----------
Net cash provided by operating activities 573 1,168 868
---------- ---------- ----------
Cash flows from financing activities:
Cash dividends paid (1,135) (716) (640)
Exercise of stock options 653 236 265
Cash paid to repurchase common stock (24) (808) (353)
Cash paid for fractional shares in connection
with stock dividends and stock splits (7) (8) (7)
---------- ---------- ----------
Net cash used in financing activities (513) (1,296) (735)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 60 (128) 133
Cash and cash equivalents at beginning of year 342 470 337
---------- ---------- ----------
Cash and cash equivalents at end of year $ 402 $ 342 $ 470
========== ========== ==========
75
Selected Quarterly Information (Unaudited)
- -----------------------------------------------------------------------------------------------
(In thousands, except per share and price range of common stock)
- -----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
- -----------------------------------------------------------------------------------------------
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 $ .27 $ .33 $ .31 $ .28
Diluted earnings per share .25 .30 .29 .26
Cash dividends per share -- .15 -- .15
- -----------------------------------------------------------------------------------------------
Price range, common stock $14.12-15.93 $14.57-17.17 $15.35-22.90 $17.25-23.65
===============================================================================================
2002
Interest income $ 4,465 $ 4,486 $ 4,732 $ 4,902
Net interest income 3,583 3,623 3,820 4,047
Provision for loan and lease losses 148 186 160 150
Noninterest income 492 552 619 660
Noninterest expense 2,344 2,288 2,285 2,472
Income before taxes 1,583 1,701 1,994 2,085
Net income 961 1,027 1,200 1,271
- -----------------------------------------------------------------------------------------------
Basic earnings per share $ .24 $ .26 $ .31 $ .32
Diluted earnings per share .23 .24 .28 .30
Cash dividends per share -- .09 -- .14
- -----------------------------------------------------------------------------------------------
Price range, common stock $9.97-12.22 $11.87-13.48 $11.59-13.45 $11.17-15.89
===============================================================================================
The earnings per share and price range have been adjusted for a 3 for 2 stock
split in 2003 and a 5% stock dividend in 2002.
76
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, 2003. There have been no disagreements
with such independent accountants during the last two fiscal years ended
December 31, 2003, 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, 2003, 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.
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
2004 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
2004 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
2004 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2004 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
77
ITEM 14. Principal Accountant 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
2004 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits.
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and among
the Registrant, ARH Interim National Bank and North Coast
Bank, N.A., dated as of March 1, 2000 (included as Annex A).
**
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the period ended December 31, 2000, filed with
the Commission on April 2, 2001.
(3.2) Bylaws, as amended, incorporated by reference from Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2001, filed with the Commission on May 14,
2001.
(4.1) Specimen of the Registrant's common stock certificate. **
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership, dated
April 1, 2000, related to 1545 River Park Drive, Suite 107,
Sacramento, California. **
(10.2) Lease agreement and addendum between American River Bank and
Bradshaw Plaza Group each dated January 31, 2000, related to
9750 Business Park Drive, Sacramento, California. **
(10.3) Lease agreement between American River Bank and Marjorie G.
Taylor dated April 5, 1984, and addendum dated July 16, 1997,
related to 10123 Fair Oaks Boulevard, Fair Oaks, California.
**
(10.4) Lease agreement between American River Bank and Sandalwood
Land Company dated August 28, 1996, related to 2240 Douglas
Boulevard, Suite 100, Roseville, California. **
(10.5) Lease agreement between American River Holdings and Union Bank
of California dated June 29, 1999, related to 1540 River Park
Drive, Suite 108, Sacramento, California. **
*(10.6) American River Holdings 1995 Stock Option Plan. **
*(10.7) Form of Nonqualified Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.8) Form of Incentive Stock Option Agreement under the 1995 Stock
Option Plan. **
78
*(10.9) American River Holdings 401(k) Plan and amendment no. 1 dated
April 1, 1998. **
*(10.10) American River Holdings Stock Option Gross-Up Plan and
Agreement, as amended, dated May 20, 1998. **
*(10.11) American River Holdings Deferred Compensation Plan dated May
1, 1998. **
*(10.12) American River Holdings Deferred Fee Plan dated April 1, 1998.
**
*(10.16) American River Bank Employee Severance Policy dated March 18,
1998. **
*(10.20) American River Holdings Incentive Compensation Plan for the
Year Ended December 31, 2000, incorporated by reference from
Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000, filed with the
Commission on November 14, 2000.
(10.21) Amendment No. 1 dated March 1, 2001, to the lease agreement
between American River Holdings and Union Bank of California
dated June 29, 1999, related to 1540 River Park Drive, Suite
108 and Suite 106, Sacramento, California, incorporated by
reference from Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the period ended December 31, 2000, filed with
the Commission on April 2, 2001.
*(10.22) First Amendment dated December 20, 2000, to the American River
Holdings Deferred Compensation Plan dated May 1, 1998,
incorporated by reference from Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the period ended December 31,
2000, filed with the Commission on April 2, 2001.
*(10.23) Amendment No. 1 to the American River Holdings Incentive
Compensation Plan, incorporated by reference from Exhibit
10.23 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2001, filed with the Commission on
August 14, 2001.
*(10.24) American River Holdings Employee Stock Purchase Plan dated
November 21, 2001, incorporated by reference from Exhibit
10.24 to the Company's Annual Report on Form 10-K for the
period ended December 31, 2001, filed with the Commission on
March 26, 2002.
(10.25) Amendment No. 2 dated March 20, 2002, to the lease agreement
between American River Holdings and Union Bank of California
dated June 29, 1999, related to 1540 River Park Drive, Suite
108 and Suite 106, Sacramento, California, incorporated by
reference from Exhibit 10.24 to the Company's Form 10-Q for
the period ended March 31, 2002, filed with the Commission on
May 3, 2002.
(10.27) 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. **
(10.28) Amendment No. 3 dated March 18, 2003, to the lease agreement
between American River Holdings and Union Bank of California
dated June 29, 1999, related to 1540 River Park Drive, Suite
108 and Suite 106, Sacramento, California, incorporated by
reference from Exhibit 10.28 to the Company's Form 10-Q for
the period ended March 31, 2003, filed with the Commission on
May 12, 2003.
(10.29) 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 Company's Form 10-Q for
the period ended September 30, 2003, filed with the Commission
on November 7, 2003.
79
*(10.30) Employment Agreement between American River Holdings and David
T. Taber dated August 22, 2003, incorporated by reference from
Exhibit 10.30 to the Company's Form 10-Q for the period ended
September 30, 2003, filed with the Commission on November 7,
2003.
*(10.31) Employment Agreement between American River Bank and William
L. Young dated August 22, 2003, incorporated by reference from
Exhibit 10.31 to the Company's Form 10-Q for the period ended
September 30, 2003, filed with the Commission on November 7,
2003.
(10.32) 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.
*(10.33) 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.
*(10.34) Salary Continuation Agreement between American River Holdings
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.
*(10.35) 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.
*(10.36) Salary Continuation Agreement between American River Bank and
William L. Young dated August 22, 2003, incorporated by
reference from Exhibit 10.36 to the Company's Form 10-Q for
the period ended September 30, 2003, filed with the Commission
on November 7, 2003.
(14.1) American River Holdings Code of Ethics
(21.1) As of the date of this report, 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 American River Holdings 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.
(b) Reports on Form 8-K
On October 16, 2003, the Company filed a Report on Form 8-K announcing
its financial results for the third quarter and year-to-date 2003
financial results.
80
On October 17, 2003, the Company filed a Report on Form 8-K announcing
the resignation of Bill Young as Director of American River Holdings
and President and Chief Executive Officer of American River Bank. Mr.
Young's resignation was based on personal family related reasons and
not due to any disagreement with the Registrant's operations, polices
or practices.
On October 30, 2003, the Company filed a Report on Form 8-K announcing
the execution of a Plan of Reorganization and Merger Agreement and the
filing of applications with the California Department of Financial
Institutions and the Federal Deposit Insurance Corporation to obtain
approval of a proposed merger of Registrant's bank subsidiaries, North
Coast Bank, National Association and American River Bank.
On December 19, 2003, the Company filed a Report on Form 8-K announcing
a $0.15 cash dividend.
An Annual Report for the fiscal year ended December 31, 2003 and Notice
of Annual Meeting and Proxy Statement for the Company's 2004 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.
81
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 HOLDINGS
March 15, 2004 By: /s/ DAVID T. TABER
- -------------- -------------------------------------
David T. Taber
Chief Executive Officer
(Principal Executive Officer)
March 15, 2004 By: /s/ MITCHELL A. DERENZO
- -------------- -------------------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting
Officer)
82
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 3/17/04
- ------------------------------
Charles D. Fite
/s/ ROGER J. TAYLOR Director, Vice Chairman 3/17/04
- ------------------------------
Roger J. Taylor
/s/ AMADOR S. BUSTOS Director 3/17/04
- ------------------------------
Amador S. Bustos
/s/ SAM J. GALLINA Director 3/17/04
- ------------------------------
Sam J. Gallina
/s/ WAYNE C. MATTHEWS Director 3/17/04
- ------------------------------
Wayne C. Matthews
/s/ WILLIAM A. ROBOTHAM Director 3/17/04
- ------------------------------
William A. Robotham
/s/ DAVID T. TABER Director 3/17/04
- ------------------------------
David T. Taber
/s/ STEPHEN H. WAKS Director 3/17/04
- ------------------------------
Stephen H. Waks
/s/ MICHAEL A. ZIEGLER Director 3/17/04
- ------------------------------
Michael A. Ziegler
83
EXHIBIT INDEX
Exhibit Number Description Page
- --------------------------------------------------------------------------------
14.1 American River Holdings Code of Ethics 85-86
23.1 Consent of Perry-Smith LLP 87
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 88
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 89
32.1 Certification of American River Holdings by its
Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 90
84