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