UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITUES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-31525
AMERICAN RIVER BANKSHARES
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(Exact name of registrant as specified in its charter)
California 68-0352144
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State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
3100 Zinfandel Drive, Rancho Cordova, California 95670
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 916-851-0123
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
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Common Stock, no par value NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
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None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter. $49,157,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 5, 2009, the registrant's no par value Common Stock totaled
5,797,533 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form
10-K: Part III, Items 10 through 14 from Registrant's definitive proxy statement
for the 2009 annual meeting of shareholders.
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AMERICAN RIVER BANKSHARES
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2008
Part I. Page
Item 1. Business 4
Item 1A. Risk Factors 19
Item 1B. Unresolved Staff Comments 23
Item 2. Properties 23
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Part II.
Item 5. Market For Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 25
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50
Item 8. Financial Statements and Supplementary Data 50
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 91
Item 9A. Controls and Procedures 91
Item 9B. Other Information 91
Part III.
Item 10. Directors, Executive Officers and Corporate Governance 92
Item 11. Executive Compensation 92
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 92
Item 13. Certain Relationships and Related Transactions, and
Director Independence 92
Item 14. Principal Accounting Fees and Services 92
Part IV.
Item 15. Exhibits and Financial Statement Schedules 92
Signatures 97
Exhibit Index 98
23.1 Consent of Independent Registered Accounting Firm 99
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 100
31.2 Certifications of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 101
32.1 Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 102
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PART I
Item 1. Business.
Cautionary Statements Regarding Forward-Looking Statements
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" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, Section 27A of the
Securities Act of 1933, as amended, and subject to the safe-harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may contain words related to future projections including, but not
limited to, words such as "believe," "expect," "anticipate," "intend," "may,"
"will," "should," "could," "would," and variations of those words and similar
words that are subject to risks, uncertainties and other factors that could
cause actual results to differ significantly from those projected. Factors that
could cause or contribute to such differences include, but are not limited to,
the following: (1) the duration of financial and economic volatility and actions
taken by the United States Congress and governmental agencies, including the
United States Department of the Treasury, to deal with challenges to the U.S.
financial system; (2) variances in the actual versus projected growth in assets
and return on assets; (3) loan and lease losses; (4) expenses; (5) changes in
the interest rate environment including interest rates charged on loans, earned
on securities investments and paid on deposits and other borrowed funds; (6)
competition effects; (7) fee and other noninterest income earned; (8) general
economic conditions nationally, regionally, and in the operating market areas of
the Company and its subsidiaries; (9) changes in the regulatory environment
including government intervention in the U.S. financial system; (10) changes in
business conditions and inflation; (11) changes in securities markets, public
debt markets, and other capital markets; (12) data processing and other
operational systems failures or fraud; (13) a decline in real estate values in
the Company's operating market areas; (14) the effects of uncontrollable events
such as terrorism, the threat of terrorism or the impact of the current military
conflicts in Afghanistan and Iraq and the conduct of the war on terrorism by the
United States and its allies, worsening financial and economic conditions,
natural disasters, and disruption of power supplies and communications; and (15)
changes in accounting standards, tax laws or regulations and interpretations of
such standards, laws or regulations, as well as other factors. The factors set
forth under "Item 1A-Risk Factors" in this report and other cautionary
statements and information set forth in this report should be carefully
considered and understood as being applicable to all related forward-looking
statements contained in this report, when evaluating the business prospects of
the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. The future results
and shareholder values may differ significantly from those expressed in these
forward-looking statements. You are cautioned not to put undue reliance on any
forward-looking statement. Any such statement speaks only as of the date of this
report, and in the case of any documents that may be incorporated by reference,
as of the date of those documents. We do not undertake any obligation to update
or release any revisions to any forward-looking statements, to report any new
information, future event or other circumstances after the date of this report
or to reflect the occurrence of unanticipated events, except as required by law.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent reports filed with the Securities and Exchange
Commission (the "SEC") on Forms 10-K, 10-Q and 8-K.
Introduction
American River Bankshares (the "Company") is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. The Company
was incorporated under the laws of the State of California in 1995. As a bank
holding company, the Company is authorized to engage in the activities permitted
under the Bank Holding Company Act of 1956, as amended, and regulations
thereunder. Its principal office is located at 3100 Zinfandel Drive, Suite 450,
Rancho Cordova, California 95670 and its telephone number is (916) 851-0123.
The Company owns 100% of the issued and outstanding common shares of
its banking subsidiary, American River Bank, and American River Financial, a
California corporation which has been inactive since its incorporation in 2003.
American River Bank was incorporated and commenced business in Fair
Oaks, California, in 1983 and thereafter moved its headquarters to Sacramento,
California in 1985. American River Bank operates five full service offices and
one convenience office in Sacramento and Placer Counties including the main
office located at 1545 River Park Drive, Suite 107, Sacramento and branch
offices located at 520 Capitol Mall, Suite 100, Sacramento; 9750 Business Park
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Drive, Sacramento; 10123 Fair Oaks Boulevard, Fair Oaks and 2240 Douglas
Boulevard, Roseville. The convenience office (limited service office) is located
at 3100 Zinfandel Drive, Suite 450, Rancho Cordova. American River Bank also
operates three full service offices in Sonoma County located at 412 Center
Street, Healdsburg; 8733 Lakewood Drive, Windsor and 90 South E Street, Suite
110, Santa Rosa, operated under the name "North Coast Bank, a division of
American River Bank." North Coast Bank was incorporated and commenced business
in 1990 as Windsor Oaks National Bank in Windsor, California. In 1997, the name
was changed to North Coast Bank. In 2000, North Coast Bank was acquired by the
Company as a separate bank subsidiary. Effective December 31, 2003, North Coast
Bank was merged with and into American River Bank.
On December 3, 2004, the Company acquired Bank of Amador located in
Jackson, California. Bank of Amador was merged with and into American River Bank
and now operates three full service banking offices as "Bank of Amador, a
division of American River Bank" within its primary service area of Amador
County, in the cities of Jackson, Pioneer and Ione.
American River Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to applicable legal limits. American River
Bank is also participating in the FDIC Transaction Account Guarantee Program
("TAGP"). Under that program, through December 31, 2009, all noninterest-bearing
transaction accounts are fully guaranteed by the FDIC for the entire amount in
the account. Coverage under the TAGP is in addition to and separate from the
coverage available under the FDIC's general deposit insurance rules. American
River Bank does not offer trust services or international banking services and
does not plan to do so in the near future. American River Bank's primary
business is serving the commercial banking needs of small to mid-sized
businesses within those counties listed above. American River Bank accepts
checking and savings deposits, offers money market deposit accounts and
certificates of deposit, makes secured and unsecured commercial, secured real
estate, and other installment and term loans and offers other customary banking
services. American River Bank also conducts lease financing for most types of
business equipment, from computer software to heavy earth-moving equipment.
American River Bank owns 100% of two inactive companies, ARBCO and American
River Mortgage. ARBCO was formed in 1984 to conduct real estate development and
has been inactive since 1995. American River Mortgage has been inactive since
its formation in 1994.
During 2008, the Company conducted no significant activities other than
holding the shares of its subsidiaries. However, it is authorized, with the
prior approval of the Board of Governors of the Federal Reserve System (the
"Board of Governors"), the Company's principal regulator, to engage in a variety
of activities which are deemed closely related to the business of banking.
The common stock of the Company is registered under the Securities
Exchange Act of 1934, as amended, and is listed and traded on the Nasdaq Global
Select Market under the symbol "AMRB."
At December 31, 2008, the Company had consolidated assets of $563
million, deposits of $437 million and shareholders' equity of $63 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, and Amador counties. The Company
generates most of its revenue by providing a wide range of products and services
to small and middle-market businesses and individuals. The Company's principal
source of revenue comes from interest income. Interest income is derived from:
(i) interest and fees on loans and leases; (ii) interest on investments
(principally government securities); and (iii) interest on Federal funds sold
(funds loaned on a short-term basis to other banks). For the year ended December
31, 2008, these sources comprised 85.0%, 15.0%, and 0.0%, respectively, of the
Company's interest income.
American River Bank's deposits are not received from a single depositor
or group of affiliated depositors, the loss of any one of which would have a
materially adverse effect on the business of the Company. A material portion of
American River Bank's deposits are not concentrated within a single industry or
group of related industries.
As of December 31, 2008 and December 31, 2007, American River Bank held
$29,000,000 and $21,500,000, respectively, in certificates of deposit for the
State of California. In connection with these deposits, American River Bank is
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generally required to pledge securities to secure such deposits, except for the
first $250,000 on December 31, 2008 and $100,000 on December 31, 2007, which
were insured by the FDIC.
American River Bank competes with approximately 40 other banking or
savings institutions in Sacramento County and 32 in Placer County. American
River Bank's market share of FDIC insured deposits in the service areas of
Sacramento County and Placer County was approximately 1.3% in each year (based
upon the most recent information made available by the FDIC through June 30,
2008). North Coast Bank, a division of American River Bank, competes with
approximately 22 other banking or savings institutions in its service areas and
its market share of FDIC insured deposits in the service area of Sonoma County
was approximately .6% (based upon the most recent information made available by
the FDIC through June 30, 2008). Bank of Amador, a division of American River
Bank competes with approximately 6 other banking or savings institutions in its
service areas and its market share of FDIC insured deposits in the service area
of Amador County was approximately 14.0% (based upon the most recent information
made available by the FDIC through June 30, 2008).
Employees
At December 31, 2008, the Company and its subsidiaries employed 122
persons on a full-time equivalent basis. The Company believes its employee
relations are good.
Website Access
The Company maintains a website where certain information about the
Company is posted. Through the website, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
thereto, as well as Section 16 Reports and amendments thereto, are available as
soon as reasonably practicable after such material is electronically filed with
or furnished to the SEC. These reports are free of charge and can be accessed
through the address www.amrb.com by selecting the SEC Filings link located at
that address. Once you have selected the SEC Filings link you will have the
option to access the Section 16 Reports or the reports filed on Forms 10-K, 10-Q
and 8-K by the Company by selecting the appropriate link.
Supervision and Regulation
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 SEC.
American River Bank is licensed by the California Commissioner of
Financial Institutions (the "Commissioner"), its deposits are insured by the
FDIC up to the applicable legal limits, and, through December 31, 2009, American
River Bank is participating in the FDIC Transaction Account Guarantee Program
which guarantees 100% of the amount of all noninterest-bearing transaction
accounts. American River Bank 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 Commissioner and the FDIC. The supervision
and regulation includes comprehensive reviews of all major aspects of American
River Bank's business and condition, including its capital ratios, allowance for
possible loan and lease losses and other factors. However, no inference should
be drawn that such authorities have approved any such factors. American River
Bankshares and American River Bank are required to file reports with the Board
of Governors, the Commissioner, and the FDIC and provide the additional
information that the Board of Governors, the Commissioner, and the FDIC may
require.
American River Bankshares is a bank holding company within the meaning
of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company
Act"), and is registered as such with, and subject to the supervision of, the
Board of Governors. The Company is required to obtain the approval of the Board
of Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the California law implementing certain provisions of prior federal
law.
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
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loans by American River Bank to affiliates, and (b) on investments by American
River Bank in affiliates' stock as collateral for loans to any borrower. The
Company and its subsidiaries are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
In addition, regulations of the Board of Governors under the Federal
Reserve Act require that reserves be maintained by American River Bank in
conjunction with any liability of the Company under any obligation (promissory
note, acknowledgement of advance, banker's acceptance or similar obligation)
with a weighted average maturity of less than seven (7) years to the extent that
the proceeds of such obligations are used for the purpose of supplying funds to
American River Bank for use in its banking business, or to maintain the
availability of such funds.
Capital Standards
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies and
banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, American River Bankshares and
American River Bank are required to maintain capital equal to at least 8.0% of
its assets and commitments to extend credit, weighted by risk, of which at least
4.0% must consist primarily of common equity (including retained earnings) and
the remainder may consist of subordinated debt, cumulative preferred stock, or a
limited amount of loan and lease loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of those loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which includes,
among other items, limited life (and in the case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses. Tier 2 capital may also include up to 45% of the
pretax net unrealized gains on certain available-for-sale equity securities
having readily determinable fair values (i.e., the excess, if any, of fair
market value over the book value or historical cost of the investment security).
The Federal regulatory agencies reserve the right to exclude all or a portion of
the unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier 2
capital, but may be taken into account in the evaluation of overall capital
adequacy and net unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against risk. Each
institution is required to maintain a minimum risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
A leverage capital standard was adopted as a supplement to the
risk-weighted capital guidelines. Under the leverage capital standard, an
institution is required to maintain a minimum ratio of Tier 1 capital to the sum
of its quarterly average total assets and quarterly average reserve for loan
losses, less intangible assets not included in Tier 1 capital. Period-end assets
may be used in place of quarterly average total assets on a case-by-case basis.
The Board of Governors and the FDIC have also adopted a minimum leverage ratio
for bank holding companies as a supplement to the risk-weighted capital
guidelines. The leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1
capital to total assets) for the highest rated bank holding companies or those
that have implemented the risk-based capital market risk measure. All other bank
holding companies must maintain a minimum Tier 1 leverage ratio of 4% with
higher leverage capital ratios required for bank holding companies that have
significant financial and/or operational weakness, a high risk profile, or are
undergoing or anticipating rapid growth.
At December 31, 2008, American River Bankshares and American River Bank
were in compliance with the risk-weighted capital and leverage ratio guidelines.
Prompt Corrective Action
The Board of Governors and the FDIC have adopted regulations
implementing a system of prompt corrective action pursuant to Section 38 of the
Federal Deposit Insurance Act and Section 131 of the FDIC Improvement Act of
7
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
8
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and reporting
requirements. The FDICIA further generally prohibits an insured state bank from
engaging as a principal in any activity that is impermissible for a national
bank, absent FDIC determination that the activity would not pose a significant
risk to the Bank Insurance Fund, and that the bank is, and will continue to be,
within applicable capital standards.
The Federal Financial Institution Examination Counsel ("FFIEC")
utilizes the Uniform Financial Institutions Rating System ("UFIRS") commonly
referred to as "CAMELS" to classify and evaluate the soundness of financial
institutions. Bank examiners use the CAMELS measurements to evaluate capital
adequacy, asset quality, management, earnings, liquidity and sensitivity to
market risk. Effective January 1, 2005, bank holding companies such as the
Company, were subject to evaluation and examination under a revised bank holding
company rating system. The so-called BOPEC rating system implemented in 1979 was
primarily focused on financial condition, consolidated capital and consolidated
earnings. The rating system reflects the change toward analysis of risk
management (as reflected in bank examination under the CAMELS measurements), in
addition to financial factors and the potential impact of nondepository
subsidiaries upon depository institution subsidiaries.
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. In its most
recent exam for CRA compliance, American River Bank has a rating of
"satisfactory."
Limitations on Dividends
The Company's ability to pay cash dividends is subject to restrictions
set forth in the California General Corporation Law. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from its subsidiaries. The payment of cash
dividends and/or management fees by American River Bank is subject to
restrictions set forth in the California Financial Code, as well as restrictions
established by the FDIC. See Item 5. "Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities" for more
information regarding cash dividends.
Competition
Competitive Data
American River Bank. At June 30, 2008, 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 199 offices in the
cities of Fair Oaks, Rancho Cordova, Roseville and Sacramento, California, where
American River Bank has its 6 Sacramento area offices, 61 offices in the cities
of Healdsburg, Santa Rosa and Windsor, California, where American River Bank has
its 3 Sonoma County offices, and 3 offices in the cities of Jackson, Pioneer and
Ione, California, where American River Bank has its 3 Amador County offices.
Additionally, American River Bank competes with thrifts and, to a lesser extent,
credit unions, finance companies and other financial service providers for
deposit and loan customers.
9
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which American River Bank is not authorized nor prepared to
offer currently. American River Bank has made arrangements with its
correspondent banks and with others to provide some of these services for its
customers. For borrowers requiring loans in excess of American River Bank's
legal lending limits, American River Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other community banks, retaining the portion of such loans which is within
its lending limits. As of December 31, 2008, American River Bank's aggregate
legal lending limits to a single borrower and such borrower's related parties
were $10,467,000 on an unsecured basis and $17,444,000 on a fully secured basis
based on capital and allowable reserves of $69,777,000.
American River Bank's business is concentrated in its service area,
which primarily encompasses Sacramento County, South Western Placer County,
Sonoma County, and Amador County. The economy of American River Bank's service
area is dependent upon government, manufacturing, tourism, retail sales,
agriculture, population growth and smaller service oriented businesses.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2008, there were 239
operating commercial and savings bank offices in Sacramento County with total
deposits of $19,551,184,000. This was an increase of $1,255,518,000 over the
June 30, 2007 balances. American River Bank held a total of $245,861,000 in
deposits, representing approximately 1.3% of total commercial and savings banks
deposits in Sacramento County as of June 30, 2008.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2008, there were 121
operating commercial and savings bank offices in Placer County with total
deposits of $5,928,875,000. This was an increase of $209,273,000 over the June
30, 2007 balances. American River Bank held a total of $67,803,000 in deposits,
representing approximately 1.1% of total commercial and savings banks deposits
in Placer County as of June 30, 2008.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2008, there were 130
operating commercial and savings bank offices in Sonoma County with total
deposits of $9,782,120,000. This was an increase of $320,888,000 over the June
30, 2007 balances. American River Bank held a total of $60,399,000 in deposits,
representing approximately 0.6% of total commercial and savings banks deposits
in Sonoma County as of June 30, 2008.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2008, there were 13
operating commercial and savings bank offices in Amador County with total
deposits of $618,282,000. This was a decrease of $18,713,000 over the June 30,
2007 balances. American River Bank held a total of $86,766,000 in deposits,
representing approximately 14.0% of total commercial and savings bank deposits
in Amador County as of June 30, 2008.
FDIC Insurance
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. In 2005, Congress adopted the Federal
Deposit Insurance Reform Act of 2005 (the "Reform Act"), which had the effect of
merging the Bank Insurance Fund and the Savings Association Insurance Fund into
a new Deposit Insurance Fund ("DIF"). The FDIC released final regulations under
the Reform Act on November 2, 2006 that established a revised risk-based deposit
insurance assessment rate system for members of the DIF to insure, among other
matters, that there will be sufficient assessment income for repayment of DIF
obligations and to further refine the differentiation of risk profiles among
institutions as a basis for assessments. Under the new assessment rate system,
the FDIC set the assessment rates that became effective January 1, 2007 for most
institutions from $0.05 to $0.07 per $100 of insured deposits and established a
Designated Reserve Ratio ("DRR") for the DIF during 2007 of 1.25% of insured
deposits. The Reform Act required the FDIC to implement a restoration plan to
restore the DRR to not less than 1.15 percent of insured deposits within five
years. The Reform Act also provided a one-time assessment credit to be allocated
among institutions. American River Bank's allocated portion of such credit was
$290,000, which was applied to reduce its insurance premium assessments. The
credit was exhausted as of September 30, 2008.
The new assessment rate system consolidates the nine categories of the
prior assessment system into four categories (Risk Categories I, II, III and IV)
and three Supervisory Groups (A, B and C) based upon institution's capital
levels and supervisory ratings. Risk Category I includes all well capitalized
institutions with the highest supervisory ratings. Risk Category II includes
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adequately capitalized institutions that are assigned to Supervisory Groups A
and B. Risk Category III includes all undercapitalized institutions that are
assigned to Supervisory Groups A and B and institutions assigned to Supervisory
Group C that are not undercapitalized but have a low supervisory rating. Risk
Category IV includes all undercapitalized institutions that are assigned to
Supervisory Group C.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(the "EESA") was signed into law. The EESA temporarily raised the limit on
federal deposit insurance coverage provided by the FDIC from $100,000 to
$250,000 per depositor.
On October 14, 2008, the FDIC implemented the Temporary Liquidity
Guarantee Program (the "TLGP") to strengthen confidence and encourage liquidity
in the financial system. The TLGP includes the Transaction Account Guarantee
Program (the "TAGP"). The TAGP offers full guarantee for noninterest-bearing
transaction accounts held at FDIC-insured depository institutions. The unlimited
deposit coverage was voluntary for eligible institutions and was in addition to
the $250,000 FDIC deposit insurance per account that was included as part of the
EESA. The insured deposit limits are currently scheduled to return to $100,000
on January 1, 2010, except for certain retirement accounts. The TAGP coverage
became effective on October 14, 2008 and is scheduled to continue for
participating institutions until December 31, 2009. In addition to the existing
risk-based deposit insurance premium assessed on such deposits, TAGP
participants will be assessed, on a quarterly basis, an annualized 10 basis
point fee on balances in noninterest-bearing transaction accounts that exceed
the existing deposit insurance limit of $250,000. American River Bank has opted
to participate in the TAGP.
On December 16, 2008, the FDIC approved an earlier proposed seven basis
point rate increase for the first quarter 2009 assessment period effective
January 1, 2009 as part of the DIF restoration plan to achieve a minimum DRR of
1.15 percent within five years.
On February 27, 2009, the FDIC issued a press release with attached
final rule dated February 26, 2009, which established increased assessment rates
effective as of April 1, 2009 and included adjustments to improve
differentiation of risk profiles among institutions. The FDIC concurrently
proposed an interim rule that imposes a 20 basis point emergency special
assessment effective June 30, 2009, to be collected from all insured depository
institutions on September 30, 2009, in addition to the imposition of an
emergency special assessment of up to 10 basis points at the end of any calendar
quarter after June 30, 2009 if the FDIC determines the DIF reserve ratio will
fall to a level that would adversely affect public confidence, among other
factors. The proposed changes to differentiate risk profiles will require
riskier institutions to pay higher assessment rates based on classification into
one of four risk categories. Within each category, the FDIC will be able to
assess higher rates to institutions with a significant reliance on secured
liabilities, which generally raises the FDIC's loss in the event of failure
without providing additional assessment revenue. The proposal also would assess
higher rates for institutions with a significant reliance on brokered deposits
but, for well-managed and well-capitalized institutions, only when accompanied
by rapid asset growth. The proposal also would provide incentives in the form of
a reduction in assessment rates for institutions to hold long-term unsecured
debt and, for smaller institutions, high levels of Tier 1 capital. Together, the
changes would improve the way the system differentiates risk among insured
institutions and help ensure that a minimum DRR of at least 1.15 percent by the
end of 2013.
Based upon the announced increase in assessments for insured financial
institutions in 2009 as described above and the continuing adverse economic
conditions impacting financial institutions generally which may necessitate
further increases in assessments, the Company anticipates that such assessments
will have a significantly greater impact upon operating expenses in 2009
compared to 2008.
General Competitive Factors
In order to compete with the major financial institutions in its
primary service areas, American River Bank uses to the fullest extent possible
the flexibility which is accorded by their community banks status. This includes
an emphasis on specialized services, local promotional activity, and personal
contacts by their respective officers, directors and employees. American River
Bank also seeks 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.
Furthermore, American River Bank also assists those customers requiring services
not offered by either bank to obtain such services from correspondent banks.
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Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by a bank to obtain their
deposits and other borrowings and the interest rate received by a bank on loans
extended to customers and on securities held in a bank's portfolio comprise the
major portion of a bank's revenues.
The interest rate differentials of a bank, and therefore their
revenues, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on American River Bank is not
predictable.
Impact of Legislative and Regulatory Proposals
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank which has been in existence for at least five years.
The federal financial institution agencies, especially the Board of
Governors, have taken steps to increase the types of activities in which bank
holding companies can engage, and to make it easier to engage in such
activities.
Gramm-Leach-Bliley Act . In 1999, the Gramm-Leach-Bliley Act (the "GLB
Act") was signed into law. The GLB Act eliminates most of the remaining
depression-era "firewalls" between banks, securities firms and insurance
companies which was established by The Banking Act of 1933, also known as the
Glass-Steagall Act ("Glass-Steagall"). Glass-Steagall sought to insulate banks
as depository institutions from the perceived risks of securities dealing and
underwriting, and related activities. The GLB Act repealed Section 20 of
Glass-Steagall which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can now
acquire securities firms or create them as subsidiaries, and securities firms
can now acquire banks or start banking activities through a financial holding
company. The GLB Act includes provisions which permit national banks to conduct
financial activities through a subsidiary that are permissible for a national
bank to engage in directly, as well as certain activities authorized by statute,
or that are financial in nature or incidental to financial activities to the
same extent as permitted to a "financial holding company" or its affiliates.
This liberalization of United States banking and financial services regulation
applies both to domestic institutions and foreign institutions conducting
business in the United States. Consequently, the common ownership of banks,
securities firms and insurance firms is now possible, as is the conduct of
commercial banking, merchant banking, investment management, securities
underwriting and insurance within a single financial institution using a
"financial holding company" structure authorized by the GLB Act.
Prior to the GLB Act, significant restrictions existed on the
affiliation of banks with securities firms and on the direct conduct by banks of
securities dealing and underwriting and related securities activities. Banks
were also (with minor exceptions) prohibited from engaging in insurance
activities or affiliating with insurers. The GLB Act removed these restrictions
and substantially eliminated 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.
12
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the GLB Act, its bank holding company must
qualify as a financial holding company. A bank holding company will qualify if
(i) its banking subsidiaries are "well capitalized" and "well managed" and (ii)
it files with the Board of Governors a certification to such effect and a
declaration that it elects to become a financial holding company. The amendment
of the Bank Holding Company Act now permits financial holding companies to
engage in activities, and acquire companies engaged in activities, that are
financial in nature or incidental to such financial activities. Financial
holding companies are also permitted to engage in activities that are
complementary to financial activities if the Board of Governors determines that
the activity does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system in general. These standards
expand upon the list of activities "closely related to banking" which have to
date defined the permissible activities of bank holding companies under the Bank
Holding Company Act.
One further effect of the GLB Act is to require that federal financial
institution and securities regulatory agencies prescribe regulations to
implement the policy that financial institutions must respect the privacy of
their customers and protect the security and confidentiality of customers'
non-public personal information. These regulations require, in general, that
financial institutions (1) may not disclose non-public personal information of
customers to non-affiliated third parties without notice to their customers, who
must have the opportunity to direct that such information not be disclosed; (2)
may not disclose customer account numbers except to consumer reporting agencies;
and (3) must give prior disclosure of their privacy policies before establishing
new customer relationships.
Neither American River Bankshares or American River Bank have
determined whether or when they may seek to acquire and exercise powers or
activities under the GLB Act, and the extent to which competition will change
among financial institutions affected by the GLB Act has not yet become clear.
Patriot Act. On October 26, 2001, President Bush signed the USA Patriot
Act (the "Patriot Act"), which includes provisions pertaining to domestic
security, surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act
prohibits any insured financial institution such as American River Bank, from
providing correspondent accounts to foreign banks which do not have a physical
presence in any country (designated as "shell banks"), subject to certain
exceptions for regulated affiliates of foreign banks. Section 313(a) also
requires financial institutions to take reasonable steps to ensure that foreign
bank correspondent accounts are not being used to indirectly provide banking
services to foreign shell banks, and Section 319(b) requires financial
institutions to maintain records of the owners and agent for service of process
of any such foreign banks with whom correspondent accounts have been
established.
Effective July 23, 2002, Section 312 of the Patriot Act created a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
The Patriot Act contains various provisions in addition to Sections
313(a) and 312 that affect the operations of financial institutions by
encouraging cooperation among financial institutions, regulatory authorities and
law enforcement authorities with respect to individuals, entities and
organizations engaged in, or reasonably suspected of engaging in, terrorist acts
or money laundering activities. The Company and American River Bank are not
currently aware of any account relationships between American River Bank and any
foreign bank or other person or entity as described above under Sections 313(a)
or 312 of the Patriot Act.
Certain surveillance provisions of the Patriot Act were scheduled to
expire on December 31, 2005, and actions to restrict the use of the Patriot Act
surveillance provisions were filed by the ACLU and other organizations. On March
9, 2006, after temporary extensions of the Patriot Act, President Bush signed
the "USA Patriot Improvement and Reauthorization Act of 2005" and the "USA
Patriot Act Additional Reauthorizing Amendments Act of 2006," which reauthorized
13
all expiring provisions of the Patriot Act by making permanent 14 of the 16
provisions and imposed a four-year expiration date on December 31, 2009 on the
other two provisions related to "roving surveillance" and production of business
records.
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.
Sarbanes-Oxley Act. On July 30, 2002, President George W. Bush signed
into law the Sarbanes-Oxley Act of 2002 (the "Act") which responds to recent
issues in corporate governance and accountability. Among other matters, key
provisions of the Act and rules promulgated by the SEC pursuant to the Act
include the following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the
CEO and CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
o Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, and disclosure of any amendments
or waivers to such code of ethics.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an
"audit committee financial expert."
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, another
board committee or the entire board of directors certain material
violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to
within 2 business days of the date a transaction triggers an obligation
to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to a phased-in
reduction of the filing deadline for Form 10-K reports and Form 10-Q
reports.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as
soon as reasonably practicable after such reports and material are
filed with or furnished to the SEC.
o Rules requiring national securities exchanges and national securities
associations to prohibit the listing of any security whose issuer does
not meet audit committee standards established pursuant to the Act.
The Company's securities are listed on the Nasdaq Global Select Market.
Consequently, in addition to the rules promulgated by the SEC pursuant to the
Act, the Company must also comply with the listing standards applicable to
Nasdaq listed companies. The Nasdaq listing standards applicable to the Company
include standards related to (i) director independence, (ii) executive session
meetings of the board, (iii) requirements for audit, nominating and compensation
committee charters, membership qualifications and procedures, (iv) shareholder
approval of equity compensation arrangements, and (v) code of conduct
requirements that comply with the code of ethics under the Act.
The effect of the Act upon the Company is uncertain; however, the
Company has incurred and it is anticipated that it will continue to incur
increased costs to comply with the Act and the rules and regulations promulgated
pursuant to the Act by the SEC, Nasdaq and other regulatory agencies having
jurisdiction over the Company or the issuance and listing of its securities. The
14
Company does not currently anticipate, however, that compliance with the Act and
such rules and regulations will have a material adverse effect upon its
financial position or results of its operations or its cash flows. The Company
is required to report on internal controls over financial reporting in
accordance with Section 404 of the Act. The Company's reporting status changed
for 2008 from an accelerated filer to a non-accelerated filer under the Act with
the result that an attestation report from the Company's independent registered
public accountants is not required for the year ended December 31, 2008.
However, this is not anticipated to significantly reduce the Company's
accounting expenses.
Corporate Disclosure Act. Effective January 1, 2003, the California
Corporate Disclosure Act (the "CCD Act") required publicly traded corporations
incorporated or qualified to do business in California to disclose information
about their past history, auditors, directors and officers. Effective September
28, 2004, the CCD Act, as currently in effect and codified at California
Corporations Code Section 1502.1, requires the Company to file with the
California Secretary of State and disclose within 150 days after the end of its
fiscal year certain information including the following:
o The name of the a company's independent auditor and a description of
services, if any, performed for a company during the previous two
fiscal years and the period from the end of the most recent fiscal year
to the date of filing;
o The annual compensation paid to each director and the five most highly
compensated non-director executive officers (including the CEO) during
the most recent fiscal year, including all plan and non-plan
compensation for all services rendered to a company as specified in
Item 402 of Regulation S-K such as grants, awards or issuance of stock,
stock options and similar equity-based compensation;
o A description of any loans made to a director at a "preferential" loan
rate during the company's two most recent fiscal years, including the
amount and terms of the loans;
o Whether any bankruptcy was filed by a company or any of its directors
or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been
convicted of fraud during the previous 10 years; and
o A description of any material pending legal proceedings other than
ordinary routine litigation as specified in Item 103 of Regulation S-K
and a description of such litigation where the company was found
legally liable by a final judgment or order.
The Company does not currently anticipate that compliance with the CCD
Act will have a material adverse effect upon its financial position or results
of its operations or its cash flows.
Check Clearing Act. The Check Clearing for the 21st Century Act
(commonly referred to as "Check 21") was signed into law in 2003 and became
effective on October 28, 2004. The law facilitates check truncation by creating
a new negotiable instrument called a "substitute check" which permits banks to
truncate original checks, to process check information electronically and to
deliver "substitute checks" to banks that want to continue receiving paper
checks. Check 21 is intended to reduce the dependence of the check payment
system on physical transportation networks (which can be disrupted by terrorist
attacks of the type which occurred on September 11, 2001) and to streamline the
collection and return process. The law does not require banks to accept checks
in electronic form nor does it require banks to use the new authority granted by
the Act to create "substitute checks." The Company does not currently anticipate
that compliance with the Act will have a material effect upon its financial
position or results of its operations or its cash flows.
Fair and Accurate Credit Transactions Act. The Board of Governors, the
FDIC, the other federal financial institution regulatory agencies, and the
Federal Trade Commission issued a joint press release on October 31, 2007 and
final rules and guidelines effective January 1, 2008, subject to mandatory
compliance as of November 1, 2008, implementing sections 114 and 315 of the Fair
and Accurate Credit Transactions Act of 2003 to require financial institutions
and other creditors to develop and implement a written identity theft prevention
program. The program must include reasonable policies and procedures for
detecting, preventing, and mitigating identity theft in connection with certain
new and existing covered accounts. Covered accounts are defined as (i) an
account primarily for personal, family, or household purposes (i.e., consumer
accounts), or (ii) any other account for which there is a reasonably foreseeable
risk to customers or the safety and soundness of the financial institution or
creditor from identity theft. The program must be appropriate to the size and
complexity of the financial institution or creditor and the nature and scope of
its activities and should be designed to:
15
o identify relevant patterns, practices, and specific forms of activity
that are "red flags" of possible identity theft and incorporate those
red flags into the program;
o detect the occurrence of red flags incorporated into the program;
o respond appropriately to any red flags that are detected to prevent and
mitigate identity theft; and
o ensure that the program is updated periodically to reflect changes in
risks to customers or to the safety and soundness of the financial
institution or creditor from identity theft.
The regulations include guidelines that each financial institution must
consider and, to the extent appropriate, include in its program and steps that
must be taken to administer the program including (i) obtaining approval of the
program by the board of directors or a committee of the board, (ii) ensuring
oversight of the development, implementation and administration of the program,
(iii) training staff, and (iv) overseeing service provider arrangements. The
guidelines contemplate that existing fraud prevention procedures may be
incorporated into the program.
Recent Regulatory Developments
In response to global credit and liquidity issues involving a number of
financial institutions, the United States government, particularly the United
States Department of the Treasury (the "U.S. Treasury") and the Federal
financial institution regulatory agencies, have taken a variety of extraordinary
measures designed to restore confidence in the financial markets and to
strengthen financial institutions, including capital injections, guarantees of
bank liabilities and the acquisition of illiquid assets from banks.
Emergency Economic Stabilization Act. On October 3, 2008, the Emergency
Economic Stabilization Act of 2008 (the "EESA") was signed into law. Pursuant to
the EESA, the U.S. Treasury was granted the authority to take a range of actions
for the purpose of stabilizing and providing liquidity to the U.S. financial
markets and has implemented several programs, including the purchase by the U.S.
Treasury of certain troubled assets from financial institutions under the
Troubled Asset Relief Program" (the "TARP") and the direct purchase by the U.S.
Treasury of equity securities of financial institutions under the Capital
Purchase Program (the "CPP"). The EESA also temporarily raised the limit on
federal deposit insurance coverage provided by the FDIC from $100,000 to
$250,000 per depositor.
Capital Purchase Program. On October 24, 2008, the U.S. Treasury
announced plans to direct $250 billion of the TARP funding into the CPP to
acquire preferred stock investments in bank holding companies and banks.
Requirements for bank holding companies and banks eligible to participate as a
Qualifying Financial Institution ("QFI") in the CPP include:
o Submission of an application prior to November 14, 2008 to the
QFI's Federal banking regulator to obtain preliminary
approval to participate in the CPP;
o If the QFI receives preliminary approval, it will have 30 days
within which to submit final documentation and fulfill any
outstanding requirements;
o The minimum amount of capital eligible for purchase by the
U.S. Treasury under the CPP is 1 percent of the Total
Risk-Weighted Assets of the QFI and the maximum is the
lesser of (i) an amount equal to 3 percent of the Total
Risk-Weighted Assets of the QFI or (ii) $25 billion;
o Capital acquired by a QFI under the CPP will be accorded Tier
1 capital treatment;
o The preferred stock issued to the U.S. Treasury will be
non-voting (except in the case of class votes), senior
perpetual preferred stock that ranks senior to common stock
and pari passu with existing preferred stock (except junior
preferred stock);
o In addition to the preferred stock, the U.S. Treasury will be
issued warrants to acquire shares of the QFI's common stock
equal in value to 15 percent of the amount of capital
purchased by the QFI;
o Dividends are payable to the U.S. Treasury at the rate of 5%
per annum for the first 5 years and 9% per annum thereafter;
o Subject to certain exceptions and other requirements, no
redemption of the preferred stock is permitted during the
first 3 years;
o Certain restrictions on the payment of dividends to
shareholders of the QFI shall remain in effect while the
preferred stock purchased by the U.S. Treasury is
outstanding;
o Repurchase of the QFI's stock requires consent of the U.S.
Treasury, subject to certain exceptions;
16
o The preferred shares are not subject to any contractual
restrictions on transfer by the U.S. Treasury; and
o The QFI must agree to be bound by certain executive
compensation and corporate governance requirements and
senior executive officers must agree to certain compensation
restrictions.
Temporary Liquidity Guarantee Program. Among other programs and actions
taken by the U.S. Treasury and other regulatory agencies, the FDIC implemented
the Temporary Liquidity Guarantee Program (the "TLGP") to strengthen confidence
and encourage liquidity in the financial system. The TLGP is comprised of the
Debt Guarantee Program (the "DGP") and the Transaction Account Guarantee Program
(the "TAGP"). The DGP guarantees all newly issued senior unsecured debt (e.g.,
promissory notes, unsubordinated unsecured notes and commercial paper) up to
prescribed limits issued by participating entities beginning on October 14, 2008
and continuing through October 31, 2009. For eligible debt issued by that date,
the FDIC will provide the guarantee coverage until the earlier of the maturity
date of the debt or June 30, 2012. The TAGP offers full guarantee for
noninterest-bearing transaction accounts held at FDIC-insured depository
institutions. The unlimited deposit coverage was voluntary for eligible
institutions and was in addition to the $250,000 FDIC deposit insurance per
account that was included as part of the EESA. The insured deposit limits are
currently scheduled to return to $100,000 on January 1, 2010, except for certain
retirement accounts. The TAGP coverage became effective on October 14, 2008 and
is scheduled to continue for participating institutions until December 31, 2009.
American River Bank opted to participate in the TAGP.
Initially, the TLGP programs, the DGP and TAGP, were provided at no
cost for the first 30 days. On November 3, 2008, the FDIC extended the opt-out
period to December 5, 2008 to provide eligible institutions additional time to
consider the terms before making a final decision regarding participation in the
program. Participants in the DGP are charged an annualized fee ranging from 50
basis points to 100 basis points (depending on the maturity of the debt issued)
multiplied by the amount of debt issued, and calculated for the maturity period
of that debt, or through June 30, 2012, whichever is earlier. American River
Bank is authorized to participate in the DGP and can issue approximately
$10,260,000 of qualifying senior debt securities covered by the DGP. As of
December 31, 2008, American River Bank has no senior unsecured debt outstanding.
The Company has not determined whether to issue qualifying senior debt
securities under the DGP as part of its liquidity planning for 2009 or
thereafter. In addition to the existing risk-based deposit insurance premium
paid on such deposits, TAGP participants will be assessed, on a quarterly basis,
an annualized 10 basis points fee on balances in noninterest-bearing transaction
accounts that exceed the existing deposit insurance limit of $250,000.
Financial Stability Plan. On February 10, 2009, the U.S. Treasury
announced a Financial Stability Plan (the "FSP") as a comprehensive approach to
strengthening the financial system and credit crisis. The Plan includes a
Capital Assistance Program (the "CAP") that is intended to serve as a bridge to
raising private capital and to ensure sufficient capital to preserve or increase
lending in a worse-than-expected economic deterioration. Eligibility to
participate in the CAP will be consistent with the criteria for QFI's under the
CPP. Eligible institutions with consolidated assets in excess of $100 billion
will be able to obtain capital under the CAP, subject to a supervisory review
process and comprehensive stress test assessment of the losses that could occur
over a two year period in the future across a range of economic scenarios,
including conditions more severe than anticipated or as typically used in
capital planning processes. Eligible institutions with consolidated assets below
$100 billion will be able to obtain capital under the CAP after a supervisory
review. As announced, the CAP includes issuance of a convertible preferred
security to the U.S. Treasury at a discount to the participating institution's
stock price as of February 9, 2009, subject to a dividend to be determined. The
security instrument will be designed to incentivize institutions to replace the
CAP capital with private capital or redeem it. Institutions participating in the
CPP under TARP may also be permitted to exchange their CPP preferred stock for
the convertible preferred CAP security. Among the other elements of the FSP, is
a temporary extension by the FDIC of the TLGP for enhancing financial
institution liquidity to October 31, 2009. On February 25, 2009, the FDIC and
other regulatory agencies jointly announced the commencement of the stress test
assessment with the intention to complete the process of assessment not later
than April 2009.
American Recovery and Reinvestment Act. On February 17, 2009, the
American Recovery and Reinvestment Act of 2009 (the "ARRA") was signed into law.
Section 7001 of the ARRA amended Section 111 of the EESA in its entirety. While
the U.S. Treasury must promulgate regulations to implement the restrictions and
standards set forth in Section 7001, the ARRA, among other things, significantly
expands the executive compensation restrictions previously imposed by the EESA.
Such restrictions apply to any entity that has received or will receive
financial assistance under the TARP, and shall generally continue to apply for
as long as any obligation arising from financial assistance provided under the
17
TARP, including preferred stock issued under the CPP, remains outstanding. These
ARRA restrictions do not apply to any TARP recipient during such time when the
federal government (i) only holds any warrants to purchase common stock of such
recipient or (ii) holds no preferred stock or warrants to purchase common stock
of such recipient. Since the Company determined not to participate in the CPP,
the restrictions and standards set forth in Section 7001 of the ARRA are not
applicable to the Company.
Term Asset-Backed Securities Loan Facility. On March 3, 2009, the U.S,
Treasury and the Board of Governors announced the Term Asset-Backed Securities
Loan Facility (the "TALF"). The TALF is one of the programs under the Financial
Stability Plan announced by the U.S. Treasury on February 10, 2009. The TALF is
intended to help stimulate the economy by facilitating securitization activities
which allow lenders to increase the availability of credit to consumers and
businesses. Under the TALF, the Federal Reserve Bank of New York ("FRBNY") will
lend up to $200 billion to provide financing to investors as support for
purchases of certain AAA-rated asset-backed securities ("ABS") initially for
newly and recently originated auto loans, credit card loans, student loans, and
SBA-guaranteed small business loans anticipated to be funded on March 25, 2009,
and rental, commercial, and government vehicle fleet leases, small ticket
equipment, heavy equipment, and agricultural equipment loans and leases proposed
to be funded in April.
ABS fundings will be held monthly beginning on March 25, 2009 through
December 2009, or longer if the TALF is extended. The loan asset classes may be
expanded in the future to include commercial mortgages, non-Agency residential
mortgages, and/or other asset classes. Credit extensions under the TALF will be
non-recourse loans to eligible borrowers secured by eligible collateral for a
three-year term with interest paid monthly. Any U.S. company that owns eligible
collateral may borrow from the TALF, provided the company maintains an account
with a primary dealer who will act as agent for the borrower and deliver
eligible collateral to the FRBNY custodian in connection with the loan funding.
The FRBYN will create a special purpose vehicle ("SPV") to purchase and manage
any assets received by the FRBYN in connection with the TALF loans.
The U.S. Treasury will provide $20 billion of credit protection to the
FRBNY in connection with the TALF through the Troubled Assets Relief Program
(the "TARP") by purchasing subordinated debt issued by the SPV to finance the
first $20 billion of asset purchases. If more than $20 billion in assets are
purchased by the SPV, the FRBNY will lend additional funds to the SPV to finance
such additional purchases. The FRBNY's loan to the SPV will be senior to the
TARP subordinated loan and secured by all of the assets of the SPV.
Future Legislation
In addition to legislative changes, the various Federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such regulations may have on American River Bankshares or
American River Bank. However, in light of the current conditions in the U.S.
financial markets and economy, Congress and regulators have increased their
focus on the regulation of the financial services industry. The Company
anticipates that additional regulations will likely increase the Company's
expenses, which may adversely impact the Company's results of operations,
financial condition, future prospects, profitability, and stock price.
18
Item 1A. Risk Factors.
The Company and its subsidiary, American River Bank, conduct business
in an environment that includes certain risks described below which could have a
material adverse effect on the Company's business, results of operations,
financial condition, future prospects and stock price. You are also referred to
the matters described under the heading "Cautionary Statements Regarding
Forward-Looking Statements," in Part I, Item 1 and Part II, Item 7 of this
report on Form 10-K for additional information regarding factors that may affect
the Company's business.
o American River Bankshares' business is subject to interest rate risk,
and variations in interest rates may negatively affect its financial
performance.
Changes in the interest rate environment may reduce the Company's net
interest income. It is expected that the Company will continue to realize income
from the differential or "spread" between the interest earned on loans,
securities and other interest-earning assets, and interest paid on deposits,
borrowings and other interest-bearing liabilities. Net interest spreads are
affected by the difference between the maturities and repricing characteristics
of interest-earning assets and interest-bearing liabilities. In addition, loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with a lower volume of loan
originations. We cannot assure you that we can minimize the Company's interest
rate risk. In addition, an increase in the general level of interest rates may
adversely affect the ability of certain borrowers to pay the interest on and
principal of their obligations. Accordingly, changes in levels of market
interest rates could materially and adversely affect the Company's net interest
spread, asset quality, loan origination volume and overall profitability.
o Governmental monetary policies and intervention to stabilize the U.S.
financial system affect American River Bankshares' business and are
beyond the control of the Company.
The business of banking is affected significantly by the fiscal and
monetary policies of the Federal government and its agencies. Such policies are
beyond the control of the Company. The Company is particularly affected by the
policies established by the Board of Governors in relation to the supply of
money and credit in the United States. The instruments of monetary policy
available to the Board of Governors can be used in varying degrees and
combinations to directly affect the availability of bank loans and deposits, as
well as the interest rates charged on loans and paid on deposits, and this can
and does have a material effect on the Company's business, results of operations
and financial condition.
Recent legislation including the Emergency Economic Stabilization Act
of 2008 (the "EESA"), signed into law by President Bush on October 3, 2008, and
the American Recovery and Reinvestment Act of 2009 (the "ARRA"), signed into law
by President Obama on February 17, 2009, each include programs that are intended
to help stabilize the U.S. financial system. However, it is uncertain whether
such legislation will sufficiently resolve the volatility of capital and credit
markets or improve capital and liquidity problems confronting the financial
system. The failure of the EESA or ARRA to mitigate or eliminate such volatility
and problems affecting the financial markets and a continuation or worsening of
current financial market conditions could limit the Company's access to capital
or sources of liquidity in amounts and at times necessary to conduct operations
in compliance with applicable regulatory requirements which could have a
material adverse affect on the Company's business, financial condition, results
of operations, future prospects, and stock price.
o American River Bankshares' subsidiary, American River Bank, faces
strong competition from banks, financial service companies and other
companies that offer banking services, which can hurt American River
Bankshares' business.
Increased competition in the market of the Company's subsidiary,
American River Bank, may result in reduced loans and deposits. Ultimately, it
may not be able to compete successfully against current and future competitors.
Many competitors offer the banking services that are offered by American River
Bank in its service area. These competitors include national and super-regional
banks, finance companies, investment banking and brokerage firms, credit unions,
government-assisted farm credit programs, other community banks and
technology-oriented financial institutions offering online services. In
particular, American River Bank's competitors include several major financial
companies whose greater resources may afford them a marketplace advantage by
enabling them to maintain numerous banking locations and mount extensive
promotional and advertising campaigns. Additionally, banks and other financial
institutions with larger capitalization and financial intermediaries not subject
19
to bank regulatory restrictions have larger lending limits and are thereby able
to serve the credit needs of larger customers. Areas of competition include
interest rates for loans and deposits, efforts to obtain deposits, and range and
quality of products and services provided, including new technology-driven
products and services. Technological innovation continues to contribute to
greater competition in domestic and international financial services markets as
technological advances, such as Internet-based banking services that cross
traditional geographic bounds, enable more companies to provide financial
services. If American River Bank is unable to attract and retain banking
customers, it may be unable to continue its loan growth and level of deposits,
which may adversely affect its and the Company's results of operations,
financial condition and future prospects.
o Worsening economic conditions could adversely affect American River
Bankshares' business.
The economic conditions in the United States, California and in the
Company's operating markets continue to deteriorate. Unemployment nationwide and
in California has increased significantly recently and is anticipated to
increase for the foreseeable future. Availability of credit and consumer
spending, real estate values, and consumer confidence have declined markedly.
The volatility of the capital markets and the credit, capital and liquidity
problems confronting the U.S. financial system have not been resolved despite
massive government expenditures and legislative efforts to stabilize the U.S.
financial system. There is no assurance that such conditions will improve or be
resolved in the foreseeable future.
The Company's subsidiary, American River Bank, conducts banking
operations principally in Northern California. As a result, the Company's
financial condition, results of operations and cash flows are subject to changes
in the economic conditions in Northern California. The Company's business
results are dependent in large part upon the business activity, population,
income levels, deposits and real estate activity in Northern California, and
adverse economic conditions could have material adverse effects upon the
Company. The State of California is currently experiencing significant budgetary
and fiscal difficulties.
The Company can provide no assurance that conditions in the United
States and California economies will not further deteriorate or that such
deterioration will not materially and adversely affect the Company. A further
deterioration in economic conditions locally, regionally or nationally, could
result in a further economic downturn in Northern California and prolong the
following consequences, any of which could further adversely affect the
Company's business:
o loan delinquencies and defaults may increase;
o problem assets and foreclosures may increase;
o demand for the Company's products and services may decline;
o low cost or non-interest bearing deposits may decrease;
o collateral for loans may decline in value, in turn reducing
customers' borrowing power, and reducing the value of assets
and collateral as sources of repayment of existing loans; and
o volatile securities market conditions could adversely affect
valuations of investment portfolio assets.
o American River Bankshares has a concentration risk in real estate
related loans.
At December 31, 2008, approximately 72.0% of the Company's loan and
lease portfolio consisted of real estate related loans. Substantially all of the
Company's real property collateral is located in its operating markets in
Northern California. The continuing trend of deteriorating economic conditions
in California and in the Company's operating markets has contributed to an
overall decline in real estate values. A continuing substantial decline in real
estate values in the Company's primary market areas could occur as a result of
worsening economic conditions, or other events including natural disasters such
as earthquakes, fires, and floods. Such a decline in values could have an
adverse impact on the Company by limiting repayment of defaulted loans through
sale of the real estate collateral and by likely increasing the number of
defaulted loans to the extent that the financial condition of its borrowers is
adversely affected by such a decline in values. At December 31, 2008,
residential construction loans, including land acquisition and development,
totaled $34.2 million or 8.2% of the Company's total loan portfolio. This was
comprised of 37.0% owner-occupied and 63.0% speculative construction and land
loans. Construction, land acquisition and development lending involve additional
risks because funds are advanced on the security of the project, which is of
uncertain value prior to its completion. Because of the uncertainties inherent
in estimating construction costs, as well as the market value of the completed
project and the effects of governmental regulation on real property, it is
relatively difficult to evaluate accurately the total funds required to complete
a project and the related loan-to-value ratio. As a result, speculative
20
construction loans often involve the disbursement of substantial funds with
repayment dependent, in part, on the completion of the project and the ability
of the borrower to sell the property, rather than the ability of the borrower or
the guarantor to repay the principal and interest. If our appraisal of the value
of the completed project proves to be overstated, we may have inadequate
security for the repayment of the loan upon completion of construction of the
project. If we are forced to foreclose on a project prior to or at completion
due to a default, there can be no assurance that we will be able to recover all
of the unpaid balance of, and accrued interest on, the loan, as well as related
foreclosure and holding costs. In addition, we may be required to fund
additional amounts to complete the project and may have to hold the property for
an unspecified period of time. The adverse effects of the foregoing matters upon
the Company's real estate portfolio could necessitate a material increase in the
provision for loan and lease losses which could adversely affect the Company's
results of operations, financial condition, and future prospects.
o American River Bankshares is subject to extensive regulation, which
could adversely affect its business.
The Company's operations are subject to extensive regulation by
Federal, state and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company believes that it is
in substantial compliance in all material respects with laws, rules and
regulations applicable to the conduct of its business. Because the Company's
business is highly regulated, the laws, rules and regulations applicable to it
are subject to regular modification and change. There can be no assurance that
these laws, rules and regulations, or any other laws, rules or regulations, will
not be adopted in the future, which could make compliance much more difficult or
expensive, restrict the Company's ability to originate, broker or sell loans,
further limit or restrict the amount of commissions, interest or other charges
earned on loans originated or sold by the Company, or otherwise adversely affect
the Company's results of operations, financial condition, or future prospects.
o American River Bank's allowance for loan and lease losses may not be
adequate to cover actual losses.
Like all financial institutions, American River Bank maintains an
allowance for loan and lease losses to provide for loan defaults and
non-performance, but its allowance for loan and lease losses may not be adequate
to cover actual loan and lease losses. In addition, future provisions for loan
and lease losses could materially and adversely affect American River Bank's and
therefore the Company's operating results. American River Bank's allowance for
loan and lease losses is based on prior experience, as well as an evaluation of
the risks in the current portfolio. The amount of future losses is susceptible
to changes in economic, operating and other conditions, including changes in the
local and California real estate market and interest rates that may be beyond
American River Bank's control, and these losses may exceed current estimates.
Federal regulatory agencies, as an integral part of their examination process,
review American River Bank's loans and leases and allowance for loan and lease
losses. Although we believe that American River Bank's allowance for loan and
lease losses is adequate to cover current losses, we cannot assure you that
American River Bank will not further increase the allowance for loan and lease
losses or that regulatory agencies will not require an increase to this
allowance including as a result of the effects of continued deterioration of
economic conditions nationally and in the operating markets in which American
River Bank conducts business. Any of these occurrences could materially and
adversely affect the Company's earnings.
o American River Bankshares' and American River Bank's operations are
dependent upon key personnel.
The future prospects of the Company will be highly dependent on its
directors, executive officers and other key personnel. The success of the
Company will, to some extent, depend on the continued service of its directors
and continued employment of the executive officers, in addition to the Company's
ability to attract and retain experienced banking professionals to serve the
Company and the Bank in other key positions. The unexpected loss of the services
of any of these individuals could have a detrimental effect on the Company and
American River Bank.
o Technology implementation problems or computer system failures could
adversely affect American River Bankshares and American River Bank.
The Company's future prospects will be highly dependent on the ability
of American River Bank to implement changes in technology that affect the
delivery of banking services such as the increased demand for computer access to
21
bank accounts and the availability to perform banking transactions
electronically. The Bank's ability to compete will depend upon it ability to
continue to adapt technology on a timely and cost-effective basis to meet such
demands. In addition, the business and operations of the Company and the Bank
will be susceptible to adverse effects from computer failures, communication and
energy disruption, and the activities including fraud of unethical individuals
with the technological ability to cause disruptions or failures of the Bank's
data processing system.
o Information security breach or other technology difficulties could
adversely affect American River Bankshares and American River Bank.
The Company and the Bank cannot be certain that implementation of
safeguards will eliminate the risk of vulnerability to technological
difficulties or failures or ensure the absence of a breach of information
security. The Bank will rely on the services of various vendors who provide data
processing and communication services to the banking industry. Nonetheless, if
information security is compromised or other technology difficulties or failures
occur, information may be lost or misappropriated, services and operations may
be interrupted and the Company and Bank could be exposed to claims from its
customers as a result. The occurrence of any of these events could adversely
affect the Company's results of operations, financial condition, prospects, and
stock price.
o The Company's controls over financial reporting and its related
governance procedures may fail or be circumvented.
Management regularly reviews and updates the Company's internal control
over financial reporting, disclosure controls and procedures, and corporate
governance policies and procedures. The Company maintains controls and
procedures to mitigate risks such as processing system failures and errors, and
customer or employee fraud, and maintains insurance coverage for certain of
these risks. Any system of controls and procedures, however well designed and
operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the system are met.
Events could occur which are not prevented or detected by the Company's internal
controls or are not insured against or are in excess of the Company's insurance
limits. Any failure or circumvention of the Company's controls and procedures or
failure to comply with regulations related to controls and procedures could have
a material adverse effect on the Company's business, results of operations and
financial condition.
o The effects of legislation in response to current credit conditions may
adversely affect the Company.
Legislation that has or may be passed at the Federal level and/or by
California in response to current conditions affecting credit markets could
cause the Company to experience higher credit losses if such legislation reduces
the amount that the Bank's borrowers are otherwise contractually required to pay
under existing loan contracts. Such legislation could also result in the
imposition of limitations upon the Bank's ability to foreclose on property or
other collateral or make foreclosure less economically feasible. Such events
could result in increased loan losses and require a material increase in the
allowance for loan losses and thereby adversely affect the Company's results of
operations, financial condition, future prospects, profitability and stock
price.
o The effects of changes to FDIC insurance coverage limits are uncertain
and increased premiums may adversely affect the Company.
The FDIC charges insured financial institutions premiums to maintain
the Deposit Insurance Fund. Current economic conditions have increased
expectations for bank failures. In such event, the FDIC would take control of
failed banks and guarantee payment of deposits up to applicable insured limits
from the Deposit Insurance Fund. Insurance premium assessments to insured
financial institutions may increase as necessary to maintain adequate funding of
the Deposit Insurance Fund.
The Emergency Economic Stabilization Act of 2008 included a provision
for an increase in the amount of deposits insured by the FDIC to $250,000. On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program,
which includes the Transaction Account Guarantee Program (the "TAGP"). The TAGP
provides unlimited deposit insurance on funds in noninterest-bearing transaction
deposit accounts not otherwise covered by the existing deposit insurance limit
of $250,000. All eligible institutions were covered under the TAGP for the first
22
30 days without incurring any costs. After the initial period, participating
institutions are assessed a 10 basis point surcharge on the additional insured
deposits through the scheduled end of the program, currently December 31, 2009.
American River Bank opted to participate in the TAGP. As a result, increased
premiums will impact the Company's earnings.
It is not clear how depositors will respond regarding the increase in
insurance coverage. Despite the increase, some depositors may reduce the amount
of deposits held at the Bank if concerns regarding bank failures persist, which
could affect the level and composition of the Bank's deposit portfolio and
thereby directly impact the Bank's funding costs and net interest margin. The
Bank's funding costs may also be adversely affected in the event that the
activities of the Federal Reserve Board and the U.S. Treasury to provide
liquidity for the banking system and improvement in capital markets are
curtailed or unsuccessful. Such events could reduce liquidity in the markets,
thereby increasing funding costs to the Bank or reducing the availability of
funds to the Bank to finance its existing operations and thereby adversely
affect the Company's results of operations, financial condition, future
prospects, profitability and stock price.
o The effects of terrorism and other events beyond the Company's control
may adversely affect its results of operations.
The terrorist actions on September 11, 2001 and thereafter, as well as,
the current military conflicts in Afghanistan and Iraq have had significant
adverse effects upon the United States economy. Whether the terrorist activities
in the future and the actions of the United States and its allies in combating
terrorism on a worldwide basis will adversely impact the Company and the extent
of such impact is uncertain. Similar events beyond the control of the Company
including, but not limited to, financial and economic volatility and
governmental actions in response, natural disasters such as earthquakes, floods,
fires, and similar adverse weather occurrences, disruption of power supplies and
communications equipment such as telephones, cellular phones, computers, and
other forms of electronic equipment or media, and widespread, adverse public
health occurrences, may adversely affect the Company's future results of
operations by, among other matters, disrupting the conduct of the Company's
operations and those of its customers, which could result in a reduction in the
demand for loans and other products and services offered by the Company,
increase non-performing loans and the amounts reserved for loan and lease
losses, and thereby adversely affect the Company's results of operations,
financial condition, future prospects, profitability and stock price.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The Company and American River Bank lease ten and own two of their
respective premises. The Company's headquarters is located at 3100 Zinfandel
Drive, Suite 450, Rancho Cordova, California. The office space is located in a
six-story office building. The location also houses a convenience office of
American River Bank that performs limited branch related transactions and
business development. The lease term is ninety-one (91) months and expires on
May 6, 2013. The premises consist of 7,378 square feet on the fourth floor of
the building. The space is leased from PGOCC, LLC, successor to One Capital
Center.
American River Bank's main office is located at 1545 River Park Drive,
Suite 107, Sacramento, California, in a modern, five-story building which has
off-street parking for its clients. American River Bank leases premises in the
building from EOP-Point West, LLC. The lease term is ten (10) 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 premises are leased from Bradshaw Plaza Group, which
is owned in part by Charles D. Fite, a director of the Company. The lease term
is ten (10) years and expires on November 30, 2016. The premises consist of
3,711 square feet on the ground floor.
American River Bank leases premises at 10123 Fair Oaks Boulevard, Fair
Oaks, California. The premises are leased from Marjorie Taylor, a former
director of the Company. The lease term was twelve (12) years and expired on
March 1, 2009. Management is currently in negations to extend the lease term.
The premises consist of 2,380 square feet on the ground floor.
23
American River Bank leases premises at 2240 Douglas Boulevard,
Roseville, California. The premises are leased from Twin Tree Land Company. The
lease term is ten (10) years and expires on November 30, 2016. The premises
consist of 3,790 square feet on the ground floor.
American River Bank leases premises at 520 Capitol Mall, Sacramento,
California. The premises are leased from 520 Capitol Mall, Inc. The lease term
is ten (10) years and expires on June 1, 2014. The premises consist of 4,010
square feet on the ground floor.
North Coast Bank, a division of American River Bank, leases premises at
8733 Lakewood Drive, Windsor, California. The premises are leased from R. and R.
Partners. The lease term is one (1) year and expires on December 31, 2009. The
premises consist of 2,200 square feet on the ground floor.
North Coast Bank, a division of American River Bank, owns premises at
412 Center Street, Healdsburg, California. The premises were purchased June 1,
1993. The purchase price for the land and building was $343,849. The building
consists of 2,620 square feet. The land consists of 10,835 square feet.
North Coast Bank, a division of American River Bank, leases premises at
90 South E Street, Santa Rosa, California. The premises are subleased leased
from Chicago Title Company until November 11, 2011 and then will be leased from
90 E Street, LLC until January 31, 2019. The combined sublease and lease term is
ten (10) years and expires on January 31, 2019. The premises consist of 3,600
square feet on the ground floor.
Bank of Amador, a division of American River Bank, leases premises at
422 Sutter Street, Jackson, California. The premises are leased from the United
States Postal Service. The lease term is five (5) years and expires on May 31,
2011. The premises consist of 6,400 square feet on the ground floor and second
floor.
Bank of Amador, a division of American River Bank, leases land at 26395
Buckhorn Ridge Road, Pioneer, California. The premises are leased from Joseph T.
Bellamy, Trustee of the Joseph T. Bellamy 2005 Trust. The lease term is ten (10)
years and expires on October 31, 2017. The premises consist of 1,757 square feet
of office space on the ground floor, an attached garage consisting of
approximately 400 square feet and 1,223 feet of office space on the second
floor.
Bank of Amador, a division of American River Bank, owns premises at 66
Main Street, Ione, California. The premises were purchased April 1, 1995. The
purchase price for the land and building was $167,500. The building consists of
2,576 square feet. The land consists of 9,700 square feet.
Bank of Amador, a division of American River Bank, leases the parking
lot at 276 North Main Street, Jackson, California. The parking lot is leased
from Wilhelmina Petkovich. The lease term is on a month-to-month basis.
The leases on the premises located at 1545 River Park Drive, 9750
Business Park Drive, 90 South E Street, 26395 Buckhorn Ridge Road, and 3100
Zinfandel Drive, contain options to extend for five years. Included in the above
are two facilities leased from current or former directors of the Company at
terms and conditions which management believes are consistent with the
commercial lease market. The foregoing summary descriptions of leased premises
are qualified in their entirety by reference to the lease agreements listed as
exhibits in Part IV, Item 15 of this Form 10-K report.
Item 3. Legal Proceedings.
There are no material legal proceedings adverse to the Company and its
subsidiaries to which any director, officer, affiliate of the Company, or 5%
shareholder of the Company or its subsidiaries, or any associate of any such
director, officer, affiliate or 5% shareholder of the Company or its
subsidiaries are a party, and none of the above persons has a material interest
adverse to the Company or its subsidiaries.
From time to time, the Company and/or its subsidiaries may be a party
to claims and legal proceedings arising in the ordinary course of business. The
Company's management is not aware of any 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.
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 2008.
24
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market Information
The Company's common stock began trading on the NASDAQ National Stock
Market ("Nasdaq") under the symbol "AMRB" on October 26, 2000. Effective July 3,
2006, the Company's common stock became listed and traded on the Nasdaq Global
Select Market. The following table shows the high and the low prices for the
common stock, for each quarter during 2008 and 2007, as reported by Nasdaq. The
prices have been adjusted to reflect 5% stock dividends declared in 2008 and in
2007.
=================================================
2008 High Low
-------------------------------------------------
First quarter $ 17.34 $ 14.29
Second quarter 15.67 9.29
Third quarter 11.33 7.17
Fourth quarter 13.33 8.01
2007 High Low
-------------------------------------------------
First quarter $ 24.03 $ 21.33
Second quarter 22.22 21.19
Third quarter 21.68 19.56
Fourth quarter 20.41 15.05
=================================================
The closing price for the Company's common stock on March 5, 2009 was
$7.25.
Holders
As of March 2, 2009, there were approximately 2,680 shareholders of
record of the Company's common stock.
Dividends
The Company has paid quarterly cash dividends on its common stock since
the first quarter of 2004; prior to that, the Company paid cash dividends twice
a year since 1992. It is currently the intention of the Board of Directors of
the Company to continue payment of cash dividends on a quarterly basis, subject
to the factors described below. In 2008 and 2007, the Company declared cash
dividends in the amount of $0.57 and $0.55, respectively, per common share. The
amounts have been adjusted to reflect 5% stock dividends declared in 2008 and in
2007. There is no assurance, however, that any dividends will be paid in the
future since they are subject to regulatory restrictions, and dependent upon
earnings, financial condition and capital requirements of the Company and its
subsidiaries.
The California General Corporation Law (the "Corporation Law") provides
that a corporation may make a distribution to its shareholders if the
corporation's retained earnings equal at least the amount of the proposed
distribution. The Corporation Law further provides that, in the event that
sufficient retained earnings are not available for the proposed distribution, a
corporation may nevertheless make a distribution to its shareholders if it meets
two conditions, which generally stated are as follows: (1) the corporation's
assets equal at least 1-1/4 times its liabilities; and (2) the corporation's
current assets equal at least its current liabilities or, if the average of the
corporation's earnings before taxes on income and before interest expenses for
the two preceding fiscal years was less than the average of the corporation's
interest expenses for such fiscal years, then the corporation's current assets
must equal at least 1-1/4 times its current liabilities.
The Board of Governors generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowing or other
arrangements that might adversely affect a bank holding company's financial
position. The Board of Governors' policy is that a bank holding company should
not continue its existing rate of cash dividends on its common stock unless its
25
net income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition.
The payment of cash dividends by American River Bank is subject to
restrictions set forth in the California Financial Code (the "Financial Code").
The Financial Code provides that a bank may not make a cash distribution to its
shareholders in excess of the lesser of (a) the bank's retained earnings; or (b)
the bank's net income for its last three fiscal years, less the amount of any
distributions made by the bank or by any majority-owned subsidiary of the bank
to the shareholders of the bank during such period. However, a bank may, with
the approval of the Commissioner, make a distribution to its shareholders in an
amount not exceeding the greater of (a) its retained earnings; (b) its net
income for its last fiscal year; or (c) its net income for its current fiscal
year. In the event that the Commissioner determines that the shareholders'
equity of a bank is inadequate or that the making of a distribution by the bank
would be unsafe or unsound, the Commissioner may order the bank to refrain from
making a proposed distribution.
The FDIC may also restrict the payment of dividends by a subsidiary
bank if such payment would be deemed unsafe or unsound or if after the payment
of such dividends, the bank would be included in one of the "undercapitalized"
categories for capital adequacy purposes pursuant to the FDIC Improvement Act of
1991.
Stock Repurchases
On January 16, 2008, the Board of Directors of the Company authorized a
stock repurchase program which allows for the repurchase of up to six and one
half percent (6.5%) annually of the Company's outstanding shares of common
stock. Each year the Company may repurchase up to 6.5% of the shares outstanding
(adjusted for stock splits or stock dividends). The number of shares reported in
column (d) of the table as shares that may be repurchased under the plan
represent shares eligible for the calendar year 2008. The repurchases under this
plan can be made from time to time in the open market as conditions allow and
will be structured to comply with Commission Rule 10b-18. Management reports
monthly to the Board of Directors on the status of the repurchase program. The
Board of Directors has reserved the right to suspend, terminate, modify or
cancel the repurchase program at any time for any reason. The 6.5% program
announced in 2008, replaced a program announced in 2001 whereby the Company had
the ability to repurchase of up to five percent (5.0%) annually of the Company's
outstanding shares of common stock. The following table lists shares repurchased
during the quarter ended December 31, 2008 and the maximum amount available to
repurchase under the repurchase plan.
--------------------- ----------------- ------------------- --------------------------- -----------------------------
Period (a) (b) (c) (d)
Total Number Average Price Total Number of Shares Maximum Number (or
of Shares (or Paid Per Share (or Units) Purchased as Approximate Dollar Value) of
Units) (or Unit) Part of Publicly Shares (or Units) That May
Purchased Announced Plans or Yet Be Purchased Under the
Programs Plans or Programs
--------------------- ----------------- ------------------- --------------------------- -----------------------------
Month #1
October 1 through 5,040 $9.67 5,040 265,721
October 31, 2008
Month #2
November 1 through None N/A None 265,721
November 30, 2008
Month #3
December 1 through None N/A None 265,721
December 31, 2008
--------------------- ----------------- ------------------- --------------------------- -----------------------------
Total 5,040 $9.67 5,040
--------------------- ----------------- ------------------- --------------------------- -----------------------------
The Company repurchased 115,815 shares in 2008, 426,668 shares in 2007,
299,410 shares in 2006, 92,986 shares in 2005, 11,869 shares in 2004, 1,915
shares in 2003 and 83,747 shares in 2002. Share amounts have been adjusted for
stock dividends and/or splits.
26
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. All per share data has been retroactively restated to reflect
stock dividends and stock splits. In December 2004, the Company completed a
merger with Bank of Amador. The merger transaction was accounted for using the
purchase method of accounting and accordingly the results of their operations
are included in the table below.
As of and for the Years Ended December 31,
(In thousands, except per share amounts and
ratios)
2008 2007 2006 2005 2004
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Net interest income $ 25,925 $ 26,402 $ 27,066 $ 26,462 $ 19,418
Provision for loan and lease losses 1,743 450 320 322 895
Other income 2,168 2,599 2,443 2,329 2,395
Other expenses 14,201 14,833 14,388 13,493 11,713
Income before income taxes 12,149 13,718 14,801 14,976 9,205
Income taxes 4,578 5,240 5,739 5,792 3,378
Net income $ 7,571 $ 8,478 $ 9,062 $ 9,184 $ 5,827
Earnings per share - basic $ 1.30 $ 1.40 $ 1.42 $ 1.41 $ 1.07
Earnings per share - diluted $ 1.30 $ 1.39 $ 1.39 $ 1.38 $ 1.02
Cash dividends per share $ 0.57 $ 0.55 $ 0.53 $ 0.46 $ 0.36
Book value per share $ 10.95 $ 10.22 $ 10.00 $ 9.67 $ 9.13
Tangible book value per share $ 7.98 $ 7.23 $ 7.14 $ 6.89 $ 6.29
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $ 563,157 $ 573,685 $ 604,003 $ 612,763 $ 586,666
Loans and leases, net 412,356 394,975 382,993 365,571 352,467
Deposits 437,061 455,645 493,875 500,706 475,387
Shareholders' equity 63,447 59,973 62,371 62,746 58,990
Average balance sheet amounts:
Assets $ 575,046 $ 575,225 $ 603,040 $ 596,670 $ 439,012
Loans and leases 410,293 390,488 381,465 360,319 277,647
Earning assets 522,566 524,365 544,794 537,031 400,265
Deposits 448,168 479,344 488,026 494,905 357,420
Shareholders' equity 61,084 60,533 62,570 60,641 39,163
SELECTED RATIOS:
For the year:
Return on average equity 12.39% 14.01% 14.48% 15.14% 14.88%
Return on average assets 1.32% 1.47% 1.50% 1.54% 1.33%
Efficiency ratio * 48.92% 49.49% 47.11% 45.16% 53.12%
Net interest margin * 5.03% 5.10% 5.03% 4.98% 4.90%
Net charge-offs to average loans & leases 0.42% 0.11% 0.03% 0.04% 0.08%
At December 31:
Average equity to average assets 10.62% 10.52% 10.38% 10.16% 8.92%
Leverage capital ratio 8.32% 7.72% 7.81% 7.66% 8.35%
Allowance for loan and leases losses to 1.41% 1.47% 1.51% 1.53% 1.54%
total loans and leases
* fully taxable equivalent
27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is American River Bankshares management's discussion and
analysis of the significant changes in income and expense accounts for the years
ended December 31, 2008, 2007, and 2006.
Cautionary Statements Regarding Forward-Looking Statements
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" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, Section 27A of the
Securities Act of 1933, as amended, and subject to the safe-harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may contain words related to future projections including, but not
limited to, words such as "believe," "expect," "anticipate," "intend," "may,"
"will," "should," "could," "would," and variations of those words and similar
words that are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from those projected. Factors that
could cause or contribute to such differences include, but are not limited to,
the following: (1) the duration of financial and economic volatility and actions
taken by the United States Congress and governmental agencies, including the
United States Department of the Treasury, to deal with challenges to the U.S.
financial system; (2) variances in the actual versus projected growth in assets
and return on assets; (3) loan and lease losses; (4) expenses; (5) changes in
the interest rate environment including interest rates charged on loans, earned
on securities investments and paid on deposits and other borrowed funds; (6)
competition effects; (7) fee and other noninterest income earned; (8) general
economic conditions nationally, regionally, and in the operating market areas of
the Company and its subsidiaries; (9) changes in the regulatory environment
including government intervention in the U.S. financial system; (10) changes in
business conditions and inflation; (11) changes in securities markets, public
debt markets, and other capital markets; (12) data processing and other
operational systems failures or fraud; (13) a decline in real estate values in
the Company's operating market areas; (14) the effects of uncontrollable events
such as terrorism, the threat of terrorism or the impact of the current military
conflicts in Afghanistan and Iraq and the conduct of the war on terrorism by the
United States and its allies, worsening financial and economic conditions,
natural disasters, and disruption of power supplies and communications; and
(15)changes in accounting standards, tax laws or regulations and interpretations
of such standards, laws or regulations, as well as other factors. The factors
set forth under "Item 1A - Risk Factors" in this report and other cautionary
statements and information set forth in this report should be carefully
considered and understood as being applicable to all related forward-looking
statements contained in this report, when evaluating the business prospects of
the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their
nature, they involve risks, uncertainties and assumptions. The future results
and shareholder values may differ significantly from those expressed in these
forward-looking statements. You are cautioned not to put undue reliance on any
forward-looking statement. Any such statement speaks only as of the date of this
report, and in the case of any documents that may be incorporated by reference,
as of the date of those documents. We do not undertake any obligation to update
or release any revisions to any forward-looking statements, to report any new
information, future event or other circumstances after the date of this report
or to reflect the occurrence of unanticipated events, except as required by law.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent reports filed with the Securities and Exchange
Commission (the "SEC") on Forms 10-K, 10-Q and 8-K.
Critical Accounting Policies
General
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. We use
historical loss data, peer group experience and the economic environment as
factors, among others, in determining the inherent loss that may be present in
our loan and lease portfolio. Actual losses could differ significantly from the
historical factors that we use. Other estimates that we use are related to the
expected useful lives of our depreciable assets. In addition, GAAP itself may
change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change.
28
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of the credit
loss risk in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accounting Standards
("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be
accrued when it is probable that a loss has occurred at the balance sheet date
and such loss can be reasonably estimated; and (2) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," which requires that losses be accrued on
impaired loans based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The allowance for loan and lease losses is determined based upon
estimates that can and do change when the actual risk, loss events, or changes
in other factors, occur. The analysis of the allowance uses a historical loss
view as one indicator of future losses and as a result could differ from the
loss incurred in the future. If the allowance for loan and lease losses falls
below that deemed adequate (by reason of loan and lease growth, actual losses,
the effect of changes in risk ratings, or some combination of these factors),
the Company has a strategy for supplementing the allowance for loan and lease
losses, over the short term. For further information regarding our allowance for
loan and lease losses, see "Allowance for Loan and Lease Losses Activity"
discussion later in this Item 7.
Stock-Based Compensation
The Company recognizes compensation expense in an amount equal to the
fair value of all share-based payments which consist of stock options granted to
directors and employees. The fair value of each option is estimated on the date
of grant and amortized over the service period using a Black-Scholes-Merton
based option valuation model that requires the use of assumptions. Critical
assumptions that affect the estimated fair value of each option include expected
stock price volatility, dividend yields, option life and the risk-free interest
rate.
Goodwill
Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise or the assumption of net
liabilities in an acquisition of branches constituting a business may give rise
to goodwill. Goodwill represents the excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities assumed
in transactions accounted for under the purchase method of accounting. The value
of goodwill is ultimately derived from the Company's ability to generate net
earnings after the acquisition. A decline in net earnings could be indicative of
a decline in the fair value of goodwill and result in impairment. For that
reason, goodwill is assessed for impairment at a reporting unit level at least
annually following the year of acquisition. The Company performed an evaluation
of the goodwill, recorded as a result of the Bank of Amador acquisition, during
the fourth quarter of 2008 and determined that there was no impairment. While
the Company believes all assumptions utilized in its assessment of goodwill for
impairment are reasonable and appropriate, changes in earnings, the effective
tax rate, historical earnings multiples and the cost of capital could all cause
different results for the calculation of the present value of future cash flows.
Income Taxes
The Company files its income taxes on a consolidated basis with its
subsidiaries. The allocation of income tax expense (benefit) represents each
entity's proportionate share of the consolidated provision for income taxes.
The Company accounts for income taxes using the balance sheet method,
under which deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment. On the consolidated balance sheet, net deferred tax assets are
included in accrued interest receivable and other assets.
Since January 1, 2007 the Company has accounted for uncertainty in
income taxes under Financial Accounting Standards Board (the "FASB")
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
Under the provisions of FIN 48, only tax positions that met the
more-likely-than-not recognition threshold on January 1, 2007 were recognized or
continue to be recognized. The benefit of a tax position is recognized in the
financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
29
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheet along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination. The election has been made to record interest
expense related to tax exposures in tax expense, if applicable, and the exposure
for penalties related to tax exposures in tax expense, if applicable.
Overview
The Company recorded its 100th consecutive profitable quarter for the
quarter ended December 31, 2008. Net income in 2008 decreased 10.7% to
$7,571,000 versus $8,478,000 in 2007. Diluted earnings per share for 2008 were
$1.30, a decrease of $0.09 or 6.5% from the $1.39 recorded in 2007. For 2008,
the Company realized a return on average equity of 12.39% and a return on
average assets of 1.32%, as compared to 14.01% and 1.47% for 2007.
Net income for 2007 was $584,000 (6.4%) lower than the $9,062,000
recorded in 2006. Diluted earnings per share in 2006 were $1.39, return on
average assets was 1.50% and return on average equity was 14.48%. Table One
below provides a summary of the components of net income for the years
indicated:
Table One: Components of Net Income
---------------------------------------------------------------------------------------------
For the years ended: 2008 2007 2006
(dollars in thousands) ------------ ------------ ------------
Net interest income* $ 26,277 $ 26,749 $ 27,396
Provision for loan and lease losses (1,743) (450) (320)
Noninterest income 2,168 2,599 2,443
Noninterest expense (14,201) (14,833) (14,388)
Provision for income taxes (4,578) (5,240) (5,739)
Tax equivalent adjustment (352) (347) (330)
------------ ------------ ------------
Net income $ 7,571 $ 8,478 $ 9,062
============ ============ ============
---------------------------------------------------------------------------------------------
Average total assets $ 575,046 $ 575,225 $ 603,040
Net income as a percentage
of average total assets 1.32% 1.47% 1.50%
---------------------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
All share and per share data for 2008, 2007 and 2006 have been adjusted
for 5% stock dividends distributed on December 18, 2008, December 20, 2007, and
December 22, 2006.
During 2008, total assets of the Company decreased $10,528,000 (1.8%)
to a total of $563,157,000 at year-end. At December 31, 2008, net loans totaled
$412,356,000, up $17,381,000 (4.4%) from the ending balances on December 31,
2007. Deposits decreased 4.1% during 2008 resulting in ending deposit balances
of $437,061,000. The Company ended 2008 with a Tier 1 capital ratio of 10.2% and
a total risk-based capital ratio of 11.5%.
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
interest-bearing depots in other banks) 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 5.03% in
2008 and 5.10% in 2007. The fully taxable equivalent net interest income was
down $472,000 (1.8%) in 2008 compared to 2007.
The fully taxable equivalent interest income component decreased from
$37,825,000 in 2007 to $33,905,000 in 2008, representing a 10.4% decrease. The
decrease in the fully taxable equivalent interest income for 2008 compared to
the same period in 2007 is comprised of two components - rate (down $4,523,000)
and volume (up $603,000). The decline in rates can be attributed to decreases
implemented by the Company on the loans and leases during the latter part of
30
2007 and 2008 in response to the Federal Reserve Board (the "FRB") decreases in
the Federal funds and discount rates. Decreases by the FRB have resulted in ten
rate reductions totaling 500 basis points since September 2007. In addition, an
increased level of nonaccrual loans resulted in foregone interest income of
approximately $647,000 during 2008 as compared to $305,000 in 2007. The overall
decreasing interest rate environment and the negative effect of the nonaccrual
loans resulted in a 74 basis point decrease in the yield on average earning
assets from 7.21% for 2007 to 6.47% for 2008. The volume increase occurred
despite a slight $1,799,000 (0.3%) decrease in average earning assets from
$524,365,000 during 2007 to $522,566,000 during 2008 as a result of a shift in
balances from lower earning investments to higher earning loans. The change in
the mix of average earning assets resulted from the Company's decision to use
the proceeds from principal reductions and maturing investment securities to
provide funding for loan growth. This strategy has reduced the average balances
on investment securities by $21,289,000 or 16.6% from $128,238,000 during 2007
to $106,949,000 during 2008, while average loan balances increased $19,805,000
or 5.1% from $390,488,000 during 2007 to $410,293,000 during 2008. The Company's
ability to increase its average loans is the result of its continued
concentrated focus on business lending and the purchase of a $7,255,000 pool of
loans secured by properties located in the Company's market area from another
bank.
The fully taxable equivalent interest income component decreased from
$38,284,000 in 2006 to $37,825,000 in 2007, representing a 1.2% decrease. The
decrease in the fully taxable equivalent interest income for 2007 compared to
the same period in 2006 is broken down by rate (up $67,000) and volume (down
$526,000). The rate increase can be attributed to an increase in the yield on
the investment portfolio from 4.41% in 2006 to 4.72% in 2007. The increase in
yield results from matured short-term securities with lower yields being
redirected to reduce borrowings and fund the growth in loans and leaving the
investment portfolio with longer maturity higher yielding investments, thus an
overall higher average yield on the existing portfolio. The volume decrease was
the result of a 3.7% decrease in average earning assets. The Company made a
decision to use the proceeds from principal reductions and maturing investment
securities to reduce the level of outstanding borrowings and provide funding for
loan growth. This strategy reduced the average balances on investment securities
by 18.3% from $162,970,000 during 2006 to $133,187,000 during 2007. Average
balances of other borrowings were down $17,010,000 (36.4%) and average loan
balances were up $9,023,000 (2.4%) during the same time period. The increase in
average loans is the result of concentrated focus on business lending.
Interest expense decreased $3,448,000 (31.1%) in 2008 compared to 2007.
The average balances of interest-bearing liabilities were $17,366,000 (4.8%)
higher in the 2008 compared to 2007. The higher balances accounted for a
$1,224,000 increase in interest expense. Average borrowings were up $29,880,000
(100.7%) as the Company used borrowings as a funding source for the increased
loan balances as average deposit balances declined. Average deposit balances
decreased $31,176,000 (6.5%) from $479,344,000 during 2007 to $448,168,000
during 2008. Although the number of deposit relationships and accounts remains
relatively stable, the average balances in those accounts have experienced a
decrease over the past twelve months. As a result of the lower overall interest
rate environment the decrease in rates accounted for a $4,672,000 reduction in
interest expense in 2008. Rates paid on interest-bearing liabilities decreased
105 basis points from 2007 to 2008 from 3.04% to 1.99%. The rate on average
borrowings dropped 221 basis points during that same time period from 5.11% to
2.90%.
Interest expense increased $188,000 (1.7%) in 2007 compared to 2006.
The increase in rates paid on interest bearing liabilities resulted in an
increase of $1,097,000 in interest expense. The rates paid on interest bearing
liabilities increased 16 basis points on a year-over-year basis and was a result
of the higher overall interest rate environment. A drop in average balances
reduced much of this increase due to higher rates. The average balances on
interest bearing liabilities were $14,447,000 (3.8%) lower in 2007 versus 2006.
The lower balances accounted for a $909,000 decrease in interest expense. In
2007, average interest bearing deposits were up $2,563,000 (0.8%) but other
borrowings were down $17,010,000 (36.4%) creating the overall drop in interest
bearing balances. In 2007, the Company focused on reducing the higher cost
borrowings; the decrease in other borrowings accounting for $806,000 in reduced
interest costs from volume compared to 2006. The Company also focused on
bringing in additional checking, money market, and savings accounts, and
reducing higher priced time deposits and as a result, the average balances on
interest checking, money market and savings accounts were up $8,033,000 (4.0%)
adding $119,000 to interest expense attributable to the increased volume, while
the average time deposit balances were down $5,470,000 (4.2%) reducing the
expense by $222,000.
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
31
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), computed
on a daily average basis, and changes in average interest rates.
Table Two: Analysis of Net Interest Margin on Earning Assets
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2008 2007 2006
------------------------------ ------------------------------- -------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg Avg Avg
(dollars in thousands) Balance Interest Yield Balance Interest Yield Balance Interest Yield
--------- --------- ----- --------- --------- ----- --------- --------- -----
Assets:
Earning assets
Loans and leases (1) $ 410,293 $ 28,512 6.95% $ 390,488 $ 31,508 8.07% $ 381,465 $ 31,082 8.15%
Taxable investment
securities 79,675 3,711 4.66% 100,086 4,544 4.54% 129,608 5,545 4.28%
Tax-exempt investment
securities (2) 27,102 1,428 5.27% 27,745 1,436 5.18% 27,886 1,355 4.86%
Corporate stock 172 22 12.79% 407 32 7.86% 559 42 7.51%
Federal funds sold 486 10 2.06% 690 34 4.93% 359 19 5.29%
Interest bearing deposits
in other banks 4,838 222 4.59% 4,949 271 5.48% 4,917 241 4.90%
--------- --------- --------- --------- --------- ---------
Total earning assets 522,566 33,905 6.47% 524,365 37,825 7.21% 544,794 38,284 7.03%
--------- --------- ---------
Cash & due from banks 19,260 17,263 28,401
Other assets 39,330 39,529 35,708
Allowance for loan & lease
losses (6,110) (5,932) (5,863)
--------- --------- ---------
$ 575,046 $ 575,225 $ 603,040
========= ========= =========
Liabilities &
Shareholders' Equity:
Interest bearing liabilities:
NOW & MMDA $ 164,531 1,929 1.17% $ 173,382 3,781 2.18% $ 168,128 3,204 1.91%
Savings 36,033 324 0.90% 37,690 546 1.45% 34,911 242 0.69%
Time deposits 121,479 3,648 3.00% 123,485 5,233 4.24% 128,955 5,231 4.06%
Other borrowings 59,560 1,727 2.90% 29,680 1,516 5.11% 46,690 2,211 4.74%
--------- --------- --------- --------- --------- ---------
Total interest bearing
Liabilities 381,603 7,628 1.99% 11,076 3.04% 378,684 10,888 2.88%
--------- --------- ---------
Demand deposits 126,125 144,787 156,032
Other liabilities 6,234 5,668 5,754
--------- --------- ---------
Total liabilities 513,962 514,692 540,470
Shareholders' equity 61,084 60,533 62,570
--------- --------- ---------
$ 575,046 $ 575,225 $ 603,040
========= ========= =========
Net interest income &
Margin (3) $ 26,277 5.03% $ 26,749 5.10% $ 27,396 5.03%
========= ===== ========= ===== ========= =====
(1) Loan and lease interest includes loan and lease fees of $250,000, $529,000
and $873,000 in 2008, 2007 and 2006, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from Federal income taxes. The effective
Federal statutory tax rate was 35% in 2008, 2007 and 2006.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
32
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
------------------------------------------------------------------------------------------
Year ended December 31, 2008 over 2007 (dollars in thousands)
Increase (decrease) due to change in:
Volume Rate (4) Net Change
------------ ------------ ------------
Interest-earning assets:
Net loans and leases (1)(2) $ 1,597 $ (4,593) $ (2,996)
Taxable investment securities (927) 94 (833)
Tax-exempt investment securities (3) (33) 25 (8)
Corporate stock (18) 8 (10)
Federal funds sold & other (10) (14) (24)
Interest bearing deposits in other banks (6) (43) (49)
------------ ------------ ------------
Total 603 (4,523) (3,920)
------------ ------------ ------------
Interest-bearing liabilities:
Demand deposits (193) (1,659) (1,852)
Savings deposits (24) (198) (222)
Time deposits (85) (1,500) (1,585)
Other borrowings 1,526 (1,315) 211
------------ ------------ ------------
Total 1,224 (4,672) (3,448)
------------ ------------ ------------
Interest differential $ (621) $ 149 $ (472)
============ ============ ============
Year Ended December 31, 2007 over 2006 (dollars in thousands)
Increase (decrease) due to change in:
Volume Rate (4) Net Change
------------ ------------ ------------
Interest-earning assets:
Net loans and leases (1)(2) $ 735 $ (309) $ 426
Taxable investment securities (1,263) 262 (1,001)
Tax-exempt investment securities (3) (7) 88 81
Corporate stock (11) 1 (10)
Federal funds sold & other 18 (3) 15
Interest bearing deposits in other banks 2 28 30
------------ ------------ ------------
Total (526) 67 (459)
------------ ------------ ------------
Interest-bearing liabilities:
Demand deposits 100 477 577
Savings deposits 19 285 304
Time deposits (222) 224 2
Other borrowings (806) 111 (695)
------------ ------------ ------------
Total (909) 1,097 188
------------ ------------ ------------
Interest differential $ 383 $ (1,030) $ (647)
============ ============ ============
(1) The average balance of non-accruing loans and leases is immaterial as a
percentage of total loans and leases and, as such, has been included in net
loans and leases.
(2) Loan and lease fees of $250,000, $529,000 and $873,000 for the years ended
December 31, 2008, 2007 and 2006, respectively, have been included in the
interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from Federal income taxes. The effective
Federal statutory tax rate was 35% in 2008, 2007 and 2006.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company provided $1,743,000 for loan and lease losses in 2008 as
compared to $450,000 for 2007. Net loan charge-offs for 2008 were $1,708,000 as
compared to $441,000 in 2007. In 2008, net loan charge-offs as a percentage of
average loans outstanding were .42% compared to .11% in 2007. In 2006, the
Company provided $320,000 for loan and lease losses and net charge-offs were
$125,000. For further information please see "Allowance for Loan and Lease
Losses Activity."
33
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,
-------------------------------------------
2008 2007 2006
------------ ------------ ------------
Service charges on deposit accounts $ 741 $ 743 $ 783
Merchant fee income 482 544 549
Earnings on Bank owned life insurance 395 404 256
Income from residential lending division 283 401 192
Accounts receivable servicing fees 170 244 372
(Loss) gain on sale, call and impairment of securities (119) 11 1
Other 216 252 290
------------ ------------ ------------
$ 2,168 $ 2,599 $ 2,443
============ ============ ============
Noninterest income was down $431,000 (16.6%) to $2,168,000 in 2008 from
the 2007 level. The decrease from 2007 to 2008 was primarily related to lower
income from fees on residential lending (down $118,000 or 29.4%), lower fees on
accounts receivable servicing (down $74,000 or 32.5%), lower merchant fees (down
$62,000 or 11.4%) and an impairment charge of $245,000 on the Company's
investment in Federal National Mortgage Association ("FNMA") preferred stock. On
September 7, 2008, the U.S. Government placed FNMA into conservatorship and as a
result the market value of the shares experienced a significant decline. The par
value of the shares is $250,000 and the Company has written down the balance by
$245,000 to $5,000. The decrease in fees from residential lending resulted from
the lower number of loan closings due to the slowdown in the residential real
estate market. The decrease in fees on accounts receivable servicing and
merchant fees is due to lower activity levels in 2008 compared to 2007.
Noninterest income was up $156,000 (6.4%) to $2,599,000 in 2007 from
the 2006 level. The increase in noninterest income can be attributed to
increases in earnings on bank owned life insurance (up $149,000 or 58.2%) and
residential lending fee income (up $209,000 or 108.9%). The Company experienced
a decrease in accounts receivable servicing fees (down $128,000 or 34.4%). The
increase in income from bank owned life insurance was the result of the Company
purchasing additional policies near the end of the fourth quarter of 2006. The
increase in fees from residential lending relates to the Company's decision to
expand is Residential Lending Division by adding four (4) mortgage specialists.
These increases were offset by a reduction of fees from accounts receivable
servicing which resulted from lower overall volume.
Salaries and Benefits
Salaries and benefits, which include commissions, were $7,687,000 (down
$709,000 or 8.4%) for 2008 as compared to $8,396,000 in 2007. The decrease in
salary and benefit expense is primarily related to a decrease in the average
full time equivalent employees ("FTE") and lower incentive compensation. The
average FTE's decreased from 129 in 2007 to 123 during 2008 and, at the end of
2008, the full-time equivalent staff was 122, down 2 from 124 at the end of
2007. The incentive compensation expense decreased $474,000 (79.0%) from
$600,000 in 2007 to $126,000 in 2008 as no performance related incentive was
earned as the Company did not hit its performance goals.
Salaries and benefits were $8,396,000 (up $580,000 or 7.4%) for 2007 as
compared to $7,816,000 in 2006. The salary and benefit expense related to the
expanded Residential Lending Division added $259,000 (or 44.7% of the increase).
Payroll taxes (up $34,000), stock option expense (up $57,000) group health
insurance (up $106,000), and retirement costs (up $43,000) also added to the
increased expense. At the end of 2007, the full-time equivalent staff was 124,
down 5 from the 129 at the end of 2006.
Occupancy, Furniture and Equipment
Occupancy expense increased $97,000 (6.9%) during 2008 to $1,495,000,
up from $1,398,000 in 2007. The majority of the increase relates to normal rent
increases and higher utilities in the Company's leased facilities as well as
depreciation expense related to recent branch remodels. Furniture and equipment
expense was $774,000 in 2008 compared to $691,000 in 2007, representing an
$83,000 (12.0%) increase. The increase in furniture and equipment expense
relates primarily to higher technology related maintenance.
34
Occupancy expense increased $14,000 (1.0%) during 2007 to $1,398,000,
up from $1,384,000 in 2006. The majority of the increase relates to normal rent
increases in the Company's leased facilities. Furniture and equipment expense
was $691,000 in 2007 compared to $812,000 in 2006, representing a $121,000
(14.9%) decrease. The decrease in furniture and equipment expense relates to
less amortization of technology related equipment. Although still being used,
certain equipment has reached its fully depreciated life.
Other Expenses
Table Five below provides a summary of the components of the other
noninterest expenses for the periods indicated (dollars in thousands):
Year Ended December 31,
------------------------------------------
2008 2007 2006
------------ ------------ ------------
Professional fees $ 936 $ 832 $ 778
Telephone and postage 403 420 411
Directors' expense 321 378 311
Outsourced item processing 391 374 495
Advertising and promotion 339 338 357
Stationery and supplies 274 322 335
Amortization of intangible assets 286 308 330
Donations 56 62 88
Other operating expenses 1,239 1,314 1,271
------------ ------------ ------------
$ 4,245 $ 4,348 $ 4,376
============ ============ ============
Other expenses were $4,245,000 (down $103,000 or 2.4%) for 2008 as
compared to $4,348,000 for 2007. Professional fees increased $104,000 (12.5%)
due in part to higher legal, accounting, and other professional services to
comply with changes in the regulatory environment and to resolve problem loans.
This increase was offset by reductions in several other expense related items as
the Company continued to focus on reducing expenses and services. The overhead
efficiency ratio on a taxable equivalent basis for 2008 was 48.9% as compared to
49.5% in 2007.
Other expenses were $4,348,000 (down $28,000 or 0.6%) for 2007 as
compared to $4,376,000 for 2006. Professional fees increased $54,000 (6.9%) and
directors' expense increased $67,000 (21.5%). These increases were offset by
reductions in outsourced item processing (down $121,000 or 24.4%) and
advertising, promotion and donations (down $45,000 or 10.1%). The increase in
professional fees relates to higher legal and other professional services to
comply with changes in the regulatory environment and to resolve problem loans.
Directors' expense increased due to higher overall fees paid to the Company
directors and higher expense related to stock options accounted for under FAS
123 (R). Item processing expense was lower in 2007 as the Company settled a
pricing issue with its vendor. The overhead efficiency ratio on a taxable
equivalent basis for 2007 was 49.5% as compared to 47.1% in 2006.
Provision for Taxes
The effective tax rate on income was 37.7%, 38.2% and 38.8% in 2008,
2007 and 2006, respectively. The effective tax rate was greater than the Federal
statutory tax rate due to state tax expense (net of Federal tax effect) of
$802,000, $919,000 and $1,006,000 in these years. Tax-exempt income of
$1,415,000, $1,410,000 and $1,211,000 from investment securities and bank owned
life insurance in these years helped to reduce the effective tax rate.
Balance Sheet Analysis
The Company's total assets were $563,157,000 at December 31, 2008 as
compared to $573,685,000 at December 31, 2007, representing a decrease of
$10,528,000 (1.8%). The average balances of total assets during 2008 were
$575,046,000 which is consistent with the 2007 total of $575,225,000.
35
Investment Securities
The Company classifies its investment securities as trading,
held-to-maturity or available-for-sale. The Company's intent is to hold all
securities classified as held-to-maturity until maturity and management believes
that it has the ability to do so. Securities available-for-sale may be sold to
implement asset/liability management strategies; as part of our contingency
funding plan; and in response to changes in interest rates, prepayment rates and
similar factors. Table Six below summarizes the values of the Company's
investment securities held on December 31 of the years indicated.
Table Six: Investment Securities Composition
-------------------------------------------------------------------------------------------------
(dollars in thousands)
Available-for-sale (at fair value) 2008 2007 2006
-------------------------------------------------------------------------------------------------
Debt securities:
U.S. Government agencies $ -- $ 16,506 $ 28,123
Mortgage-backed securities 32,232 31,066 33,236
Obligations of states and political subdivisions
31,012 31,111 41,224
Corporate debt securities -- -- 1,003
Equity securities:
Corporate stock 90 287 623
-------------------------------------------------------------------------------------------------
Total available-for-sale investment securities $ 63,334 $ 78,970 $ 104,209
=================================================================================================
Held-to-maturity (at amortized cost)
-------------------------------------------------------------------------------------------------
Debt securities:
Mortgage-backed securities $ 24,365 $ 34,754 $ 44,031
-------------------------------------------------------------------------------------------------
Total held-to-maturity investment securities $ 24,365 $ 34,754 $ 44,031
=================================================================================================
See Table Fifteen for a breakdown of the investment securities by
maturity and the corresponding weighted average yields.
Loans and Leases
The Company concentrates its lending activities in the following
principal areas: (1) commercial; (2) commercial real estate; (3) multi-family
real estate; (4) real estate construction (both commercial and residential); (5)
residential real estate; (6) lease financing receivable; (7) agriculture; and
(8) consumer loans. At December 31, 2008, these categories accounted for
approximately 22%, 52%, 2%, 12%, 6%, 1%, 2% and 3%, respectively, of the
Company's loan portfolio. This mix was relatively unchanged compared to 24%,
48%, 1%, 16%, 5%, 1%, 2% and 3% at December 31, 2007. Continuing focus in the
Company's market area, new borrowers developed through the Company's marketing
efforts, and credit extensions expanded to existing borrowers resulted in the
Company originating over $125 million in new loans in 2008. The Company reported
net increases in balances for commercial real estate ($26,852,000 or 14.0%),
multi-family real estate ($3,108,000 or 53.3%), residential real estate
($4,486,000 or 22.8%), lease financing receivable ($405,000 or 10.0%), and
consumer loans ($4,046,000 or 37.6%) and the Company experienced a decrease in
commercial ($4,007,000 or 4.2%), real estate construction ($17,358,000 or
26.3%), and agriculture ($162,000 or 2.0%) primarily as a result of paydowns.
Table Seven below summarizes the composition of the loan and lease portfolio for
the past five years as of December 31.
36
Table Seven: Loan and Lease Portfolio Composition
---------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------------------------------------
(dollars in thousands) 2008 2007 2006 2005 2004
---------------------------------------------------------------------------------------------------------
Commercial $ 90,625 $ 94,632 $ 85,859 $ 77,971 $ 66,864
Real estate:
Commercial 218,626 191,774 175,643 154,500 166,263
Multi-family 8,938 5,830 3,618 3,767 2,660
Construction 48,664 66,022 90,314 103,048 90,162
Residential 24,706 20,120 8,689 4,680 5,236
Lease financing receivable 4,475 4,070 6,375 7,967 9,994
Agriculture 8,015 8,177 7,362 8,129 8,252
Consumer 14,796 10,750 11,712 11,900 9,417
---------------------------------------------------------------------------------------------------------
418,845 401,375 389,572 371,962 358,848
Deferred loan fees, net (571) (517) (705) (712) (885)
Allowance for loan and
lease losses (5,918) (5,883) (5,874) (5,679) (5,496)
---------------------------------------------------------------------------------------------------------
Total net loans and leases $ 412,356 $ 394,975 $ 382,993 $ 365,571 $ 352,467
=========================================================================================================
A significant portion of the Company's loans and leases are direct
loans and leases made to individuals and local businesses. The Company relies
substantially on local promotional activity and personal contacts by American
River Bank officers, directors and employees to compete with other financial
institutions. The Company makes loans and leases to borrowers whose applications
include a sound purpose and a viable primary repayment source, generally
supported by a secondary source of repayment. Commercial loans consist of credit
lines for operating needs, loans for equipment purchases, working capital, and
various other business loan products. Consumer loans include a range of
traditional consumer loan products such as personal lines of credit and loans to
finance purchases of autos, boats, recreational vehicles, mobile homes and
various other consumer items. Construction loans are generally comprised of
commitments to customers within the Company's service area for construction of
commercial properties, multi-family properties and custom and semi-custom
single-family residences. Other real estate loans consist primarily of loans
secured by first trust deeds on commercial and residential properties typically
with maturities from 3 to 10 years and original loan-to- value ratios generally
from 65% to 75%. Agriculture loans consist primarily of vineyard loans and
development loans to plant vineyards. In general, except in the case of loans
under SBA programs or Farm Services Agency guarantees, the Company does not make
long-term mortgage loans; however, in 2008, American River Bank had a
residential lending division to assist customers in securing most forms of
longer term single-family mortgage financing. American River Bank acted as a
broker between American River Bank's clients and the loan wholesalers. American
River Bank received an origination fee for loans closed.
Subprime loans generally refer to residential mortgages made to
higher-risk borrowers with lower credit and/or income histories. Many of these
subprime loans were made with adjustable interest rates that reset upward after
an introductory period. Such subprime loans coupled with declines in housing
prices have led to an increase in default rates resulting in many instances of
increased foreclosure rates as the adjustable interest rates reset to higher
levels. The Company does not have any "subprime" loans on its books at December
31, 2008.
Average net loans and leases in 2008 were $410,293,000 which represents
an increase of $19,805,000 (5.1%) over the average in 2007. Average net loans
and leases in 2007 were $390,488,000 which represents an increase of $9,023,000
(2.4%) over the average in 2006. Loan growth in 2008 and 2007 resulted from the
continued concentrated effort to increase commercial relationships, the addition
of 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, through active credit administration and regular
monitoring. With this in mind, management has designed and implemented a
37
comprehensive loan and lease review and grading system that functions to
continually assess the credit risk inherent in the loan and lease portfolio. In
addition, the Company has taken actions to further strengthen its lending
compliance management system in accordance with recommendations in connection
with its 2008 compliance examination including, among other matters, enhancement
of existing procedures for internal control of loan compliance functions such as
maintenance of required levels of compliance training, increased monitoring of
the compliance program, and identification of any compliance weaknesses.
Ultimately, underlying trends in economic and business cycles may
influence credit quality. American River Bank's business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base, in
Sonoma County, through North Coast Bank, a division of American River Bank,
whose business is focused on businesses within the three communities in which it
has offices (Santa Rosa, Windsor, and Healdsburg) and in Amador County, through
Bank of Amador, a division of American River Bank, whose business is focused on
businesses and consumers within the three communities in which it has offices
(Jackson, Pioneer, and Ione) as well as a diversified residential construction
loan business in numerous Northern California counties. The economy of Sonoma
County is diversified with professional services, manufacturing, agriculture and
real estate investment and construction, while the economy of Amador County is
reliant upon government, services, retail trade, manufacturing industries and
Indian gaming.
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rate and terms, vacancy rates, absorption and sale rates; real
estate values, supply and demand factors, and rates of return; operating
expenses; inflation; and sufficiency of repayment sources independent of the
real estate including, in some instances, personal guarantees. In extending
credit and commitments to borrowers, the Company generally requires collateral
and/or guarantees as security. The repayment of such loans is expected to come
from cash flow or from proceeds from the sale of selected assets of the
borrowers. The Company's requirement for collateral and/or guarantees is
determined on a case-by-case basis in connection with management's evaluation of
the creditworthiness of the borrower. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, income-producing
properties, residences and other real property. The Company secures its
collateral by perfecting its security interest in business assets, obtaining
deeds of trust, or outright possession among other means.
In management's judgment, a concentration exists in real estate loans
which represented approximately 71.8% of the Company's loan and lease portfolio
at December 31, 2008, up from 70.7% at December 31, 2007. Management believes
that the residential land and residential construction portion of the Company's
loan portfolio carries more than the normal credit risk it has seen in the past
several years, due primarily to severely curtailed demand for new and resale
residential property, a large supply of unsold residential land and new and
resale homes, and observed reductions in values throughout the Company's market
area. Management has responded by evaluating loans that it considers to carry
any significant risk above the normal risk of collectability, and taking actions
where possible to reduce credit risk exposure by methods that include, but are
not limited to, seeking liquidation of the loan by the borrower, seeking
additional tangible collateral or other repayment support, converting the
property through judicial or non-judicial foreclosure proceedings, and other
collection techniques. Management currently believes that it maintains its
allowance for loan and lease loss at levels adequate to reflect the loss risk
inherent in its total loan portfolio.
Although management believes the Company's real estate concentration to
have no more than the normal risk of collectability, a continued substantial
further decline in the economy in general, or a continued additional 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
38
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 or contracted third-party professionals.
Nonaccrual, Past Due and Restructured Loans and Leases
Management generally places loans and leases on nonaccrual status when
they become 90 days past due, unless the loan or lease is well secured and in
the process of collection. Loans and leases are charged off when, in the opinion
of management, collection appears unlikely.
The recorded investments in nonaccrual loans and leases and loans and
leases that were 90 days or more past due and on accrual totaled $6,241,000 and
$7,440,000 at December 31, 2008 and 2007, respectively. Of the $6,241,000 in
non-performing loans and leases at December 31, 2008, there were sixteen real
estate loans totaling $5,931,000; three commercial loans totaling $261,000;
three leases totaled $41,000; and one consumer loan totaling $8,000.
Interest due but excluded from interest income on nonaccrual loans and
leases was $647,000 during 2008, $305,000 during 2007, and not significant
during 2006. In 2008, 2007 and 2006, interest income recognized from payments
received on nonaccrual loans and leases was not significant.
Table Eight below sets forth nonaccrual loans and leases and loans and
leases past due 90 days or more and on accrual as of year-end for the past five
years.
Table Eight: Non-Performing Loans and Leases
-----------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------------------------------------------
(dollars in thousands) 2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------
Past due 90 days or more and still accruing:
Commercial $ -- $ -- $ -- $ 24 $ --
Real estate 444 455 13 -- --
Lease financing receivable 22 -- -- -- 11
Consumer and other 8 -- -- -- --
Nonaccrual:
Commercial 261 148 -- -- 52
Real estate 5,487 6,787 12 15 113
Lease financing receivable 19 50 53 52 71
Consumer and other -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
Total non-performing loans and leases $ 6,241 $ 7,440 $ 78 $ 91 $ 247
=======================================================================================================================
There were no loan or lease concentrations in excess of 10% of total
loans and leases not otherwise disclosed as a category of loans and leases as of
December 31, 2008. Management is not aware of any potential problem loans or
leases, which were accruing and current at December 31, 2008, where serious
doubt exists as to the ability of the borrower to comply with the present
repayment terms.
Impaired Loans
The Company considers a loan to be impaired when, based on current
information and events, it is probable that it will be unable to collect all
amounts due (principal and interest) according to the contractual terms of the
loan agreement. The measurement of impairment may be based on (i) the present
value of the expected cash flows of the impaired loan discounted at the loan's
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The Company does not apply this definition to
smaller-balance loans that are collectively evaluated for credit risk. In
assessing impairment, the Company reviews all loans graded substandard or lower
with outstanding principal balances in excess of $250,000. The recorded
investment in loans and leases that were considered to be impaired totaled
$6,083,000 at December 31, 2008 and had a related valuation allowance of
$788,000. The average recorded investment in impaired loans and leases during
2008 was approximately $8,291,000. As of December 31, 2007, the recorded
investment in loans and leases that were considered to be impaired totaled
$6,637,000 and had a related valuation allowance of $764,000. The average
39
recorded investment in impaired loans and leases during 2007 was approximately
$407,000. There were no loans or leases considered to be impaired at December
31, 2006.
Allowance for Loan and Lease Losses Activity
The Company maintains an allowance for loan and lease losses ("ALLL")
to cover probable losses inherent in the loan and lease portfolio, which is
based upon management's estimated range of those losses. The ALLL is established
through a provision for loan and lease losses and is increased by provisions
charged against current earnings and recoveries and reduced by charge-offs.
Actual losses for loans and leases can vary significantly from this estimate.
The methodology and assumptions used to calculate the allowance are continually
reviewed as to their appropriateness given the most recent losses realized and
other factors that influence the estimation process. The model assumptions and
resulting allowance level are adjusted accordingly as these factors change.
The adequacy of the ALLL and the level of the related provision for
loan and lease losses is determined based on management's judgment after
consideration of numerous factors including but not limited to: (i) local and
regional economic conditions, (ii) the financial condition of the borrowers,
(iii) loan impairment and the related level of expected charge-offs, (iv)
evaluation of industry trends, (v) industry and other concentrations, (vi) loans
and leases which are contractually current as to payment terms but demonstrate a
higher degree of risk as identified by management, (vii) continuing evaluations
of the performing loan portfolio, (viii) ongoing review and evaluation of
problem loans identified as having loss potential, (ix) quarterly review by the
Board of Directors, and (x) assessments by banking regulators and other third
parties. Management and the Board of Directors evaluate the ALLL and determine
its appropriate level considering objective and subjective measures, such as
knowledge of the borrowers' business, valuation of collateral, the determination
of impaired loans or leases and exposure to potential losses.
The allowance for loan and lease losses totaled $5,918,000 or 1.41% of
total loans and leases at December 31, 2008, $5,883,000 or 1.47% of total loans
and leases at December 31, 2007, and $5,874,000 or 1.51% at December 31, 2006.
The Company establishes general reserves in accordance with Statement of
Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies," and
specific reserves in accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." The ALLL is maintained by categories of the loan and
lease portfolio based on loan type and loan rating; however, the entire
allowance is available to cover actual loan and lease losses. While management
uses available information to recognize possible losses on loans and leases,
future additions to the allowance may be necessary, based on changes in economic
conditions and other matters. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
ALLL. Such agencies may require the Company to provide additions to the
allowance based on their judgment of information available to them at the time
of their examination.
It is the policy of management to maintain the allowance for loan and
lease losses at a level believed to be adequate for known and inherent risks in
the portfolio. Our methodology incorporates a variety of risk considerations,
both quantitative and qualitative, in establishing an allowance for loan and
lease losses that management believes is appropriate at each reporting date.
Based on information currently available to analyze inherent credit risk,
including economic factors, overall credit quality, historical delinquencies and
a history of actual charge-offs, management believes that the provision for loan
and lease losses and the allowance for loan and lease losses are prudent and
adequate. Adjustments may be made based on differences from estimated loan and
lease growth, the types of loans constituting this growth, changes in risk
ratings within the portfolio, and general economic conditions. However, no
prediction of the ultimate level of loans and leases charged off in future
periods can be made with any certainty.
40
Table Nine below summarizes, for the periods indicated, the activity in
the ALLL.
Table Nine: Allowance for Loan and Lease Losses
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Year Ended December 31,
----------------------------------------------------------------------------
2008 2007 2006 2005 2004
-------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $ 410,293 $ 390,488 $ 381,465 $ 360,319 $ 277,647
-------------------------------------------------------------------------------------------------------------------
Allowance for loan & lease losses
at beginning of period $ 5,883 $ 5,874 $ 5,679 $ 5,496 $ 3,949
Loans and leases charged off:
Commercial 422 301 71 72 --
Real estate 1,114 72 -- -- --
Consumer 139 105 1 -- 1
Lease financing receivable 59 70 78 134 268
-------------------------------------------------------------------------------------------------------------------
Total 1,734 548 150 206 269
-------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases
previously charged off:
Commercial 12 41 6 9 57
Real estate -- -- -- -- --
Consumer -- -- 9 2 3
Lease financing receivable 14 66 10 56 --
-------------------------------------------------------------------------------------------------------------------
Total 26 107 25 67 60
-------------------------------------------------------------------------------------------------------------------
Net loans and leases charged off 1,708 441 125 139 209
Allowance acquired in merger -- -- -- -- 861
Additions to allowance charged
to operating expenses 1,743 450 320 322 895
-------------------------------------------------------------------------------------------------------------------
Allowance for loan and
lease losses at end of period $ 5,918 $ 5,883 $ 5,874 $ 5,679 $ 5,496
Ratio of net charge-offs to average
loans and leases outstanding .42% .11% .03% .04% .08%
Provision for loan and lease losses
to average loans and leases
outstanding .42% .12% .08% .09% .32%
Allowance for loan and lease losses
to loans and leases, net of
deferred fees, at end of period 1.41% 1.47% 1.51% 1.53% 1.54%
As part of its loan review process, management has allocated the
overall allowance based on specific identified problem loans and leases,
qualitative factors, uncertainty inherent in the estimation process and
historical loss data. A risk exists that future losses cannot be precisely
quantified or attributed to particular loans or leases or classes of loans and
leases. Management continues to evaluate the loan and lease portfolio and
assesses current economic conditions that will affect management's conclusion as
to future allowance levels. Table Ten below summarizes the allocation of the
allowance for loan and lease losses for the five years ended December 31, 2008.
41
Table Ten: Allowance for Loan and Lease Losses by Loan Category
----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
December 31, 2008 December 31, 2007 December 31, 2006
----------------------------------------------------------------------------------------------------------------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
----------------------------------------------------------------------------------------------------------------------------------
Commercial $ 1,644 21.6% $ 1,369 23.6% $ 1,269 22.1%
Real estate 4,030 71.8% 4,314 70.7% 4,332 71.4%
Agriculture 8 1.9% 8 2.0% 7 1.9%
Consumer 170 3.5% 108 2.7% 131 3.0%
Lease financing receivable 66 1.2% 84 1.0% 135 1.6%
----------------------------------------------------------------------------------------------------------------------------------
Total allocated $ 5,918 100.0% $ 5,883 100.0% $ 5,874 100.0%
----------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 December 31, 2004
-----------------------------------------------------------------------------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
-----------------------------------------------------------------------------------------------
Commercial $ 1,056 21.0% $ 1,028 18.6%
Real estate 3,948 71.5% 3,825 73.7%
Agriculture 213 2.2% 110 2.3%
Consumer 246 3.2% 220 2.6%
Lease financing receivable 216 2.1% 313 2.8%
-----------------------------------------------------------------------------------------------
Total allocated $ 5,679 100.0% $ 5,496 100.0%
-----------------------------------------------------------------------------------------------
The allocation presented should not be interpreted as an indication
that charges to the allowance for loan and lease losses will be incurred in
these amounts or proportions, or that the portion of the allowance allocated to
each loan and lease category represents the total amounts available for
charge-offs that may occur within these categories.
Other Real Estate
During 2008, the Company received $61,000 from the proceeds from the
sale of other real estate with no gain recognized on the sale. There was
$2,158,000 and $61,000 with no valuation allowance in other real estate at
December 31, 2008 and 2007. The balance in 2008 consists of three properties
acquired through foreclosure.
Deposits
At December 31, 2008, total deposits were $437,061,000 representing a
decrease of $18,584,000 (4.1%) compared to the December 31, 2007 balance of
$455,645,000. The Company's deposit growth plan for 2008 was to concentrate its
efforts on increasing noninterest-bearing demand, interest-bearing money market
and NOW accounts, and savings accounts. However, due to the competitive rate
environment and the overall weak economy that resulted in depositors holding
lower overall balances in their account, the Company experienced decreases in
noninterest bearing ($13,523,000 or 10.2%), savings ($2,201,000 or 6.2%), and
money market ($21,478,000 or 16.9%), but did have a slight increase in NOW
accounts ($2,004,000 or 4.6%). In addition, the Company did experience an
increase in time deposits ("CD's") of $16,604,000 (14.3%) during 2008, due in
part to the addition of $10,074,000 in brokered CD's late in the year.
Other Borrowed Funds
Other borrowings outstanding as of December 31, 2008 consist of
advances from the Federal Home Loan Bank (the "FHLB"). The following table
summarizes these borrowings (dollars in thousands):
42
2008 2007 2006
Amount Rate Amount Rate Amount Rate
--------------------------------------------------------------------------------------------
Short-term borrowings:
FHLB advances $ 43,231 1.83% $ 51,603 3.61% $ 37,270 5.08%
============================================================================================
Long-term borrowings:
FHLB advances $ 14,000 3.19% $ $ 5,000 4.92%
============================================================================================
The maximum amount of short-term borrowings at any month-end during
2008, 2007 and 2006, was $59,000,000, $51,603,000, and $64,489,000,
respectively. The FHLB advances are collateralized by loans and securities
pledged to the FHLB. The following is a breakdown of rates and maturities on
FHLB advances (dollars in thousands):
Short Term Long Term
Amount $ 42,231 $ 14,000
Maturity 2009 2010 to 2011
Average rates 1.83% 3.19%
The Company has also been issued a total of $2,500,000 as of December
31, 2008 and $3,750,000 as of December 31, 2007 in letters of credit by the FHLB
which have been pledged to secure Local Agency Deposits. The letters of credit
act as a guarantee of payment to certain third parties in accordance with
specified terms and conditions. The letters of credit were not drawn upon in
2008 or 2007 and management does not expect to draw upon these lines in the
future.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed regularly by
management. The Company's capital position represents the level of capital
available to support continuing operations and expansion.
The Company, through a Board of Directors authorized plan, may
repurchase, as conditions warrant, up to 6.5% annually of the Company's common
stock. The repurchases are to be made from time to time in the open market as
conditions allow and will be structured to comply with SEC Rule 10b-18.
Management reports monthly to the Board of Directors on the status of the
repurchase program. The Board of Directors has reserved the right to suspend,
terminate, modify or cancel the repurchase program at any time for any reason.
The Company repurchased 115,815 shares in 2008, 426,668 shares in 2007, 299,410
shares in 2006, 92,986 shares in 2005, 11,869 shares in 2004, 1,915 shares in
2003 and 83,747 shares in 2002. Share amounts have been adjusted for stock
dividends and/or splits. See "Stock Repurchases" under Item 5 on page 26 for
more information regarding the stock repurchase plan.
The Company and American River Bank are subject to certain regulatory
capital requirements administered by the Board of Governors of the Federal
Reserve System and the Federal Deposit Insurance Corporation. Failure to meet
these minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, banks must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and
American River Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. At December 31, 2008, shareholders' equity was $63,447,000,
representing an increase of $3,474,000 (5.8%) from $59,973,000 at December 31,
2007. This increase was attributable principally to the retention of earnings
offset by the payment of cash dividends and the repurchase of Company stock. In
2007, shareholders' equity decreased $2,398,000 (3.8%) from 2006. The ratio of
total risk-based capital to risk adjusted assets was 11.5% at December 31, 2008
compared to 10.7% at December 31, 2007. Tier 1 risk-based capital to
risk-adjusted assets was 10.2% at December 31, 2008 and 9.5% at December 31,
2007.
43
Table Eleven below lists the Company's actual capital ratios at
December 31, 2008 and 2007 as well as the minimum capital ratios for capital
adequacy.
Table Eleven: Capital Ratios
------------------------------------------------------------------------------------------------
At December 31, Minimum Regulatory
Capital to Risk-Adjusted Assets 2008 2007 Capital Requirements
------------------------------------------------------------------------------------------------
Leverage ratio 8.3% 7.7% 4.00%
Tier 1 Risk-Based Capital 10.2% 9.5% 4.00%
Total Risk-Based Capital 11.5% 10.7% 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.
American River Bank's ratios are in excess of the regulatory definition of "well
capitalized."
The Company filed an application with the U.S. Treasury to preserve its
opportunity to participate in the Capital Purchase Program ("CPP") and received
approval of its application on November 21, 2008. However, the Board of
Directors subsequently determined that participation in the CPP was not in the
best interests of the Company and its shareholders after evaluation of the CPP
and due diligence reviews of the CPP agreements and documentation including
restrictions imposed upon the Company under the investment agreement and related
documentation which could reduce investment returns to shareholders of
participating bank holding companies and banks by restricting dividends to
common shareholders, diluting existing shareholders' interests, and restricting
capital management practices, and consideration of various other factors
including, but not limited to, capital raising alternatives and the condition of
capital markets, the current and projected economic conditions in the Company's
market areas and the Unites States generally, the condition of the Company's
loan and investment portfolios and other financial factors, and with advice of
such advisors as the Company's Board of Directors deemed appropriate. The
Company gave notice to the U.S. Treasury on January 20, 2009 of its intention
not to participate in the CPP. See "Capital Purchase Program" at page 16 for
more information about the CPP.
Management believes that the Company's capital is adequate to support
current operations and anticipated growth, cash dividends and future capital
requirements of the Company and its subsidiaries.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
interest rate risk inherent in its loan and deposit functions. The goal for
managing the assets and liabilities of the Company is to maximize shareholder
value and earnings while maintaining a high quality balance sheet without
exposing the Company to undue interest rate risk. The Board of Directors has
overall responsibility for the interest rate risk management policies. The
Company has a Risk Management Committee that establishes and monitors guidelines
to control the sensitivity of earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include, but are not limited to, lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the consolidated balance sheet is
managed with the goal that movements of interest rates on assets and liabilities
are correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. The Company uses simulation models to forecast
earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer-modeling
techniques, the Company is able to estimate the potential impact of changing
interest rates on earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans and leases, securities and interest bearing liabilities
(i.e. deposits/borrowings) positions as the beginning base. The forecast balance
sheet is processed against three interest rate scenarios. The scenarios include
a 200 basis point rising rate forecast, a flat rate forecast and a 200 basis
point falling rate forecast which take place within a one year time frame. The
net interest income is measured during the year assuming a gradual change in
rates over the twelve-month horizon. The simulation modeling indicated below
attempts to estimate changes in the Company's net interest income utilizing a
44
forecast balance sheet projected from year-end balances. Table Twelve 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 Twelve: Interest Rate Risk Simulation of Net Interest as of December 31, 2008
-------------------------------------------------------------------------------------------
(dollars in thousands) $ Change in NII
from Current
12 Month Horizon
----------------
Variation from a constant rate scenario
+200bp $ (264)
-200bp $ 467
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as reasonable
estimates of interest rate risk.
Interest Rate Sensitivity Analysis
Interest rate sensitivity is a function of the repricing
characteristics of the portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity. Interest rate sensitivity management focuses on the
maturity of assets and liabilities and their repricing during periods of changes
in market interest rates. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the current
portfolio that are subject to repricing at various time horizons. The
differences are known as interest sensitivity gaps. A positive cumulative gap
may be equated to an asset sensitive position. An asset sensitive position in a
rising interest rate environment will cause a bank's interest rate margin to
expand. This results as floating or variable rate loans reprice more rapidly
than fixed rate certificates of deposit that reprice as they mature over time.
Conversely, a declining interest rate environment will cause the opposite
effect. A negative cumulative gap may be equated to a liability sensitive
position. A liability sensitive position in a rising interest rate environment
will cause a bank's interest rate margin to contract, while a declining interest
rate environment will have the opposite effect.
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company through its effect on market rates of
interest, which affects the Company's ability to attract loan customers.
Inflation affects the growth of total assets by increasing the level of loan
demand, and potentially adversely affects capital adequacy because loan growth
in inflationary periods can increase at rates higher than the rate that capital
grows through retention of earnings which may be generated in the future. In
addition to its effects on interest rates, inflation increases overall operating
expenses. Inflation has not had a material effect upon the results of operations
of the Company during the years ended December 31, 2008, 2007 and 2006.
Liquidity
Liquidity management refers to the Company's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, short-term investments
and securities, and loan and lease repayments contribute to liquidity, along
with deposit increases, while loan and lease funding and deposit withdrawals
decrease liquidity. The Company assesses the likelihood of projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual client funding needs. Commitments to fund
loans and outstanding standby letters of credit at December 31, 2008 were
approximately $76,937,000 and $3,798,000, respectively. Such loan commitments
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, 2008,
consolidated liquid assets totaled $30.8 million or 7.3% of total assets
compared to $47.1 million or 8.2% of total assets on December 31, 2007. In
45
addition to liquid assets, the Company maintains short-term lines of credit in
the amount of $37,000,000 with correspondent banks. At December 31, 2008, the
Company had $37,000,000 available under these credit lines. Additionally,
American River Bank is a member of the FHLB. At December 31, 2008, American
River Bank could have arranged for up to $119,743,000 in secured borrowings from
the FHLB. These borrowings are secured by pledged mortgage loans and investment
securities. At December 31, 2008, the Company had $60,112,000 available under
these secured borrowing arrangements. American River Bank also has a secured
borrowing arrangement with the Federal Reserve Bank. The borrowing can be
secured by pledging selected loans and investment securities. At December 31,
2008, the collateral value at the Federal Reserve Bank was $935,000. American
River Bank also has informal agreements with various other banks to sell
participations in loans, if necessary. Furthermore, American River Bank has
access to multiple wholesale funding sources.
The Company serves primarily a business and professional customer base
and, as such, its deposit base is susceptible to economic fluctuations.
Accordingly, management strives to maintain a balanced position of liquid assets
to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. These securities are also
available to pledge as collateral for borrowings if the need should arise.
American River Bank can also pledge securities to borrow from the Federal
Reserve Bank and the FHLB.
Among other programs and actions taken by the U.S. Treasury and other
regulatory agencies, the FDIC implemented the Temporary Liquidity Guarantee
Program (the "TLGP") to strengthen confidence and encourage liquidity in the
financial system. The TLGP includes the Debt Guarantee Program (the "DGP"). The
DGP guarantees all newly issued senior unsecured debt (e.g., promissory notes,
unsubordinated unsecured notes and commercial paper) up to prescribed limits
issued by participating entities beginning on October 14, 2008 and continuing
through June 30, 2009. For eligible debt issued by that date, the FDIC will
provide the guarantee coverage until the earlier of the maturity date of the
debt or June 30, 2012. American River Bank is authorized to participate in the
DGP and can issue approximately $10,260,000 of qualifying senior debt securities
covered by the DGP. As of December 31, 2008, American River Bank has no senior
unsecured debt outstanding. The Company has not determined whether to issue
qualifying senior debt securities under the DGP as part of its liquidity
planning for 2009 or thereafter.
The principal cash requirements of the Company are for expenses
incurred in the support of administration and operations. For nonbanking
functions, the Company is dependent upon the payment of cash dividends from its
subsidiaries to service its commitments. The Company expects that the cash
dividends paid by American River Bank to the Company will be sufficient to meet
this payment schedule. The maturity distribution of certificates of deposit is
set forth in Table Thirteen 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 Thirteen: Certificates of Deposit Maturities
December 31, 2008
--------------------------------------------------------------------------------
(dollars in thousands) Less than $100,000 Over $100,000
--------------------------------------------------------------------------------
Three months or less $ 13,263 $ 44,392
Over three months through six months 8,712 29,892
Over six months through twelve months 9,280 12,604
Over twelve months 6,564 8,273
--------------------------------------------------------------------------------
Total $ 37,819 $ 95,161
================================================================================
Loan and lease demand also affects the Company's liquidity position.
Table Fourteen below presents the maturities of loans and leases for the period
indicated.
46
Table Fourteen: Loan and Lease Maturities (Gross Loans and Leases)
-----------------------------------------------------------------------------------------
December 31, 2008
-----------------------------------------------------------------------------------------
One year One year through Over
(dollars in thousands) or less five years five years Total
-----------------------------------------------------------------------------------------
Commercial $ 46,396 $ 30,421 $ 13,808 $ 90,625
Real estate 59,902 69,329 171,703 300,934
Agriculture 1,525 5,865 625 8,015
Consumer 1,265 3,841 9,690 14,796
Leases 331 3,424 720 4,475
-----------------------------------------------------------------------------------------
Total $ 109,419 $ 112,880 $ 196,546 $ 418,845
=========================================================================================
Loans and leases shown above with maturities greater than one year
include $233,036,000 of floating interest rate loans and $76,390,000 of fixed
rate loans and leases.
The carrying amount, maturity distribution and weighted average yield
of the Company's investment securities available-for-sale and held-to-maturity
portfolios are presented in Table Fifteen below. The yields on tax-exempt
obligations have been computed on a tax equivalent basis. Table Fifteen does not
include FHLB Stock, which does not have stated maturity dates or readily
available market values. The balance in FHLB Stock at December 31, 2008, 2007
and 2006 was $3,922,000, $2,800,000 and $3,071,000, respectively.
Table Fifteen: Securities Maturities and Weighted Average Yields
December 31, 2008, 2007 and 2006
---------------------------------------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis)
2008 2007 2006
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
(dollars in thousands) Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------------------------------------------------------------
Available-for-sale securities:
U.S. Treasury and agency securities
Maturing within 1 year -- -- $ 13,072 3.77% $ 11,870 3.57%
Maturing after 1 year but within 5 years -- -- 3,434 3.84% 16,253 3.78%
State & political subdivisions
Maturing within 1 year $ 2,055 4.42% 2,363 4.15% 4,556 4.00%
Maturing after 1 year but within 5 years 12,228 5.42% 11,561 5.17% 12,625 4.82%
Maturing after 5 years but within 10 years 11,782 6.08% 9,810 6.38% 13,789 6.33%
Maturing after 10 years 4,948 5.77% 7,377 6.28% 10,254 6.28%
Mortgage-backed securities 32,232 4.89% 31,066 4.30% 33,236 4.30%
Other
Maturing within 1 year -- -- -- -- 1,003 4.67%
Non maturing 89 0.00% 287 4.44% 623 6.12%
---------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 63,334 5.26% $ 78,970 4.76% $ 104,209 4.66%
=================================================================================================================================
Held-to-maturity securities:
Mortgage-backed securities $ 24,365 4.89% $ 34,754 4.69% $ 44,031 4.66%
---------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 24,365 4.89% $ 34,754 4.69% $ 44,031 4.66%
=================================================================================================================================
The carrying values of available-for-sale securities include net
unrealized gains (losses) of $673,000, $171,000 and ($957,000) at December 31,
2008, 2007 and 2006, respectively. The carrying values of held-to-maturity
securities do not include unrealized gains or losses, however, the net
unrealized gains (losses) at December 31, 2008, 2007 and 2006 were $524,000,
$101,000 and ($311,000), respectively.
47
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing needs of
its customers and to reduce its exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
As of December 31, 2008, commitments to extend credit and letters of
credit were the only financial instruments with off-balance sheet risk. The
Company has not entered into any contracts for financial derivative instruments
such as futures, swaps, options or similar instruments. Real estate commitments
are generally secured by property with a loan-to-value ratio of 65% to 75%. In
addition, the majority of the Company's commitments have variable interest
rates.
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and letters of credit as it does for
loans included on the consolidated balance sheet. The following financial
instruments represent off-balance-sheet credit:
December 31,
---------------------------
2008 2007
------------ ------------
Commitments to extend credit (dollars in thousands):
Revolving lines of credit secured by
1-4 family residences $ 7,396 $ 8,252
Commercial real estate, construction and land
development commitments secured by real estate 17,076 31,881
Other unused commitments, principally commercial loans 52,465 72,500
------------ ------------
$ 76,937 $ 112,633
============ ============
Letters of credit $ 3,798 $ 7,537
============ ============
Certain financial institutions have elected to use special purpose
vehicles ("SPV") to dispose of problem assets. The SPV is typically a subsidiary
company with an asset and liability structure and legal status that makes its
obligations secure even if the parent corporation goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from
their reported impaired and non-performing assets. The Company does not use
those vehicles or any other structures to dispose of problem assets.
Contractual Obligations
The Company leases certain facilities at which it conducts its
operations. Future minimum lease commitments under non-cancelable operating
leases are noted in Table Sixteen below. Table Sixteen below presents certain of
the Company's contractual obligations as of December 31, 2008. Included in the
table are amounts payable under the Company's Deferred Compensation and Deferred
Fees Plans and are listed in the "Other Long-Term Liabilities..." category. At
December 31, 2008, these amounts represented $2,023,000 and are anticipated to
be primarily payable at least five years in the future.
Table Sixteen: Contractual Obligations
--------------------------------------
(dollars in thousands) Payments due by period
------------------------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
------------------------------------------------------------------------
Long-Term Debt $ 14,000 $ -- $ 14,000 $ -- $ --
Capital Lease Obligations -- -- -- -- --
Operating Leases 5,056 952 1,412 1,209 1,483
Purchase Obligations -- -- -- -- --
Other Long-Term Liabilities Reflected on the
Company's Balance Sheet under GAAP 2,023 -- -- -- 2,023
-----------------------------------------------------------------------------------------------------------------------
Total $ 21,079 $ 952 $ 15,412 $ 1,209 $ 3,506
=======================================================================================================================
48
Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141R").
SFAS No. 141(R), among other things, establishes principles and requirements for
how the acquirer in a business combination (i) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquired business, (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. The Company is required to adopt SFAS No. 141(R)
for all business combinations for which the acquisition date is on or after
January 1, 2009. Earlier adoption is prohibited. This standard will change the
accounting treatment for business combinations on a prospective basis.
In May 2008, the FASB issued Statement of Financial Accounting
Standards No. 162, "The Hierarchy of Generally Accepted Accounting Principles"
("SFAS No. 162"). This standard identifies a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles for nongovernmental entities. It establishes that the GAAP hierarchy
should be directed to entities because it is the entity (not the auditor) that
is responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. SFAS 162 is effective 60 days following
the SEC's approval of the Public Company Accounting Oversight Board auditing
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles". The adoption of SFAS 162 did not have
a significant impact on the Company's financial position, results of operations
or cash flows.
In December 2008, the FASB issued FASB Staff Position ("FSP") Financial
Accounting Standard No. 132R-1, "Employers' Disclosures about Postretirement
Benefit Plan Assets" ("FSP 132(R)-1"). This standard provides guidance on an
employer's disclosures about plan assets of a defined benefit pension or other
postretirement plan. The objectives of the disclosures about plan assets in an
employer's defined benefit pension or other postretirement plan are to provide
users of financial statements with an understanding of how investment allocation
decisions are made, including the factors that are pertinent to an understanding
of investment policies and strategies, the major categories of plan assets, the
inputs and valuation techniques used to measure the fair value of plan assets,
the effect of fair value measurements using significant unobservable inputs
(Level 3) on changes in plan assets for the period, and significant
concentrations of risk within plan assets. The disclosures about plan assets
required by this FSP are effective for fiscal years ending after December 15,
2009. Early adoption is permitted. The adoption of FSP 132(R)-1 is not expected
to have a significant impact on the Company's financial position, results of
operations or cash flows.
49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by Item 7A of Form 10-K is contained in the "Market
Risk Management" section of Item 7-"Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 44-45.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm 51
Consolidated Balance Sheet, December 31, 2008 and 2007 52
Consolidated Statement of Income for the Years Ended
December 31, 2008, 2007 and 2006 53
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 2008, 2007 and 2006 54
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2008, 2007 and 2006 55-56
Notes to Consolidated Financial Statements 57-89
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.
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
The Shareholders and Board of Directors
American River Bankshares
We have audited the accompanying consolidated balance sheet of American
River Bankshares and subsidiaries (the "Company") as of December 31, 2008 and
2007 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, 2008. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American River Bankshares and subsidiaries as of December 31, 2008 and 2007, 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, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Perry-Smith LLP
Sacramento, California
March 5, 2009
51
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2008 and 2007
(Dollars in thousands)
2008 2007
------------ ------------
ASSETS
Cash and due from banks $ 15,170 $ 16,245
Federal funds sold 1,700
------------ ------------
Total cash and cash equivalents 15,170 17,945
Interest-bearing deposits in banks 4,248 4,951
Investment securities:
Available for sale, at fair value 63,334 78,970
Held to maturity, at amortized cost 24,365 34,754
Loans and leases, less allowance for loan and lease losses of
$5,918 in 2008 and $5,883 in 2007 412,356 394,975
Premises and equipment, net 2,115 1,983
Federal Home Loan Bank stock 3,922 2,800
Accounts receivable servicing receivables, net 1,236 1,666
Goodwill 16,321 16,321
Intangible assets 907 1,193
Accrued interest receivable and other assets 19,183 18,127
------------ ------------
$ 563,157 $ 573,685
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 119,143 $ 132,666
Interest bearing 317,918 322,979
------------ ------------
Total deposits 437,061 455,645
Short-term borrowings 43,231 51,603
Long-term borrowings 14,000
Accrued interest payable and other liabilities 5,418 6,464
------------ ------------
Total liabilities 499,710 513,712
------------ ------------
Commitments and contingencies (Note 12)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares authorized;
issued and outstanding - 5,792,283 shares in 2008 and
5,590,277 shares in 2007 47,433 45,668
Retained earnings 15,617 14,204
Accumulated other comprehensive income, net of taxes 397 101
------------ ------------
Total shareholders' equity 63,447 59,973
------------ ------------
$ 563,157 $ 573,685
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
52
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands, except per share data)
2008 2007 2006
-------------- -------------- --------------
Interest income:
Interest and fees on loans and leases $ 28,512 $ 31,508 $ 31,081
Interest on Federal funds sold 10 34 19
Interest on deposits in banks 222 271 241
Interest and dividends on investment securities:
Taxable 3,711 4,544 5,545
Exempt from Federal income taxes 1,080 1,095 1,034
Dividends 18 26 34
-------------- -------------- --------------
Total interest income 33,553 37,478 37,954
-------------- -------------- --------------
Interest expense:
Interest on deposits 5,901 9,560 8,677
Interest on borrowings 1,727 1,516 2,211
-------------- -------------- --------------
Total interest expense 7,628 11,076 10,888
-------------- -------------- --------------
Net interest income 25,925 26,402 27,066
Provision for loan and lease losses 1,743 450 320
-------------- -------------- --------------
Net interest income after provision for loan
and lease losses 24,182 25,952 26,746
-------------- -------------- --------------
Noninterest income:
Service charges 741 743 783
(Loss) gain on sale, call and impairment
of investment securities (119) 11 1
Other income 1,546 1,845 1,659
-------------- -------------- --------------
Total noninterest income 2,168 2,599 2,443
-------------- -------------- --------------
Noninterest expense:
Salaries and employee benefits 7,687 8,396 7,816
Occupancy 1,495 1,398 1,384
Furniture and equipment 774 691 812
Other expense 4,245 4,348 4,376
-------------- -------------- --------------
Total noninterest expense 14,201 14,833 14,388
-------------- -------------- --------------
Income before provision for income taxes 12,149 13,718 14,801
Provision for income taxes 4,578 5,240 5,739
-------------- -------------- --------------
Net income $ 7,571 $ 8,478 $ 9,062
============== ============== ==============
Basic earnings per share $ 1.30 $ 1.40 $ 1.42
============== ============== ==============
Diluted earnings per share $ 1.30 $ 1.39 $ 1.39
============== ============== ==============
Cash dividends per share of issued and outstanding
common stock, adjusted for stock dividends $ 0.57 $ 0.55 $ 0.53
============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
53
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
Accumulated
Other Total Total
Common Stock Comprehensive Share- Compre-
-------------------------- Retained Income (Loss) holders' hensive
Shares Amount Earnings (Net of Taxes) Equity Income
------------ ----------- ----------- ------------ ------------ ------------
Balance, January 1, 2006 5,604,479 $ 47,474 $ 16,029 $ (757) $ 62,746
Cumulative effect of adopting Staff
Accounting Bulletin No. 108, net of taxes (214) (214)
Comprehensive income:
Net income 9,062 9,062 $ 9,062
Other comprehensive income, net of tax:
Net change in unrealized losses on
available-for-sale investment
securities 192 192 192
------------
Total comprehensive income $ 9,254
============
Cash dividend ($0.53 per share) (3,332) (3,332)
Fractional shares redeemed for stock
dividend (21) (21)
5% stock dividend 268,346 6,834 (6,834)
Stock options exercised 43,162 441 441
Stock option compensation 221 221
Retirement of common stock (258,641) (6,724) (6,724)
------------ ----------- ----------- ------------ ------------
Balance, December 31, 2006 5,657,346 48,246 14,690 (565) 62,371
Comprehensive income:
Net income 8,478 8,478 $ 8,478
Other comprehensive income, net of tax:
Net change in unrealized gains on
available-for-sale investment
securities 666 666 666
------------
Total comprehensive income $ 9,144
============
Cash dividend ($0.55 per share) (3,319) (3,319)
Fractional shares redeemed for stock
dividend (6) (9) (9)
5% stock dividend 265,683 5,645 (5,645)
Stock options exercised 54,569 679 679
Stock option compensation 301 301
Retirement of common stock (387,315) (9,194) (9,194)
------------ ----------- ----------- ------------ ------------
Balance, December 31, 2007 5,590,277 45,668 14,204 101 59,973
Comprehensive income:
Net income 7,571 7,571 $ 7,571
Other comprehensive income, net of tax:
Net change in unrealized gains on
available-for-sale investment
securities 296 296 296
------------
Total comprehensive income $ 7,867
============
Cash dividend ($0.57 per share) (3,317) (3,317)
Fractional shares redeemed for stock
dividend (10) (10)
5% stock dividend 275,048 2,841 (2,841)
Stock options exercised 37,258 354 354
Stock option compensation 290 290
Retirement of common stock (110,300) (1,710) (1,710)
------------ ----------- ----------- ------------ ------------
Balance, December 31, 2008 5,792,283 $ 47,433 $ 15,617 $ 397 $ 63,447
============ =========== =========== ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
54
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
2008 2007 2006
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 7,571 $ 8,478 $ 9,062
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 1,743 450 320
Increase (decrease) in deferred loan and lease
origination fees, net 54 (188) (7)
Depreciation and amortization 822 840 951
Amortization of investment security premiums
and discounts, net 137 254 659
Provision for accounts receivable servicing receivable
allowance for losses (3) 11
Loss (gain) on sale, call and impairment of
investment securities 119 (11) (1)
Increase in cash surrender value of life insurance policies (395) (404) (192)
Provision for deferred income taxes (446) (240) (1,003)
Stock option compensation expense 290 301 221
Tax benefit from exercise of stock options (85) (236) (149)
Decrease (increase) in accrued interest receivable and
other assets 1,762 (501) 857
(Decrease) increase in accrued interest payable and
other liabilities (1,035) 986 (525)
------------ ------------ ------------
Net cash provided by operating activities 10,537 9,726 10,204
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from the sale of investment securities 24,225 6,506 3,259
Proceeds from called available-for-sale investment
securities 1,455 1,170 400
Proceeds from matured available-for-sale investment
securities 11,615 17,485 21,150
Purchases of available-for-sale investment securities (29,629) (7,275)
Purchases of held-to-maturity investment securities (967) (9,489)
Proceeds from principal repayments for available-for-sale
mortgage-backed securities 8,137 2,711 2,275
Proceeds from principal repayments for held-to-maturity
mortgage-backed securities 10,469 8,496 10,305
Net decrease (increase) in interest-bearing deposits in banks 703 (107)
Net increase in loans and leases (21,335) (12,302) (17,733)
Net decrease (increase) in accounts receivable servicing
receivables 430 918 (592)
Proceeds from sale of other real estate 61
Purchases of equipment (670) (672) (379)
Purchase of single premium life insurance policies (4,432)
Net (increase) decrease in FHLB stock (1,122) 271 (463)
------------ ------------ ------------
Net cash provided by (used in) investing activities 4,339 23,616 (3,081)
------------ ------------ ------------
(Continued)
55
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
2008 2007 2006
------------ ------------ ------------
Cash flows from financing activities:
Net decrease in demand, interest-bearing and savings
deposits $ (35,198) $ (22,767) $ (19,768)
Net increase (decrease) in time deposits 16,614 (15,463) 12,937
Increase (decrease) in long-term borrowings 14,000 (5,000) 730
(Decrease) increase in short-term borrowings (8,372) 14,333 (2,116)
Exercise of stock options 269 443 292
Tax benefit from exercise of stock options 85 236 149
Cash paid to repurchase common stock (1,710) (9,194) (6,724)
Payment of cash dividends (3,329) (3,328) (3,325)
Cash paid for fractional shares (10) (9) (21)
------------ ------------ ------------
Net cash used in financing activities (17,651) (40,749) (17,846)
------------ ------------ ------------
Decrease in cash and cash equivalents (2,775) (7,407) (10,723)
Cash and cash equivalents at beginning of year 17,945 25,352 36,075
------------ ------------ ------------
Cash and cash equivalents at end of year $ 15,170 $ 17,945 $ 25,352
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 7,913 $ 11,197 $ 10,815
Income taxes $ 5,010 $ 5,403 $ 6,665
Non-cash investing activities:
Real estate acquired through foreclosure $ 2,158 $ 61
Net change in unrealized gain on available-for-sale
investment securities $ 502 $ 1,128 $ 322
Non-cash financing activities:
Dividends declared and unpaid $ 828 $ 839 $ 848
Cumulative effect of adopting SAB 108, net of taxes $ 214
Tax benefit from exercise of stock options $ 85 $ 236 $ 149
The accompanying notes are an integral
part of these consolidated financial statements.
56
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS OF THE COMPANY
American River Bankshares (the "Company") was incorporated under the
laws of the State of California in 1995 under the name of American
River Holdings and changed its name in 2004 to American River
Bankshares. As a bank holding company, the Company is authorized to
engage in the activities permitted under the Bank Holding Company Act
of 1956, as amended, and regulations thereunder. As a community
oriented bank holding company, the principal communities served are
located in Sacramento, Placer, Yolo, El Dorado, Amador, and Sonoma
counties.
The Company owns 100% of the issued and outstanding common shares of
its banking subsidiary, American River Bank ("ARB"). ARB was
incorporated in 1983. ARB accepts checking and savings deposits, offers
money market deposit accounts and certificates of deposit, makes
secured and unsecured commercial, secured real estate, and other
installment and term loans and offers other customary banking services.
ARB operates six banking offices in Sacramento and Placer counties,
three banking offices in Sonoma County under the name North Coast Bank,
a division of ARB, and three banking offices in Amador County under the
name Bank of Amador, a division of ARB.
The Company also owns one inactive subsidiary, American River
Financial.
ARB does not offer trust services or international banking services and
does not plan to do so in the near future. The deposits of ARB are
insured by the Federal Deposit Insurance Corporation (the "FDIC") up to
applicable legal limits.
ARB is participating in the FDIC Transaction Account Guarantee Program.
Under that program, through December 31, 2009, all noninterest-bearing
transaction accounts are fully guaranteed by the FDIC for the entire
amount in the account. Coverage under the Transaction Account Guarantee
Program is in addition to and separate from the coverage available
under the FDIC's general deposit insurance rules.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
-------
The accounting and reporting policies of the Company and its
subsidiaries conform with accounting principles generally accepted in
the United States of America and prevailing practices within the
financial services industry.
Reclassifications
-----------------
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 2008.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
transactions and accounts have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
57
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
-------------------------
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one-day periods.
Investment Securities
---------------------
Investments are classified into the following categories:
o Available-for-sale securities, reported at fair
value, with unrealized gains and losses excluded from
earnings and reported, net of taxes, as accumulated
other comprehensive income (loss) within
shareholders' equity.
o Held-to-maturity securities, which management has the
positive intent and ability to hold to maturity,
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. There were no transfers in the years ended
December 31, 2008 and 2007. As of December 31, 2008 and 2007, the
Company did not have any trading securities.
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.
Investment securities are evaluated for impairment on at least a
quarterly basis and more frequently when economic or market conditions
warrant such an evaluation to determine whether a decline in their
value is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline and the intent and ability of the
Company to retain its investment in the securities for a period of time
sufficient to allow for an anticipated recovery in fair value, in
addition to the reasons underlying the decline, to determine whether
the loss in value is other than temporary. The term "other than
temporary" is not intended to indicate that the decline is permanent,
but indicates that the prospects for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value
of the investment. Once a decline in value is determined to be other
than temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized.
Federal Home Loan Bank Stock
----------------------------
Investments in Federal Home Loan Bank (the "FHLB") stock are carried at
cost and are redeemable at par with certain restrictions. Investments
in FHLB stock are necessary to participate in FHLB programs.
Loans and Leases
----------------
Loans and leases are reported at the principal amounts outstanding,
adjusted for unearned income, deferred loan origination fees and costs,
purchase premiums and discounts, write-downs and the allowance for loan
and lease losses. Loan and lease origination fees, net of certain
deferred origination costs, and purchase premiums and discounts are
recognized as an adjustment to the yield of the related loans and
leases.
58
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans and Leases (Continued)
----------------
The accrual of interest on loans and leases is discontinued when, in
the opinion of management, there is an indication that the borrower may
be unable to meet payment requirements within an acceptable time frame
relative to the terms stated in the loan agreement. Upon such
discontinuance, all unpaid accrued interest is reversed against current
income unless the loan or lease is well secured and in the process of
collection. Interest received on nonaccrual loans and leases is either
applied against principal or reported as interest income, according to
management's judgment as to the collectibility of principal. Generally,
loans and leases are restored to accrual status when the obligation is
brought current and has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility
of the total contractual principal and interest is no longer in doubt.
Direct financing leases are carried net of unearned income. Income from
leases is recognized by a method that approximates a level yield on the
outstanding net investment in the lease.
Loan Sales and Servicing
------------------------
Included in the loan and lease portfolio are Small Business
Administration ("SBA") loans and Farmer Mac guaranteed loans that may
be sold in the secondary market. At the time the loan is sold, the
related right to service the loan is either retained, with the Company
earning future servicing income, or released in exchange for a one-time
servicing-released premium. A portion of this premium may be required
to be refunded if the borrower defaults or the loan prepays within
ninety days of the settlement date. There were no sales of loans
subject to these recourse provisions at December 31, 2008, 2007 and
2006. 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, 2008 and 2007.
SBA and Farmer Mac loans with unpaid balances of $567,000 and $847,000
were being serviced for others as of December 31, 2008 and 2007,
respectively. The Company also serviced loans that are participated
with other financial institutions totaling $6,858,000 and $7,797,000 as
of December 31, 2008 and 2007, 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 at December 31, 2008 and
2007.
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 probable
losses on loans and leases identified by management as doubtful,
substandard and special mention, as well as losses that can be expected
to occur in the normal course of business related to currently
performing loans and leases. The determination of the allowance is
based on estimates made by management, to include consideration of the
character of the loan and lease portfolio including concentrations,
types of lending, specifically identified problem loans and leases,
inherent risk of loss in the portfolio taken as a whole and economic
conditions in the Company's service areas.
The methodology for evaluating the adequacy of the allowance for loan
and lease losses has two basic elements: first, the identification of
impaired loans and the measurement of impairment for each individual
loan identified; and second, a method for estimating a general
allowance for loan and lease losses.
59
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan and Lease Losses (Continued)
-----------------------------------
A loan or lease is considered impaired when it is probable that all
contractual principal and interest payments due will not be collected
in accordance with the terms of the loan or lease agreement. Impairment
on individually identified loans or leases that are not collateral
dependent is measured based on the present value of expected future
cash flows discounted at each loan or lease's original effective
interest rate. For loans that are collateral dependent, impairment is
measured based on the fair value of the collateral less estimated
selling costs.
In estimating the general allowance for loan and lease losses, the
balance of the loan portfolio is grouped into segments that have common
characteristics, such as loan type, collateral type or risk rating.
Loans typically segregated by risk rating are those that have been
assigned ratings (using regulatory definitions) of special mention,
substandard and doubtful. Loans graded loss are generally charged off
immediately.
For each general allowance portfolio segment, loss factors are applied
to calculate the required allowance. These loss factors are based upon
historical loss rates adjusted for qualitative factors representing
other significant factors affecting loan portfolio including economic
factors, credit policy and underwriting, management and staff
effectiveness, trends in delinquencies and losses, and concentrations.
The Company's Loan Committee reviews the adequacy of the allowance for
loan and lease losses at least quarterly, to include consideration of
the relative risks in the portfolio and current economic conditions.
The allowance is adjusted based on that review if, in the judgment of
the Loan Committee and management, changes are warranted.
The allowance is established through a provision for loan and lease
losses which is charged to expense. Additions to the allowance are
expected to maintain the adequacy of the total allowance after credit
losses and loan and lease growth. Although management believes the
allowance for loan and lease losses to be adequate, ultimate losses may
vary from their estimates. In addition, the FDIC and California
Department of Financial Institutions, as an integral part of their
examination process, review the allowance for loan and lease losses.
These agencies may require additions to the allowance for loan and
lease losses based on their judgment about information available at the
time of their examinations.
Other Real Estate
-----------------
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the recorded investment in the loan balance and accrued interest
income over the estimated fair market value of the property less
estimated selling costs is charged against the allowance for loan and
lease losses. Valuation allowances for losses on other real estate are
maintained to provide for temporary declines in value. These allowances
are 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. During 2008 the Company
received $61,000 from the proceeds from the sale of other real estate
with no gain recognized on the sale. There was $2,158,000 and $61,000
with no valuation allowance in other real estate at December 31, 2008
and 2007.
60
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
----------------------
Premises and equipment are carried at cost. Depreciation is determined
using the straight-line method over the estimated useful lives of the
related assets. The useful life of the building and improvements is
forty years. The useful lives of furniture, fixtures and equipment are
estimated to be three to ten years. Leasehold improvements are
amortized over the life of the asset or the term of the related lease,
whichever is shorter. When assets are sold or otherwise disposed of,
the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is recognized
in income for the period. The cost of maintenance and repairs is
charged to expense as incurred. Impairment of long-lived assets is
evaluated by management based upon an event or changes in circumstances
surrounding the underlying assets which indicate long-lived assets may
be impaired.
Goodwill and Intangible Assets
------------------------------
Business combinations involving the Company's acquisition of equity
interests or net assets of another enterprise or the assumption of net
liabilities in an acquisition of branches constituting a business may
give rise to goodwill. Goodwill represents the excess of the cost of an
acquired entity over the net of the amounts assigned to assets acquired
and liabilities assumed in transactions accounted for under the
purchase method of accounting. The value of goodwill is ultimately
derived from the Company's ability to generate net earnings after the
acquisition and is not deductible for tax purposes. A decline in net
earnings could be indicative of a decline in the fair value of goodwill
and result in impairment. For that reason, goodwill is assessed for
impairment at least annually.
Intangible assets are comprised of core deposit intangibles which
represent the estimated fair value of the long-term deposit
relationships that were assumed when the Company acquired Bank of
Amador in December 2004. Core deposit intangibles are amortized using a
method that approximates the expected run-off of the deposit base,
which, in this case, is eight years. Management evaluates the
recoverability and remaining useful life annually to determine whether
events or circumstances warrant a revision to the intangible assets or
the remaining amortization period.
Income Taxes
------------
The Company files its income taxes on a consolidated basis with its
subsidiaries. The allocation of income tax expense (benefit) represents
each entity's proportionate share of the consolidated provision for
income taxes.
The Company accounts for income taxes using the balance sheet method,
under which deferred tax assets and liabilities are recognized for the
tax consequences of temporary differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. On the consolidated balance sheet, net
deferred tax assets are included in accrued interest receivable and
other assets.
Since January 1, 2007, the Company has accounted for uncertainty in
income taxes under Financial Accounting Standards Board ("FASB")
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN
48"). Under the provisions of FIN 48, only tax positions that met the
more-likely-than-not recognition threshold on January 1, 2007 were
recognized or continue to be recognized upon adoption. The Company
previously recognized income tax positions based on management's
estimate of whether it was reasonably possible that a liability had
been incurred for unrecognized income tax benefits by applying FASB
Statement No. 5, Accounting for Contingencies. The adoption of FIN 48
did not have a material impact on the Company's financial position,
results of operations or cash flows.
61
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
------------
When tax returns are filed, it is highly certain that some positions
taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the
position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or
litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being
realized upon settlement with the applicable taxing authority. The
portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a
liability for unrecognized tax benefits in the accompanying balance
sheet along with any associated interest and penalties that would be
payable to the taxing authorities upon examination.
Interest expense and penalties associated with unrecognized tax
benefits, if any, are classified as income tax expense in the
consolidated statement of income.
Comprehensive Income
--------------------
Comprehensive income is reported in addition to net income for all
periods presented. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of other comprehensive
income (loss) that historically has not been recognized in the
calculation of net income. Unrealized gains and losses on the Company's
available-for-sale investment securities are included in other
comprehensive income (loss), adjusted for realized gains or losses
included in net income. Total comprehensive income and the components
of accumulated other comprehensive income (loss) are presented in the
consolidated statement of changes in shareholders' equity.
Earnings Per Share
------------------
Basic earnings per share ("EPS"), which excludes dilution, is computed
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method has been applied to
determine the dilutive effect of stock options in computing diluted
EPS. EPS is retroactively adjusted for stock splits and stock dividends
for all periods presented.
Stock-Based Compensation
------------------------
At December 31, 2008, the Company has one stock-based compensation
plan, which is described more fully in Note 13. Compensation expense,
net of related tax benefits, recorded in 2008, 2007 and 2006 totaled
$254,000, $251,000 and $184,000, or $0.04, $0.04 and $0.03 per diluted
share, respectively. Compensation expense is recognized over the
vesting period on a straight line accounting basis.
The fair value of each option award is estimated on the date of grant
using a Black-Scholes-Merton based option valuation model that uses the
assumptions noted in the following table. Because Black-Scholes-Merton
based option valuation models incorporate ranges of assumptions for
inputs, those ranges are disclosed. Expected volatilities are based on
historical volatility of the Company's stock and other factors. The
Company uses historical data to estimate option exercise and employee
termination within the valuation model. The expected term of options
granted represents the period of time that options granted are expected
to be outstanding. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant.
62
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (Continued)
------------------------
2008 2007 2006
--------------- ------------ ------------
Dividend yield 3.53% to 4.62% 2.33% 2.16%
Expected volatility 21.3% to 24.3% 21.6% 29.6%
Risk-free interest rate 3.38% to 3.45% 4.68% 4.70%
Expected option life in years 7 7 7
Weighted average fair value of options
granted during the year $2.75 $5.78 $7.57
The following is a summary of stock option information as of or for the
years ended December 31, 2008, 2007 and 2006:
2008 2007 2006
------------ ------------ ------------
(dollars in thousands)
Total intrinsic value of options
exercised $ 285 $ 832 $ 791
Aggregate cash received for option
exercises $ 269 $ 444 $ 292
Total fair value of options vested $ 254 $ 263 $ 154
Total compensation cost $ 290 $ 301 $ 221
Tax benefit recognized $ 36 $ 50 $ 37
Net compensation cost $ 254 $ 251 $ 184
Total compensation cost for nonvested
awards not yet recognized $ 717 $ 894 $ 828
Weighted average years to be recognized 2.9 2.2 2.4
Cumulative Effect of Adopting Staff Accounting Bulletin No. 108
---------------------------------------------------------------
In September 2006, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 108 Considering the
Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements, which provides interpretive guidance
on how registrants should quantify financial statement misstatements.
Under SAB 108 registrants are required to consider both a "rollover"
method which focuses primarily on the income statement impact of
misstatements and the "iron curtain" method which focuses primarily on
the balance sheet impact of misstatements. Historically, the Company
evaluated uncorrected differences utilizing the rollover approach and
the impact under that approach was not considered material. The
transition provisions of SAB 108 permit a registrant to adjust retained
earnings for the cumulative effect of immaterial errors relating to
prior years. The Company adopted SAB 108 in the fourth quarter of 2006.
Under the iron-curtain method, the cumulative effect of unrecorded
compensated absences was considered material to the Company's 2006
financial statements and, therefore, management recorded an adjustment
to decrease the opening 2006 retained earnings balance in the amount of
$214,000, increase other liabilities in the amount of $350,000 and
increase deferred tax assets by $136,000.
63
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards
--------------------------------------------
Accounting for Business Combinations
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations ("SFAS No.
141R"). SFAS No. 141(R), among other things, establishes principles and
requirements for how the acquirer in a business combination (i)
recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquired business, (ii) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain
purchase, and (iii) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial
effects of the business combination. The Company is required to adopt
SFAS No. 141(R) for all business combinations for which the acquisition
date is on or after January 1, 2009. Earlier adoption is prohibited.
This standard will change the accounting treatment for business
combinations on a prospective basis.
The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued Statement of Financial Accounting
Standards No. 162, The Hierarchy of Generally Accepted Accounting
Principles ("SFAS No. 162"). This standard identifies a consistent
framework, or hierarchy, for selecting accounting principles to be used
in preparing financial statements that are presented in conformity with
U.S. generally accepted accounting principles for nongovernmental
entities. It establishes that the GAAP hierarchy should be directed to
entities because it is the entity (not the auditor) that is responsible
for selecting accounting principles for financial statements that are
presented in conformity with GAAP. SFAS 162 is effective November 15,
2008. The adoption of this Statement did not have a material impact on
the Company's consolidated financial statements.
Employers' Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued FASB Staff Position ("FSP") Financial
Accounting Standard No. 132R-1, Employers' Disclosures about
Postretirement Benefit Plan Assets ("FSP 132(R)-1"). This standard
provides guidance on an employer's disclosures about plan assets of a
defined benefit pension or other postretirement plan. The objectives of
the disclosures about plan assets in an employer's defined benefit
pension or other postretirement plan are to provide users of financial
statements with an understanding of how investment allocation decisions
are made, including the factors that are pertinent to an understanding
of investment policies and strategies, the major categories of plan
assets, the inputs and valuation techniques used to measure the fair
value of plan assets, the effect of fair value measurements using
significant unobservable inputs (Level 3) on changes in plan assets for
the period, and significant concentrations of risk within plan assets.
The disclosures about plan assets required by this FSP are effective
for fiscal years ending after December 15, 2009. Early adoption is
permitted. The adoption of FSP 132(R)-1 is not expected to have a
material impact on the Company's financial position, results of
operations or cash flows.
64
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. FAIR VALUE MEASUREMENTS
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows (dollars in thousands):
December 31, 2008 December 31, 2007
---------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 15,170 $ 15,170 $ 17,945 $ 17,945
Interest-bearing deposits in banks 4,248 4,249 4,951 4,963
Investment securities 87,699 88,223 113,724 113,825
Loans and leases, net 412,356 407,725 394,975 393,047
FHLB stock 3,922 3,922 2,800 2,800
Accounts receivable servicing
receivables 1,236 1,236 1,666 1,666
Accrued interest receivable 2,265 2,265 2,691 2,691
Cash surrender value of life
insurance policies 10,496 10,496 10,101 10,101
Financial liabilities:
Deposits $ 437,061 $ 438,160 $ 455,645 $ 456,250
Short-term borrowings 43,231 43,231 51,603 51,603
Long-term borrowings 14,000 14,599
Accrued interest payable 462 462 747 747
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,
2008 and 2007:
Cash and cash equivalents: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
Interest-bearing deposits in banks: The fair values of interest-bearing
deposits in banks are estimated by discounting their future cash flows
using rates at each reporting date for instruments with similar
remaining maturities offered by comparable financial institutions.
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.
65
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. FAIR VALUE MEASUREMENTS (Continued)
Loans and leases: For variable-rate loans and leases that reprice
frequently with no significant change in credit risk, fair values are
based on carrying values. The fair values for other loans and leases
are estimated using discounted cash flow analyses, using interest rates
being offered at each reporting date for loans and leases with similar
terms to borrowers of comparable creditworthiness. The carrying amount
of accrued interest receivable approximates its fair value.
FHLB stock: The carrying amount of FHLB stock approximates its fair
value. This investment is carried at cost and is redeemable at par with
certain restrictions.
Accounts receivable servicing receivables: The carrying amount of
accounts receivable servicing receivables approximates their fair value
because of the relatively short period of time between the origination
of the receivables and their expected collection.
Cash surrender value of life insurance policies: The fair value of life
insurance policies are based on cash surrender values at each reporting
date as provided by insurers.
Deposits: The fair values for non-maturing deposits are, by definition,
equal to the amount payable on demand at the reporting date represented
by their carrying amount. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow analysis using
interest rates offered at each reporting date for certificates with
similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value.
Short-term and long-term borrowings: The fair value of short-term
borrowings is estimated to be the carrying amount. The fair value of
long-term borrowings is estimated using a discounted cash flow analysis
using interest rates currently available for similar debt instruments.
Commitments to extend credit: The fair value of commitments are based
on fees currently charged to enter into similar agreements, net of
origination fees. These fees were not material at December 31, 2008 and
2007.
On January 1, 2008, the Company adopted FASB Statement No. 157 ("SFAS
157"), Fair Value Measurements. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurement. Upon adoption of SFAS
No. 157, there was no cumulative effect adjustment to beginning
retained earnings and no impact on the financial statements.
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not
Active. The FSP was effective immediately and clarifies the application
of FASB statement No. 157, Fair Value Measurements, in a market that is
not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for
that financial asset is not active.
66
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. FAIR VALUE MEASUREMENTS (Continued)
The following tables present information about the Company's assets and
liabilities measured at fair value on a recurring and nonrecurring
basis as of December 31, 2008. They indicate the fair value hierarchy
of the valuation techniques utilized by the Company to determine such
fair value. In general, fair values determined by Level 1 inputs
utilize quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access. Fair
values determined by Level 2 inputs utilize inputs other than quoted
prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly. Level 2 inputs include quoted
prices for similar assets and liabilities in active markets, and inputs
other than quoted prices that are observable for the asset or
liability, such as interest rates and yield curves that are observable
at commonly quoted intervals. Level 3 inputs are unobservable inputs
for the asset or liability, and include situations where there is
little, if any, market activity for the asset or liability. In certain
cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the level in the
fair value hierarchy within which the fair value measurement in its
entirety falls has been determined based on the lowest level input that
is significant to the fair value measurement in its entirety. The
Company's assessment of the significance of a particular input to the
fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
(dollars in thousands) Fair Value Measurements
at December 31, 2008, Using
--------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Fair Value for Identical Observable Unobservable
December 31, Assets Inputs Inputs
Description 2008 (Level 1) (Level 2) (Level 3)
---------------------------------------- ------------ ------------ ------------ ------------
Assets and liabilities measured
on a recurring basis:
Available-for-sale securities $ 63,334 $ 84 $ 61,201 $ 2,049
============ ============ ============ ============
Assets and liabilities measured
on a nonrecurring basis:
Impaired loans $ 6,083 $ 6,083
Other real estate 2,158 2,158
------------ ------------ ------------ ------------
$ 8,241 $ -- $ 8,241 $ --
============ ============ ============ ============
Changes in balances of recurring items valued using significant
unobservable inputs (level 3) are as follows:
(dollars in thousands) Balance Balance
as of Unrealized Realized as of
January 1, Transfers Gains Gains December 31,
2008 In (Out) (Losses) (Losses) 2008
------------ ------------ ------------ ---------- ------------
Level 3 available-for-sale
securities $ -- $ 2,210 $ (161) $ -- $ 2,049
============ ============ ============ ============ ============
67
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. FAIR VALUE MEASUREMENTS (Continued)
There were no changes in the valuation techniques used during 2008. The
following methods were used to estimate the fair value of each class of
financial instrument above:
Available-for-sale securities - Fair values for investment securities
are based on quoted market prices, if available, or evaluated pricing
models that vary by asset class and incorporate available trade, bid
and other market information. Pricing applications apply available
information, as applicable, through processes such as benchmark curves,
benchmarking to like securities, sector groupings and matrix pricing.
Impaired loans - The fair value of impaired loans is based on the fair
value of the collateral for all collateral dependent loans and for
other impaired loans is estimated using a discounted cash flow model.
Other real estate - Other real estate represents real estate which the
Company has taken control of in partial or full satisfaction of loans.
The fair value of other real estate is based on the fair value of the
real estate less costs to sell.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2008 and 2007, goodwill totaled $16,321,000. Goodwill
is evaluated annually for impairment under the provisions of SFAS No.
142, Goodwill and Other Intangible Assets, and management determined
that no impairment recognition was required for the years ended
December 31, 2008, 2007 and 2006. Goodwill is not deductible for tax
purposes.
Other intangible assets are comprised of core deposit intangibles
totaling $907,000 and $1,193,000 at December 31, 2008 and 2007,
respectively. Amortization of the intangible included in other expense
totaled $286,000, $308,000 and $330,000 for the years ended December
31, 2008, 2007 and 2006, respectively. The remaining balance will be
amortized over the next 3.9 years and is estimated as follows (dollars
in thousands):
Year Ending
December 31,
-------------
2009 $ 264
2010 242
2011 219
2012 182
-------------
$ 907
=============
68
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at
December 31, 2008 and 2007 consisted of the following (dollars in
thousands):
Available-for-Sale
------------------
2008
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities:
Mortgage-backed securities $ 32,073 $ 392 $ (233) $ 32,232
Obligations of states and
political subdivisions 30,506 666 (160) 31,012
Equity securities:
Corporate stock 82 11 (3) 90
------------ ------------ ------------ ------------
$ 62,661 $ 1,069 $ (396) $ 63,334
============ ============ ============ ============
2007
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities:
U.S. Government agencies $ 16,539 $ 8 $ (41) $ 16,506
Mortgage-backed securities 31,174 13 (121) 31,066
Obligations of states and
political subdivisions 30,758 452 (99) 31,111
Equity securities:
Corporate stock 328 24 (65) 287
------------ ------------ ------------ ------------
$ 78,799 $ 497 $ (326) $ 78,970
============ ============ ============ ============
Net unrealized gains on available-for-sale investment securities
totaling $673,000 were recorded, net of $276,000 in tax liabilities, as
accumulated other comprehensive income within shareholders' equity at
December 31, 2008. Proceeds and gross realized gains from the sale and
call of available-for-sale investment securities for the year ended
December 31, 2008 totaled $25,680,000 and $126,000, respectively. There
were no transfers of available-for-sale investment securities during
the year ended December 31, 2008.
During 2008, management determined that one equity security (FNMA
Preferred Stock) had a loss considered to be other-than-temporary. The
Company recorded an impairment charge of $245,000 with a remaining
balance of $5,000 at December 31, 2008.
Net unrealized gains on available-for-sale investment securities
totaling $171,000 were recorded, net of $70,000 in tax liabilities, as
accumulated other comprehensive income within shareholders' equity at
December 31, 2007. Proceeds and gross realized gains from the sale and
call of available-for-sale investment securities for the year ended
December 31, 2007 totaled $5,896,000 and $25,000, respectively. There
were no transfers of available-for-sale investment securities during
the year ended December 31, 2007.
Proceeds and gross realized gains from the sale and call of
available-for-sale investment securities for the year ended December
31, 2006 totaled $3,660,000 and $1,000, respectively.
69
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT SECURITIES (Continued)
Held-to-Maturity
----------------
2008
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities:
Mortgage-backed securities $ 24,365 $ 532 $ (8) $ 24,889
============ ============ ============ ============
2007
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities:
Mortgage-backed securities $ 34,754 $ 199 $ (98) $ 34,855
============ ============ ============ ============
Proceeds and gross realized losses from the sale of held-to-maturity
investment securities for the year ended December 31, 2007 totaled
$1,780,000 and $14,000, respectively. There were no sales of
held-to-maturity investment securities for the years ended December 31,
2008 and 2006 and no transfers of held-to-maturity investment
securities for the years ended December 31, 2008, 2007 and 2006.
The amortized cost and estimated fair value of investment securities at
December 31, 2008 by contractual maturity are shown below (dollars in
thousands).
Available-for-Sale Held-to-Maturity
---------------------------- ----------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Within one year $ 2,034 $ 2,055
After one year through five years 12,030 12,227
After five years through ten years 10,304 10,648
After ten years 6,138 6,082
------------ ------------
30,506 30,012
Investment securities not due
at a single maturity date:
Mortgage-backed securities 32,073 32,232 $ 24,365 $ 24,889
Corporate stock 82 90
------------ ------------ ------------ ------------
$ 62,661 $ 63,334 $ 24,365 $ 24,889
============ ============ ============ ============
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.
Investment securities with amortized costs totaling $54,838,000 and
$64,007,000 and estimated fair values totaling $55,659,000 and
$63,926,000 were pledged to secure treasury tax and loan accounts,
State Treasury funds on deposit, public agency and bankruptcy trustee
deposits and borrowing arrangements (see Note 10) at December 31, 2008
and 2007, respectively.
70
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT SECURITIES (Continued)
Investment securities with unrealized losses at December 31, 2008 and
2007 are summarized and classified according to the duration of the
loss period as follows (dollars in thousands):
2008
-------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or More Total
--------------------------- ---------------------------- ----------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
Available-for-Sale
------------------
Debt securities:
Mortgage-backed
securities $ 8,810 $ (233) $ 2,049 $ 10,859 $ (233)
Obligations of states
and political sub-
divisions 5,628 (118) 724 $ (42) 6,352 (160)
Corporate stock 5 (3) 5 (3)
------------ ------------ ------------ ------------ ------------ ------------
$ 14,443 $ (354) $ 2,773 $ (42) $ 17,216 $ (396)
============ ============ ============ ============ ============ ============
Held-to-Maturity
----------------
Debt securities:
Mortgage-backed
securities $ 633 $ (1) $ 489 $ (7) $ 1,122 $ (8)
============ ============ ============ ============ ============ ============
2007
-------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or More Total
--------------------------- ---------------------------- ----------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
Available-for-Sale
------------------
Debt securities:
U.S. Government
agencies $ 11,552 $ (41) $ 11,552 $ (41)
Mortgage-backed
securities 30,136 (121) 30,136 (121)
Obligations of states
and political sub-
divisions $ 1,484 $ (62) 6,944 (37) 8,428 (99)
Corporate stock 186 (65) 186 (65)
------------ ------------ ------------ ------------ ------------ ------------
$ 1,484 $ (62) $ 48,818 $ (264) $ 50,302 $ (326)
============ ============ ============ ============ ============ ============
Held-to-Maturity
----------------
Debt securities:
Mortgage-backed
securities $ 1,192 $ (2) $ 14,838 $ (96) $ 16,030 $ (98)
============ ============ ============ ============ ============ ============
At December 31, 2008, the Company held 165 securities of which 26 were
in a loss position for less than twelve months and 3 were in a loss
position for twelve months or more. Of the 29 securities 13 are
mortgage backed securities, 10 are obligations of states and political
sub-divisions and 6 are corporate stocks.
71
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT SECURITIES (Continued)
The unrealized loss on the Company's investments mortgage-backed
securities and obligations of states and political sub-divisions is
primarily driven by interest rates. Because the decline in market value
is attributable to a change in interest rates and not credit quality,
and because the Company has the ability and intent to hold these
investments until recovery of fair value, which may be maturity,
management does not consider these investments to be
other-than-temporarily impaired.
6. LOANS AND LEASES
Outstanding loans and leases are summarized as follows (dollars in
thousands):
December 31,
----------------------------
2008 2007
------------ ------------
Real estate - commercial $ 218,626 $ 191,774
Real estate - construction 48,664 66,022
Real estate - multi-family 8,938 5,830
Real estate - residential 24,706 20,120
Commercial 90,625 94,632
Lease financing receivable 4,475 4,070
Agriculture 8,015 8,177
Consumer 14,796 10,750
------------ ------------
418,845 401,375
Deferred loan and lease origination fees, net (571) (517)
Allowance for loan and lease losses (5,918) (5,883)
------------ ------------
$ 412,356 $ 394,975
============ ============
Certain loans are pledged as collateral for available borrowings with
the FHLB. Pledged loans totaled $202,419,000 and $171,709,000 at
December 31, 2008 and 2007, respectively (see Note 10).
The components of the Company's lease financing receivable are
summarized as follows (dollars in thousands):
December 31,
----------------------------
2008 2007
------------ ------------
Future lease payments receivable $ 4,985 $ 4,388
Residual interests 67 75
Unearned income (577) (393)
------------ ------------
Net lease financing receivable $ 4,475 $ 4,070
============ ============
72
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. LOANS AND LEASES (Continued)
Future lease payments receivable are as follows (dollars in thousands):
Year Ending
December 31,
-----------------
2009 $ 1,635
2010 1,138
2011 903
2012 772
2013 400
Thereafter 137
------------
Total lease payments receivable $ 4,985
============
Changes in the allowance for loan and lease losses were as follows
(dollars in thousands):
Year Ended December 31,
------------------------------------------
2008 2007 2006
------------ ------------ ------------
Balance, beginning of year $ 5,883 $ 5,874 $ 5,679
Provision charged to operations 1,743 450 320
Losses charged to allowance (1,734) (548) (150)
Recoveries 26 107 25
------------ ------------ ------------
Balance, end of year $ 5,918 $ 5,883 $ 5,874
============ ============ ============
The recorded investment in loans and leases that were considered to be
impaired totaled $6,083,000 at December 31, 2008 and had a related
valuation allowance of $788,000. The average recorded investment in
impaired loans and leases during 2008 was approximately $8,291,000.
The recorded investment in loans and leases that were considered to be
impaired totaled $6,637,000 at December 31, 2007 and had a related
valuation allowance of $764,000. The average recorded investment in
impaired loans and leases during 2007 was approximately $407,000.
Non-accrual loans and leases totaled approximately $5,767,000 and
$6,985,000 at December 31, 2008 and 2007, respectively. Loans and
leases past due 90 days or more and still accruing interest at December
31, 2008 and 2007 were $474,000 and $455,000, respectively. Interest
income on non-accrual loans is generally recognized on a cash basis and
was not significant for the years ended December 31, 2008, 2007 and
2006. Interest foregone on non-accrual loans totaled $647,000 and
$305,000 for the years ended December 31, 2008 and 2007, respectively.
Interest foregone on non-accrual loans for the year ended December 31,
2006 was not significant.
Salaries and employee benefits totaling $910,000, $1,030,000 and
$1,183,000 have been deferred as loan and lease origination costs for
the years ended December 31, 2008, 2007 and 2006, respectively.
73
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (dollars in
thousands):
December 31,
----------------------------
2008 2007
------------ ------------
Land $ 206 $ 206
Building and improvements 740 1,094
Furniture, fixtures and equipment 7,013 6,518
Leasehold improvements 1,566 1,293
------------ ------------
9,525 9,111
Less accumulated depreciation
and amortization (7,410) (7,128)
------------ ------------
$ 2,115 $ 1,983
============ ============
Depreciation and amortization included in occupancy and furniture and
equipment expense totaled $539,000, $535,000 and $623,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
8. ACCOUNTS RECEIVABLE SERVICING RECEIVABLES
The Company purchases existing accounts receivable on a discounted
basis from selected merchants and assumes the related billing and
collection responsibilities on a recourse basis. Accounts receivable
servicing fees included in other income totaled $170,000, $244,000 and
$372,000 for the years ended December 31, 2008, 2007 and 2006,
respectively. The valuation allowance for these receivables is not
significant.
9. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following (dollars in
thousands):
December 31,
----------------------------
2008 2007
------------ ------------
Savings $ 33,438 $ 35,639
Money market 105,919 127,397
NOW accounts 45,581 43,577
Time, $100,000 or more 95,161 75,723
Other time 37,819 40,643
------------ ------------
$ 317,918 $ 322,979
============ ============
74
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. INTEREST-BEARING DEPOSITS (Continued)
Aggregate annual maturities of time deposits are as follows (dollars in
thousands):
Year Ending
December 31,
-----------------
2009 $ 118,120
2010 6,835
2011 4,202
2012 1,900
2013 1,893
Thereafter 30
------------
$ 132,980
============
Interest expense recognized on interest-bearing deposits consisted of
the following (dollars in thousands):
Year Ended December 31,
------------------------------------------
2008 2007 2006
------------ ------------ ------------
Savings $ 324 $ 546 $ 242
Money market 1,861 3,668 3,074
NOW accounts 68 113 130
Time, $100,000 or more 2,249 3,167 3,092
Other time 1,399 2,066 2,139
------------ ------------ ------------
$ 5,901 $ 9,560 $ 8,677
============ ============ ============
10. BORROWING ARRANGEMENTS
The Company has a total of $37,000,000 in unsecured short-term
borrowing arrangements to purchase Federal funds with two of its
correspondent banks. There were no advances under the borrowing
arrangements as of December 31, 2008 and 2007.
In addition, the Company has a line of credit available with the
Federal Home Loan Bank which is secured by pledged mortgage loans (see
Note 6) and investment securities (see Note 5). Borrowings may include
overnight advances as well as loans with a term of up to thirty years.
Advances totaling $57,231,000 were outstanding from the Federal Home
Loan Bank at December 31, 2008, bearing fixed interest rates ranging
from 0.05% to 3.78% and maturing between January 2, 2009 and August 22,
2011. Advances totaling $51,603,000 were outstanding from the Federal
Home Loan Bank at December 31, 2007, bearing fixed interest rates
ranging from 3.25% to 5.21% and maturing between January 2, 2008 and
October 30, 2008. Amounts available under the borrowing arrangement
with the Federal Home Loan Bank at December 31, 2008 and 2007 totaled
$60,012,000 and $79,631,000, respectively.
In addition, the Company entered into a secured borrowing agreement
with the Federal Reserve Bank in 2008. The borrowing can be secured by
pledging selected loans and investment securities. Collateral value at
December 31, 2008 was $935,000. There were no advances outstanding as
of December 31, 2008.
75
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. BORROWING ARRANGEMENTS (Continued)
The following table summarizes these borrowings (in thousands):
December 31,
---------------------------------------------------------
2008 2007
--------------------------- ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------ ------------ ------------ ------------
Short-term portion of borrowings $ 43,231 1.83% $ 51,603 3.61%
Long-term borrowings 14,000 3.19%
------------ ------------
$ 57,231 2.16% $ 51,603 3.61%
============ ============
The Company has also been issued $2,500,000 in letters of credit by the
Federal Home Loan Bank which have been pledged to secure Local Agency
Deposits. The letters of credit act as a guarantee of payment to
certain third parties in accordance with specified terms and
conditions. The letters of credit were not drawn upon in 2008 and
management does not expect to draw upon these lines in the future.
ARB is eligible to issue certain debt that is backed by the full faith
and credit of the United States, up to a limit of $10,260,000, under
the FDIC's Temporary Liquidity Guarantee Program. Any senior unsecured
debt with a stated maturity of more than thirty days issued by ARB up
to its debt guarantee limit falls under this program. ARB will be
charged an annualized assessment from the FDIC, ranging from 50 to 100
basis points, based on the term and amount of the debt outstanding
under the program. At December 31, 2008, the Company had no borrowings
under this debt guarantee program.
11. INCOME TAXES
The provision for income taxes for the years ended December 31, 2008,
2007, and 2006 consisted of the following (dollars in thousands):
Federal State Total
------------ ------------ ------------
2008
----
Current $ 3,617 $ 1,407 $ 5,024
Deferred (263) (183) (446)
------------ ------------ ------------
Provision for income taxes $ 3,354 $ 1,224 $ 4,578
============ ============ ============
2007
----
Current $ 3,986 $ 1,494 $ 5,480
Deferred (163) (77) (240)
------------ ------------ ------------
Provision for income taxes $ 3,823 $ 1,417 $ 5,240
============ ============ ============
2006
----
Current $ 5,076 $ 1,666 $ 6,742
Deferred (878) (125) (1,003)
------------ ------------ ------------
Provision for income taxes $ 4,198 $ 1,541 $ 5,739
============ ============ ============
76
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following (dollars
in thousands):
December 31,
---------------------------
2008 2007
------------ ------------
Deferred tax assets:
Allowance for loan and lease losses $ 2,641 $ 2,532
Future benefit of state tax deduction 443 485
Deferred compensation 1,591 1,371
Other 414 262
------------ ------------
Total deferred tax assets 5,089 4,650
------------ ------------
Deferred tax liabilities:
Core deposit intangible (416) (547)
Unrealized gains on available-for-sale investment
securities (276) (70)
Investment market to market (58) (91)
Future liability of state deferred tax assets (291) (237)
Deferred loan costs (433) (423)
Federal Home Loan Bank stock dividends (274) (211)
------------ ------------
Total deferred tax liabilities (1,748) (1,579)
------------ ------------
Net deferred tax assets $ 3,341 $ 3,071
============ ============
The Company and its subsidiaries file income tax returns in the United
States and California jurisdictions. There are currently no pending
federal, state or local income tax examinations by tax authorities.
With few exceptions, the Company is no longer subject to the
examination by federal taxing authorities for the years ended before
December 31, 2005 and by state and local taxing authorities for years
before December 31, 2004. The unrecognized tax benefits and changes
therein and the interest and penalties accrued by the Company as of
December 31, 2008 were not significant.
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rate of 35.0% to income
before income taxes. The significant items comprising these differences
consisted of the following:
Year Ended December 31,
------------------------------------------
2008 2007 2006
------------ ------------ ------------
Federal income tax statutory rate 35.0% 35.0% 35.0%
State franchise tax, net of Federal tax effect 6.6% 6.7% 6.8%
Tax benefit of interest on obligations of
states and political subdivisions (2.9)% (2.5)% (2.2)%
Tax-exempt income from life insurance
policies (1.1)% (1.0)% (0.5)%
Stock option compensation expense 0.5% 0.4% 0.3%
Other (0.4)% (0.4)% (0.6)%
------------ ------------ ------------
Effective tax rate 37.7% 38.2% 38.8%
============ ============ ============
77
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases branch facilities, administrative offices and
various equipment under noncancelable operating leases which expire on
various dates through the year 2019. Certain of the leases have five
year renewal options. Two of the branch facilities are leased from
current or former members of the Company's Board of Directors (see Note
17).
Future minimum lease payments are as follows (dollars in thousands):
Year Ending
December 31,
-----------------
2009 $ 952
2010 759
2011 653
2012 627
2013 582
Thereafter 1,483
------------
$ 5,056
============
Rental expense included in occupancy, furniture and equipment expense
totaled $1,110,000, $1,061,000 and $1,035,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Financial Instruments With Off-Balance-Sheet Risk
-------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing
needs of its customers and to reduce its exposure to fluctuations in
interest rates. These financial instruments consist of commitments to
extend credit and standby letters of credit. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized on the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and
standby letters of credit as it does for loans included on the
consolidated balance sheet.
The following financial instruments represent off-balance-sheet credit
risk (dollars in thousands):
December 31,
---------------------------
2008 2007
------------ ------------
Commitments to extend credit:
Revolving lines of credit secured by 1-4 family residences $ 7,396 $ 8,252
Commercial real estate, construction and land
development commitments secured by real estate 17,076 31,881
Other unused commitments, principally commercial loans 52,465 72,500
------------ ------------
$ 76,937 $ 112,633
============ ============
Standby letters of credit $ 3,798 $ 7,537
============ ============
78
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
-------------------------------------------------
At inception, real estate commitments are generally secured by property
with a loan-to-value ratio of 65% to 75%. In addition, the majority of
the Company's commitments have variable interest rates.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any conditions established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each client's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies but may include
accounts receivable, inventory, equipment and deeds of trust on
residential real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to
guarantee the performance or financial obligation of a client to a
third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to clients.
The fair value of the liability related to these standby letters of
credit, which represents the fees received for issuing the guarantees,
was not significant at December 31, 2008 and 2007. The Company
recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
Significant Concentrations of Credit Risk
-----------------------------------------
The Company grants real estate mortgage, real estate construction,
commercial, agricultural and consumer loans to clients throughout
Sacramento, Placer, Yolo, Amador, El Dorado, and Sonoma counties.
In management's judgment, a concentration exists in real estate-related
loans which represented approximately 72% and 71% of the Company's loan
portfolio at December 31, 2008 and 2007, respectively. A continued
substantial decline in the economy in general, or a continued decline
in real estate values in the Company's primary market areas in
particular, could have an adverse impact on collectibility of these
loans. However, personal and business income represent the primary
source of repayment for a majority of these loans.
Correspondent Banking Agreements
--------------------------------
The Company maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements. The
Company did not have any uninsured deposits at December 31, 2008.
Contingencies
-------------
The Company is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to such actions will not
materially affect the consolidated financial position or results of
operations of the Company.
79
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. SHAREHOLDERS' EQUITY
Earnings Per Share
------------------
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows (dollars and
shares in thousands, except per share data):
Weighted
Average
Number of
Net Shares Per-Share
For the Year Ended Income Outstanding Amount
-------------------------------- ------------ ------------- ------------
December 31, 2008
-----------------
Basic earnings per share $ 7,571 5,811 $ 1.30
------------ ------------- ------------
Effect of dilutive stock options 14
------------ ------------
Diluted earnings per share $ 7,571 5,825 $ 1.30
============ ============ ============
December 31, 2007
-----------------
Basic earnings per share $ 8,478 6,053 $ 1.40
============
Effect of dilutive stock options 63
------------ ------------
Diluted earnings per share $ 8,478 6,116 $ 1.39
============ ============ ============
December 31, 2006
-----------------
Basic earnings per share $ 9,062 6,396 $ 1.42
============
Effect of dilutive stock options 118
------------ ------------
Diluted earnings per share $ 9,062 6,514 $ 1.39
============ ============ ============
Stock Option Plan
-----------------
In 2000, the Board of Directors adopted a stock option plan under which
options may be granted to employees and directors under incentive and
nonstatutory agreements. The stock option plan was approved by the
Company's shareholders. At December 31, 2008, grants outstanding
combined with shares available for future grants totaled 603,000 shares
under this plan. The plan requires 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. The
Plan does not provide for the settlement of awards in cash and new
shares are issued upon the exercise of options.
80
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. SHAREHOLDERS' EQUITY (Continued)
Stock Option Plan (Continued)
-----------------
A summary of the outstanding and vested stock option activity for the
year ended December 31, 2008 is as follows:
Outstanding Nonvested
---------------------------- ----------------------------
Weighted
Average Weighted
Exercise Average
Price Fair Value
Shares Per Share Shares Per Share
------------ ------------ ------------ ------------
Balance, January 1, 2008 347,191 $ 17.54 187,721 $ 5.88
Options granted 65,387 $ 16.04 65,387 $ 2.75
Options vested (46,867) $ 5.43
Options exercised (39,121) $ 6.88
Options expired or canceled (35,133) $ 15.91 (20,780) $ 5.57
------------ ------------
Balance, December 31, 2008 338,324 $ 18.67 185,461 $ 4.92
============ ============
A summary of exercisable options as of December 31, 2008 is as follows:
Number of vested stock options 152,863
Weighted average exercise price per share $ 17.23
Aggregate intrinsic value $ 31,000
Weighted average remaining contractual term in years 5.72
A summary of options outstanding at December 31, 2008 follows:
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 2008 Life 2008
------------------------ ------------ ------------ ------------
$ 4.10 5,250 .95 years 5,250
$ 11.67 33,578 4.25 years 33,578
$ 12.38 1,575 9.42 years
$ 12.66 927 4.45 years 927
$ 16.19 63,562 9.13 years
$ 16.78 50,859 5.35 years 39,987
$ 18.11 27,561 6.05 years 15,869
$ 18.24 34,045 6.65 years 20,427
$ 23.40 57,813 8.38 years 11,563
$ 24.01 63,154 7.15 years 25,262
------------ ------------
338,324 152,863
============ ============
81
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. SHAREHOLDERS' EQUITY (Continued)
Common Stock Repurchase Program
-------------------------------
On January 16, 2008, the Board of Directors of the Company authorized a
stock repurchase program that allows for the repurchase of up to six
and one half percent (6.5%) annually of the Company's outstanding
shares of common stock. The repurchases under this plan can be made
from time to time in the open market as conditions allow. Management
reports monthly to the Board of Directors on the status of the
repurchase program. The Board of Directors has reserved the right to
suspend, terminate, modify or cancel the repurchase programs at any
time for any reason. The 6.5% percent program announced in 2008,
replaced a program announced in 2001 whereby the Company had the
ability to repurchase up to five percent (5.0%) annually of the
Company's outstanding shares of common stock. On October 17, 2007, the
Board of Directors of the Company expanded the stock repurchase program
by an additional $2,000,000 for calendar year 2007. At December 31,
2008, ARB did not have excess retained earnings that would allow it to
pay cash dividends to the Company, however, ARB anticipates that
additional requests for exemptions to the dividend restrictions will be
made which, if approved, would allow ARB to pay cash dividends to the
Company.
Stock Dividend
--------------
The Board of Directors declared a 5% stock dividend on November 19,
2008, November 21, 2007 and November 15, 2006. As appropriate, per
share and relevant data in the consolidated financial statements have
been retroactively restated to reflect the stock dividends.
14. REGULATORY MATTERS
Dividends
---------
Upon declaration by the Board of Directors of the Company, all
shareholders of record will be entitled to receive dividends. The
California Financial Code restricts the total dividend payment of any
state banking association in any calendar year to the lesser of (1) the
bank's retained earnings or (2) the bank's net income for its last
three fiscal years, less distributions made to shareholders during the
same three-year period. In addition, subject to prior regulatory
approval, any state banking association may request an exception to
this restriction. In 2006, ARB requested, and received approval for, a
one-time payment of $2,500,000. At December 31, 2008, ARB did not have
excess retained earnings that would allow it to pay cash dividends to
the Company, however, ARB anticipates that additional requests for
exemptions to the dividend restrictions will be made which, if
approved, would allow ARB to pay cash dividends to the Company.
The Company has paid quarterly cash dividends on its common stock since
the first quarter of 2004; prior to that, the Company paid cash
dividends twice a year since 1992. It is currently the intention of the
Board of Directors of the Company to continue payment of cash dividends
on a quarterly basis, subject to the restrictions herein. In 2008, 2007
and 2006, the Company declared cash dividends in the amount of $0.57,
$0.55 and $0.53, respectively, per common share. The amounts have been
adjusted to reflect 5% stock dividends declared in 2008 and in 2007.
There is no assurance, however, that any dividends will be paid in the
future since they are subject to regulatory restrictions, and dependent
upon earnings, financial condition and capital requirements of the
Company and its subsidiaries.
Regulatory Capital
------------------
The Company and ARB are subject to certain regulatory capital
requirements administered by the Board of Governors of the Federal
Reserve System and the FDIC. Failure to meet these minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial
statements.
82
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. REGULATORY MATTERS (Continued)
Regulatory Capital (Continued)
------------------
Under capital adequacy guidelines, the Company and ARB 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. These quantitative measures are
established by regulation and require that minimum amounts and ratios
of total and Tier 1 capital to risk-weighted assets and of Tier 1
capital to average assets be maintained. Capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
ARB is also subject to additional capital guidelines under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, ARB must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table on the
following page. The most recent notification from the FDIC categorized
ARB as well capitalized under these guidelines. There are no conditions
or events since that notification that management believes have changed
the Bank's category.
Management believes that the Company and ARB met all their capital
adequacy requirements as of December 31, 2008 and 2007. There are no
conditions or events since those notifications that management believes
have changed the categories.
December 31,
------------------------------------------------------------
2008 2007
---------------------------- ----------------------------
Amount Ratio Amount Ratio
------------ ------------ ------------ ------------
(dollars in thousands)
Leverage Ratio
--------------
American River Bankshares and Subsidiaries $ 45,822 8.3% $ 42,358 7.7%
Minimum regulatory requirement $ 22,038 4.0% $ 21,956 4.0%
American River Bank $ 46,134 8.4% $ 42,616 7.8%
Minimum requirement for "Well-Capitalized" institution
under prompt corrective action provisions $ 27,451 5.0% $ 27,375 5.0%
Minimum regulatory requirement $ 21,961 4.0% $ 21,900 4.0%
Tier 1 Risk-Based Capital Ratio
-------------------------------
American River Bankshares and Subsidiaries $ 45,822 10.2% $ 42,358 9.5%
Minimum regulatory requirement $ 17,889 4.0% $ 17,926 4.0%
American River Bank $ 46,134 10.4% $ 42,616 9.6%
Minimum requirement for "Well-Capitalized" institution
under prompt corrective action provisions $ 26,736 6.0% $ 26,775 6.0%
Minimum regulatory requirement $ 17,824 4.0% $ 17,850 4.0%
Total Risk-Based Capital Ratio
------------------------------
American River Bankshares and Subsidiaries $ 51,416 11.5% $ 47,963 10.7%
Minimum regulatory requirement $ 35,805 8.0% $ 35,874 8.0%
American River Bank $ 51,708 11.6% $ 48,198 10.8%
Minimum requirement for "Well-Capitalized" institution
under prompt corrective action provisions $ 44,594 10.0% $ 44,656 10.0%
Minimum regulatory requirement $ 35,676 8.0% $ 35,725 8.0%
83
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income consisted of the following (dollars in
thousands):
Year Ended December 31,
--------------------------------------------
2008 2007 2006
------------ ------------ ------------
Merchant fee income $ 482 $ 544 $ 549
Accounts receivable servicing fees (Note8) 170 244 372
Income from residential lending division 283 401 256
Bank owned life insurance 395 404 192
Other 216 252 290
------------ ------------ ------------
$ 1,546 $ 1,845 $ 1,659
============ ============ ============
Other noninterest expense consisted of the following (dollars in
thousands):
Year Ended December 31,
--------------------------------------------
2008 2007 2006
------------ ------------ ------------
Professional fees $ 936 $ 832 $ 778
Telephone and postage 403 420 411
Outsourced item processing 391 374 495
Advertising and promotion 339 338 357
Directors' expense 321 378 311
Amortization of intangible assets 286 308 330
Stationery and supplies 274 322 335
Donations 56 62 88
Other operating expenses 1,239 1,314 1,271
------------ ------------ ------------
$ 4,245 $ 4,348 $ 4,376
============ ============ ============
16. EMPLOYEE BENEFIT PLANS
American River Bankshares 401(k) Plan
-------------------------------------
The American River Bankshares 401(k) Plan has been in place since
January 1, 1993 and is available to all employees. Under the plan, the
Company will match 100% of each participants' contribution up to 3% of
annual compensation plus 50% of the next 2% of annual compensation.
Employer Safe Harbor matching contributions are 100% vested upon
entering the plan. The Company's contributions totaled $200,000,
$227,000 and $217,000 for the years ended December 31, 2008, 2007 and
2006, respectively.
Employee Stock Purchase Plan
----------------------------
The Company contracts with an administrator for 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.
84
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. EMPLOYEE BENEFIT PLANS (Continued)
American River Bankshares Deferred Compensation Plan
----------------------------------------------------
The Company has established a Deferred Compensation Plan for certain
members of the management team and a Deferred Fee Agreement for
Non-Employee Directors for the purpose of providing the opportunity for
participants to defer compensation. Participants of the management
team, who are selected by a committee designated by the Board of
Directors, may elect to defer annually a minimum of $5,000 or a maximum
of eighty percent of their base salary and all of their cash bonus.
Directors may also elect to defer up to one hundred percent of their
monthly fees. The Company bears all administration costs and accrues
interest on the participants' deferred balances at a rate based on U.S.
Government Treasury rates plus 4.0%. This rate was 7.45% at December
31, 2008. Deferred compensation, including interest earned, totaled
$2,023,000, $1,769,000 and $1,488,000 at December 31, 2008, 2007 and
2006, respectively. The expense recognized under this plan totaled
$142,000, $142,000 and $113,000 for the years ended December 31, 2008,
2007 and 2006, respectively.
Salary Continuation Plan
------------------------
The Company has agreements to provide certain current executives, or
their designated beneficiaries, with annual benefits for up to 15 years
after retirement or death. These benefits are substantially equivalent
to those available under life insurance policies purchased by the
Company on the lives of the executives. The Company accrues for these
future benefits from the effective date of the agreements until the
executives' expected final payment dates in a systematic and rational
manner. As of December 31, 2008 and 2007, the Company had accrued
$672,000 and $521,000, respectively, for potential benefits payable.
This payable approximates the then present value of the benefits
expected to be provided at retirement. The expense recognized under
this plan totaled $188,000, $169,000 and $126,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Under these plans, the Company invested in single premium life
insurance policies with cash surrender values totaling $10,496,000 and
$10,101,000 at December 31, 2008 and 2007, respectively. On the
consolidated balance sheet, the cash surrender value of life insurance
policies is included in accrued interest receivable and other assets.
Tax-exempt income on these policies, net of expense, totaled
approximately $395,000, $404,000 and $192,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
17. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company enters into
transactions with related parties, including Directors and affiliates.
These transactions include borrowings from the Company with
substantially the same terms, including rates and collateral, as loans
to unrelated parties. The following is a summary of the aggregate
activity involving related party borrowers during 2008 (dollars in
thousands):
Balance, January 1, 2008 $ 3,425
Disbursements 11
Amounts repaid (153)
------------
Balance, December 31, 2008 $ 3,283
============
Undisbursed commitments to related parties,
December 31, 2008 $ 5
============
The Company also leases two of its branch facilities from current or
former members of the Company's Board of Directors. Rental payments to
the Directors totaled $110,000, $106,000 and $118,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
85
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. OTHER COMPREHENSIVE INCOME
At December 31, 2008, 2007 and 2006, the Company had other
comprehensive income as follows (dollars in thousands):
Before Tax After
Tax Expense Tax
------------ ------------ ------------
For the Year Ended December 31, 2008
------------------------------------
Other comprehensive income:
Unrealized holding gains $ 628 $ (258) $ 370
Less reclassification adjustment for realized
gains included in net income 126 (52) 74
------------ ------------ ------------
$ 502 $ (206) $ 296
============ ============ ============
For the Year Ended December 31, 2007
------------------------------------
Other comprehensive income:
Unrealized holding gains $ 1,153 $ (472) $ 681
Less reclassification adjustment for realized
gains included in net income 25 (10) 15
------------ ------------ ------------
$ 1,128 $ (462) $ 666
============ ============ ============
For the Year Ended December 31, 2006
------------------------------------
Other comprehensive income:
Unrealized holding gains $ 323 $ (130) $ 193
Less reclassification adjustment for realized
gains included in net income 1 1
------------ ------------ ------------
$ 322 $ (130) $ 192
============ ============ ============
86
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
December 31, 2008 and 2007
(Dollars in thousands)
2008 2007
------------ ------------
ASSETS
Cash and due from banks $ 1,596 $ 611
Investment in subsidiaries 63,759 60,231
Dividends receivable from subsidiaries 840
Other assets 1,884 1,873
------------ ------------
$ 67,239 $ 63,555
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable to shareholders $ 828 $ 839
Other liabilities 2,964 2,743
------------ ------------
Total liabilities 3,792 3,582
------------ ------------
Shareholders' equity:
Common stock 47,433 45,668
Retained earnings 15,617 14,204
Accumulated other comprehensive income, net of taxes 397 101
------------ ------------
Total shareholders' equity 63,447 59,973
------------ ------------
$ 67,239 $ 63,555
============ ============
87
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF INCOME
For the Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
2008 2007 2006
------------ ------------ ------------
Income:
Dividends declared by subsidiaries -
eliminated in consolidation $ 4,560 $ 12,575 $ 9,570
Management fee from subsidiaries - eliminated
in consolidation 3,706 3,332 3,174
Other income 39 39 20
------------ ------------ ------------
Total income 8,305 15,946 12,764
------------ ------------ ------------
Expenses:
Salaries and employee benefits 2,582 2,766 2,647
Professional fees 390 384 386
Directors' expense 248 288 237
Other expenses 668 696 726
------------ ------------ ------------
Total expenses 3,888 4,134 3,996
------------ ------------ ------------
Income before equity in undistributed
income of subsidiaries 4,417 11,812 8,768
Equity in undistributed (distributed) income of
subsidiaries 3,113 (3,637) (28)
------------ ------------ ------------
Income before income taxes 7,530 8,175 8,740
Income tax benefit 41 303 322
------------ ------------ ------------
Net income $ 7,571 $ 8,478 $ 9,062
============ ============ ============
88
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
2008 2007 2006
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 7,571 $ 8,478 $ 9,062
Adjustments to reconcile net income to net
cash provided by operating activities:
(Distributed) undistributed earnings of
subsidiaries (3,113) 3,637 28
Decrease (increase) in dividends receivable
from subsidiaries 840 (540) 542
Stock option compensation expense 291 301 221
Increase in other assets (104) (500) (206)
Increase in other liabilities 221 820 32
------------ ------------ ------------
Net cash provided by operating activities 5,705 12,196 9,679
------------ ------------ ------------
Cash flows from investing activities:
Purchase of equipment (26) (41) (58)
------------ ------------ ------------
Net cash used in investing activities (26) (41) (58)
------------ ------------ ------------
Cash flows from financing activities:
Cash dividends paid (3,328) (3,328) (3,325)
Exercise of stock options, including tax benefit 354 679 441
Cash paid to repurchase common stock (1,710) (9,194) (6,724)
Cash paid for fractional shares (10) (9) (21)
------------ ------------ ------------
Net cash used in financing activities (4,694) (11,852) (9,629)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 985 303 (8)
Cash and cash equivalents at beginning of year 611 308 316
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,596 $ 611 $ 308
============ ============ ============
89
Selected Quarterly Information (Unaudited)
-----------------------------------------------------------------------------------------------
(In thousands, except per share and price range of common stock)
-----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-----------------------------------------------------------------------------------------------
2008
Interest income $ 8,578 $ 8,252 $ 8,604 $ 8,119
Net interest income 6,342 6,395 6,742 6,446
Provision for loan and lease losses 337 190 381 835
Noninterest income 585 639 446 498
Noninterest expense 3,629 3,642 3,694 3,236
Income before taxes 2,961 3,202 3,113 2,873
Net income 1,833 1,981 1,931 1,826
-----------------------------------------------------------------------------------------------
Basic earnings per share $ .31 $ .34 $ .33 $ .32
Diluted earnings per share .31 .34 .33 .32
Cash dividends per share .143 .143 .143 .143
-----------------------------------------------------------------------------------------------
Price range, common stock $14.29-17.34 $ 9.29-15.67 $ 7.17-11.33 $ 8.01-13.33
===============================================================================================
2007
Interest income $ 9,464 $ 9,498 $ 9,454 $ 9,062
Net interest income 6,547 6,609 6,680 6,566
Provision for loan and lease losses 121 144 50 135
Noninterest income 641 724 669 565
Noninterest expense 3,692 3,779 3,796 3,566
Income before taxes 3,375 3,410 3,503 3,430
Net income 2,086 2,098 2,152 2,142
-----------------------------------------------------------------------------------------------
Basic earnings per share $ .34 $ .34 $ .35 $ .36
Diluted earnings per share .33 .34 .35 .36
Cash dividends per share .136 .136 .136 .143
-----------------------------------------------------------------------------------------------
Price range, common stock $21.33-24.03 $21.19-22.22 $19.56-21.68 $15.05-20.41
===============================================================================================
The earnings per share, cash dividends, and price range have been adjusted for
5% stock dividends in 2008 and 2007.
90
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, 2008. There have been no disagreements
with such independent accountants during the last two fiscal years ended
December 31, 2008, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
Item 9A. Controls and Procedures.
Effectiveness of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December
31, 2008. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely making known to them material information
relating to the Company and the Company's consolidated subsidiaries required to
be disclosed in the Company's reports filed or submitted under the Exchange Act.
During the quarter ended December 31, 2008, there have been no changes in
the Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, these controls.
Report of Management on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting for the Company
(as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934, as amended).
The Company's management, including the Chief Executive Officer and
Chief Financial Officer, has assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2008, presented in
conformity with accounting principles generally accepted in the United States of
America. In making this assessment, management used the criteria applicable to
the Company as set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control--Integrated Framework. Based upon such
assessment, management believes that, as of December 31, 2008, the Company's
internal control over financial reporting is effective based upon those
criteria.
This annual report on Form 10-K does not include an attestation report
of the Company's independent registered public accounting firm regarding
internal control over financial reporting. Management's report was not subject
to attestation by the Company's independent registered public accounting firm
pursuant to the rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this annual report, as a result
of the change during 2008 in the Company's status from an accelerated filer to a
non-accelerated filer.
/s/ DAVID T. TABER /s/ MITCHELL A. DERENZO
-------------------------------- --------------------------------
David T. Taber Mitchell A. Derenzo
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
Item 9B. Other Information.
None.
91
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
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
2009 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
Item 11. Executive Compensation.
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2009 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2009 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
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
2009 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2009 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits.
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and
among the Registrant, ARH Interim National Bank and North
Coast Bank, N.A., dated as of March 1, 2000 (included as
Annex A). **
(2.2) Agreement and Plan of Reorganization and Merger by and
among the Registrant, American River Bank and Bank of
Amador, dated as of July 8, 2004 (included as Annex A).
***
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2008,
filed with the Commission on August 8, 2008.
92
(3.2) Bylaws, as amended, incorporated by reference from
Exhibit 3.2 to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2008, filed with the
Commission on August 8, 2008.
(4.1) Specimen of the Registrant's common stock certificate,
incorporated by reference from Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2004, filed with the Commission on August
11, 2004.
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership, dated
April 1, 2000, related to 1545 River Park Drive, Suite
107, Sacramento, California. **
(10.2) Lease agreement between American River Bank and Bradshaw
Plaza, Associates, Inc. dated November 27, 2006, related
to 9750 Business Park Drive, Sacramento, California
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on November 28, 2006.
(10.3) Lease agreement between American River Bank and Marjorie
G. Taylor dated April 5, 1984, and addendum thereto dated
July 16, 1997, related to 10123 Fair Oaks Boulevard, Fair
Oaks, California. **
(10.4) Lease agreement between American River Bank and LUM YIP
KEE, Limited (formerly Sandalwood Land Company) dated
August 28, 1996, related to 2240 Douglas Boulevard, Suite
100, Roseville, California (**) and Amendment No. 1
thereto dated July 28, 2006, incorporated by reference
from Exhibit 99.1 to the Registrant's Report on Form 8-K,
filed with the Commission on July 31, 2006.
*(10.5) Registrant's 1995 Stock Option Plan. **
*(10.6) Form of Nonqualified Stock Option Agreement under the
1995 Stock Option Plan. **
*(10.7) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.8) Registrant's Deferred Compensation Plan, incorporated by
reference from Exhibit 99.2 to the Registrant's Report on
Form 8-K, filed with the Commission on May 30, 2006.
*(10.09) Registrant's Deferred Fee Plan, incorporated by reference
from Exhibit 99.1 to the Registrant's Report on Form 8-K,
filed with the Commission on May 30, 2006.
(10.10) Lease agreement between American River Bank and 520
Capitol Mall, Inc., dated August 19, 2003, related to 520
Capitol Mall, Suite 100, Sacramento, California,
incorporated by reference from Exhibit 10.29 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2003, filed with the Commission on
November 7, 2003 and the First Amendment thereto dated
April 21, 2004, incorporated by reference from Exhibit
10.37 to the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 2004, filed with the
Commission on August 11, 2004.
*(10.11) Employment Agreement between Registrant and David T.
Taber dated June 2, 2006, incorporated by reference from
Exhibit 99.3 to the Registrant's Report on Form 8-K,
filed with the Commission on May 30, 2006.
(10.12) Lease agreement between R & R Partners, a California
General Partnership and North Coast Bank, dated July 1,
2003, related to 8733 Lakewood Drive, Suite A, Windsor,
California, incorporated by reference from Exhibit 10.32
to the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 2003, filed with the
Commission on November 7, 2003; the First Amendment
thereto, dated January 2, 2006, incorporated by reference
from Exhibit 99.1 to the Registrant's Report on Form 8-K,
93
filed with the Commission on January 3, 2006; and the
Second Amendment thereto, dated December 8, 2006,
incorporated by reference from Exhibit 10.39 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 2007, filed with the Commission on May 7,
2007; and the Third Amendment thereto, dated December 31,
2008, incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on January 2, 2009.
*(10.13) Salary Continuation Agreement, as amended on February 21,
2008, between American River Bank and Mitchell A.
Derenzo, incorporated by reference from Exhibit 99.3 to
the Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.14) Salary Continuation Agreement, as amended on February 21,
2008, between the Registrant and David T. Taber,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.15) Salary Continuation Agreement, as amended on February 21,
2008, between American River Bank and Douglas E. Tow,
incorporated by reference from Exhibit 99.2 to the
Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.16) Registrant's 2000 Stock Option Plan with forms of
Nonqualified Stock Option Agreement and Incentive Stock
Option Agreement. **
*(10.17) Registrant's 401(k) Plan dated December 23, 2008,
incorporated by reference from Exhibit 99.1 to the Report
on Form 8-K, filed with the Commission on December 24,
2008.
(10.18) Lease agreement between Bank of Amador and the United
States Postal Service, dated April 24, 2001, related to
424 Sutter Street, Jackson, California (***) and the
First Amendment thereto, dated June 5, 2006, incorporated
by reference from Exhibit 99.1 to the Registrant's Report
on Form 8-K, filed with the Commission on June 6, 2006.
*(10.19) Salary Continuation Agreement, as amended on February 21,
2008, between Bank of Amador, a division of American
River Bank, and Larry D. Standing and related Endorsement
Split Dollar Agreement, incorporated by reference from
Exhibit 99.4 to the Registrant's Report on Form 8-K,
filed with the Commission on February 22, 2008.
*(10.20) Director Retirement Agreement, as amended on February 21,
2008, between Bank of Amador, a division of American
River Bank, and Larry D. Standing, incorporated by
reference from Exhibit 99.5 to the Registrant's Report on
Form 8-K, filed with the Commission on February 22, 2008.
(10.21) Item Processing Agreement between American River Bank and
Fidelity Information Services, Inc., dated April 22,
2005, incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on April 27, 2005.
(10.22) Lease agreement between Registrant and One Capital
Center, a California limited partnership, dated May 17,
2005, related to 3100 Zinfandel Drive, Rancho Cordova,
California, incorporated by reference from Exhibit 99.1
to the Registrant's Report on Form 8-K, filed with the
Commission on May 18, 2005.
(10.23) Managed Services Agreement between American River
Bankshares and ProNet Solutions, Inc., dated September 8,
2005, incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on September 9, 2005.
*(10.24) American River Bankshares 2005 Executive Incentive Plan,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on October 27, 2005; the First Amendment
thereto, incorporated by reference from Exhibit 99.1 to
94
the Registrant's Report on Form 8-K, filed with the
Commission on March 17, 2006; and the Second Amendment
thereto, incorporated by reference from Exhibit 99.1 to
the Registrant's Report on Form 8-K, filed with the
Commission on March 23, 2007; and the Third Amendment
thereto, incorporated by reference from Exhibit 99.1 to
the Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.25) American River Bankshares Director Emeritus Program,
incorporated by reference from Exhibit 10.33 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2006, filed with the Commission on August
8, 2006.
*(10.26) Employment Agreement dated September 20, 2006 between
American River Bankshares and Mitchell A. Derenzo,
incorporated by reference from Exhibit 99.1 to the
Registrant's Report on Form 8-K, filed with the
Commission on September 20, 2006.
*(10.27) Employment Agreement dated September 20, 2006 between
American River Bankshares and Douglas E. Tow,
incorporated by reference from Exhibit 99.2 to the
Registrant's Report on Form 8-K, filed with the
Commission on September 20, 2006.
*(10.28) Employment Agreement dated September 20, 2006 between
American River Bankshares and Kevin B. Bender,
incorporated by reference from Exhibit 99.3 to the
Registrant's Report on Form 8-K, filed with the
Commission on September 20, 2006.
*(10.29) Employment Agreement dated September 20, 2006 between
American River Bank and Raymond F. Byrne, incorporated by
reference from Exhibit 99.5 to the Registrant's Report on
Form 8-K, filed with the Commission on September 20,
2006.
*(10.30) Salary Continuation Agreement, as amended on February 21,
2008, between American River Bank and Kevin B. Bender,
incorporated by reference from Exhibit 99.6 to the
Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
*(10.31) Salary Continuation Agreement, as amended on February 21,
2008, between American River Bank and Raymond F. Byrne,
incorporated by reference from Exhibit 99.7 to the
Registrant's Report on Form 8-K, filed with the
Commission on February 22, 2008.
(10.32) Lease agreement dated May 23, 2007 between Bank of
Amador, a division of American River Bank, and Joseph
Bellamy, Trustee of the Joseph T. Bellamy 2005 Trust,
related to 26395 Buckhorn Ridge Road, Pioneer,
California, incorporated by reference from Exhibit 99.1
to the Registrant's Report on Form 8-K, filed with the
Commission on May 24, 2007 and the First Amendment
thereto, dated October 15, 2007, incorporated by
reference from Exhibit 99.1 to the Registrant's Report on
Form 8-K, filed with the Commission on October 16, 2007.
(10.33) Sublease agreement dated December 23, 2008 between North
Coast Bank, a division of American River Bank, and
Chicago Title Company, a California Corporation; and
lease agreement dated December 23, 2008 between North
Coast Bank, a division of American River Bank, and 90 E
Street LLC, related to 90 E Street, Santa Rosa,
California, incorporated by reference from Exhibit 99.2
and 99.3 to the Registrant's Report on Form 8-K, filed
with the Commission on December 24, 2008.
(14.1) Registrant's Code of Ethics, incorporated by reference
from Exhibit 14.1 to the Registrant's Annual Report on
Form 10-K for the period ended December 31, 2003, filed
with the Commission on March 19, 2004.
(21.1) The Registrant's only subsidiaries are American River
Bank and American River Financial.
95
(23.1) Consent of Perry-Smith LLP.
(31.1) Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Registrant by its Chief Executive
Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Denotes management contracts, compensatory plans or
arrangements.
** Incorporated by reference to Registrant's
Registration Statement on Form S-4 (No. 333-36326)
filed with the Commission on May 5, 2000.
*** Incorporated by reference to Registrant's
Registration Statement on Form S-4 (No. 333-119085)
filed with the Commission on September 17, 2004.
An Annual Report for the fiscal year ended December 31, 2008 and Notice
of Annual Meeting and Proxy Statement for the Company's 2009 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.
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN RIVER BANKSHARES
March 5, 2009 By: /s/ DAVID T. TABER
------------- ----------------------------------------
David T. Taber
Chief Executive Officer
(Principal Executive Officer)
March 5, 2009 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 3/05/09
---------------------------
Charles D. Fite
/s/ ROGER J. TAYLOR Director, Vice Chairman 3/05/09
---------------------------
Roger J. Taylor
/s/ AMADOR S. BUSTOS Director 3/05/09
---------------------------
Amador S. Bustos
/s/ DORENE C. DOMINGUEZ Director 3/05/09
---------------------------
Dorene C. Dominguez
/s/ ROBERT J. FOX Director 3/05/09
---------------------------
Robert J. Fox
/s/ WILLIAM A. ROBOTHAM Director 3/05/09
---------------------------
William A. Robotham
/s/ DAVID T. TABER Director 3/05/09
---------------------------
David T. Taber
/s/ STEPHEN H. WAKS Director 3/05/09
---------------------------
Stephen H. Waks
/s/ MICHAEL A. ZIEGLER Director 3/05/09
---------------------------
Michael A. Ziegler
97
EXHIBIT INDEX
Exhibit Number Description Page
--------------------------------------------------------------------------------
23.1 Consent of Perry-Smith LLP 99
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 100
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 101
32.1 Certification of American River Bankshares Chief
Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 102
98