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, 2005
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[ ] Transition report pursuant to Section 13 or 15 (d) of Securities Exchange
Act of 1934
Commission File No. 0-31525
AMERICAN RIVER BANKSHARES
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(Exact name of registrant as specified in its charter)
California 68-0352144
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
3100 Zinfandel Drive, Rancho Cordova, California 95670
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(Address of principal executive offices) (Zip code)
(916) 851-0123
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
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 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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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: $105,826,000.
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 7, 2006:
No par value Common Stock - 5,614,576 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
2006 annual meeting of shareholders.
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AMERICAN RIVER BANKSHARES
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2005
Part I. Page
Item 1. Business 4
Item 1A. Risk Factors 16
Item 1B. Unresolved Staff Comments 18
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Part II.
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 20
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 84
Item 9A. Controls and Procedures 84
Item 9B. Other Information 86
Part III.
Item 10. Directors and Executive Officers of the Registrant 86
Item 11. Executive Compensation 86
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 86
Item 13. Certain Relationships and Related Transactions 86
Item 14. Principal Accounting Fees and Services 86
Part IV.
Item 15. Exhibits and Financial Statement Schedules 87
Signatures 91
Exhibit Index 93
23.1 Consent of Independent Registered Accounting Firm 94
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 95
31.2 Certifications of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 96
32.1 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 97
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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, and Section 27A of the
Securities Act of 1933, as amended. 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) variances in the
actual versus projected growth in assets; (2) 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; (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; (10) changes in business conditions and inflation; (11)
changes in securities markets; (12) data processing problems; (13) a decline in
real estate values in the Company's operating market areas; (14) the effects of
terrorism, the threat of terrorism or the impact of the current military
conflict in Iraq and the conduct of the war on terrorism by the United States
and its allies, as well as other factors. 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 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 head
office located at 1545 River Park Drive, Suite 107, Sacramento, and branch
offices located at 520 Capitol Mall, Suite 100, Sacramento, 9750 Business Park
Drive, Sacramento, 10123 Fair Oaks Boulevard, Fair Oaks and 2240 Douglas
Boulevard, Roseville, and the convenience office (limited service office)
located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, and three full
service offices in Sonoma County located at 412 Center Street, Healdsburg, 8733
Lakewood Drive, Windsor, and 50 Santa Rosa Avenue, Suite 100, Santa Rosa,
operated under the name "North Coast Bank, a division of American River Bank."
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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 up to applicable legal limits. American River Bank does
not offer trust services or international banking services and does not plan to
do so in the near future. American River Bank's primary business is serving the
commercial banking needs of small to mid-sized businesses within those counties
listed above. American River Bank accepts checking and savings deposits, offers
money market deposit accounts and certificates of deposit, makes secured and
unsecured commercial, secured real estate, and other installment and term loans
and offers other customary banking services. American River Bank also conducts
lease financing for most types of business equipment, from computer software to
heavy earth-moving equipment.
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 2005, the Company conducted no significant activities other than
holding the shares of its subsidiaries. However, it is authorized, with the
prior approval of the Board of Governors of the Federal Reserve System (the
"Board of Governors"), the Company's principal regulator, to engage in a variety
of activities which are deemed closely related to the business of banking.
The common stock of the Company is registered under the Securities
Exchange Act of 1934, as amended, and is listed and traded on the Nasdaq
National Market under the symbol "AMRB."
At December 31, 2005, the Company had consolidated assets of $613
million, deposits of $501 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, 2005, these sources comprised 79.9%, 19.8%, and 0.3%, respectively, of the
Company's interest income.
American River Bank's deposits are not received from a single
depositor or group of affiliated depositors, the loss of any one of which would
have a materially adverse effect on the business of the Company. A material
portion of American River Bank's deposits are not concentrated within a single
industry or group of related industries.
As of December 31, 2005 and December 31, 2004, American River Bank
held $11,500,000 in certificates of deposit for the State of California. In
connection with these deposits, American River Bank is generally required to
pledge securities to secure such deposits, except for the first $100,000, which
are insured by the FDIC.
American River Bank competes with approximately 35 other banking or
savings institutions in Sacramento County and 27 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 1.4% and 1.4%,
respectively (based upon the most recent information made available by the FDIC
through June 30, 2005). North Coast Bank, a division of American River Bank,
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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 .7% (based upon the most recent information
made available by the FDIC through June 30, 2005). Bank of Amador, a division of
American River Bank competes with approximately 7 other banking or savings
institutions in its service areas and its market share of FDIC insured deposits
in the service area of Amador County was approximately 17.7% (based upon the
most recent information made available by the FDIC through June 30, 2005).
Employees
At December 31, 2005, 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 by the Company by
selecting the appropriate link.
Regulation and Supervision
General
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the qualification
requirements of the California Corporate Securities Law of 1968, as amended. The
Company is also subject to the periodic reporting requirements of Section 13 of
the Securities Exchange Act of 1934, as amended, which include, but are not
limited to, annual, quarterly and other current reports with the Securities and
Exchange Commission (the "SEC").
American River Bank is licensed by the California Commissioner of
Financial Institutions, its deposits are insured by the FDIC up to the
applicable legal limits, and it has chosen not to become a member of the Federal
Reserve System. Consequently, American River Bank is subject to the supervision
of, and is regularly examined by, the California Commissioner of Financial
Institutions and the FDIC. The supervision and regulation includes comprehensive
reviews of all major aspects of American River Bank's business and condition,
including its capital ratios, allowance for possible loan and lease losses and
other factors. However, no inference should be drawn that such authorities have
approved any such factors. American River Bankshares and American River Bank are
required to file reports with the Board of Governors, the California
Commissioner of Financial Institutions, and the FDIC and provide the additional
information that the Board of Governors, California Commissioner of Financial
Institutions, and FDIC may require.
American River Bankshares is a bank holding company within the meaning
of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company
Act"), and is registered as such with, and subject to the supervision of, the
Board of Governors. The Company is required to obtain the approval of the Board
of Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.
The Company, and any subsidiaries which it may acquire or organize, are
deemed to be "affiliates" within the meaning of that term as defined in the
Federal Reserve Act. This means, for example, that there are limitations (a) on
loans by American River Bank to affiliates, and (b) on investments by American
River Bank in affiliates' stock as collateral for loans to any borrower. The
Company and its subsidiaries are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
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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, 2005, American River Bankshares and American River Bank
were in compliance with the risk-weighted capital and leverage ratio guidelines.
Prompt Corrective Action
The Board of Governors and the FDIC have adopted regulations
implementing a system of prompt corrective action pursuant to Section 38 of the
Federal Deposit Insurance Act and Section 131 of the FDIC Improvement Act of
1991 ("FDICIA"). The regulations establish five capital categories with the
7
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.
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Additional Regulations
Under the FDICIA, the federal financial institution agencies have
adopted regulations which require institutions to establish and maintain
comprehensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and reporting
requirements. The FDICIA further generally prohibits an insured state bank from
engaging as a principal in any activity that is impermissible for a national
bank, absent FDIC determination that the activity would not pose a significant
risk to the Bank Insurance Fund, and that the bank is, and will continue to be,
within applicable capital standards.
The Federal Financial Institution Examination Counsel ("FFIEC")
utilizes the Uniform Financial Institutions Rating System ("UFIRS") commonly
referred to as "CAMELS" to classify and evaluate the soundness of financial
institutions. Bank examiners use the CAMELS measurements to evaluate capital
adequacy, asset quality, management, earnings, liquidity and sensitivity to
market risk. Effective January 1, 2005, bank holding companies such as the
Company, 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 new rating system reflects the change toward analysis of risk
management (as reflected in bank examination under the CAMELS measurements), in
addition to financial factors and the potential impact of nondepository
subsidiaries upon depository institution subsidiaries.
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital adequacy
in conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings. American
River Bank has a rating of "satisfactory" for CRA compliance.
Limitations on Dividends
The Company's ability to pay cash dividends is subject to restrictions
set forth in the California General Corporation Law. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from its subsidiaries. The payment of cash
dividends and/or management fees by American River Bank is subject to
restrictions set forth in the California Financial Code, as well as restrictions
established by the FDIC. See Item 5. "Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities" for more
information regarding cash dividends.
Competition
Competitive Data
American River Bank. At June 30, 2005, 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 164 offices in the
cities of Fair Oaks, Rancho Cordova, Roseville and Sacramento, California, where
American River Bank has its 6 Sacramento area offices, 56 offices in the cities
of Healdsburg, Santa Rosa and Windsor, California, where American River Bank has
its 3 Sonoma County offices, and 4 offices in the cities of Jackson, Pioneer and
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Ione, California, where American River Bank has its 3 Amador County offices.
Additionally, American River Bank competes with thrifts and, to a lesser extent,
credit unions, finance companies and other financial service providers for
deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which American River Bank is not authorized nor prepared to
offer currently. American River Bank has made arrangements with its
correspondent banks and with others to provide some of these services for its
customers. For borrowers requiring loans in excess of American River Bank's
legal lending limits, American River Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other community banks, retaining the portion of such loans which is within
its lending limits. As of December 31, 2005, American River Bank's aggregate
legal lending limits to a single borrower and such borrower's related parties
were $10,298,000 on an unsecured basis and $17,164,000 on a fully secured basis
based on capital and allowable reserves of $68,656,000.
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, 2005, there were 206
operating commercial and savings bank offices in Sacramento County with total
deposits of $18,586,086,000. This was an increase of $1,896,610,000 over the
June 30, 2004 balances. American River Bank held a total of $267,353,000 in
deposits, representing approximately 1.4% of total commercial and savings banks
deposits in Sacramento County as of June 30, 2005.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2005, there were 98
operating commercial and savings bank offices in Placer County with total
deposits of $5,113,151,000. This was an increase of $726,999,000 over the June
30, 2004 balances. American River Bank held a total of $71,353,000 in deposits,
representing approximately 1.4% of total commercial and savings banks deposits
in Placer County as of June 30, 2005.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2005, there were 123
operating commercial and savings bank offices in Sonoma County with total
deposits of $8,789,733,000. This was an increase of $397,392,000 over the June
30, 2004 balances. American River Bank held a total of $61,589,000 in deposits,
representing approximately 0.7% of total commercial and savings banks deposits
in Sonoma County as of June 30, 2005.
Based upon the most recent "Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks" report dated June 30, 2005, there were 13
operating commercial and savings bank offices in Amador County with total
deposits of $627,759,000. This was an increase of $33,612,000 over the June 30,
2004 balances. American River Bank held a total of $110,937,000 in deposits,
representing approximately 17.7% of total commercial and savings banks deposits
in Amador County as of June 30, 2005.
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 FDIC has not yet released final
regulations, but it is anticipated that the final regulations, when released,
will include, among other matters, increased premium assessments. Based upon the
current risk-based assessment rate schedule, American River Bank's current
capital ratios and levels of deposits, American River Bank does not anticipate a
significant increase in operating expenses due to changes in the assessment rate
applicable to it during 2006 from that in 2005. The Company currently believes
that changes, if any, will occur in the fourth quarter and, that such changes
are not anticipated to have a material impact on the results of operations for
the Company in 2006.
General Competitive Factors
In order to compete with the major financial institutions in their
primary service areas, American River Bank uses to the fullest extent possible
the flexibility which is accorded by their community banks status. This includes
an emphasis on specialized services, local promotional activity, and personal
contacts by their respective officers, directors and employees. They also seek
to provide special services and programs for individuals in their primary
service area who are employed in the agricultural, professional and business
fields, such as loans for equipment, furniture, tools of the trade or expansion
10
of practices or businesses. In the event there are customers whose loan demands
exceed their respective lending limits, they seek to arrange for such loans on a
participation basis with other financial institutions. They also assist those
customers requiring services not offered by either bank to obtain such services
from correspondent banks.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by a bank to obtain their
deposits and other borrowings and the interest rate received by a bank on loans
extended to customers and on securities held in a bank's portfolio comprise the
major portion of a bank's revenues.
The interest rate differentials of a bank, and therefore their
revenues, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on American River Bank is not
predictable.
Impact of Legislative and Regulatory Proposals
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank which has been in existence for at least five years.
The federal financial institution agencies, especially the Board of
Governors, have taken steps to increase the types of activities in which bank
holding companies can engage, and to make it easier to engage in such
activities.
In 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was signed into
law. The GLB Act eliminates most of the remaining depression-era "firewalls"
between banks, securities firms and insurance companies which was established by
The Banking Act of 1933, also known as the Glass-Steagall Act
("Glass-Steagall"). Glass-Steagall sought to insulate banks as depository
institutions from the perceived risks of securities dealing and underwriting,
and related activities. The GLB Act 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
11
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.
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.
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act
prohibits any insured financial institution such as American River Bank, from
providing correspondent accounts to foreign banks which do not have a physical
presence in any country (designated as "shell banks"), subject to certain
exceptions for regulated affiliates of foreign banks. Section 313(a) also
requires financial institutions to take reasonable steps to ensure that foreign
bank correspondent accounts are not being used to indirectly provide banking
services to foreign shell banks, and Section 319(b) requires financial
institutions to maintain records of the owners and agent for service of process
of any such foreign banks with whom correspondent accounts have been
established.
Effective July 23, 2002, Section 312 of the Patriot Act created a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
The Company and American River Bank are not currently aware of any
account relationships between American River Bank and any foreign bank or other
person or entity as described above under Sections 313(a) or 312 of the Patriot
Act. The terrorist attacks on September 11, 2001 have realigned national
security priorities of the United States and it is reasonable to anticipate that
the United States Congress may enact additional legislation in the future to
combat terrorism including modifications to existing laws such as the Patriot
Act to expand powers as deemed necessary. Certain surveillance provisions of the
12
Patriot Act were scheduled to expire on December 31, 2005, and actions to
restrict the use of the Patriot Act surveillance provisions have been filed by
the ACLU and other organizations. Congress recently extended the expiration date
to permit the evaluation of changes to the Patriot Act. It is not clear whether
the provisions that were scheduled to expire will expire, or be replaced or
superseded by alternative provisions. The effects which the Patriot Act and any
additional legislation enacted by Congress may have upon financial institutions
is uncertain; however, such legislation could increase compliance costs and
thereby potentially may have an adverse effect upon the Company's results of
operations.
Certain legislative and regulatory proposals that could affect American
River Bankshares and American River Bank and the banking business in general are
periodically introduced before the United States Congress, the California State
Legislature and Federal and state government agencies. It is not known to what
extent, if any, legislative proposals will be enacted and what effect such
legislation would have on the structure, regulation and competitive
relationships of financial institutions. It is likely, however, that such
legislation could subject American River Bankshares or American River Bank to
increased regulation, disclosure and reporting requirements, competition, and
costs of doing business.
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002 (the "Act") which responds to recent issues in
corporate governance and accountability. Among other matters, key provisions of
the Act and rules promulgated by the SEC pursuant to the Act include the
following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by
the CEO and CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
o Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, and disclosure of any amendments
or waivers to such code of ethics. The disclosure obligation became
effective for fiscal years ending on or after July 15, 2003. The
ethics code must contain written standards that are reasonably
designed to deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
o Full, fair, accurate, timely, and understandable disclosure in
reports and documents that a registrant files with, or submits
to, the Securities and Exchange Commission and in other public
communications made by the registrant;
o Compliance with applicable governmental laws, rules and
regulations;
o The prompt internal reporting to an appropriate person or persons
identified in the code of violations of the code; and
o Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an
"audit committee financial expert." The disclosure obligation became
effective for fiscal years ending on or after July 15, 2003. To
qualify as an "audit committee financial expert," a person must have:
o An understanding of generally accepted accounting principles and
financial statements;
o The ability to assess the general application of such principles
in connection with the accounting for estimates, accruals and
reserves;
13
o Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth
and complexity of issues that can reasonably be expected to be
raised by the registrant's financial statements, or experience
actively supervising one or more persons engaged in such
activities;
o An understanding of internal controls and procedures for
financial reporting; and
o An understanding of audit committee functions.
A person must have acquired the above listed attributes to be
deemed to qualify as an "audit committee financial expert" through any one
or more of the following:
o Education and experience as a principal financial officer,
principal accounting officer, controller, public accountant or
auditor or experience in one or more positions that involve the
performance of similar functions;
o Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant,
auditor or person performing similar functions;
o Experience overseeing or assessing the performance of companies
or public accountants with respect to the preparation, auditing
or evaluation of financial statements; or
o Other relevant experience.
The rule contains a specific safe harbor provision to clarify
that the designation of a person as an "audit committee financial expert"
does not cause that person to be deemed to be an "expert" for any purpose
under Section 11 of the Securities Act of 1933, as amended, or impose on
such person any duties, obligations or liability greater than the duties,
obligations and liability imposed on such person as a member of the audit
committee and the board of directors, absent such designation. Such a
designation also does not affect the duties, obligations or liability of
any other member of the audit committee or board of directors.
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, another
board committee or the entire board of directors certain material
violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to
within 2 business days of the date a transaction triggers an
obligation to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to 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 Securities and Exchange Commission.
o Rules requiring national securities exchanges and national securities
associations to prohibit the listing of any security whose issuer does
not meet audit committee standards established pursuant to the Act
including:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's
independent accountant;
o Responsibility for handling complaints regarding the issuer's
accounting practices;
o Authority to engage advisers; and
o Funding requirements for the independent auditor and outside
advisers engaged by the audit committee.
On November 4, 2003, the Securities and Exchange Commission adopted
changes to the standards for the listing of issuer securities by the New York
Stock Exchange and Nasdaq Stock Market. The revised standards for listing
conform to and supplement Rule 10A-3 under the Securities Exchange Act of 1934,
as amended, which the Securities and Exchange Commission adopted in April 2003
pursuant to the Act.
The Company's securities are listed on the Nasdaq Stock Market.
Consequently, in addition to the rules promulgated by the Securities and
Exchange Commission pursuant to the Act, the Company must also comply with
revised listing standards applicable to Nasdaq listed companies. Generally,
14
listed companies were required to comply with the revised listing standards by
the first annual meeting of shareholders following January 15, 2004. The revised
Nasdaq listing standards applicable to the Company include the following:
o A majority of directors of a listed company must be "independent",
which excludes:
o Any director who is, or at any time in the past three years was,
employed by a listed company, its parent or a subsidiary;
o Any director or any family member who received payments in excess
of $60,000 in the current year or prior three years from a listed
company, its parent or a subsidiary;
o Any director whose family member is employed or during the last
three years was employed as an executive officer of a listed
company, its parent or a subsidiary;
o Any director or any family member who is a partner, controlling
shareholder or executive officer of an organization to which a
listed company made payments or from which a listed company
received payments, for services or property, in the current year
or prior three years in excess of the greater of $200,000 or 5%
of the recipient's consolidated gross revenues in the year of
payment;
o Any director or any family member who is employed as an executive
officer of another organization where during the current year or
prior three years an executive officer of a listed company served
on the compensation committee of such organization; and
o Any director or any family member who is a partner of the outside
auditor of a listed company or was a partner or employee of the
listed company's auditor and worked on the company's audit in the
prior three years.
o Independent directors of a listed company must meet alone in executive
sessions at least two times annually.
o Listed companies must certify adoption of a resolution or written
charter dealing with nominations of directors and select nominees for
election as directors either by determination of a majority of
independent directors or by a nominating committee consisting solely of
independent directors, with certain exceptions.
o Compensation of a listed company's chief executive officer must be
determined either by a majority of independent directors or by a
compensation committee consisting solely of independent directors, with
certain exceptions.
o The audit committee of a listed company, subject to certain exceptions,
must comply with requirements that include:
o The committee be comprised of at least three independent
directors who have not participated in the preparation of
financial statements for the company, its parent or subsidiaries
during the last three years;
o Each director must be able to read and understand financial
statements;
o At least one director must meet the "financial sophistication"
criteria which the company must certify;
o The committee must adopt a written charter; and
o The committee is responsible for the review and approval of all
related-party transactions, except those approved by another
board committee comprised of independent directors.
o The adoption or amendment of any equity compensation arrangement after
June 30, 2003, such as a stock option plan, requires shareholder
approval, subject to certain exemptions.
o A code of conduct had to be adopted by May 4, 2004 that (i) complies
with the code of ethics requirements of the Act and the Nasdaq
Marketplace Rules; (ii) covers all directors, officers and employees;
(iii) includes an enforcement mechanism; and (iv) permits only the
board of directors to grant waivers from or changes to the code of
conduct affecting directors and executive officers and requires prompt
disclosure thereof on a Form 8-K filing with the Securities and
Exchange Commission.
The effect of the Act upon the Company is uncertain; however, 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 Securities and Exchange Commission, Nasdaq and other
regulatory agencies having jurisdiction over the Company or the issuance and
listing of its securities. The Company does not currently anticipate, however,
that compliance with the Act and such rules and regulations will have a material
adverse effect upon its financial position or results of its operations or its
cash flows.
15
On September 28, 2002, California Governor Gray Davis signed into law
the California Corporate Disclosure Act (the "CCD Act"), which became effective
January 1, 2003. The CCD Act requires publicly traded corporations incorporated
or qualified to do business in California to disclose information about their
past history, auditors, directors and officers. The CCD Act requires the Company
to disclose:
o The name of the a company's independent auditor and a description
of services, if any, performed for the company during the
previous 24 months;
o The annual compensation paid to each director and executive
officer, including stock or stock options not otherwise available
to other company employees;
o A description of any loans made to a director at a "preferential"
loan rate during the previous 24 months, including the amount and
terms of the loans;
o Whether any bankruptcy was filed by a company or any of its
directors or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been
convicted of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any
securities or banking provisions of California law during the
previous 10 years for which the company was found liable or fined
more than $10,000.
The Company does not currently anticipate that compliance with the CCD
Act will have a material adverse effect upon its financial position or results
of its operations or its cash flows.
The Check Clearing for the 21st Century Act (commonly referred to as
"Check 21") was signed into law in 2003 and became effective on October 28,
2004. The law facilitates check truncation by creating a new negotiable
instrument called a "substitute check" which permits banks to truncate original
checks, to process check information electronically and to deliver "substitute
checks" to banks that want to continue receiving paper checks. Check 21 is
intended to reduce the dependence of the check payment system on physical
transportation networks (which can be disrupted by terrorist attacks of the type
which occurred on September 11, 2001) and to streamline the collection and
return process. The law does not require banks to accept checks in electronic
form nor does it require banks to use the new authority granted by the Act to
create "substitute checks." The Company does not currently anticipate that
compliance with the Act will have a material effect upon its financial position
or results of its operations or its cash flows.
In addition to legislative changes, the various Federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such regulations may have on American River Bankshares or
American River Bank.
Item 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," 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.
16
o American River Bankshares' subsidiary, American River Bank, faces
strong competition from financial service companies and other companies
that offer banking services, which can hurt American River Bankshares'
business.
The Company's subsidiary, American River Bank, conducts banking
operations principally in Northern California. Increased competition in American
River Bank's market 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
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 Changes in economic conditions could result in an economic downturn in
Northern California which could adversely affect American River
Bankshares' business.
The Company's business is directly affected by factors such as
economic, political and market conditions, broad trends in industry and finance,
legislative and regulatory changes, changes in government monetary and fiscal
policies and inflation, all of which are beyond the Company's control. A
deterioration in economic conditions locally, regionally or nationally including
as the result of terrorist activities within and outside California could result
in an economic downturn in Northern California and trigger the following
consequences, any of which could 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; and
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.
o American River Bankshares has a concentration risk in real estate
related loans.
At December 31, 2005, approximately 71.5% 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. A substantial decline in real estate values in the
Company's primary market areas could occur as a result of an economic downturn,
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. Those events could necessitate a significant increase in the provision
for loan and lease losses which could adversely affect the Company's results of
operations, financial condition, and future prospects.
17
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 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
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 it will not further increase the allowance for loan
and lease losses or that regulators will not require it to increase this
allowance. Either of these occurrences could materially and adversely affect the
Company's earnings.
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 is 91 months expiring on May 6, 2013. The
premises consist of 7,378 square feet on the fourth floor. The space is leased
from PGOCC, LLC.
American River Bank's head office is located at 1545 River Park Drive,
Suite 107, Sacramento, California, in a modern, five floor building which has
offstreet parking for its clients. American River Bank leases premises in the
building from EOP-Point West, L.L.C. The lease term is ten years and expires on
March 31, 2010. The premises consist of 9,498 square feet on the ground floor.
American River Bank leases premises at 9750 Business Park Drive,
Sacramento, California. The office space is leased from Bradshaw Plaza Group,
which is owned in part by Charles D. Fite, a director of the Company. The lease
term is seven years and expires on November 30, 2006. The premises consist of
4,590 square feet on the ground floor.
American River Bank leases premises at 10123 Fair Oaks Boulevard, Fair
Oaks, California. The office space is leased from Marjorie Taylor, a former
director of the Company. The lease term is 12 years and expires on March 1,
2009. The premises consist of 2,380 square feet on the ground floor.
18
American River Bank leases premises at 2240 Douglas Boulevard,
Roseville, California. The office space is leased from Twin Tree Land Company.
The lease term is 10 years and expires on December 18, 2006. The premises
consist of 3,790 square feet on the ground floor.
American River Bank leases premises at 520 Capitol Mall, Sacramento,
California. The office space is leased from 520 Capitol Mall, Inc. The lease
term is 10 years and expires on June 1, 2014. The premises consist of 4,010
square feet on the ground floor.
North Coast Bank, a division of American River Bank, leases premises at
8733 Lakewood Drive, Windsor, California. The office space is leased from R. and
R. Partners. The two-year lease expired on December 31, 2005, management
negotiated a one-year extension expiring on December 31, 2006. The premises
consist of 2,200 square feet on the ground floor.
North Coast Bank, a division of American River Bank, owns premises at
412 Center Street, Healdsburg, California. The premises were purchased June 1,
1993. The purchase price for the land and building was $343,849. The building
consists of 2,620 square feet. The land consists of 10,835 square feet.
North Coast Bank, a division of American River Bank, leases premises at
50 Santa Rosa Avenue, Santa Rosa, California. The office space is leased from
HSG Trust. The lease term is ten (10) years and expires on January 31, 2009. The
premises consist of 7,072 square feet on the ground floor.
Bank of Amador, a division of American River Bank, leases premises at
422 Sutter Street, Jackson, California. The office space is leased from the
United States Postal Service. The lease term is five (5) years and expires on
May 31, 2006. The premises consist of 6,400 square feet on the ground floor and
second floor.
Bank of Amador, a division of American River Bank, leases land at 26675
Tiger Creek Road, Pioneer, California. The Company owns the 2,460 square foot
modular building and leases the land from Soaring Eagle Inc. The land lease term
is five (5) years and expires on May 31, 2007.
Bank of Amador, a division of American River Bank, owns premises at 66
Main Street, Ione, California. The premises were purchased April 1, 1995. The
purchase price for the land and building was $167,500. The building consists of
2,576 square feet. The land consists of 9,700 square feet.
Bank of Amador, a division of American River Bank, leases the parking
lot at 276 North Main Street, Jackson, California. The parking lot is leased
from Wilhelmina Petkovich. The lease term is three (3) years and expires on
December 31, 2007.
The leases on the premises located at 1545 River Park Drive, 9750
Business Park Drive, 2240 Douglas Boulevard, 50 Santa Rosa Avenue, and 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 report.
Item 3. Legal Proceedings.
There are no material legal proceedings adverse to the Company and its
subsidiaries to which any director, officer, affiliate of the Company, or 5%
shareholder of the Company or its subsidiaries, or any associate of any such
director, officer, affiliate or 5% shareholder of the Company or its
subsidiaries are a party, and none of the above persons has a material interest
adverse to the Company or its subsidiaries.
From time to time, the Company and/or its subsidiaries is a party to
claims and legal proceedings arising in the ordinary course of business. The
Company's management is not aware of any material pending legal proceedings to
which either it or its subsidiaries may be a party or has recently been a party,
which will have a material adverse effect on the financial condition or results
of operations of the Company or its subsidiaries, taken as a whole.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the shareholders during
the fourth quarter of 2005.
19
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market Information
The Company's common stock began trading on the NASDAQ National Stock
Market ("NASDAQ") under the symbol "AMRB" on October 26, 2000. The following
table shows the high and the low prices for the common stock, for each quarter,
as reported by NASDAQ. The prices have been adjusted to reflect 5% stock
dividends declared in 2005 and in 2004.
===================================================
2005 High Low
---------------------------------------------------
First quarter $22.38 $19.85
Second quarter 22.62 19.76
Third quarter 23.10 19.91
Fourth quarter 22.89 21.05
2004 High Low
---------------------------------------------------
First quarter $19.05 $17.24
Second quarter 20.18 18.03
Third quarter 21.21 17.69
Fourth quarter 21.77 19.41
===================================================
The closing price for the Company's common stock on March 7, 2006 was
$27.31.
Holders
As of March 3, 2006, there were approximately 2,823 shareholders of
record of the Company's common stock.
Dividends
The Company has paid quarterly cash dividends on its common stock since
the first quarter of 2004; prior to that, the Company paid cash dividends twice
a year since 1992. It is currently the intention of the Board of Directors of
the Company to continue payment of cash dividends on a quarterly basis. In 2005
and 2004, the Company declared cash dividends in the amount of $.54 and $.42,
respectively, per common share. The amounts have been adjusted to reflect 5%
stock dividends declared in 2005 and in 2004. 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
20
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 Federal Deposit
Insurance Corporation Improvement Act of 1991.
As of December 31, 2005, American River Bank had $2.2 million in
retained earnings available for dividend payments to the Company, which in turn
could be paid out to shareholders of the Company.
Stock Repurchases
On September 20, 2001, the Board of Directors of the Company authorized
a stock repurchase program which calls for the repurchase of up to five percent
(5%) annually of the Company's outstanding shares of common stock. Each year the
Company may repurchase up to 5% of the shares outstanding (adjusted for stock
splits or stock dividends). The 198,698 shares reported in the table as shares
that may be repurchased under the plan represent shares eligible for the
calendar year 2005. The repurchases are to be made from time to time in the open
market as conditions allow and will be structured to comply with Commission Rule
10b-18. 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 this repurchase program at any time for any
reason. The following table lists shares repurchased during the quarter and the
maximum amount available to repurchase under the repurchase plan.
----------------------------------------------------------------------------------------------------------------------------
Period (a) (b) (c) (d)
Total Number 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 11,970 $ 22.00 11,970 226,313 shares
October 31, 2005
Month #2
November 1 through 18,375 $ 21.84 18,375 207,938 shares
November 30, 2005
Month #3
December 1 through 9,240 $ 22.08 9,240 198,698 shares
December 31, 2005
----------------------------------------------------------------------------------------------------------------------------
Total 39,585 $ 21.94 39,585
----------------------------------------------------------------------------------------------------------------------------
During 2005, the Company repurchased 80,325 shares; during 2004, the
Company repurchased 10,253 shares; during 2003, the Company repurchased 1,654
shares and in 2002, the Company repurchased 72,353 shares under the repurchase
plan.
21
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
pooling 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)
2005 2004 2003 2002 2001
STATEMENT OF OPERATIONS DATA
Net interest income $ 26,462 $ 19,418 $ 16,866 $ 15,073 $ 14,577
Provision for loan and lease losses 322 895 946 644 791
Other income 2,329 2,395 2,253 2,323 2,365
Other expenses 13,493 11,713 10,372 9,389 9,502
Income before income taxes 14,976 9,205 7,801 7,363 6,649
Income taxes 5,792 3,378 3,060 2,904 2,612
Net income $ 9,184 $ 5,827 $ 4,741 $ 4,459 $ 4,037
Earnings per share - basic $ 1.63 $ 1.24 $ 1.08 $ 1.02 $ 0.92
Earnings per share - diluted 1.60 1.18 1.00 0.95 0.86
Cash dividends per share 0.54 0.42 0.27 0.21 0.16
Book value per share 11.20 10.57 7.93 7.31 6.39
Tangible book value per share 7.98 7.29 7.92 7.29 6.37
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $ 612,763 $ 586,666 $ 397,393 $ 342,563 $ 286,559
Loans and leases, net 365,571 352,467 262,464 229,008 195,026
Deposits 500,706 475,387 322,507 275,796 254,888
Shareholders' equity 62,746 58,990 35,457 31,726 27,942
Average balance sheet amounts:
Assets $ 596,670 $ 439,012 $ 363,175 $ 309,574 $ 279,049
Loans and leases 360,319 277,647 248,342 209,133 202,624
Earning assets 537,031 400,265 333,800 280,623 255,904
Deposits 494,905 357,420 279,883 263,323 246,960
Shareholders' equity 60,641 39,163 33,461 29,509 26,316
SELECTED RATIOS:
For the year:
Return on average equity 15.14% 14.88% 14.17% 15.11% 15.34%
Return on average assets 1.54% 1.33% 1.31% 1.44% 1.45%
Efficiency ratio * 45.16% 53.12% 53.73% 53.43% 55.37%
Net interest margin * 4.98% 4.90% 5.10% 5.43% 5.76%
Net chargeoffs to average loans & leases 0.04% 0.08% 0.08% 0.03% 0.31%
At December 31:
Average equity to average assets 10.16% 8.92% 9.21% 9.53% 9.43%
Leverage capital ratio 7.66% 8.35% 8.96% 8.93% 9.49%
Allowance for loan and leases losses to
total loans and leases 1.53% 1.54% 1.48% 1.38% 1.32%
* fully taxable equivalent
22
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, 2005, 2004, and 2003.
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, and Section 27A of the
Securities Act of 1933, as amended. 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) variances in the
actual versus projected growth in assets; (2) 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; (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; (10) changes in business conditions and inflation; (11)
changes in securities markets; (12) data processing problems; (13) a decline in
real estate values in the Company's operating market areas; (14) the effects of
terrorism, the threat of terrorism or the impact of the current military
conflict in Iraq and the conduct of the war on terrorism by the United States
and its allies, as well as other factors. 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 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.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of the credit
loss risk in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accounting Standards
("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be
accrued when they are probable of occurring and estimable; and (2) SFAS No. 114,
23
"Accounting by Creditors for Impairment of a Loan," which requires that losses
be accrued based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The allowance for loan and lease losses is determined based upon
estimates that can and do change when the actual risk or loss events occur. The
analysis of the allowance uses an historical loss view as an indicator of future
losses and as a result could differ from the loss incurred in the future.
However, since our analysis of risk and loss potential is updated regularly, the
errors that might otherwise occur are mitigated. The use of factors and ranges
is inherently subjective and our actual losses could be greater or less than the
estimates. The Company's goal is to maintain an allowance for loan and lease
losses that is between the lower and upper ranges as described above. If the
allowance for loan and lease losses falls below the lower range of adequate
reserves (by reason of loan and lease growth, actual losses, the effect of
changes in risk ratings, or some combination of these factors), the Company has
a strategy for supplementing the allowance for loan and lease losses, over the
short term, so that it would again fall within the lower and upper acceptable
ranges. For further information regarding our allowance for loan and lease
losses, see "Allowance for Loan and Lease Losses Activity" discussion later in
this Item 7.
Stock-Based Compensation
The Company accounts for its stock-based compensation under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Since the Company's stock option plan provides for the issuance
of options at a price of no less than the fair market value at the date of the
grant, no compensation expense is recognized in the financial statements unless
the options are modified after the grant date.
In December 2004, the Financial Accounting Standards Board issued
Statement Number 123 (revised 2004) ("FAS 123 (R)"), Share-Based Payments. FAS
123 (R) requires all entities to recognize compensation expense in an amount
equal to the fair value of share-based payments such as stock options granted to
employees. The Company is required to apply FAS 123 (R) on a modified
prospective method, beginning on January 1, 2006. Under this method, the Company
is required to record compensation expense (as previous awards continue to vest)
for the unvested portion of previously granted awards that remain outstanding at
the date of adoption. Management believes that the effect of FAS 123 (R) will be
consistent with its pro forma disclosures included in Note 2 to the Consolidated
Financial Statements in Item 8 - Financial Statements and Supplementary Data.
The fair value of each option is estimated on the date of grant and amortized
over the service period using an option pricing model. Critical assumptions that
affect the estimated fair value of each option include expected stock price
volatility, dividend yields, option life and forfeiture rates and the risk-free
interest rate.
Goodwill
Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise or the assumption of net
liabilities in an acquisition of branches constituting a business may give rise
to goodwill. Goodwill represents the excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities assumed
in transactions accounted for under the purchase method of accounting. The value
of goodwill is ultimately derived from the Company's ability to generate net
earnings after the acquisition. A decline in net earnings could be indicative of
a decline in the fair value of goodwill and result in impairment. For that
reason, goodwill is assessed for impairment at a reporting unit level at least
annually following the year of acquisition. The Company performed an evaluation
of the goodwill, recorded as a result of the Bank of Amador acquisition, during
the fourth quarter of 2005 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.
Overview
The Company recorded its 88th consecutive profitable quarter for the
quarter ended December 31, 2005. Net income in 2005 increased 57.6% to
$9,184,000 versus $5,827,000 in 2004. Diluted earnings per share for 2005 and
2004 were $1.60 and $1.18, respectively. For 2005, the Company realized a return
on average equity of 15.14% and a return on average assets of 1.54%, as compared
to 14.88% and 1.33% for 2004. During December of 2004, the Company completed a
24
merger with Bank of Amador, therefore, 2005 includes the first full year of
results from Bank of Amador.
Net income for 2004 was $1,086,000 (22.9%) higher than the $4,741,000
recorded in 2003. Diluted earnings per share in 2003 were $1.00, return on
average assets was 1.31% and return on average equity was 14.17%. All share and
per share data for 2005, 2004 and 2003 have been adjusted for a three-for-two
stock split distributed on October 31, 2003 and 5 percent stock dividends
distributed on December 23, 2005 and January 28, 2005.
Table One below provides a summary of the components of net income for the years
indicated:
Table One: Components of Net Income
--------------------------------------------------------------------------------
For the twelve months ended:
(In thousands, except percentages) 2005 2004 2003
---------- ---------- ----------
Net interest income* $ 26,767 $ 19,602 $ 17,035
Provision for loan and lease losses (322) (895) (946)
Noninterest income 2,329 2,395 2,253
Noninterest expense (13,493) (11,713) (10,372)
Provision for income taxes (5,792) (3,378) (3,060)
Tax equivalent adjustment (305) (184) (169)
---------- ---------- ----------
Net income $ 9,184 $ 5,827 $ 4,741
========== ========== ==========
================================================================================
Average total assets $ 596,670 $ 439,012 $ 363,175
Net income as a percentage
of average total assets 1.54% 1.33% 1.31%
--------------------------------------------------------------------------------
* Fully taxable equivalent basis (FTE)
During 2005, total assets of the Company increased $26,097,000 (4.4%) to a total
of $612,763,000 at year-end. At December 31, 2005, net loans totaled
$365,571,000, up $13,104,000 (3.7%) from the ending balances on December 31,
2004. Deposit growth for the year was 5.3% resulting in ending deposit balances
of $500,706,000. The Company ended 2005 with a Tier 1 capital ratio of 10.6% and
a total risk-based capital ratio of 11.9%.
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans, securities, federal funds sold and
investments in time deposits) over the interest paid on deposits and borrowed
funds. Net interest margin is net interest income expressed as a percentage of
average earning assets.
The Company's fully taxable equivalent net interest margin was 4.98% in
2005 and 4.90% in 2004. The fully taxable equivalent net interest margin in
dollars was up $7,165,000 (36.6%) in 2005 over 2004.
The fully taxable equivalent interest income component increased from
$22,820,000 in 2004 to $33,518,000 in 2005, representing a 46.9% increase. The
increase in the fully taxable equivalent interest income for 2005 compared to
the same period in 2004 is broken down by rate (up $3,036,000) and volume (up
$7,662,000). The rate increase can be attributed to increases implemented by the
Company during 2004 and 2005 in response to the Federal Reserve Board (the
"FRB") increases in the Federal funds and Discount rates. Increases by the FRB
have resulted in thirteen 25 basis point increases since June 2004. The overall
increasing interest rate environment over the past year and a half has resulted
in a 54 basis point increase in the yield on average earning assets from 5.70%
for 2004 to 6.24% for 2005. The volume increase was the result of a 34.2%
increase in average earning assets. Average loan balances were up $82,672,000
(29.8%) in 2005 over the balances in 2004, while average investment securities
balances were up $53,499,000 (46.7%). The increase in average loans and
25
investments is the result of the Bank of Amador acquisition which was completed
in December 2004, and a concentrated focus on business lending, the demand for
commercial real estate and the effects of a favorable local market.
The fully taxable equivalent interest income component increased from
$19,937,000 in 2003 to $22,820,000 in 2004, representing a 14.5% increase. The
increase in the fully taxable equivalent interest income for 2004 compared to
the same period in 2003 is broken down by rate (down $562,000) and volume (up
$3,445,000). The rate decrease can be attributed to decreases implemented by the
Company during 2001 and 2002 in response to the Federal Reserve Board (the
"FRB") decreases in the Federal funds and Discount rates. Recent increases by
the FRB have resulted in five 25 basis point increases since June 2004; however,
these recent increases have had only a minor effect. The overall lower interest
rate environment over the past three years has resulted in a 27 basis point drop
in the yield on average earning assets from 5.97% for 2003 to 5.70% for 2004.
The volume increase was the result of a 19.9% increase in average earning
assets. Average loan balances were up $29,305,000 (11.8%) in 2004 over the
balances in 2003, while average investment securities balances were up
$39,566,000 (52.7%). The increase in average loans is the result of a
concentrated focus on business lending, the demand for commercial real estate
and the effects of a favorable local market. The increase in investment
securities is primarily due to the Company investing its excess funds in
investment securities. The excess funds were created by an increase in deposit
balances and other borrowings. The Bank of Amador acquisition was completed in
December 2004 and had a minimal impact on the average balances during 2004.
Interest expense increased $3,533,000 (109.8%) in 2005 compared to
2004. The average balances on interest bearing liabilities were $91,680,000
(32.5%) higher in 2005 versus 2004. The higher balances accounted for a
$1,028,000 increase in interest expense. The higher balances were due to the
Bank of Amador acquisition and internal growth of average interest bearing
deposits. The increase in rates paid on interest bearing liabilities resulted in
an increase of $2,505,000 in interest expense. The rates paid on interest
bearing liabilities increased 67 basis points on a year-over-year basis and was
a result of the higher interest rate environment over the past year and a half;
Interest expense increased $316,000 (10.9%) in 2004 compared to 2003.
The average balances on interest bearing liabilities were $45,734,000 (19.4%)
higher in 2004 versus 2003. The higher balances accounted for a $452,000
increase in interest expense. The higher balances were due to internal growth of
average interest bearing deposits ($33,991,000) and an increase in other
borrowings ($11,743,000). The decrease in rates paid on interest bearing
liabilities partially offset the increased expense due to the volume growth. The
decrease in rates paid on interest bearing liabilities was a result of the lower
interest rate environment over the past three years. Although rates increased
over the last few months of 2004, the rates paid on interest bearing liabilities
decreased nine basis points on a year-over-year basis and accounted for a
decrease in interest expense of $136,000 for the period.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and past trends
of the Company's interest income and expenses. Table Two provides an analysis of
net interest margin on earning assets setting forth average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
26
Table Two: Analysis of Net Interest Margin on Earning Assets
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2005 2004 2003
-------------------------------- -------------------------------- ---------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg Avg Avg
(In thousands, except Balance Interest Yield Balance Interest Yield Balance Interest Yield
percentages) --------- --------- --------- --------- --------- --------- --------- --------- ---------
Assets:
Earning assets
Loans and leases (1) $ 360,319 $ 26,536 7.36% $ 277,647 $ 18,115 6.52% $ 248,342 $ 16,744 6.74%
Taxable investment
securities 141,855 5,436 3.83% 101,728 3,751 3.69% 64,159 2,312 3.60%
Tax-exempt investment
securities (2) 25,705 1,228 4.78% 12,324 713 5.79% 10,519 637 6.06%
Corporate stock 559 40 7.16% 568 40 7.04% 376 28 7.45%
Federal funds sold 2,826 90 3.18% 2,711 67 2.47% 5,595 48 0.86%
Investments in time
deposits 5,767 188 3.26% 5,287 134 2.53% 4,809 168 3.49%
--------- --------- --------- --------- --------- ---------
Total earning assets 537,031 33,518 6.24% 400,265 22,820 5.70% 333,800 19,937 5.97%
--------- --------- ---------
Cash & due from banks 29,566 30,263 24,914
Other assets 35,760 12,836 7,993
Allowance for loan &
lease losses (5,687) (4,352) (3,532)
--------- --------- ---------
$ 596,670 $ 439,012 $ 363,175
========= ========= =========
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
NOW & MMDA $ 185,634 2,247 1.21% $ 146,041 1,099 0.75% $ 120,772 912 0.76%
Savings 39,102 150 0.38% 24,527 56 0.23% 16,714 35 0.21%
Time deposits 113,719 3,249 2.86% 72,987 1,356 1.86% 72,078 1,443 2.00%
Other borrowings 35,003 1,105 3.16% 38,223 707 1.85% 26,480 512 1.93%
--------- --------- --------- --------- --------- ---------
Total interest bearing
liabilities 373,458 6,751 1.81% 281,778 3,218 1.14% 236,044 2,902 1.23%
--------- --------- ---------
Demand deposits 156,450 113,865 90,685
Other liabilities 6,121 4,206 2,985
--------- --------- ---------
Total liabilities 536,029 399,849 329,714
Shareholders' equity 60,641 39,163 33,461
--------- --------- ---------
$ 596,670 $ 439,012 $ 363,175
========= ========= =========
Net interest income &
margin (3) $ 26,767 4.98% $ 19,602 4.90% $ 17,035 5.10%
========= ========= ========= ========= ========= =========
(1) Loan and lease interest includes loan and lease fees of $1,091,000,
$741,000 and $814,000 in 2005, 2004 and 2003, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
27
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
----------------------------------------------------------------------------------------------
Year ended December 31, 2005 over 2004 (dollars in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans and leases (1)(2) $ 5,394 $ 3,027 $ 8,421
Taxable investment securities 1,480 205 1,685
Tax-exempt investment securities (3) 774 (259) 515
Corporate stock (1) 1 --
Federal funds sold & other 3 20 23
Investment in time deposits 12 42 54
---------- ---------- ----------
Total 7,662 3,036 10,698
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 298 850 1,148
Savings deposits 33 61 94
Time deposits 757 1,136 1,893
Other borrowings (60) 458 398
---------- ---------- ----------
Total 1,028 2,505 3,533
---------- ---------- ----------
Interest differential $ 6,634 $ 531 $ 7,165
========== ========== ==========
Year Ended December 31, 2004 over 2003 (in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
---------- ---------- ----------
Net loans and leases (1)(2) $ 1,976 $ (605) $ 1,371
Taxable investment securities 1,354 85 1,439
Tax-exempt investment securities (3) 109 (33) 76
Corporate stock 14 (2) 12
Federal funds sold & other (25) 44 19
Investment in time deposits 17 (51) (34)
---------- ---------- ----------
Total 3,445 (562) 2,883
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits 191 (4) 187
Savings deposits 16 5 21
Time deposits 18 (105) (87)
Other borrowings 227 (32) 195
---------- ---------- ----------
Total 452 (136) 316
---------- ---------- ----------
Interest differential $ 2,993 $ (426) $ 2,567
========== ========== ==========
(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 $1,091,000, $741,000 and $814,000 for the years
ended December 31, 2005, 2004 and 2003, respectively, have been included in
the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company provided $322,000 for loan and lease losses in 2005 as
compared to $895,000 for 2004. Net loan charge-offs for 2005 were $139,000 as
compared to $209,000 in 2004. In 2005, net loan charge-offs as a percentage of
average loans outstanding were .04% compared to .08% in 2004. In 2003, the
Company provided $946,000 for loan and lease losses and net charge-offs were
$194,000. For further information please see "Allowance for Loan and Lease
Losses Activity."
28
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,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Service charges on deposit accounts $ 672 $ 551 $ 534
Gain on life insurance death benefit -- 553 --
Accounts receivable servicing fees 356 316 247
Merchant fee income 509 393 357
Fees from lease brokerage services -- 9 381
Income from residential lending division 283 187 366
Gain on sale of available-for-sale securities 48 -- 33
Other 461 386 335
---------- ---------- ----------
$ 2,329 $ 2,395 $ 2,253
========== ========== ==========
Noninterest income was down $66,000 (2.8%) to $2,329,000 in 2005 from
the 2004 level. A portion of this decrease represents the tax-free net proceeds
from a life insurance policy ($553,000) the Company received in June of 2004 as
a result of the death of a former executive officer. Without the life insurance
proceeds received in 2004, noninterest income for 2005 would have shown an
increase of $487,000. The increase in noninterest income can be attributed to
increases in fees from service charges (up $121,000 or 22.0%), increases in fees
from merchant income (up $116,000 or 29.5%), and an increase in residential
lending fee income (up $96,000 or 51.3%). The increase in service charges and
merchant fee income is the direct result of an increased number of deposit and
merchant accounts, many of which can be attributed to the Bank of Amador
acquisition completed in December 2004.
Noninterest income was up $142,000 (6.3%) to $2,395,000 in 2004 from
the 2003 level. Much of this increase ($553,000) represents the tax-free net
proceeds from a life insurance policy the Company received in June of 2004 as a
result of the death of a former executive officer. Without the life insurance
proceeds, noninterest income would have shown a decrease of $411,000. The
decrease in noninterest income can be attributed to decreases in fees from lease
brokerage services (down $372,000 or 97.6%) and a decrease in residential
lending fee income (down $179,000 or 48.9%). The decrease in lease brokerage
services resulted from the majority of originated leases being recorded during
2004 on the books of the Company as opposed to receiving fee income for
brokering the leases to outside funding sources. In addition, overall lease
volume decreased (from $5,940,000 in 2003 to $4,967,000 in 2004) as a result of
the change from a nationwide lessor to a lessor that does business in California
counties located near American River Bank branch locations. The residential
lending division experienced a decrease in loan volume as a result of a slight
increase in mortgage rates, which caused the number of refinances to decrease.
Salaries and Benefits
Salaries and benefits, which include commissions, were $6,958,000 (up
$910,000 or 15.0%) for 2005 as compared to $6,048,000 in 2004. The increase is
primarily the result of salaries, taxes and benefits paid to the employees of
the three new offices added as a result of the Bank of Amador acquisition which
was completed in December 2004 ($742,000) and cost of living raises, higher
salary costs to retain key employees in a competitive market, and overall higher
health care related costs. At the end of 2005, the full-time equivalent staff
was 122, down 1 from the 123 at the end of 2004.
Salaries and benefits, which include commissions, were $6,048,000 (down
$185,000 or 3.0%) for 2004 as compared to $6,223,000 in 2003. The decrease is
primarily the result of lower incentive accruals ($156,000 or 18.5%) and lower
commissions paid in the Residential Lending Division. The lower incentive
accrual relates to an adjustment in the incentive program by reducing the
overall percentage available to employees. The decreased commissions in the
Residential Lending Division are directly related to the drop in fees generated.
At the end of 2004, the full-time equivalent staff was 123, up 22 from the 101
29
at the end of 2003. Much of the increase in the number of employees came as a
result of the acquisition of Bank of Amador in December 2004 and did not have a
material impact on overall salary and benefit expense for 2004.
Occupancy, Furniture and Equipment
Occupancy expense increased $276,000 (29.0%) during 2005 to $1,229,000,
up from $953,000 in 2004. The majority of the increase relates to the three new
offices added in Amador County ($152,000), the cost associated for a full year
related to the 2004 opening of a new banking office in Downtown Sacramento
($38,000) located at 520 Capitol Mall, Suite 100, Sacramento, CA 95814, expenses
related to the 2005 opening of a new Company headquarters ($36,000) located at
3100 Zinfandel Drive, Suite 450, Rancho Cordova, CA 95670, and annual rent
increases on the Company's leased facilities. Furniture and equipment expense
was $918,000 in 2005 compared to $752,000 in 2004, representing a $166,000
(22.1%) increase. The increase in furniture and equipment expense relates to the
three new offices added in Amador County ($166,000).
Occupancy expense increased $136,000 (16.6%) during 2004 to $953,000,
up from $817,000 in 2003. The majority of the increase relates to the cost
associated with the new banking office in Downtown Sacramento ($114,000) located
at 520 Capitol Mall, Suite 100, Sacramento, CA 95814 and annual rent increases
on the Company's leased facilities. Furniture and equipment expense was $752,000
in 2004 compared to $653,000 in 2003, representing a $99,000 (15.2%) increase.
The majority of the increase in furniture and equipment expense relates to the
new banking office ($51,000) and higher maintenance and repair costs associated
with technology related equipment ($44,000).
Other Expenses
Other expenses were $4,388,000 (up $466,000 or 11.9%) for 2005 as
compared to $3,922,000 for 2004. The 2004 expense included a donation of
$503,000 to establish the American River Bankshares Foundation (the
"Foundation"). Donations made to the Foundation in 2005 were $455,000 less than
in 2004. The actual increase in other expenses of $466,000 and the overall lower
donation to the Foundation of $455,000 added together represent an increase in
other expenses of $921,000. This increase can be attributed to the December 2004
acquisition of Bank of Amador and the resulting three new Amador County offices
($935,000 increase). Included in the $935,000 increase is $322,000 related to
amortization of the core deposit intangible associated with the acquisition. The
overhead efficiency ratio on a taxable equivalent basis for 2005 was 45.2% as
compared to 53.1% in 2004.
Other expenses were $3,960,000 (up $1,291,000 or 48.4%) for 2004 as
compared to $2,669,000 for 2003. Professional fees increased $143,000 (42.7%)
from $335,000 during 2003 to $478,000 in 2004. Professional fees, which includes
accounting, legal and other professional services, was up primarily due to
retainer fees paid to a deposit gathering relationship established in 2004
($172,000). Donations were $527,000 (up $501,000) for 2004 compared to $26,000
in 2003. The increase in donations results from the Company's decision to create
and fund the Foundation ($503,000). Directors expense increased from $353,000
(up $165,000 or 46.7%) in 2003 to $518,000 in 2004. The increase in Directors
expense relates to higher amounts accrued under the Gross-Up Plan (the "Plan").
The Plan compensates for the tax effects of the exercise of nonstatutory stock
options. The Plan named certain non-employee Directors as participants and
applies only to those options granted on August 25, 1995. The Plan encourages
participating optionees to retain shares acquired through the exercise of
nonstatutory stock options by the Company paying to the participating optionee
an amount equal to the taxable income resulting from an exercise of a
nonstatutory stock option multiplied by the Company's effective tax rate,
subject to the optionee's agreement to hold the shares acquired for a minimum of
one (1) year. Other operating expenses increased from $939,000 in 2003 (up
$217,000 or 22.1%) to $1,156,000 in 2004. These increases related to the benefit
payments related to the death of a former Company executive ($82,000), and
normal expenses related to the overall growth of the Company. The overhead
efficiency ratio on a taxable equivalent basis for 2004 was 53.1% as compared to
53.7% in 2003.
Provision for Taxes
The effective tax rate on income was 38.7%, 36.7% and 39.2% in 2005,
2004 and 2003, respectively. The effective tax rate was greater than the federal
statutory tax rate due to state tax expense (net of federal tax effect) of
$1,033,000, $589,000 and $538,000 in these years. Tax-exempt income of $896,000,
$533,000 and $454,000 from investment securities in these years helped to reduce
the effective tax rate. The 2004 effective tax rate was further reduced by tax
exempt income of $553,000 from the proceeds from a life insurance policy.
30
Balance Sheet Analysis
The Company's total assets were $612,763,000 at December 31, 2005 as
compared to $586,666,000 at December 31, 2004, representing an increase of
$26,097,000 (4.4%). The average balances of total assets during 2005 were
$596,670,000 which represents an increase of $157,658,000 (35.9%) over the
December 31, 2004 total of $439,012,000. Approximately $134,000,000 of the
increase is attributable to the Bank of Amador acquisition in December 2004.
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 and in response to changes in interest
rates, prepayment rates and similar factors. Table Five below summarizes the
values of the Company's investment securities held on December 31 of the years
indicated.
Table Five: Investment Securities Composition
-------------------------------------------------------------------------------------
(dollars in thousands)
Available-for-sale (at fair value) 2005 2004 2003
-------------------------------------------------------------------------------------
Debt securities:
U.S. Government agencies $ 49,119 $ 46,701 $ 21,450
Mortgage-backed securities 33,326 40,359 26,757
Obligations of states and political
subdivisions 37,106 27,240 12,061
Corporate debt securities 1,014 1,114 787
Commercial paper 1,000
Equity securities:
Corporate stock 624 627 631
-------------------------------------------------------------------------------------
Total available-for-sale investment securities $ 124,189 $ 116,041 $ 62,686
=====================================================================================
Held-to-maturity (at amortized cost)
-------------------------------------------------------------------------------------
Debt securities:
Mortgage-backed securities $ 45,012 $ 41,203 $ 26,960
Obligations of states and political
subdivisions 200
-------------------------------------------------------------------------------------
Total held-to-maturity investment securities $ 45,012 $ 41,203 $ 27,160
=====================================================================================
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, 2005, these categories accounted for
approximately 21%, 42%, 1%, 28%, 1%, 2%, 2% and 3%, respectively, of the
Company's loan portfolio. This mix was relatively unchanged compared to 19%,
46%, 1%, 25%, 1%, 3%, 2% and 3% at December 31, 2004. Continuing economic
activity in the Company's market area, new borrowers developed through the
Company's marketing efforts, and credit extensions expanded to existing
borrowers resulted in the Company originating over $215 million in new loans;
however, higher than normal loan and lease paydowns and payoffs resulted in net
increases in balances for commercial ($11,107,000 or 16.6%), multi-family real
estate ($1,107,000 or 41.6%), real estate construction ($12,886,000 or 14.3%),
and consumer loans ($2,483,000 or 26.4%). Despite the new borrowers, the Company
experienced a decrease in commercial real estate ($11,763,000 or 7.1%),
residential real estate ($556,000 or 10.6%), lease financing receivable
($2,027,000 or 20.3%), and agriculture ($123,000 or 1.5%) as a result of
paydowns. Table Six below summarizes the composition of the loan and lease
portfolio for the past five years as of December 31.
31
Table Six: Loan and Lease Portfolio Composition
-----------------------------------------------------------------------------------------------
December 31,
------------------------------------------------------------------
(dollars in thousands) 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------------
Commercial $ 77,971 $ 66,864 $ 57,346 $ 49,231 $ 43,619
Real estate:
Commercial 154,500 166,263 142,249 119,977 99,355
Multi-family 3,767 2,660 5,301 7,573 803
Construction 103,048 90,162 37,434 32,385 30,821
Residential 4,680 5,236 1,508 1,661 3,119
Lease financing receivable 7,967 9,994 9,276 6,766 2,499
Agriculture 8,129 8,252 8,027 8,824 10,251
Consumer 11,900 9,417 5,950 6,371 7,598
-----------------------------------------------------------------------------------------------
371,962 358,848 267,091 232,788 198,065
Deferred loan fees, net (712) (885) (678) (583) (425)
Allowance for loan and
Lease losses (5,679) (5,496) (3,949) (3,197) (2,614)
-----------------------------------------------------------------------------------------------
Total net loans and leases $ 365,571 $ 352,467 $ 262,464 $ 229,008 $ 195,026
===============================================================================================
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, American River Bank has a residential lending division to assist
customers in securing most forms of longer term single-family mortgage
financing. American River Bank acts as a broker between American River Bank's
customers and the loan wholesalers. American River Bank receives an origination
fee for loans closed.
Average net loans and leases in 2005 were $360,319,000 which represents
an increase of $82,672,000 (29.8%) over the average in 2004. Average net loans
and leases in 2004 were $277,647,000 which represents an increase of $29,305,000
(11.8%) over the average in 2003. Loan growth in 2005 and 2004 resulted from a
favorable economy in the Company's market area, new borrowers developed through
the Company's marketing efforts and credit extensions expanded to existing
borrowers. Additionally the average loan growth in 2005 increased in part do to
the addition of the Bank of Amador loans at the end of 2004.
Risk Elements
The Company assesses and manages credit risk on an ongoing basis
through a total credit culture that emphasizes excellent credit quality,
extensive internal monitoring and established formal lending policies.
Additionally, the Company contracts with an outside loan review consultant to
periodically review the existing loan and lease portfolio. Management believes
its ability to identify and assess risk and return characteristics of the
Company's loan and lease portfolio is critical for profitability and growth.
Management strives to continue its emphasis on credit quality in the loan and
lease approval process, active credit administration and regular monitoring.
With this in mind, management has designed and implemented a comprehensive loan
and lease review and grading system that functions to continually assess the
credit risk inherent in the loan and lease portfolio.
32
Ultimately, underlying trends in economic and business cycles may
influence credit quality. American River Bank's business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base, in
Sonoma County, through North Coast Bank, a division of American River Bank,
whose business is focused on businesses within the three communities in which it
has offices (Santa Rosa, Windsor, and Healdsburg) and in Amador County, through
Bank of Amador, a division of American River Bank, whose business is focused on
businesses and consumers within the three communities in which it has offices
(Jackson, Pioneer, and Ione) as well as a diversified residential construction
loan business in numerous Northern California counties. The economy of Sonoma
County is diversified with professional services, manufacturing, agriculture and
real estate investment and construction, while the economy of Amador County is
reliant upon government, services, retail trade, manufacturing industries and
Indian gaming.
The Company has significant extensions of credit and commitments to
extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. The more significant factors management considers involve the
following: lease rate and terms, absorption and sale rates; real estate values
and rates of return; operating expenses; inflation; and sufficiency of repayment
sources independent of the real estate including, in some instances, personal
guarantees.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flow or from proceeds from the sale of selected
assets of the borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the creditworthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its security interest in business assets,
obtaining deeds of trust, or outright possession among other means.
In management's judgment, a concentration exists in real estate loans
which represented approximately 71.5% of the Company's loan and lease portfolio
at December 31, 2005, down from 73.7% at December 31, 2004. Although management
believes this concentration to have no more than the normal risk of
collectability, a substantial decline in the economy in general, or a decline in
real estate values in the Company's primary market areas in particular, could
have an adverse impact on the collectability of these loans and require an
increase in the provision for loan and lease losses which could adversely affect
the Company's future prospects, results of operations, profitability and stock
price. Management believes that its lending policies and underwriting standards
will tend to minimize losses in an economic downturn, however, there is no
assurance that losses will not occur under such circumstances. The Company's
loan policies and underwriting standards include, but are not limited to, the
following: (1) maintaining a thorough understanding of the Company's service
area and originating a significant majority of its loans within that area, (2)
maintaining a thorough understanding of borrowers' knowledge, capacity, and
market position in their field of expertise, (3) basing real estate loan
approvals not only on market demand for the project, but also on the borrowers'
capacity to support the project financially in the event it does not perform to
expectations (whether sale or income performance), and (4) maintaining
conforming and prudent loan to value and loan to cost ratios based on
independent outside appraisals and ongoing inspection and analysis by the
Company's lending officers.
Nonaccrual, Past Due and Restructured Loans and Leases
Management generally places loans and leases on nonaccrual status when
they become 90 days past due, unless the loan or lease is well secured and in
the process of collection. Loans and leases are charged off when, in the opinion
of management, collection appears unlikely.
The recorded investments in loans and leases that were considered to be
impaired totaled $91,000 and $247,000 at December 31, 2005 and 2004,
respectively. The related allowance for losses for these loans and leases at
December 31, 2005 and December 31, 2004 was $24,000 and $62,000, respectively.
Management believes that the allowance allocations are adequate for the inherent
risk of those loans and leases. The average recorded investment in impaired
loans and leases for the years ended December 31, 2005, 2004 and 2003 was
$271,000, $124,000 and $148,000, respectively.
Interest due but excluded from interest income on nonaccrual loans and
leases was not material during 2005, 2004 and 2003. In 2005, 2004 and 2003,
interest income recognized from payments received on nonaccrual loans and leases
was also not material.
33
Table Seven below sets forth nonaccrual loans and leases and loans and
leases past due 90 days or more as of year-end for the past five years.
Table Seven: Non-Performing Loans and Leases
-------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------
(dollars in thousands) 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------------
Past due 90 days or more and still accruing:
Commercial $ 24 $ -- $ 2 $ 2 $ --
Real estate -- -- -- -- --
Lease financing receivable -- 11 -- -- --
Consumer and other -- -- -- -- --
-------------------------------------------------------------------------------------------------------------
Nonaccrual:
Commercial -- 52 -- 42 534
Real estate 15 113 -- 160 314
Lease financing receivable 52 71 179 -- --
Consumer and other -- -- -- 2 8
-------------------------------------------------------------------------------------------------------------
Total non-performing loans and leases $ 91 $ 247 $ 181 $ 206 $ 856
=============================================================================================================
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, 2005. Management is not aware of any potential problem loans or
leases, which were accruing and current at December 31, 2004 or 2005, where
serious doubt exists as to the ability of the borrower to comply with the
present repayment terms.
Allowance for Loan and Lease Losses Activity
The Company maintains an allowance for loan and lease losses ("ALLL")
to cover probable losses inherent in the loan and lease portfolio, which is
based upon management's estimated range of those losses. The ALLL is established
through a provision for loan and lease losses and is increased by provisions
charged against current earnings and recoveries and reduced by charge-offs.
Actual losses for loans and leases can vary significantly from this estimate.
The methodology and assumptions used to calculate the allowance are continually
reviewed as to their appropriateness given the most recent losses realized and
other factors that influence the estimation process. The model assumptions and
resulting allowance level are adjusted accordingly as these factors change.
The adequacy of the ALLL and the level of the related provision for
loan and lease losses is determined based on management's judgment after
consideration of numerous factors including but not limited to: (i) local and
regional economic conditions, (ii) borrowers' financial condition, (iii) loan
impairment and the related level of expected charge-offs, (iv) evaluation of
industry trends, (v) industry and other concentrations, (vi) loans and leases
which are contractually current as to payment terms but demonstrate a higher
degree of risk as identified by management, (vii) continuing evaluations of the
performing loan portfolio, (viii) ongoing review and evaluation of problem loans
identified as having loss potential, (ix) quarterly review by the Board of
Directors, and (x) assessments by banking regulators and other third parties.
Management and the Board of Directors evaluate the ALLL and determine its
appropriate level considering objective and subjective measures, such as
knowledge of the borrowers' business, valuation of collateral, the determination
of impaired loans or leases and exposure to potential losses.
The Company establishes general reserves in accordance with Statement
of Accounting Standards ("SFAS") No. 5., Accounting for Contingencies, and
specific reserves in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The ALLL is maintained by categories of the loan and lease
portfolio based on loan type and loan rating; however, the entire allowance is
available to cover actual loan and lease losses. While management uses available
information to recognize possible losses on loans and leases, future additions
to the allowance may be necessary, based on changes in economic conditions and
other matters. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's ALLL. Such agencies
may require the Company to provide additions to the allowance based on their
judgment of information available to them at the time of their examination.
The adequacy of the ALLL is determined based on three components.
First, is the dollar weighted risk rating of the loan portfolio, including all
outstanding loans and leases. Every extension of credit has been assigned a risk
rating based upon a comprehensive definition intended to measure the inherent
risk of lending money. Each rating has an assigned risk factor expressed as a
34
reserve percentage. Second, established specific reserves consistent with SFAS
No. 114 "Accounting by Creditors for Impairment of a Loan" are assigned to
individually impaired loans. These are estimated potential losses associated
with specific borrowers based upon estimated cash flows or collateral value and
events affecting the risk rating. Third, the Company maintains a reserve for
qualitative factors that may affect the portfolio as a whole, such as those
factors described above, including a reserve for model imprecision consistent
with SFAS No. 5 "Accounting for Contingencies".
The allowance for loan and lease losses totaled $5,679,000 or 1.53% of
total loans and leases at December 31, 2005, $5,496,000 or 1.54% of total loans
and leases at December 31, 2004, and $3,949,000 or 1.48% at December 31, 2003.
Table Eight below summarizes, for the periods indicated, the activity
in the allowance for loan and lease losses.
Table Eight: Allowance for Loan and Lease Losses
--------------------------------------------------------------------------------------------------------
(in thousands, except for
percentages) Year Ended December 31,
------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------------------------------------------------------------
Average loans and leases
outstanding $ 360,319 $ 277,647 $ 248,342 $ 209,133 $ 202,624
--------------------------------------------------------------------------------------------------------
Allowance for loan & lease
losses at beginning of period $ 5,496 $ 3,949 $ 3,197 $ 2,614 $ 2,454
Loans and leases charged off:
Commercial 72 -- 13 44 556
Real estate -- -- -- 59 85
Consumer -- 1 8 48 13
Lease financing receivable 134 268 333 -- 57
--------------------------------------------------------------------------------------------------------
Total 206 269 354 151 711
--------------------------------------------------------------------------------------------------------
Recoveries of loans and leases
previously charged off:
Commercial 9 57 113 1 9
Real estate -- -- 47 85 --
Consumer 2 3 -- 4 --
Lease financing receivable 56 -- -- -- 71
--------------------------------------------------------------------------------------------------------
Total 67 60 160 90 80
--------------------------------------------------------------------------------------------------------
Net loans and leases charged off 139 209 194 61 631
Allowance acquired in merger -- 861 -- -- --
Additions to allowance charged
to operating expenses 322 895 946 644 791
--------------------------------------------------------------------------------------------------------
Allowance for loan and
lease losses at end of period $ 5,679 $ 5,496 $ 3,949 $ 3,197 $ 2,614
Ratio of net charge-offs to average
loans and leases outstanding .04% .08% .08% .03% .31%
Provision for loan and lease losses
to average loans and leases
outstanding .09% .32% .38% .31% .39%
Allowance for loan and lease losses
to loans and leases, net of
deferred fees, at end of period 1.53% 1.54% 1.48% 1.38% 1.32%
It is the policy of management to maintain the allowance for loan and
lease losses at a level adequate for known and inherent risks in the portfolio.
Our methodology incorporates a variety of risk considerations, both quantitative
and qualitative, in establishing an allowance for loan and lease losses that
management believes is appropriate at each reporting date. Based on information
currently available to analyze inherent credit risk, including economic factors,
overall credit quality, historical delinquencies and a history of actual
35
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.
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 Nine below summarizes the allocation of the
allowance for loan and lease losses for the five years ended December 31, 2005.
The allocation presented should not be interpreted as an indication that charges
to the allowance for loan and lease losses will be incurred in these amounts or
proportions, or that the portion of the allowance allocated to each loan and
lease category represents the total amounts available for charge-offs that may
occur within these categories.
Table Nine: Allowance for Loan and Lease Losses by Loan Category
----------------------------------------------------------------------------------------------------------------
(in thousands,
except percentages) December 31, 2005 December 31, 2004 December 31, 2003
----------------------------------------------------------------------------------------------------------------
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 $ 1,056 21.0% $ 1,028 18.6% $ 865 21.5%
Real estate 3,948 71.5% 3,825 73.7% 2,579 69.8%
Agriculture 213 2.2% 110 2.3% 201 3.0%
Consumer 246 3.2% 220 2.6% 91 2.2%
Lease financing receivable 216 2.1% 313 2.8% 213 3.5%
----------------------------------------------------------------------------------------------------------------
Total allocated $ 5,679 100.0% $ 5,496 100.0% $ 3,949 100.0%
----------------------------------------------------------------------------------------------------------------
December 31, 2002 December 31, 2001
------------------------------------------------------------------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
------------------------------------------------------------------------------------
Commercial $ 660 21.1% $ 923 22.0%
Real estate 2,173 69.5% 1,288 67.7%
Agriculture 116 3.8% 147 5.3%
Consumer 152 2.9% 206 3.8%
Lease financing receivable 96 2.7% 50 1.2%
------------------------------------------------------------------------------------
Total allocated $ 3,197 100.0% $ 2,614 100.0%
------------------------------------------------------------------------------------
Other Real Estate
At December 31, 2005 and 2004, the Company did not have any Other Real
Estate properties.
Deposits
At December 31, 2005, total deposits were $500,706,000 representing an
increase of $25,319,000 (5.3%) over the December 31, 2004 balance of
$475,387,000. The Company's deposit growth plan for 2005 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, interest-bearing money market and NOW accounts and savings accounts
decreased slightly, but noninterest-bearing demand increased 14.4% in 2005.
During 2004, deposits increased $152,880,000 (47.4%) from the total of
$322,507,000 at December 31, 2003, of which $114,255,000 of the increase can be
attributed to the Bank of Amador acquisition completed in December 2004.
36
Other Borrowed Funds
Other borrowings outstanding as of December 31, 2005 consist of
advances (both long-term and short-term) from the Federal Home Loan Bank (the
"FHLB") and an overnight borrowing from a correspondent bank. The following
table summarizes these borrowings (dollars in thousands):
2005 2004 2003
-----------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------------------------
Short-term borrowings:
FHLB advances $ 39,386 3.73% $ 24,457 1.85% $ 25,054 1.41%
Advances from correspondent
banks -- -- -- -- 9,600 1.44%
-----------------------------------------------------------------------------
Total short-term borrowings $ 39,386 3.73% $ 24,457 1.85% $ 34,654 1.41%
-----------------------------------------------------------------------------
Long-term borrowings:
FHLB advances $ 4,270 4.10% $ 9,832 3.15% $ 1,888 6.13%
-----------------------------------------------------------------------------
Total long-term borrowings $ 4,270 4.10% $ 9,832 3.15% $ 1,888 6.13%
-----------------------------------------------------------------------------
The maximum amount of short-term borrowings at any month-end during
2005, 2004 and 2003, was $39,386,000, $40,855,000, and $38,100,000,
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 $ 39,386 $ 4,270
Maturity 2006 2007
Average rates 3.73% 4.10%
The Company has also been issued a total of $2,000,000 in letters of
credit by the FHLB which have been pledged to secure Local Agency Deposits. The
letters of credit act as a guarantee of payment to certain third parties in
accordance with specified terms and conditions. The letters of credit were not
drawn upon in 2005 or 2004 and management does not expect to draw upon these
lines in the future.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed regularly by
management. The Company's capital position represents the level of capital
available to support continuing operations and expansion.
On September 20, 2001, the Company announced a plan to repurchase, as
conditions warrant, up to 5% annually of the Company's common stock. Each year
the Company may repurchase up to 5% of the shares outstanding (adjusted for
stock splits or stock dividends). The repurchases are to be made from time to
time in the open market as conditions allow and will be structured to comply
with Commission Rule 10b-18. 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 this repurchase
program at any time for any reason. During 2005, the Company repurchased 80,325
shares; during 2004, the Company repurchased 10,253 shares; during 2003, the
Company repurchased 1,654 shares and in 2002, the Company repurchased 72,353
shares under the repurchase plan. See "Stock Repurchases" under Item 5 on page
21 for more information regarding the stock repurchase plan.
37
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, 2005, shareholders' equity was $62,746,000,
representing an increase of $3,756,000 (6.4%) from $58,990,000 at December 31,
2004. This increase was attributable principally to the retention of earnings
after the payment of cash dividends. In 2004, shareholders' equity increased
$23.5 million (66.4%) from 2003 due in part to the Bank of Amador acquisition.
The ratio of total risk-based capital to risk adjusted assets was 11.9% at
December 31, 2005 compared to 10.9% at December 31, 2004. Tier 1 risk-based
capital to risk-adjusted assets was 10.6% at December 31, 2005 and 9.6% at
December 31, 2004.
Table Ten below lists the Company's actual capital ratios at December
31, 2005 and 2004 as well as the minimum capital ratios for capital adequacy.
Table Ten: Capital Ratios
----------------------------------------------------------------------------------------
At December 31, Minimum Regulatory
Capital to Risk-Adjusted Assets 2005 2004 Capital Requirements
----------------------------------------------------------------------------------------
Leverage ratio 7.7% 8.4% 4.00%
Tier 1 Risk-Based Capital 10.6% 9.6% 4.00%
Total Risk-Based Capital 11.9% 10.9% 8.00%
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
American River Bank's ratios are in excess of the regulatory definition of "well
capitalized."
Management believes that the Company's capital is adequate to support
current operations and anticipated growth, cash dividends and future capital
requirements of the Company and its subsidiaries.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
interest rate risk inherent in its loan and deposit functions. The goal for
managing the assets and liabilities of the Company is to maximize shareholder
value and earnings while maintaining a high quality balance sheet without
exposing the Company to undue interest rate risk. The Board of Directors has
overall responsibility for the interest rate risk management policies. The
Company has a Risk Management Committee that establishes and monitors guidelines
to control the sensitivity of earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include, but are not limited to, lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the consolidated balance sheet is
managed with the goal that movements of interest rates on assets and liabilities
are correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. The Company uses simulation models to forecast
earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer-modeling
techniques, the Company is able to estimate the potential impact of changing
interest rates on earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans and leases, securities and interest bearing liabilities
38
(i.e. deposits/borrowings) positions as the beginning base. The forecast balance
sheet is processed against three interest rate scenarios. The scenarios include
a 200 basis point rising rate forecast, a flat rate forecast and a 200 basis
point falling rate forecast which take place within a one year time frame. The
net interest income is measured during the year assuming a gradual change in
rates over the twelve-month horizon. The simulation modeling indicated below
attempts to estimate changes in the Company's net interest income utilizing a
forecast balance sheet projected from year-end balances.
Table Eleven 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 Eleven: Interest Rate Risk Simulation of Net Interest as of
December 31, 2005
--------------------------------------------------------------------------------
(dollars in thousands) $ Change in NII
from Current
12 Month Horizon
----------------
Variation from a constant rate scenario
+200bp $ 707
-200bp $ (1,184)
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.
As reflected in Table Twelve below, at December 31, 2005, the
cumulative gap through the one-year time horizon indicates a slightly liability
sensitive position.
39
Table Twelve: Interest Rate Sensitivity
December 31, 2005
-------------------------------------------------------------------------------------------------------------
Assets and Liabilities
which mature or reprice within (days):
Non-
(dollars in thousands) 0-90 91-180 181-365 Over 365 repricing Total
-------------------------------------------------------------------------------------------------------------
Assets:
Investments $ 11,502 $ 12,307 $ 18,562 $ 135,532 $ -- $ 177,903
Loans and leases 188,144 26,505 29,379 121,543 -- 365,571
Other assets -- -- -- -- 69,289 67,289
-------------------------------------------------------------------------------------------------------------
Total assets $ 199,646 $ 38,812 $ 47,941 $ 257,075 $ 69,289 $ 612,763
=============================================================================================================
Liabilities:
Noninterest bearing $ -- $ -- $ -- $ -- $ 164,397 $ 164,397
Interest bearing:
NOW Accounts 23,183 9,273 6,953 6,955 -- 46,364
Money market 66,720 26,688 20,019 20,016 -- 133,443
Savings 18,855 7,542 3,771 7,543 -- 37,711
Time certificates 48,617 24,831 23,981 21,362 -- 118,791
Short-term borrowings 22,840 5,515 11,031 -- -- 39,386
Long-term borrowings -- -- -- 4,270 -- 4,270
Other liabilities -- -- -- -- 5,655 5,655
Shareholders' equity -- -- -- -- 62,746 62,746
-------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholders' equity $ 180,215 $ 73,849 $ 65,755 $ 60,146 $ 232,798 $ 612,763
=============================================================================================================
Interest rate
sensitivity gap $ 19,431 $ (35,037) $ (17,814) $ 196,929 $ (163,509)
Cumulative interest
rate sensitivity gap $ 19,431 $ (15,606) $ (33,420) $ 163,509 --
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, 2005, 2004 and 2003.
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, 2005 were
approximately $137,802,000 and $3,393,000, 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.
40
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, 2005,
consolidated liquid assets totaled $99.2 million or 16.2% of total assets
compared to $96.4 million or 16.4% of total assets on December 31, 2004. In
addition to liquid assets, the Company maintains short-term lines of credit in
the amount of $48,000,000 with correspondent banks. At December 31, 2005, the
Company had $48,000,000 available under these credit lines. Additionally, the
American River Bank is a member of the FHLB. At December 31, 2005, American
River Bank could have arranged for up to $49,196,000 in secured borrowings from
the FHLB. These borrowings are secured by pledged mortgage loans and investment
securities. At December 31, 2005, the Company had $3,534,000 available under
these secured borrowing arrangements. American River Bank also has informal
agreements with various other banks to sell participations in loans, if
necessary. The Company serves primarily a business and professional customer
base and, as such, its deposit base is susceptible to economic fluctuations.
Accordingly, management strives to maintain a balanced position of liquid assets
to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Company can sell any of its unpledged securities held in the
available-for-sale category to meet liquidity needs. These securities are also
available to pledge as collateral for borrowings if the need should arise.
American River Bank has established a master repurchase agreement with a
correspondent bank to enable such transactions. American River Bank can also
pledge securities to borrow from the FRB and the FHLB.
The principal cash requirements of the Company are for expenses
incurred in the support of administration and operations. For nonbanking
functions, the Company is dependent upon the payment of cash dividends from its
subsidiaries to service its commitments. The Company expects that the cash
dividends paid by American River Bank to the Company will be sufficient to meet
this payment schedule. The maturity distribution of certificates of deposit is
set forth in 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, 2005
--------------------------------------------------------------------------------
(dollars in thousands) Less than $100,000 Over $100,000
--------------------------------------------------------------------------------
Three months or less $ 15,470 $ 33,147
Over three months through six months 11,248 13,583
Over six months through twelve months 12,148 11,833
Over twelve months 10,862 10,500
--------------------------------------------------------------------------------
Total $ 49,728 $ 69,063
================================================================================
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.
Table Fourteen: Loan and Lease Maturities (Gross Loans and Leases)
--------------------------------------------------------------------------------
December 31, 2005
--------------------------------------------------------------------------------
One year One year through Over
(dollars in thousands) or less five years five years Total
--------------------------------------------------------------------------------
Commercial $ 46,631 $ 24,410 $ 6,930 $ 77,971
Real estate 102,693 60,814 102,488 265,995
Agriculture 1,001 1,354 5,774 8,129
Consumer 1,362 3,032 7,506 11,900
Leases 402 7,464 101 7,967
--------------------------------------------------------------------------------
Total $ 152,089 $ 97,074 $ 122,799 $ 371,962
================================================================================
Loans and leases shown above with maturities greater than one year
include $169,383,000 of floating interest rate loans and $50,490,000 of fixed
rate loans and leases.
41
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: Securities Maturities and Weighted Average Yields
December 31, 2005, 2004 and 2003
-------------------------------------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis)
2005 2004 2003
-----------------------------------------------------------------------------
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 $ 21,012 3.37% $ 7,055 3.88% $ 3,573 3.70%
Maturing after 1 year but within 5 years 28,107 3.70% 39,645 3.41% 17,877 3.75%
State & political subdivisions
Maturing within 1 year -- -- 1,105 4.83% 452 6.17%
Maturing after 1 year but within 5 years 15,426 4.43% 6,574 4.30% 967 5.69%
Maturing after 5 years but within 10 years 17,386 6.39% 17,393 6.16% 6,188 7.18%
Maturing after 10 years 4,294 6.37% 2,168 6.83% 4,454 7.44%
Government sponsored mortgage-backed securities 36,326 4.30% 40,359 4.30% 26,757 4.47%
Other
Maturing within 1 year -- -- 1,115 2.23% 1,514 1.84%
Maturing after 1 year but within 5 years 1,014 4.67% -- -- 273 3.94%
Non maturing 624 6.18% 627 6.63% 631 6.64%
-------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 124,189 4.40% $ 116,041 4.32% $ 62,686 4.55%
===============================================================================================================================
Held-to-maturity securities:
State & political subdivisions
Maturing within 1 year $ -- -- $ -- -- $ 200 6.77%
Government sponsored mortgage-backed securities 45,012 4.37% 41,203 4.16% 26,960 4.06%
-------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 45,012 4.37% $ 41,203 4.16% $ 27,160 4.08%
===============================================================================================================================
The carrying values of available-for-sale securities include net
unrealized (losses) gains of ($1,279,000), $880,000 and $1,430,000 at December
31, 2005, 2004 and 2003, respectively. The carrying values of held-to-maturity
securities do not include unrealized gains or losses, however, the net
unrealized (losses) gains at December 31, 2005, 2004 and 2003 were ($354,000),
$125,000 and $56,000, respectively. Table 15 does not include FHLB or FRB Stock,
which do not have stated maturity dates or readily available market values. The
balance in FHLB and FRB Stock at December 31, 2005, 2004 and 2003 was
$2,608,000, $2,158,000 and $1,546,000, respectively.
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing needs of
its customers and to reduce its exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
42
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,
-----------------------
2005 2004
---------- ----------
Commitments to extend credit (dollars in thousands):
Revolving lines of credit secured by
1-4 family residences $ 16,845 $ 2,328
Commercial real estate, construction and land
development commitments secured by real estate 55,313 66,066
Other unused commitments, principally commercial loans 65,644 57,019
---------- ----------
$ 137,802 $ 125,413
========== ==========
Letters of credit $ 3,393 $ 2,788
========== ==========
As of December 31, 2005, 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.
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, 2005. Included in the
table are amounts payable under the Company's Deferred Compensation and Deferred
Fees Plans and are listed in the "other" category. These amounts represented
$1,147,000 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 5
Total 1 year 1-3 years 3-5 years years
--------------------------------------------------------------
Long-Term Debt $ 4,270 $ -- $ 4,270 $ -- $ --
Capital Lease Obligations -- -- -- -- --
Operating Leases 4,037 860 1,382 922 873
Purchase Obligations -- -- -- -- --
Other Long-Term Liabilities Reflected on the
Company's Balance Sheet under GAAP 1,147 -- -- -- 1,147
-------------------------------------------------------------------------------------------------------------
Total $ 9,454 $ 860 $ 5,652 $ 922 $ 2,020
=============================================================================================================
Accounting Pronouncements
In March 2004, the Financial Accounting Standards Board (the "FASB")
and Emerging Issues Task Force (the "EITF") reached consensus on several issues
being addressed in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The consensus provides
guidance for evaluating whether an investment is other-than-temporarily impaired
43
and was effective for other-than-temporary impairment evaluations made in
reporting periods beginning after June 15, 2004. The disclosure provisions of
EITF Issue No. 03-1 continue to be effective for the Company's consolidated
financial statements for the year ended December 31, 2005.
On November 3, 2005, the FASB issued FASB Staff Position ("FSP") Nos.
FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. This FSP addresses the determination as to
when an investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. This FSP also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. This FSP nullifies certain requirements of EITF Issue No. 03-1, and
supersedes EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment
upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The guidance
in this FSP amends FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The FSP is effective for reporting periods beginning
after December 15, 2005. The Company does not anticipate any material impact to
its financial condition or results of operations as a result of the adoption of
this guidance.
In December 2004, the FASB issued Statement No. 123 (revised 2004)
("FAS 123 (R)"), Share-Based Payments. FAS 123 (R) requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments such as stock options granted to employees. The Company may
elect to adopt FAS 123 (R) using a modified prospective method or modified
retrospective method. Under the modified retrospective method, the Company would
restate previously issued financial statements, basing the compensation expense
on that previously reported in their pro forma disclosures required by FAS 123.
The modified prospective method would require the Company to record compensation
expense for the unvested portion of previously granted awards that remain
outstanding at the date of adoption as these awards continue to vest. FAS 123
(R) is effective January 1, 2006. Management has elected to use the modified
prospective method and has completed its evaluation of the effect of FAS 123
(R), and does not expect it to have a material impact on its financial position
or results of operations.
On June 7, 2005, the FASB issued Statement No. 154 ("FAS 154"),
Accounting Changes and Error Corrections - a replacement of Accounting
Principles Board (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. Under the
provisions of FAS 154, voluntary changes in accounting principles are applied
retrospectively to prior periods' financial statements unless it would be
impractical to do so. FAS 154 supersedes APB Opinion No. 20, which required that
most voluntary changes in accounting principles be recognized by including in
the current period's net income the cumulative effect of the change. FAS 154
also makes a distinction between "retrospective application" of a change in
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. The provisions of FAS 154 are effective for
accounting changes made in fiscal years beginning after December 15, 2005.
Management of the Company does not expect the adoption of this standard to have
a material impact on its financial position or results of operations.
Other Matters
Effects of Terrorism. The terrorist actions on September 11, 2001 and
thereafter and the current military conflict in Iraq have had significant
adverse effects upon the United States economy. Whether the terrorist activities
in the future and the actions of the United States and its allies in combating
terrorism on a worldwide basis will adversely impact the Company and the extent
of such impact is uncertain. Such economic deterioration could adversely affect
the Company's future results of operations by, among other matters, reducing the
demand for loans and other products and services offered by the Company,
increasing nonperforming loans and the amounts reserved for loan and lease
losses, and causing a decline in the Company's stock price.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by Item 7A of Form 10-K is contained in the "Market
Risk Management" section of Item 7-"Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 38-40.
44
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm 46
Consolidated Balance Sheet, December 31, 2005 and 2004 47
Consolidated Statement of Income for the Years Ended
December 31, 2005, 2004 and 2003 48
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 2005, 2004 and 2003 49
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003 50-51
Notes to Consolidated Financial Statements 52-82
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.
45
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, 2005 and
2004 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, 2005. 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, 2005 and 2004, 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, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
We have also audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 8, 2006 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ Perry-Smith LLP
Sacramento, California
March 8, 2006
46
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005 and 2004
(Dollars in thousands)
2005 2004
---------- ----------
ASSETS
Cash and due from banks $ 34,825 $ 28,115
Federal funds sold 1,250 7,000
---------- ----------
Total cash and cash equivalents 36,075 35,115
Interest-bearing deposits in banks 4,844 5,939
Investment securities (Notes 5 and 10):
Available for sale, at fair value 124,189 116,041
Held to maturity, at amortized cost (fair value of $44,658
and $41,328 at December 31, 2005 and 2004, respectively) 45,012 41,203
Loans and leases, less allowance for loan and lease losses of
$5,679 in 2005 and $5,496 in 2004 (Notes 6, 10, 12 and 17) 365,571 352,467
Premises and equipment, net (Note 7) 2,090 1,876
Federal Home Loan Bank stock 2,608 2,158
Accounts receivable servicing receivables, net (Note 8) 2,000 2,409
Goodwill (Notes 3 and 4) 16,321 16,146
Intangible assets (Notes 3 and 4) 1,831 2,183
Accrued interest receivable and other assets (Notes 11 and 16) 12,222 11,129
---------- ----------
$ 612,763 $ 586,666
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 164,397 $ 143,710
Interest bearing (Note 9) 336,309 331,677
---------- ----------
Total deposits 500,706 475,387
Short-term borrowings (Note 10) 39,386 24,457
Long-term borrowings (Note 10) 4,270 9,832
Accrued interest payable and other liabilities (Note 16) 5,655 18,000
---------- ----------
Total liabilities 550,017 527,676
---------- ----------
Commitments and contingencies (Note 12)
Shareholders' equity (Notes 13 and 14):
Common stock - no par value; 20,000,000 shares authorized;
issued and outstanding - 5,604,479 shares in 2005 and
5,314,732 shares in 2004 47,474 42,557
Retained earnings 16,029 15,878
Accumulated other comprehensive (loss) income, net of taxes
(Notes 5 and 18) (757) 555
---------- ----------
Total shareholders' equity 62,746 58,990
---------- ----------
$ 612,763 $ 586,666
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
47
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2005, 2004 and 2003
(Dollars in thousands, except per share data)
2005 2004 2003
---------- ---------- ----------
Interest income:
Interest and fees on loans and leases $ 26,536 $ 18,115 $ 16,744
Interest on Federal funds sold 90 67 48
Interest on deposits in banks 188 134 168
Interest and dividends on investment securities:
Taxable 5,436 3,751 2,312
Exempt from Federal income taxes 931 537 475
Dividends 32 32 21
---------- ---------- ----------
Total interest income 33,213 22,636 19,768
---------- ---------- ----------
Interest expense:
Interest on deposits (Note 9) 5,646 2,511 2,390
Interest on borrowings (Note 10) 1,105 707 512
---------- ---------- ----------
Total interest expense 6,751 3,218 2,902
---------- ---------- ----------
Net interest income 26,462 19,418 16,866
Provision for loan and lease losses (Note 6) 322 895 946
---------- ---------- ----------
Net interest income after provision for loan
and lease losses 26,140 18,523 15,920
---------- ---------- ----------
Noninterest income:
Service charges 672 551 534
Gain on sale of available-for-sale investment securities
(Note 5) 48 33
Other income (Note 15) 1,609 1,844 1,686
---------- ---------- ----------
Total noninterest income 2,329 2,395 2,253
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits (Notes 6 and 16) 6,958 6,048 6,233
Occupancy (Notes 7 and 12) 1,229 953 817
Furniture and equipment (Notes 7 and 12) 918 752 653
Loss on sale of available-for-sale investment securities
(Note 5) 38
Other expense (Note 15) 4,388 3,922 2,669
---------- ---------- ----------
Total noninterest expense 13,493 11,713 10,372
---------- ---------- ----------
Income before provision for income taxes 14,976 9,205 7,801
Provision for income taxes (Note 11) 5,792 3,378 3,060
---------- ---------- ----------
Net income $ 9,184 $ 5,827 $ 4,741
========== ========== ==========
Basic earnings per share (Note 13) $ 1.63 $ 1.24 $ 1.08
========== ========== ==========
Diluted earnings per share (Note 13) $ 1.60 $ 1.18 $ 1.00
========== ========== ==========
Cash dividends per share of issued and outstanding common
stock, adjusted for stock dividends $ 0.54 $ 0.42 $ 0.27
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
48
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2005, 2004 and 2003
(Dollars in thousands)
Accum-
ulated
Other
Compre-
hensive
Income/ Total Total
Common Stock (Loss) Share- Compre-
------------------------ Retained (Net of holders' hensive
Shares Amount Earnings Taxes) Equity Income
---------- ---------- ---------- ---------- ---------- ----------
Balance, January 1, 2003 3,938,883 $ 16,064 $ 14,358 $ 1,304 $ 31,726
Comprehensive income (Note 18):
Net income 4,741 4,741 $ 4,741
Other comprehensive loss, net of tax:
Net change in unrealized gains on available-
for-sale investment securities (440) (440) (440)
----------
Total comprehensive income $ 4,301
==========
Cash dividend ($.27 per share) (1,192) (1,192)
Fractional shares redeemed (225) (7) (7)
Stock options exercised 135,704 653 653
Retirement of common stock (Note 13) (19,102) (24) (24)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 4,055,260 16,693 17,900 864 35,457
Comprehensive income (Note 18):
Net income 5,827 5,827 $ 5,827
Other comprehensive loss, net of tax:
Net change in unrealized gains on available-
for-sale investment securities (309) (309) (309)
----------
Total comprehensive income $ 5,518
==========
Stock issued in acquisition (Note 3) 775,548 18,284 18,284
Cash dividend ($.42 per share) (2,044) (2,044)
5% stock dividend 252,392 5,805 (5,805)
Stock options exercised 263,446 1,959 1,959
Retirement of common stock (Note 13) (31,914) (184) (184)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2004 5,314,732 42,557 15,878 555 58,990
Comprehensive income (Note 18):
Net income 9,184 9,184 $ 9,184
Other comprehensive loss, net of tax:
Net change in unrealized gains on available-
for-sale investment securities (1,312) (1,312) (1,312)
----------
Total comprehensive income $ 7,872
==========
Cash dividend ($.54 per share) (3,012) (3,012)
Fractional shares redeemed (1) (32) (32)
5% stock dividend 266,801 6,021 (6,021)
Stock options exercised 113,309 945 945
Retirement of common stock (Note 13) (90,362) (2,017) (2,017)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2005 5,604,479 $ 47,474 $ 16,029 $ (757) $ 62,746
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
49
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
(Dollars in thousands)
2005 2004 2003
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 9,184 $ 5,827 $ 4,741
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan and lease losses 322 895 946
(Decrease) increase in deferred loan and lease origination
fees, net (173) (79) 95
Depreciation and amortization 1,014 575 484
Amortization of investment security premiums
and discounts, net 1,099 1,249 936
Provision for accounts receivable servicing receivable
allowance for losses 35 1
(Gain) loss on sale of available-for-sale investment
securities (48) 38 (33)
Gain on life insurance death benefit (553)
Increase in cash surrender value of life insurance policies (178) (69) (27)
Provision for deferred income taxes (422) (82) (474)
Decrease (increase) in accrued interest receivable and
other assets 179 (1,136) (389)
(Decrease) increase in accrued interest payable and
other liabilities (12,604) 1,920 331
---------- ---------- ----------
Net cash (used in) provided by operating activities (1,592) 8,585 6,611
---------- ---------- ----------
Cash flows from investing activities:
Cash acquired in acquisition 26,294
Proceeds from the sale of available-for-sale investment
securities 6,964 5,019 6,274
Proceeds from called available-for-sale investment
securities 280
Proceeds from matured available-for-sale investment
securities 20,180 5,435 6,840
Proceeds from matured held-to-maturity investment
securities 200 1,125
Purchases of available-for-sale investment securities (41,596) (50,875) (24,015)
Purchases of held-to-maturity investment securities (16,901) (23,737) (25,432)
Proceeds from principal repayments for available-for-sale
mortgage-backed securities 3,411 8,507 8,911
Proceeds from principal repayments for held-to-maturity
mortgage-backed securities 12,495 8,758 8,890
Net decrease (increase) in interest-bearing deposits in banks 1,095 (1,189) 1,288
Net increase in loans and leases (13,242) (12,064) (34,491)
Net decrease (increase) in accounts receivable servicing
receivables 374 (631) (383)
Death benefit from life insurance policy 1,236
Purchases of equipment (886) (704) (320)
Net (increase) decrease in FHLB and FRB stock (450) (612) 16
Purchase of life insurance policies (1,614)
---------- ---------- ----------
Net cash used in investing activities (28,276) (34,363) (52,911)
---------- ---------- ----------
(Continued)
50
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2005, 2004 and 2003
(Dollars in thousands)
2005 2004 2003
---------- ---------- ----------
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings
deposits $ 12,722 $ 37,341 $ 47,477
Net increase (decrease) in time deposits 12,597 (3,697) (766)
Repayment of long-term debt (5,562) (53) (50)
Increase (decrease) in other borrowings 14,929 (2,200) 4,050
Exercise of stock options 945 1,959 653
Cash paid to repurchase common stock (2,017) (184) (24)
Payment of cash dividends (2,754) (2,070) (1,135)
Cash paid for fractional shares in connection with stock
dividends and stock splits (32) (7)
---------- ---------- ----------
Net cash provided by financing activities 30,828 31,096 50,198
---------- ---------- ----------
Increase in cash and cash equivalents 960 5,318 3,898
Cash and cash equivalents at beginning of year 35,115 29,797 25,899
---------- ---------- ----------
Cash and cash equivalents at end of year $ 36,075 $ 35,115 $ 29,797
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 6,509 $ 3,149 $ 2,980
Income taxes $ 5,990 $ 1,765 $ 3,242
Non-cash investing activities:
Net change in unrealized gain on available-for-sale
investment securities $ (2,159) $ (550) $ (719)
Non-cash financing activities:
Dividends declared and unpaid $ 841 $ 582 $ 608
Adjustments to goodwill $ 238
Supplemental schedule related to acquisition (Notes 3 and 4):
Deposits $ 119,236
Other liabilities 489
Payable to Bank of Amador shareholders 12,730
Interest bearing deposits in banks (100)
Available-for-sale investment securities (22,542)
Loans, net (78,737)
Premise and equipment (226)
Intangible assets (18,296)
Other assets (4,544)
Stock issued 18,284
----------
Cash acquired $ 26,294
==========
The accompanying notes are an integral part of these
consolidated financial statements.
51
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
five banking offices in Sacramento and Placer counties, three banking
offices in Sonoma County under the name North Coast Bank (NCB), a
division of ARB, and three banking offices in Amador County under the
name Bank of Amador, a division of ARB.
On December 3, 2004, the Company acquired Bank of Amador located in
Jackson, California (more fully described in Note 3). Bank of Amador
was merged with and into American River Bank and now operates as Bank
of Amador, a division of American River Bank. The merger transaction
was accounted under the purchase method of accounting and accordingly
the results of their operations have been included in the consolidated
financial statements since the date of acquisition.
The Company also owns one inactive subsidiary, American River
Financial.
The deposits of ARB are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to applicable legal limits. ARB does not
offer trust services or international banking services and does not
plan to do so in the near future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
-------
The accounting and reporting policies of the Company and its
subsidiaries conform with accounting principles generally accepted in
the United States of America and prevailing practices within the
financial services industry.
Reclassifications
-----------------
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 2005.
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.
52
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
-------------------------
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one-day periods.
Investment Securities
---------------------
Investments are classified into the following categories:
o Available-for-sale securities, reported at fair value,
with unrealized gains and losses excluded from earnings
and reported, net of taxes, as accumulated other
comprehensive income (loss) within shareholders' equity.
o Held-to-maturity securities, which management has the
positive intent and ability to hold, reported at amortized
cost, adjusted for the accretion of discounts and
amortization of premiums.
Management determines the appropriate classification of its investments
at the time of purchase and may only change the classification in
certain limited circumstances. All transfers between categories are
accounted for at fair value.
Gains or losses on the sale of investment securities are computed on
the specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums. In
addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
Investment securities are evaluated for impairment on at least a
quarterly basis and more frequently when economic or market conditions
warrant such an evaluation to determine whether a decline in their
value is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline and the intent and ability of the
Company to retain its investment in the securities for a period of time
sufficient to allow for an anticipated recovery in fair value, in
addition to the reasons underlying the decline, to determine whether
the loss in value is other than temporary. The term "other than
temporary" is not intended to indicate that the decline is permanent,
but indicates that the prospects for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value
of the investment. Once a decline in value is determined to be other
than temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized.
Federal Reserve Bank and Federal Home Loan Bank Stock
-----------------------------------------------------
Investments in Federal Reserve Bank (FRB) and Federal Home Loan Bank
(FHLB) stock are carried at cost and are redeemable at par with certain
restrictions. Members of the FRB are required to purchase restricted
stock in the FRB. Investments in FHLB are required to participate in
FHLB programs. The FRB stock was surrendered in 2004 when the Company
discontinued its membership in the FRB.
Loans and Leases
----------------
Loans and leases are reported at the principal amounts outstanding,
adjusted for unearned income, deferred loan origination fees and costs,
purchase premiums and discounts, write-downs and the allowance for loan
and lease losses. Loan and lease origination fees, net of certain
deferred origination costs, and purchase premiums and discounts are
recognized as an adjustment to the yield of the related loans and
leases.
53
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans and Leases (Continued)
----------------
The accrual of interest on loans and leases is discontinued when, in
the opinion of management, there is an indication that the borrower may
be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed against current
income unless the loan or lease is in the process of collection.
Interest received on nonaccrual loans and leases is either applied
against principal or reported as interest income, according to
management's judgment as to the collectibility of principal. Generally,
loans and leases are restored to accrual status when the obligation is
brought current and has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility
of the total contractual principal and interest is no longer in doubt.
Direct financing leases are carried net of unearned income. Income from
leases is recognized by a method that approximates a level yield on the
outstanding net investment in the lease.
Loan Sales and Servicing
------------------------
Included in the portfolio are Small Business Administration (SBA) loans
and Farmer Mac guaranteed loans that may be sold in the secondary
market. Loans held for sale are carried at the lower of cost or market
value. Market value is determined by the specific identification method
as of the balance sheet date or the date that the purchasers have
committed to purchase the loans. At the time the loan is sold, the
related right to service the loan is either retained, with the Company
earning future servicing income, or released in exchange for a one-time
servicing-released premium. A portion of this premium may be required
to be refunded if the borrower defaults or the loan prepays within
ninety days of the settlement date. There were no sales of loans
subject to these recourse provisions at December 31, 2005, 2004 and
2003. 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, 2005 and 2004.
SBA and Farmer Mac loans with unpaid balances of $1,609,000 and
$2,640,000 were being serviced for others as of December 31, 2005 and
2004, respectively. The Company also serviced loans that are
participated with other financial institutions totaling $20,911,000 and
$12,329,000 as of December 31, 2005 and 2004, respectively.
Servicing rights acquired through 1) a purchase or 2) the origination
of loans which are sold or securitized with servicing rights retained
are recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing,
and are subsequently amortized in proportion to and over the period of
the related net servicing income or expense. Servicing assets are
periodically evaluated for impairment. Servicing assets were not
considered material for disclosure purposes.
Allowance for Loan and Lease Losses
-----------------------------------
The allowance for loan and lease losses is maintained to provide for
possible losses related to impaired loans and leases and other possible
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.
54
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan and Lease Losses (Continued)
-----------------------------------
Commercial and real estate loans and leases determined to be impaired
or classified are individually evaluated by management for specific
risk of loss. In addition, reserve factors are assigned to currently
performing loans and leases based on management's assessment of the
following for each identified loan and lease type: (1) inherent credit
risk and (2) historical losses. Management's risk assessment includes
its own portfolio characteristics and performance, the loss experience
of peer banks, and other economic conditions and factors. These
estimates are particularly susceptible to changes in the economic
environment and market conditions.
The Company's Loan Committee reviews the adequacy of the allowance for
loan and lease losses at least quarterly, to include consideration of
the relative risks in the portfolio and current economic conditions.
The allowance is adjusted based on that review if, in the judgment of
the Loan Committee and management, changes are warranted.
The allowance is established through a provision for loan and lease
losses which is charged to expense. Additions to the allowance are
expected to maintain the adequacy of the total allowance after credit
losses and loan and lease growth. The allowance for loan and lease
losses at December 31, 2005 and 2004, respectively, reflect
management's estimate of possible losses in the portfolio.
Other Real Estate
-----------------
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the recorded investment in the loan balance and accrued interest
income over the estimated fair market value of the property less
estimated selling costs is charged against the allowance for loan and
lease losses. A valuation allowance for losses on other real estate is
maintained to provide for temporary declines in value. The allowance is
established through a provision for losses on other real estate which
is included in other expenses. Subsequent gains or losses on sales or
writedowns resulting from permanent impairments are recorded in other
income or expense as incurred. There was no other real estate held by
the Company at December 31, 2005 and 2004.
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.
55
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Intangible Assets (Continued)
------------------------------
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. 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.
Income Taxes
------------
The Company files its income taxes on a consolidated basis with its
subsidiaries. The allocation of income tax expense (benefit) represents
each entity's proportionate share of the consolidated provision for
income taxes.
The Company accounts for income taxes using the balance sheet method,
under which deferred tax assets and liabilities are recognized for the
tax consequences of temporary differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. On the consolidated balance sheet, net
deferred tax assets are included in accrued interest receivable and
other assets.
Comprehensive Income
--------------------
Comprehensive income is reported in addition to net income for all
periods presented. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of other comprehensive
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, 2005, the Company has two stock-based compensation
plans, which are described more fully in Note 13. The Company accounts
for these plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Generally, stock-based compensation cost is not
reflected in net income, as all options granted under these plans had
an exercise price equal to the market value of the underlying common
stock on the date of grant.
56
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (Continued)
------------------------
Pro forma adjustments to the Company's consolidated net income and
earnings per share are disclosed during the years in which the options
become vested. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation.
Year Ended December 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
(Dollars in thousands, except
per share data)
Net income, as reported $ 9,184 $ 5,827 $ 4,741
Add: Stock-based compensation expense included in
reported net income, net of tax effect 20
Deduct: Total stock-based compensation expense
determined under the fair value based method for
all awards, net of related tax effects (88) (68) (150)
---------- ---------- ----------
Pro forma net income $ 9,096 $ 5,759 $ 4,611
========== ========== ==========
Basic earnings per share - as reported $ 1.63 $ 1.24 $ 1.08
Basic earnings per share - pro forma $ 1.62 $ 1.22 $ 1.05
Diluted earnings per share - as reported $ 1.60 $ 1.18 $ 1.00
Diluted earnings per share - pro forma $ 1.59 $ 1.17 $ 0.97
Weighted average fair value of options granted
during the year $ 6.22 $ 4.69 $ 3.17
The fair value of each option is estimated on the date of grant using
an option-pricing model.
2005 2004 2003
------------- ------------- -------------
Dividend yield 2.27% to 2.71% 2.15% 1.74% to 1.88%
Expected volatility 30.3% to 31.4% 22.0% 19.4% to 19.6%
Risk-free interest rate 3.96% to 4.08% 4.01% 2.91% to 3.52%
Expected option life 7 years 7 years 7 years
Impact of New Financial Accounting Standards
--------------------------------------------
Other-Than-Temporary Impairment
In March 2004, the Financial Accounting Standards Board (FASB) and
Emerging Issues Task Force (EITF) reached consensus on several issues
being addressed in EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments. The consensus provides guidance for evaluating whether an
investment is other-than-temporarily impaired and was effective for
other-than-temporary impairment evaluations made in reporting periods
beginning after June 15, 2004. The disclosure provisions of EITF Issue
No. 03-1 continue to be effective for the Company's consolidated
financial statements for the year ended December 31, 2005.
57
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards (Continued)
--------------------------------------------
Other-Than-Temporary Impairment (Continued)
On November 3, 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS
115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments. This FSP addresses the
determination as to when an investment is considered impaired, whether
that impairment is other than temporary, and the measurement of an
impairment loss. This FSP also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and
requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. This FSP nullifies
certain requirements of EITF Issue No. 03-1, and supersedes EITF Topic
No. D-44, Recognition of Other-Than-Temporary Impairment upon the
Planned Sale of a Security Whose Cost Exceeds Fair Value. The guidance
in this FSP amends FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The FSP is effective for
reporting periods beginning after December 15, 2005. The Company does
not anticipate any material impact to its financial condition or
results of operations as a result of the adoption of this guidance.
Share-Based Payments
In December 2004, the FASB issued Statement No. 123 (revised 2004) (FAS
123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments such as stock options granted to employees. The
Company may elect to adopt FAS 123 (R) using a modified prospective
method or modified retrospective method. Under the modified
retrospective method, the Company would restate previously issued
financial statements, basing the compensation expense on that
previously reported in their pro forma disclosures required by FAS 123.
The modified prospective method would require the Company to record
compensation expense for the unvested portion of previously granted
awards that remain outstanding at the date of adoption as these awards
continue to vest. FAS 123 (R) is effective for the first fiscal year
beginning after June 15, 2005, effectively January 1, 2006 for the
Company. Management has elected to use the modified prospective method
and has completed its evaluation of the effect of FAS 123 (R), and does
not expect it to have a material impact on its financial position or
results of operations.
Accounting Changes and Error Corrections
On June 7, 2005, the FASB issued Statement No. 154 (FAS 154),
Accounting Changes and Error Corrections - a replacement of Accounting
Principles Board (APB) Opinion No. 20, Accounting Changes, and SFAS No.
3, Reporting Accounting Changes in Interim Financial Statements. Under
the provisions of FAS 154, voluntary changes in accounting principles
are applied retrospectively to prior periods' financial statements
unless it would be impractical to do so. FAS 154 supersedes APB Opinion
No. 20, which required that most voluntary changes in accounting
principles be recognized by including in the current period's net
income the cumulative effect of the change. FAS 154 also makes a
distinction between "retrospective application" of a change in
accounting principle and the "restatement" of financial statements to
reflect the correction of an error. The provisions of FAS 154 are
effective for accounting changes made in fiscal years beginning after
December 15, 2005. Management of the Company does not expect the
adoption of this standard to have a material impact on its financial
position or results of operations.
58
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. MERGER TRANSACTION WITH BANK OF AMADOR
On December 3, 2004, the Company completed an acquisition of Bank of
Amador (BNKA) through a merger and tax-free reorganization. The Company
acquired BNKA and merged BNKA with and into ARB. The acquisition was
completed because the Board of Directors and management of both
organizations believed the combination would be in the best interests
of shareholders of the Company and BNKA and that the combined companies
could offer a broader array of services and products than each could
offer on its own. Total consideration paid BNKA shareholders was
determined through extensive negotiations supported by internal
modeling, which management believed would result in earnings per share
accretion to the Company's shareholders in 2005. These factors
contributed to the purchase price which resulted in the recognition of
goodwill.
The following table summarizes the terms of the acquisition (dollars in
thousands):
Shares of common stock issued 775,548
Value of common stock issued $ 18,284
Cash paid to Bank of Amador shareholders $ 12,730
Total consideration paid $ 31,014
During 2005, goodwill was increased $238,000 representing the final
adjustments to the initial allocation of the purchase price.
The following supplemental pro forma information discloses selected
financial information for the periods indicated as though the merger
had been completed at the beginning of each year presented (dollars in
thousands, except per share data):
Year Ended December 31,
-----------------------
2004 2003
---------- ----------
Earnings as reported:
Revenue $ 25,031 $ 22,021
Net income $ 5,827 $ 4,741
Basic EPS $ 1.30 $ 1.13
Diluted EPS $ 1.24 $ 1.05
Pro forma merger adjustments:
Revenue $ 6,905 $ 7,043
Net income $ 1,584 $ 1,817
Pro forma earnings after merger adjustments:
Revenue $ 31,936 $ 29,064
Net income $ 7,411 $ 6,558
Basic EPS $ 1.42 $ 1.32
Diluted EPS $ 1.37 $ 1.24
Pro forma net income for the year ended December 31, 2004 excludes
nonrecurring charges of approximately $2,086,000 on an after-tax basis,
representing merger-related expenses and the cost of retiring
outstanding stock options.
59
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. MERGER TRANSACTION WITH BANK OF AMADOR (Continued)
The estimated fair value of assets acquired and liabilities assumed are
as follows (dollars in thousands):
Cash and cash equivalents $ 26,294
Interest-bearing deposits in banks 100
Available-for-sale investment securities 22,542
Gross loans 79,598
Allowance for loan and lease losses (861)
Premises and equipment 226
Core deposit intangible 2,213
Goodwill 16,083
Other assets 4,544
----------
Total assets acquired 150,739
----------
Deposits 119,236
Other liabilities 489
----------
Total liabilities assumed 119,725
----------
Purchase price $ 31,014
==========
4. GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2005 and 2004, goodwill totaled $16,321,000 and
$16,146,000, respectively. Goodwill is evaluated annually for
impairment under the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, and the Company determined that no impairment
recognition was required for the years ended December 31, 2005 and
2004. Goodwill is not deductible for tax purposes.
Other intangible assets are comprised of core deposit intangibles
totaling $1,831,000 and $2,183,000 at December 31, 2005 and 2004,
respectively. Amortization included in other expense totaled $352,000
and $30,000 for the years ended December 31, 2005 and 2004,
respectively. The remaining balance will be amortized over 6.9 years.
Amortization expense for the next five years is estimated as follows
(dollars in thousands):
Year Ending
December 31,
-------------
2006 $ 330
2007 308
2008 286
2009 264
2010 242
60
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, 2005 and 2004 consisted of the following (dollars in
thousands):
Available-for-Sale
------------------
2005
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities:
U.S. Government agencies $ 49,860 $ (741) $ 49,119
Mortgage-backed securities 37,065 $ 31 (770) 36,326
Obligations of states and
political subdivisions 36,942 486 (322) 37,106
Corporate debt securities 1,017 (3) 1,014
Equity securities:
Corporate stock 584 52 (12) 624
------------ ------------ ------------ ------------
$ 125,468 $ 569 $ (1,848) $ 124,189
============ ============ ============ ============
2004
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities:
U.S. Government agencies $ 46,610 $ 181 $ (90) $ 46,701
Mortgage-backed securities 40,309 137 (87) 40,359
Obligations of states and
political subdivisions 26,541 744 (45) 27,240
Corporate debt securities 1,115 1 (2) 1,114
Equity securities:
Corporate stock 586 62 (21) 627
------------ ------------ ------------ ------------
$ 115,161 $ 1,125 $ (245) $ 116,041
============ ============ ============ ============
Net unrealized losses on available-for-sale investment securities
totaling $1,279,000 were recorded, net of $522,000 in tax benefits, as
accumulated other comprehensive loss within shareholders' equity at
December 31, 2005. Proceeds and gross realized gains from the sale of
available-for-sale investment securities for the year ended December
31, 2005 totaled $6,964,000 and $48,000, respectively. There were no
transfers of available-for-sale investment securities during the year
ended December 31, 2005.
Net unrealized gains on available-for-sale investment securities
totaling $880,000 were recorded, net of $325,000 in tax liabilities, as
accumulated other comprehensive income within shareholders' equity at
December 31, 2004. Proceeds and gross realized losses from the sale of
available-for-sale investment securities for the year ended December
31, 2004 totaled $5,019,000 and ($38,000), respectively. There were no
transfers of available-for-sale investment securities during the year
ended December 31, 2004 and 2003.
61
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT SECURITIES (Continued)
Held-to-Maturity
----------------
2005
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities:
Mortgage-backed securities $ 45,012 $ 60 $ (414) $ 44,658
============ ============ ============ ============
2004
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Debt securities:
Mortgage-backed securities $ 41,203 $ 216 $ (91) $ 41,328
============ ============ ============ ============
There were no sales or transfers of held-to-maturity investment
securities for the years ended December 31, 2005, 2004 and 2003.
The amortized cost and estimated fair value of investment securities at
December 31, 2005 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 $ 21,165 $ 21,012
After one year through five years 45,306 44,547
After five years through ten years 17,066 17,386
After ten years 4,282 4,294
---------- ----------
87,819 87,239
Investment securities not due at
a single maturity date:
Mortgage-backed securities 37,065 36,326 $ 45,012 $ 44,658
Corporate stock 584 624
---------- ---------- ---------- ----------
$ 125,468 $ 124,189 $ 45,012 $ 44,658
========== ========== ========== ==========
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 $57,898,000 and
$57,481,000 and estimated fair values totaling $56,901,000 and
$57,599,000 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, 2005
and 2004, respectively.
62
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT SECURITIES (Continued)
Investment securities with unrealized losses at December 31, 2005 are
summarized and classified according to the duration of the loss period
as follows (dollars in thousands):
Less than 12 Months 12 Months or More Total
---------------------------- ---------------------------- ----------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
Available-for-Sale
------------------
Debt securities:
U.S. Government
agencies $ 29,344 $ (368) $ 19,775 $ (373) $ 49,119 $ (741)
Mortgage-backed
securities 16,779 (374) 16,619 (396) 33,398 (770)
Obligations of states
and political sub-
divisions 18,083 (212) 6,370 (110) 24,453 (322)
Corporate debt
securities 1,014 (3) 1,014 (3)
Corporate stock 238 (12) 238 (12)
------------ ------------ ------------ ------------ ------------ ------------
$ 65,220 $ (957) $ 43,002 $ (891) $ 108,222 $ (1,848)
============ ============ ============ ============ ============ ============
Held-to-Maturity
----------------
Debt securities:
Mortgage-backed
securities $ 30,753 $ (344) $ 3,130 $ (70) $ 33,883 $ (414)
============ ============ ============ ============ ============ ============
At December 31, 2005, the Company held 245 investment securities of
which 101 were in a loss position for less than twelve months and 52
were in a loss position and had been in a loss position for twelve
months or more. Management periodically evaluates each investment
security in a loss position for other-than-temporary impairment,
relying primarily on industry analyst reports and observation of market
conditions and interest rate fluctuations. Management believes it will
be able to collect all amounts due according to the contractual terms
of the underlying investment securities and that the noted decline in
fair value is considered temporary and due only to interest rate
fluctuations.
63
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. LOANS AND LEASES
Outstanding loans and leases are summarized as follows (dollars in
thousands):
December 31,
------------------------
2005 2004
---------- ----------
Real estate - commercial $ 154,500 $ 166,263
Real estate - construction 103,048 90,162
Real estate - multi-family 3,767 2,660
Real estate - residential 4,680 5,236
Commercial 77,971 66,864
Lease financing receivable 7,967 9,994
Agriculture 8,129 8,252
Consumer 11,900 9,417
---------- ----------
371,962 358,848
Deferred loan and lease origination fees, net (712) (885)
Allowance for loan and lease losses (5,679) (5,496)
---------- ----------
$ 365,571 $ 352,467
========== ==========
Certain loans have been pledged to secure borrowing arrangements (see
Note 10).
The components of the Company's leases receivable are summarized as
follows (dollars in thousands):
December 31,
------------------------
2005 2004
---------- ----------
Future lease payments receivable $ 8,470 $ 10,709
Residual interests 275 276
Unearned income (778) (991)
---------- ----------
Net lease financing receivable $ 7,967 $ 9,994
========== ==========
Future lease payments receivable are as follows (dollars in thousands):
Year Ending
December 31,
------------
2006 $ 3,810
2007 2,495
2008 1,500
2009 521
2010 142
Thereafter 2
-----------
Total lease payments receivable $ 8,470
===========
64
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows
(dollars in thousands):
Year Ended December 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Balance, beginning of year $ 5,496 $ 3,949 $ 3,197
Allowance acquired 861
Provision charged to operations 322 895 946
Losses charged to allowance (206) (269) (354)
Recoveries 67 60 160
---------- ---------- ----------
Balance, end of year $ 5,679 $ 5,496 $ 3,949
========== ========== ==========
At December 31, 2005 and 2004, nonaccrual loans and leases totaled
$67,000 and $236,000, respectively. Interest foregone on nonaccrual
loans for the years ended December 31, 2005, 2004 and 2003 was not
material.
The recorded investment in loans and leases that were considered to be
impaired totaled $91,000 and $247,000 at December 31, 2005 and 2004,
respectively. The related allowance for loan and lease losses for these
loans and leases as determined under loan impairment standards at
December 31, 2005 and 2004 was $24,000 and $62,000, respectively. The
average recorded investment in impaired loans and leases for the years
ended December 31, 2005, 2004 and 2003 was $271,000, $124,000 and
$148,000, respectively. Interest income recognized on impaired loans
and leases using a cash-basis method for the years ended December 31,
2005, 2004 and 2003 was not material.
Salaries and employee benefits totaling $1,395,000, $706,000 and
$570,000 have been deferred as loan and lease origination costs for the
years ended December 31, 2005, 2004 and 2003, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (dollars in
thousands):
December 31,
------------------------
2005 2004
---------- ----------
Land $ 206 $ 206
Building and improvements 779 597
Furniture, fixtures and equipment 6,023 5,378
Leasehold improvements 1,133 1,123
---------- ----------
8,141 7,304
Less accumulated depreciation
and amortization (6,051) (5,428)
---------- ----------
$ 2,090 $ 1,876
========== ==========
Depreciation and amortization included in occupancy and furniture and
equipment expense totaled $672,000, $562,000 and $480,000 for the years
ended December 31, 2005, 2004 and 2003, respectively.
65
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. ACCOUNTS RECEIVABLE SERVICING RECEIVABLES
The Company purchases existing accounts receivable on a discounted
basis from selected merchants and assumes the related billing and
collection responsibilities on a recourse basis. Accounts receivable
servicing fees included in other income totaled $356,000, $316,000 and
$247,000 for the years ended December 31, 2005, 2004 and 2003,
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,
-----------------------
2005 2004
---------- ----------
Savings $ 37,711 $ 38,957
Money market 133,443 139,373
NOW accounts 46,364 47,052
Time, $100,000 or more 69,063 57,037
Other time 49,728 49,258
---------- ----------
$ 336,309 $ 331,677
========== ==========
Aggregate annual maturities of time deposits are as follows (dollars in
thousands):
Year Ending
December 31,
------------
2006 $ 97,429
2007 11,659
2008 5,558
2009 2,322
2010 1,816
Thereafter 7
-------------
$ 118,791
=============
Interest expense recognized on interest-bearing deposits consisted of
the following (dollars in thousands):
Year Ended December 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Savings $ 150 $ 56 $ 35
Money market 2,164 1,057 884
NOW accounts 83 43 28
Time, $100,000 or more 1,620 836 743
Other time 1,629 519 700
---------- ---------- ----------
$ 5,646 $ 2,511 $ 2,390
========== ========== ==========
66
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. BORROWING ARRANGEMENTS
The Company has a total of $48,000,000 in unsecured short-term
borrowing arrangements to purchase Federal funds with four of its
correspondent banks. There were no advances under the borrowing
arrangements as of December 31, 2005 and 2004.
In addition, the Company has a line of credit available with the
Federal Home Loan Bank which is secured by pledged mortgage loans (see
Note 6) and investment securities (see Note 5). Borrowings may include
overnight advances as well as loans with a term of up to thirty years.
Advances totaling $43,656,000 were outstanding from the Federal Home
Loan Bank at December 31, 2005, bearing fixed interest rates ranging
from 2.10% to 6.13% and maturing between January 3, 2006 and December
31, 2007. Advances totaling $34,289,000 were outstanding from the
Federal Home Loan Bank at December 31, 2004, bearing fixed interest
rates ranging from 1.29% to 6.13% and maturing between January 24, 2005
and December 21, 2007. Amounts available under the borrowing
arrangement with the Federal Home Loan Bank at December 31, 2005 and
2004 totaled $3,534,000 and $16,071,000, respectively.
The following table summarizes these borrowings (in thousands):
December 31,
--------------------------------------------------
2005 2004
----------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- ---------- ---------- ----------
Short-term portion of borrowings $ 39,386 3.73% $ 24,457 1.85%
Long-term borrowings 4,270 4.10% 9,832 3.15%
---------- ----------
FHLB advances $ 43,656 3.76% $ 34,289 2.22%
========== ==========
Future minimum principal payments on outstanding borrowings are as
follows (dollars in thousands):
Year Ending
December 31,
------------
2006 $ 39,386
2007 4,270
-------------
$ 43,656
=============
The Company has also been issued $2,000,000 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 2005 and
management does not expect to draw upon these lines in the future.
67
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. INCOME TAXES
The provision for income taxes for the years ended December 31, 2005,
2004, and 2003 consisted of the following (dollars in thousands):
Federal State Total
------------ ------------ ------------
2005
----
Current $ 4,706 $ 1,508 $ 6,214
Deferred (481) 59 (422)
------------ ------------ ------------
Provision for income taxes $ 4,225 $ 1,567 $ 5,792
============ ============ ============
2004
----
Current $ 2,504 $ 956 $ 3,460
Deferred (25) (57) (82)
------------ ------------ ------------
Provision for income taxes $ 2,479 $ 899 $ 3,378
============ ============ ============
2003
----
Current $ 2,566 $ 968 $ 3,534
Deferred (332) (142) (474)
------------ ------------ ------------
Provision for income taxes $ 2,234 $ 826 $ 3,060
============ ============ ============
Deferred tax assets (liabilities) consisted of the following (dollars
in thousands):
December 31,
------------------------
2005 2004
---------- ----------
Deferred tax assets:
Allowance for loan and lease losses $ 2,382 $ 2,295
Future benefit of State tax deduction 506 214
Deferred compensation 517 484
Unrealized losses on available-for-sale investment
securities 522
Other 167 10
---------- ----------
Total deferred tax assets 4,094 3,003
---------- ----------
Deferred tax liabilities:
Core deposit intangible (819) (970)
Investment market to market (165) (192)
Future liability of State deferred tax assets (133) (115)
Deferred loan costs (430)
Unrealized gain on available-for-sale investment securities (325)
Federal Home Loan Bank stock dividends (122) (88)
Other (10) (167)
---------- ----------
Total deferred tax liabilities (1,679) (1,857)
---------- ----------
Net deferred tax assets $ 2,415 $ 1,146
========== ==========
68
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. INCOME TAXES (Continued)
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rate of 34% to income before
income taxes. The significant items comprising these differences
consisted of the following:
Year Ended December 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Federal income tax statutory rate 34.0 % 34.0 % 34.0 %
State franchise tax, net of Federal tax effect 6.9 % 6.4 % 6.9 %
Tax benefit of interest on obligations of
states and political subdivisions (2.1)% (2.0)% (2.1)%
Tax-exempt income from life insurance
policies (0.4)% (2.2)%
Other 0.3 % 0.5 % 0.4 %
---------- ---------- ----------
Effective tax rate 38.7 % 36.7 % 39.2 %
========== ========== ==========
12. COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases branch facilities, administrative offices and
various equipment under noncancelable operating leases which expire on
various dates through the year 2014. Certain of the leases have five
year renewal options. Two of the branch facilities are leased from
current or former members of the Company's Board of Directors (see Note
17).
Future minimum lease payments are as follows (dollars in thousands):
Year Ending
December 31,
------------
2006 $ 860
2007 689
2008 693
2009 556
2010 366
Thereafter 873
-------------
$ 4,037
=============
Rental expense included in occupancy, furniture and equipment expense
totaled $887,000, $718,000 $600,000 for the years ended December 31,
2005, 2004 and 2003, 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.
69
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
-------------------------------------------------
The Company's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and
standby letters of credit as it does for loans included on the
consolidated balance sheet.
The following financial instruments represent off-balance-sheet credit
risk (dollars in thousands):
December 31,
-----------------------
2005 2004
---------- ----------
Commitments to extend credit:
Revolving lines of credit secured by 1-4 family residences $ 16,845 $ 2,328
Commercial real estate, construction and land
development commitments secured by real estate 55,313 66,066
Other unused commitments, principally commercial loans 65,644 57,019
---------- ----------
$ 137,802 $ 125,413
========== ==========
Standby letters of credit $ 3,393 $ 2,788
========== ==========
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, 2005 and 2004. The Company
recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
Significant Concentrations of Credit Risk
-----------------------------------------
The Company grants real estate mortgage, real estate construction,
commercial, agricultural and consumer loans to clients throughout
Sacramento, Placer, Yolo, Amador, El Dorado, Sonoma, Napa, Marin and
Mendocino counties.
In management's judgment, a concentration exists in real estate-related
loans which represented approximately 72% and 74% of the Company's loan
portfolio at December 31, 2005 and 2004, respectively. Although
management believes such concentrations to have no more than the normal
risk of collectibility, a substantial decline in the economy in
general, or a decline in real estate values in the Company's primary
market areas in particular, could have an adverse impact on
collectibility of these loans. However, personal and business income
represent the primary source of repayment for a majority of these
loans.
70
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
Correspondent Banking Agreements
--------------------------------
The Company maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements.
Uninsured deposits totaled $20,623,000 at December 31, 2005.
Contingencies
-------------
The Company is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to such actions will not
materially affect the consolidated financial position or results of
operations of the Company.
13. SHAREHOLDERS' EQUITY
Earnings Per Share
------------------
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows (dollars and
shares in thousands, except per share data):
Weighted
Average
Number of
Net Shares Per-Share
For the Year Ended Income Outstanding Amount
--------------------------------- ------------ ------------ ------------
December 31, 2005
-----------------
Basic earnings per share $ 9,184 5,620 $ 1.63
============
Effect of dilutive stock options 114
------------ ------------
Diluted earnings per share $ 9,184 5,734 $ 1.60
============ ============ ============
December 31, 2004
-----------------
Basic earnings per share $ 5,827 4,716 $ 1.24
============
Effect of dilutive stock options 215
------------ ------------
Diluted earnings per share $ 5,827 4,931 $ 1.18
============ ============ ============
December 31, 2003
-----------------
Basic earnings per share $ 4,741 4,398 $ 1.08
============
Effect of dilutive stock options 362
------------ ------------
Diluted earnings per share $ 4,741 4,760 $ 1.00
============ ============ ============
71
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans
------------------
In 2000 and 1995, the Board of Directors adopted stock option plans
under which options may be granted to employees and directors under
incentive and nonstatutory agreements. At December 31, 2005, grants
outstanding combined with shares available for future grants totaled
649,629 shares under these plans. The plans require that the option
price may not be less than the fair market value of the stock at the
date the option is granted. The purchase price of exercised options is
payable in full in cash or shares of the Company's common stock owned
by the optionee at the time the option is exercised. The options expire
on dates determined by the Board of Directors, but not later than ten
years from the date of grant. Options vest ratably over a five year
period. Outstanding options under the 1995 plan are exercisable until
their expiration; however, no new options will be granted under this
plan.
A summary of the combined activity within the plans follows:
2005 2004 2003
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
Options outstanding,
beginning of year 359,748 $ 8.98 605,704 $ 5.80 688,742 $ 4.51
Options granted 65,458 $ 21.05 69,850 $ 19.43 68,430 $ 13.52
Options exercised (118,975) $ 4.00 (290,449) $ 4.08 (149,614) $ 3.96
Options canceled (15,296) $ 17.77 (25,358) $ 15.00 (1,854) $ 4.74
------------ ------------ ------------
Options outstanding,
end of year 290,935 $ 13.25 359,748 $ 8.98 605,704 $ 5.80
============ ============ ============
Options exercisable,
end of year 159,444 $ 8.43 257,478 $ 5.70 533,397 $ 4.76
============ ============ ============
A summary of options outstanding at December 31, 2005 follows:
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 2005 Life 2005
------------------------ ---------------- ---------------- ----------------
$ 3.03 9,806 .8 years 9,806
$ 4.74 15,593 4.0 years 15,593
$ 5.02 11,245 2.7 years 11,245
$ 5.57 21,703 1.4 years 21,703
$ 8.03 14,943 3.9 years 14,943
$ 8.21 15,074 3.0 years 15,074
$ 8.85 43,404 2.7 years 43,404
$ 13.51 40,248 7.4 years 16,099
$ 14.65 801 7.5 years 320
$ 19.43 56,281 8.4 years 11,257
$ 20.96 25,256 9.1 years
$ 21.11 36,581 9.7 years
---------------- ----------------
290,935 159,444
================ ================
72
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. SHAREHOLDERS' EQUITY (Continued)
Common Stock Repurchase Program
-------------------------------
During 1997, the Board of Directors authorized the annual repurchase of
up to five percent of the Company's common stock. Repurchases are
generally made in the open market at market prices.
Stock Dividend
--------------
The Board of Directors declared 5% stock dividends on November 16, 2005
and December 16, 2004. All per share and stock option data included in
the consolidated financial statements have been retroactively restated
to reflect the stock dividends.
Stock Split
-----------
On September 17, 2003, the Board of Directors declared a three-for-two
stock split, payable on October 31, 2003 to shareholders of record on
October 17, 2003. All per share, shares outstanding and stock option
data in the consolidated financial statements have been retroactively
restated to reflect the stock split.
14. REGULATORY MATTERS
Dividends
---------
Upon declaration by the Board of Directors of the Company, all
shareholders of record will be entitled to receive dividends. The
California Financial Code restricts the total dividend payment of any
state banking association in any calendar year to the lesser of (1) the
bank's retained earnings or (2) the bank's net income for its last
three fiscal years, less distributions made to shareholders during the
same three-year period. At December 31, 2005, the subsidiaries had
$2,209,000 in retained earnings available for dividend payments to the
Company.
Regulatory Capital
------------------
The Company and its banking subsidiary are subject to certain
regulatory capital requirements administered by the Board of Governors
of the Federal Reserve System and the FDIC. Failure to meet these
minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the banking
subsidiaries must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and its banking subsidiary's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its banking subsidiary to maintain
minimum amounts and ratios of total and Tier 1 capital to risk-weighted
assets and of Tier 1 capital to average assets. Each of these
components is defined in the regulations. Management believes that the
Company and its banking subsidiary met all their capital adequacy
requirements as of December 31, 2005 and 2004.
73
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. REGULATORY MATTERS (Continued)
Regulatory Capital (Continued)
------------------
In addition, the most recent notifications from the FDIC categorized
ARB as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, ARB must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth below. There are no conditions or events
since those notifications that management believes have changed the
categories.
December 31,
--------------------------------------------------
2005 2004
----------------------- -----------------------
Amount Ratio Amount Ratio
---------- ---------- ---------- ----------
(dollars in thousands)
Leverage Ratio
--------------
American River Bankshares and Subsidiaries $ 45,471 7.7% $ 40,106 8.4%
Minimum regulatory requirement $ 23,746 4.0% $ 19,222 4.0%
American River Bank $ 45,602 7.7% $ 42,191 8.8%
Minimum requirement for "Well-Capitalized" institution $ 29,626 5.0% $ 23,986 5.0%
Minimum regulatory requirement $ 23,701 4.0% $ 19,189 4.0%
Tier 1 Risk-Based Capital Ratio
-------------------------------
American River Bankshares and Subsidiaries $ 45,471 10.6% $ 40,106 9.6%
Minimum regulatory requirement $ 17,165 4.0% $ 16,631 4.0%
American River Bank $ 45,602 10.7% $ 42,191 10.2%
Minimum requirement for "Well-Capitalized" institution $ 25,680 6.0% $ 24,898 6.0%
Minimum regulatory requirement $ 17,120 4.0% $ 16,599 4.0%
Total Risk-Based Capital Ratio
------------------------------
American River Bankshares and Subsidiaries $ 50,839 11.9% $ 45,307 10.9%
Minimum regulatory requirement $ 34,330 8.0% $ 33,263 8.0%
American River Bank $ 50,956 11.9% $ 47,382 11.4%
Minimum requirement for "Well-Capitalized" institution $ 42,800 10.0% $ 41,497 10.0%
Minimum regulatory requirement $ 34,240 8.0% $ 33,198 8.0%
15. OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income consisted of the following (dollars in
thousands):
Year Ended December 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Gain on life insurance death benefit $ 553
Accounts receivable servicing fees (Note 8) $ 356 316 $ 247
Merchant fee income 509 393 357
Income from residential lending division 283 187 366
Fees from lease brokerage services 9 381
Other 461 386 335
---------- ---------- ----------
$ 1,609 $ 1,844 $ 1,686
========== ========== ==========
74
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. OTHER NONINTEREST INCOME AND EXPENSE (Continued)
Other noninterest expense consisted of the following (dollars in
thousands):
Year Ended December 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Professional fees $ 732 $ 478 $ 335
Outsourced item processing 489 383 361
Telephone and postage 439 280 275
Advertising and promotion 331 288 198
Donations 82 527 26
Stationery and supplies 303 262 175
Directors' compensation 429 518 353
Amortization of intangible assets 352 30 7
Other operating expenses 1,231 1,156 939
---------- ---------- ----------
$ 4,388 $ 3,922 $ 2,669
========== ========== ==========
16. EMPLOYEE BENEFIT PLANS
American River Bankshares 401(k) Plan
-------------------------------------
The American River Bankshares 401(k) Plan commenced January 1, 1993 and
is available to all employees. Under the plan, the Company will match
100% of each participants' contribution up to 3% of annual compensation
plus 50% of the next 2% of annual compensation. Employer Safe Harbor
matching contributions (made after January 1, 2004) are 100% vested
upon entering the plan. Employer contributions made prior to January 1,
2004 vest at a rate of 20% per year over a five year period. Employer
contributions totaled $220,000, $169,000 and $116,000 for the years
ended December 31, 2005, 2004 and 2003, 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.
American River Bankshares Deferred Compensation Plan
----------------------------------------------------
The Company has established a Deferred Compensation Plan for certain
members of the management team and a Deferred Fee Agreement for
Non-Employee Directors for the purpose of providing the opportunity for
participants to defer compensation. Participants of the management
team, who are selected by a Committee designated by the Board of
Directors, may elect to defer annually a minimum of $5,000 or a maximum
of eighty percent of their base salary and all of their cash bonus.
Directors may also elect to defer up to one hundred percent of their
monthly fees. The Company bears all administration costs and funds the
interest earned on participant deferrals at a rate based on U.S.
Government Treasury rates. Deferred compensation, including interest
earned, totaled $1,147,000, $851,000 and $615,000 at December 31, 2005,
2004 and 2003, respectively.
75
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. EMPLOYEE BENEFIT PLANS (Continued)
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. At the balance sheet date, the amount of accrued benefits
approximates the then present value of the benefits expected to be
provided at retirement. The expense recognized under this plan totaled
$115,000, $29,000 and $42,000 for the years ended December 31, 2005,
2004 and 2003, respectively.
Under these plans, the Company invested in single premium life
insurance policies with cash surrender values totaling $5,073,000 and
$4,895,000 at December 31, 2005 and 2004, respectively. On the
consolidated balance sheet, the cash surrender value of life insurance
policies is included in accrued interest receivable and other assets.
Income on these policies, net of expense, totaled approximately
$179,000, $69,000 and $27,000 for the years ended December 31, 2005,
2004 and 2003, respectively.
17. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company enters into
transactions with related parties, including Directors and affiliates.
These transactions include borrowings from the Company with
substantially the same terms, including rates and collateral, as loans
to unrelated parties. The following is a summary of the aggregate
activity involving related party borrowers during 2005 (dollars in
thousands):
Balance, January 1, 2005 $ 7,048
Disbursements 170
Amounts repaid 242
-----------
Balance, December 31, 2005 $ 6,976
===========
Undisbursed commitments to related parties,
December 31, 2005 $ 31
===========
The Company also leases two branch facilities from current and former
members of the Company's Board of Directors. Rental payments to the
Directors totaled $115,000, $112,000 and $109,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.
18. OTHER COMPREHENSIVE LOSS
At December 31, 2005, 2004 and 2003, the Company had other
comprehensive loss as follows (dollars in thousands):
Tax
Before Benefit After
Tax (Expense) Tax
---------- ---------- ----------
For the Year Ended December 31, 2005
------------------------------------
Other comprehensive loss:
Unrealized holding losses $ (2,111) $ 827 $ (1,284)
Less reclassification adjustment for realized
gains included in net income 48 (20) 28
---------- ---------- ----------
$ (2,159) $ 847 $ (1,312)
========== ========== ==========
76
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. OTHER COMPREHENSIVE LOSS (Continued)
Tax
Before Benefit After
Tax (Expense) Tax
----------- ----------- -----------
For the Year Ended December 31, 2004
------------------------------------
Other comprehensive loss:
Unrealized holding losses $ (588) $ 256 $ (332)
Less reclassification adjustment for realized
losses included in net income (38) 15 (23)
----------- ----------- -----------
$ (550) $ 241 $ (309)
=========== =========== ===========
For the Year Ended December 31, 2003
------------------------------------
Other comprehensive loss:
Unrealized holding losses $ (686) $ 266 $ (420)
Less reclassification adjustment for realized
gains included in net income 33 (13) 20
----------- ----------- -----------
$ (719) $ 279 $ (440)
=========== =========== ===========
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which
it is practicable to estimate fair value. These estimates are made at a
specific point in time based on relevant market data and information
about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering the Company's
entire holdings of a particular financial instrument for sale at one
time, nor do they attempt to estimate the value of anticipated future
business related to the instruments. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the fair values presented.
The following methods and assumptions were used by the Company to
estimate the fair value of its financial instruments at December 31,
2005 and 2004:
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.
77
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (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 demand deposits are, by definition, equal
to the amount payable on demand at the reporting date represented by
their carrying amount. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow analysis using
interest rates offered at each reporting date for certificates with
similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value.
Short-term and long-term borrowings: The fair value of short-term
borrowings is estimated to be the carrying amount. The fair value of
long-term borrowings is estimated using a discounted cash flow analysis
using interest rates currently available for similar debt instruments.
Commitments to extend credit: The fair value of commitments are based
on fees currently charged to enter into similar agreements, net of
origination fees. These fees were not material at December 31, 2005 and
2004.
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows (dollars in thousands):
December 31, 2005 December 31, 2004
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 34,825 $ 34,825 $ 28,115 $ 28,115
Federal Funds sold 1,250 1,250 7,000 7,000
Interest-bearing deposits in banks 4,844 4,823 5,939 5,901
Investment securities 169,201 168,847 157,244 157,369
Loans and leases 365,571 364,589 352,467 352,768
FHLB stock 2,608 2,608 2,158 2,158
Accounts receivable servicing
receivables 2,000 2,000 2,409 2,409
Accrued interest receivable 2,925 2,925 2,504 2,504
Cash surrender value of life
insurance policies 5,073 5,073 4,895 4,895
78
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
December 31, 2005 December 31, 2004
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial liabilities:
Deposits $ 500,706 $ 500,906 $ 475,387 $ 476,139
Short-term borrowings 39,386 39,386 24,457 24,457
Long-term debt 4,270 3,423 9,832 10,223
Accrued interest payable 795 795 553 553
79
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
20. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
December 31, 2005 and 2004
(Dollars in thousands)
2005 2004
---------- ----------
ASSETS
Cash and due from banks $ 316 $ 2,654
Investment in subsidiaries 62,997 61,075
Dividends receivable from subsidiaries 842 9,985
Other assets 973 822
---------- ----------
$ 65,128 $ 74,536
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable to shareholders $ 841 $ 582
Other liabilities 1,541 14,964
---------- ----------
Total liabilities 2,382 15,546
---------- ----------
Shareholders' equity:
Common stock 47,474 42,557
Retained earnings 16,029 15,878
Accumulated other comprehensive (loss) income,
net of taxes (757) 555
---------- ----------
Total shareholders' equity 62,746 58,990
---------- ----------
$ 65,128 $ 74,536
========== ==========
80
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
20. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF INCOME
For the Years Ended December 31, 2005, 2004 and 2003
(Dollars in thousands)
2005 2004 2003
---------- ---------- ----------
Income:
Dividends declared by subsidiaries -
eliminated in consolidation $ 6,522 $ 12,035 $ 950
Management fee from subsidiaries - eliminated
in consolidation 2,760 2,193 1,781
Other income 19 20 10
---------- ---------- ----------
Total income 9,301 14,248 2,741
---------- ---------- ----------
Expenses:
Salaries and employee benefits 2,338 2,042 2,104
Professional fees 225 107 93
Directors' compensation 339 433 274
Donations 503
Other expenses 611 524 454
---------- ---------- ----------
Total expenses 3,513 3,609 2,925
---------- ---------- ----------
Income (loss) before equity in undistributed
income of subsidiaries 5,788 10,639 (184)
Equity in undistributed (distributed) income of
subsidiaries 3,107 (5,355) 4,487
---------- ---------- ----------
Income before income taxes 8,895 5,284 4,303
Income tax benefit 289 543 438
---------- ---------- ----------
Net income $ 9,184 $ 5,827 $ 4,741
========== ========== ==========
81
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
20. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
(Dollars in thousands)
2005 2004 2003
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 9,184 $ 5,827 $ 4,741
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed (distributed) earnings of
subsidiaries (8,895) 5,355 (4,487)
Decrease (increase) in dividends receivable
from subsidiaries 5,780 (9,635)
Decrease (increase) in other assets 9,225 (149) (47)
(Decrease) increase in other liabilities (692) 1,149 366
---------- ---------- ----------
Net cash provided by operating activities 14,602 2,547 573
---------- ---------- ----------
Cash flows from investing activities:
Cash paid to Bank of Amador shareholders (12,730)
Purchase of equipment (353)
---------- ---------- ----------
Net cash used in investing activities (13,083)
---------- ---------- ----------
Cash flows from financing activities:
Cash dividends paid (2,753) (2,070) (1,135)
Exercise of stock options 945 1,959 653
Cash paid to repurchase common stock (2,017) (184) (24)
Cash paid for fractional shares in connection
with stock dividends and stock splits (32) (7)
---------- ---------- ----------
Net cash used in financing activities (3,857) (295) (513)
---------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents (2,338) 2,252 60
Cash and cash equivalents at beginning of year 2,654 402 342
---------- ---------- ----------
Cash and cash equivalents at end of year $ 316 $ 2,654 $ 402
========== ========== ==========
Non-cash investing activities:
Payable to Bank of Amador shareholders $ 12,730
Common stock issued in acquisition $ 18,284
Non-cash financing activities:
Dividends declared and unpaid $ 841 $ 582 $ 608
82
Selected Quarterly Information (Unaudited)
-----------------------------------------------------------------------------------------------
(In thousands, except per share and price range of common stock)
-----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-----------------------------------------------------------------------------------------------
2005
Interest income $ 7,674 $ 8,011 $ 8,562 $ 8,966
Net interest income 6,315 6,439 6,753 6,955
Provision for loan and lease losses 217 55 -- 50
Noninterest income 581 584 594 570
Noninterest expense 3,328 3,403 3,464 3,298
Income before taxes 3,351 3,565 3,883 4,177
Net income 2,051 2,190 2,376 2,567
-----------------------------------------------------------------------------------------------
Basic earnings per share $ .37 $ .39 $ .42 $ .46
Diluted earnings per share .36 .38 .41 .45
Cash dividends per share .119 .124 .143 .150
-----------------------------------------------------------------------------------------------
Price range, common stock $21.05-22.89 $19.91-23.10 $19.76-22.62 $19.85-22.38
===============================================================================================
2004
Interest income $ 5,113 $ 5,356 $ 5,672 $ 6,495
Net interest income 4,422 4,638 4,869 5,489
Provision for loan and lease losses 198 231 266 200
Noninterest income 429 1,022 441 503
Noninterest expense 2,749 3,463 2,814 2,687
Income before taxes 1,904 1,966 2,230 3,105
Net income 1,160 1,427 1,339 1,901
-----------------------------------------------------------------------------------------------
Basic earnings per share $ .26 $ .31 $ .29 $ .38
Diluted earnings per share .24 .30 .28 .37
Cash dividends per share .105 .105 .105 .105
-----------------------------------------------------------------------------------------------
Price range, common stock $17.24-19.05 $18.03-20.18 $17.69-21.21 $19.41-21.77
===============================================================================================
The earnings per share and price range have been adjusted for 5% stock dividends
in 2005 and 2004.
83
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, 2005. There have been no disagreements
with such independent accountants during the last two fiscal years ended
December 31, 2005, 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, 2005. 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, 2005, 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, 2005. 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, 2005, the Company's internal control over
financial reporting is effective based upon those criteria.
Perry-Smith LLP, the registered public accounting firm that audited the
Company's consolidated financial statements included in this Annual Report under
Item 8, "Financial Statements and Supplementary Data," has issued a report with
respect to management's assessment of the effectiveness of the Company's
internal control over financial reporting. The report of Perry-Smith LLP is set
forth immediately below.
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
--------------------------------------------------------------------------------
To the Board of Directors
American River Bankshares
We have audited management's assessment, included in the accompanying
Report of Management on Internal Control Over Financial Reporting, that American
River Bankshares and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("the COSO criteria"). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that American River Bankshares
and subsidiaries maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material respects, based on
the COSO criteria. Also in our opinion, American River Bankshares and
subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of American River Bankshares and subsidiaries as of December 31, 2005 and
2004, 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, 2005 and our report dated March 8, 2006 expressed an
unqualified opinion thereon.
/s/ Perry-Smith LLP
------------------------------------
Sacramento, California
March 8, 2006
85
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2006 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
2006 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
2006 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
2006 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
2006 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
86
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits.
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and
among the Registrant, ARH Interim National Bank and North
Coast Bank, N.A., dated as of March 1, 2000 (included as
Annex A). **
(2.2) Agreement and Plan of Reorganization and Merger by and
among the Registrant, American River Bank and Bank of
Amador, dated as of July 8, 2004 (included as Annex A). ***
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2004,
filed with the Commission on August 11, 2004.
(3.2) Bylaws, as amended, incorporated by reference from Exhibit
3.2 to the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 2004, filed with the Commission
on August 11, 2004.
(4.1) Specimen of the Registrant's common stock certificate,
incorporated by reference from Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2004, filed with the Commission on August
11, 2004.
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership, dated
April 1, 2000, related to 1545 River Park Drive, Suite 107,
Sacramento, California. **
(10.2) Lease agreement and addendum between American River Bank
and Bradshaw Plaza Group each dated January 31, 2000,
related to 9750 Business Park Drive, Sacramento,
California. **
(10.3) Lease agreement between American River Bank and Marjorie G.
Taylor dated April 5, 1984, and addendum dated July 16,
1997, related to 10123 Fair Oaks Boulevard, Fair Oaks,
California. **
(10.4) Lease agreement between American River Bank and Sandalwood
Land Company dated August 28, 1996, related to 2240 Douglas
Boulevard, Suite 100, Roseville, California. **
*(10.5) Registrant's 1995 Stock Option Plan. **
*(10.6) Form of Nonqualified Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.7) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.8) Registrant's Stock Option Gross-Up Plan and Agreement, as
amended, dated May 20, 1998. **
87
*(10.9) Registrant's Deferred Compensation Plan dated May 1,
1998.**
*(10.10) Registrant's Deferred Fee Plan dated April 1, 1998. **
*(10.11) American River Bank Employee Severance Policy dated March
18, 1998. **
*(10.12) First Amendment dated December 20, 2000, to the
Registrant's Deferred Compensation Plan dated May 1, 1998,
incorporated by reference from Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the period
ended December 31, 2000, filed with the Commission on April
2, 2001.
*(10.13) Amendment No. 1 to the Registrant's Incentive Compensation
Plan, incorporated by reference from Exhibit 10.23 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2001, filed with the Commission on August
14, 2001.
(10.14) Lease agreement and addendum between North Coast Bank, N.A.
and Rosario LLC, each dated September 1, 1998, related to
50 Santa Rosa Avenue, Santa Rosa, California. **
(10.15) Lease agreement between American River Bank and 520 Capitol
Mall, Inc., dated August 19, 2003, related to 520 Capitol
Mall, Suite 100, Sacramento, California, incorporated by
reference from Exhibit 10.29 to the Registrant's Form 10-Q
for the period ended September 30, 2003, filed with the
Commission on November 7, 2003.
*(10.16) Employment Agreement between Registrant and David T. Taber
dated August 22, 2003, incorporated by reference from
Exhibit 10.30 to the Registrant's Form 10-Q for the period
ended September 30, 2003, filed with the Commission on
November 7, 2003.
(10.17) Lease agreement between R & R Partners, a California
General Partnership and North Coast Bank, N.A., dated July
1, 2003, related to 8733 Lakewood Drive, Suite A, Windsor,
California, incorporated by reference from Exhibit 10.32 to
the Company's Form 10-Q for the period ended September 30,
2003, filed with the Commission on November 7, 2003.
*(10.18) Salary Continuation Agreement between American River Bank
and Mitchell A. Derenzo dated August 22, 2003, incorporated
by reference from Exhibit 10.33 to the Company's Form 10-Q
for the period ended September 30, 2003, filed with the
Commission on November 7, 2003.
*(10.19) Salary Continuation Agreement between the Registrant and
David T. Taber dated August 22, 2003, incorporated by
reference from Exhibit 10.34 to the Company's Form 10-Q for
the period ended September 30, 2003, filed with the
Commission on November 7, 2003.
*(10.20) Salary Continuation Agreement between American River Bank
and Douglas E. Tow dated August 22, 2003, incorporated by
reference from Exhibit 10.35 to the Company's Form 10-Q for
the period ended September 30, 2003, filed with the
Commission on November 7, 2003.
*(10.21) Registrant's 2000 Stock Option Plan with forms of
Nonqualified Stock Option Agreement and Incentive Stock
Option Agreement. **
(10.22) First Amendment dated April 21, 2004, to the lease
agreement between American River Bank and 520 Capitol Mall,
Inc. dated August 19, 2003, related to 520 Capitol Mall,
Suite 100 Sacramento, California, incorporated by reference
from Exhibit 10.37 to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 2004, filed with
the Commission on August 11, 2004.
88
*(10.23) Registrant's 401(k) Plan dated September 20, 2004,
incorporated by reference from Exhibit 10.38 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2004, filed with the Commission on
November 12, 2004.
(10.24) Agreement between Bank of Amador and the United States
Postal Service, dated April 24, 2001, related to 424 Sutter
Street, Jackson, California. ***
(10.25) Ground lease agreement between Bank of Amador and the James
B. Newman and Helen M. Newman, dated June 1, 1992, related
to 26675 Tiger Creek Road, Pioneer, California. ***
*(10.26) Salary Continuation Agreement between Bank of Amador and
Larry D. Standing dated April 1, 2004, and related
Endorsement Split Dollar Agreement dated April 1, 2004. ***
*(10.27) Amended and Restated Director Retirement Agreement dated as
of August 1, 2003, between Bank of Amador and Larry D.
Standing. ***
*(10.28) Employment Agreement between Registrant and Larry D.
Standing dated December 3, 2004. ***
(10.29) 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.
(10.30) 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.
(10.31) 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.
*(10.32) 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.
(10.33) First Amendment to Commercial Lease Agreement between R. &
R. Partners, and North Coast Bank, a division of American
River Bank, dated January 2, 2006, related to 8733 Lakewood
Drive, Suite A, Windsor, California, incorporated by
reference from Exhibit 99.1 to the Registrant's Report on
Form 8-K, filed with the Commission on January 3, 2006.
(14.1) Registrant's Code of Ethics, incorporated by reference from
Exhibit 14.1 to the Registrant's Annual Report on Form 10-K
for the period ended December 31, 2003, filed with the
Commission on March 19, 2004.
(21.1) The Registrant's only subsidiaries are American River Bank
and American River Financial.
(23.1) Consent of Perry-Smith LLP.
(31.1) Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
89
(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, 2005 and Notice
of Annual Meeting and Proxy Statement for the Company's 2006 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.
90
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 7, 2006 By: /s/ DAVID T. TABER
------------- ---------------------------------
David T. Taber
Chief Executive Officer
(Principal Executive Officer)
March 7, 2006 By: /s/ MITCHELL A. DERENZO
------------- ---------------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and
Accounting Officer)
91
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 3/07/06
--------------------------
Charles D. Fite
/s/ ROGER J. TAYLOR Director, Vice Chairman 3/06/06
--------------------------
Roger J. Taylor
/s/ AMADOR S. BUSTOS Director 3/08/06
--------------------------
Amador S. Bustos
/s/ ROBERT J. FOX Director 3/08/06
--------------------------
Amador S. Bustos
/s/ WILLIAM A. ROBOTHAM Director 3/08/06
--------------------------
William A. Robotham
/s/ DAVID T. TABER Director 3/08/06
--------------------------
David T. Taber
/s/ STEPHEN H. WAKS Director 3/07/06
--------------------------
Stephen H. Waks
/s/ MICHAEL A. ZIEGLER Director 3/07/06
--------------------------
Michael A. Ziegler
92
EXHIBIT INDEX
Exhibit Number Description Page
--------------------------------------------------------------------------------
23.1 Consent of Perry-Smith LLP 94
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 95
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 96
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 97
93