(cid:41) (cid:50) (cid:38) (cid:56) (cid:54) (cid:3) (cid:50) (cid:49) (cid:3) (cid:41) (cid:56) (cid:49) (cid:39) (cid:36) (cid:48) (cid:40) (cid:49) (cid:55) (cid:36) (cid:47) (cid:54)
2 0 1 0 a n n u a l r e p o r t
Annual Report Copies
American River Bankshares will provide its security holders and interested parties,
without charge, a copy of its 2010 Annual Report on Form 10-K, including the
financial statements and schedules thereto, as filed with the Securities and Exchange
Commission. To request a copy by mail, please contact American River Bankshares. To
view a pdf version online, please go to www.envisionreports.com/AMRB.
2
Table of Contents
Letter from the Chairman and CEO ............................................................................................................3
Total Return Performance ............................................................................................................................4
Our Locations ..............................................................................................................................................4
Financial Highlights .....................................................................................................................................5
Our Team .....................................................................................................................................................7
Selected Financial Data ................................................................................................................................9
Management’s Discussion and Analysis of Financial Condition and Results of Operations .........................10
Selected Quarterly Information ..................................................................................................................33
Report of Management on Internal Control Over Financial Reporting ......................................................34
Report of Independent Registered Public Accounting Firm ........................................................................35
Consolidated Balance Sheet, December 31, 2010 and 2009 .......................................................................36
Consolidated Statement of Income for the Years Ended December 31, 2010, 2009 and 2008 ....................37
Consolidated Statement of Changes in Shareholders’ Equity for the Years Ended
December 31, 2010, 2009 and 2008 ..........................................................................................................38
Consolidated Statement of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008 ..............39
Notes to Consolidated Financial Statements ...............................................................................................42
T H I S P A G E H A S B E E N I N T E N T I O N A L L Y L E F T B L A N K .
2
Letter from the Chairman and CEO
Dear Fellow Shareholder,
Focus on Fundamentals. American River Bankshares focused its efforts in 2010 on
building new relationships and improving asset quality.
Despite the high credit costs related to collection and valuation allowances, we ended
2010 with a modest profit.
Our diligent efforts with our credit challenges resulted in some positive results. Year
over year, classified loans were down 28.6% and loans past due 30-89 days were
down 27.0%.
Loan demand remains off from normal levels as some businesses continue to struggle,
have become debt averse or can handle with cash on hand what growth they are
experiencing. In 2010, we originated $35 million in new loans, slightly less than half
of the production in 2009.
American River Bank, Bank of Amador and North Coast Bank continue to employ
a business model of relationship management, with the heart of the strategy being
obtaining the principal operating account for both business and personal clients.
These actions produced an $18.6 million or 6% increase in core deposits.
We remain well-capitalized with $90 million in total shareholders’ equity and very
liquid, which puts us in a position to take advantage of opportunities within the
communities we serve.
In 2011, American River Bankshares will continue its approach of strategic-minded
growth and a focus on fundamentals, especially in the area of asset quality. Economic
recovery remains slow and uncertain, but we have the confidence that we are
positioned correctly for the future success of our Company.
Thank you for your continued investment and for the trust and confidence you have
placed in our Company.
Sincerely,
CHARLES D. FITE
CHAIRMAN OF THE BOARD
DAVID T. TABER
PRESIDENT & CHIEF EXECUTIVE OFFICER
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
3
T O T A L R E T U R N P E R F O R M A N C E
140
120
100
80
60
40
20
12/31/05
12/31/06
12/31/07
13/31/08
12/31/09
12/31/10
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
American River Bankshares
NASDAQ Composite
SNL Bank NASDAQ
100.00
100.00
100.00
117.41
110.39
112.27
91.15
122.15
88.14
59.46
73.32
64.01
47.84
106.57
51.93
36.52
125.91
61.27
S O U RC E : S N L F I N A N C I A L L C , C H A R L OT T E S V I L L E , VA
O U R L O C A T I O N S
AMERICAN RIVER BANKSHARES HEADQUARTERS
RANCHO CORDOVA, CA
AMERICAN RIVER BANK
1 BRADSHAW PLAZA
2 CAPITOL MALL
3 FAIR OAKS VILLAGE
4 POINT WEST
5 ROSEVILLE
BANK OF AMADOR
6 BUCKHORN
7
8
IONE
JACKSON
NORTH COAST BANK
9 HEALDSBURG
10 SANTA ROSA
4
9
S A N T A R O S A
10
R O S E V I L L E
4
12
5
3
S A C R A M E N T O
6
7
8
J A C K S O N
S A N F R A N C I S C O
S T O C K T O N
Financial Highlights
N E T I N T E R E S T M A R G I N N I M
L O A N M I X
E
G
A
T
N
E
C
R
E
P
6
5
4
3
2
1
0
5.03
5.10
5.03
4.90
Construction &
Land Development
$15,971
Multi-Family RE
$6,968
4.49
Residential RE
$26,099
Other
$23,170
Owner
Occupied CRE
$117,154
2006
2007
2009
2010
2008
Y E A R
Commercial
$58,261
Investor CRE
$98,922
C A P I T A L R A T I O S
11.59
10.70
7.81
7.72
11.50
8.32
18.39
20.33
12.45
12.55
E
G
A
T
N
E
C
R
E
P
25
20
15
10
5
0
2006
2007
2008
Y E A R
2009
2010
Leverage Ratio
Total Risk-Based Capital Ratio
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
5
D E P O S I T M I X
4
7
5
,
0
6
1
$
S
D
N
A
S
U
O
H
T
N
I
S
R
A
L
L
O
D
200,000
150,000
100,000
50,000
0
9
2
8
,
1
3
1
$
6
6
6
,
2
3
1
$
7
9
3
,
7
2
1
$
5
6
7
,
2
2
1
$
6
6
3
,
6
1
1
$
3
4
1
,
9
1
1
$
9
1
9
,
5
0
1
$
0
8
9
,
2
3
1
$
8
2
3
,
8
1
1
$
4
1
6
,
1
3
1
$
5
2
4
,
3
3
1
$
6
3
6
,
7
3
1
$
6
3
6
,
6
2
1
$
8
3
2
,
0
1
1
$
4
1
8
,
1
4
$
3
9
8
,
6
3
$
7
7
5
,
3
4
$
9
3
6
,
5
3
$
2006
2007
1
8
5
,
5
4
$
8
3
4
,
3
3
$
2008
Y E A R
4
5
1
,
0
5
$
4
3
2
,
6
3
$
5
7
0
,
5
4
$
7
3
5
,
5
4
$
2009
2010
Noninterest-Bearing Deposits
Interest Checking
Money Market
Savings
Time Deposit
B U S I N E S S F O C U S E D D E P O S I T S
Time
23%
Savings
10%
Noninterest-
Bearing
27%
Interest Checking
10%
Money Market
30%
Personal
28%
Business
72%
6
Our Team
A M E R I C A N R I V E R B A N K A N D
B A N K S H A R E S B O A R D O F
D I R E C T O R S
Charles D. Fite
Chairman of the Board
President, Fite Development Co.
Roger J. Taylor, DDS
Vice-Chairman of the Board
Executive Director—Impax
Health Prime
Stephen H. Waks, Esq.
Secretary to the Board
Attorney-at-Law and Owner—
Waks Law Corporation
Robert J. Fox, CPA
Partner—Gallina LLP
William A. Robotham, CPA
Executive Partner—Pisenti &
Brinker LLP
David T. Taber
President & CEO—American
River Bankshares
Philip A. Wright
Owner—Prudential California Realty
Michael A. Ziegler
President & CEO—Pride Industries
A M E R I C A N R I V E R B A N K S H A R E S
E X E C U T I V E T E A M
S T O C K L I S T I N G
American River Bankshares trades on
the NASDAQ Global Select Stock
Market under the symbol “AMRB”
I N V E S T O R R E L A T I O N S
American River Bankshares
3100 Zinfandel Drive, Suite 450
Rancho Cordova, CA 95670
(916) 851-0123
investor.relations@amrb.com
www.amrb.com
T R A N S F E R A G E N T
Computershare Trust Company
P.O. Box 43078
Providence, RI 02940
1-800-942-5909
www.computershare.com
A N N U A L M E E T I N G
The 2011 annual meeting of American
River Bankshares will be held at 3:00
p.m. on May 19, 2011 at:
Sacramento Marriott Rancho Cordova
11211 Point East Drive
Rancho Cordova, CA 95742
David T. Taber
President & CEO
Mitchell A. Derenzo
EVP & Chief Financial Officer
Douglas E. Tow
EVP & Chief Credit Officer
Kevin B. Bender
EVP & Chief Operating Officer
N O R T H C O A S T B A N K R E G I O N A L
C O M M U N I T Y B A N K B O A R D
Raymond F. Byrne
President, North Coast Bank
Pam Chanter
Vice President—Vantreo
Insurance Brokers
Robert Hillmann
Movie Producer-Director
President Renergy BioConverter
Herb Liberman
Economic Development Coordinator
Healdsburg Chamber of Commerce &
Visitors Bureau
William A. Robotham, CPA
Stephen E. Schwitalla
CEO—Sonoma County
Vintners Co-op
Philip A. Wright
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
7
T H I S P A G E H A S B E E N I N T E N T I O N A L L Y L E F T B L A N K .
8
AMERICAN RIVER BANKSHARES A ND SUB SIDI AR IES— SE LECTED FI NA NC IA L DATA
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 THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
2010
2009
2008
2007
2006
Operations Data:
Net interest income
Provision for loan and lease losses
Noninterest income
Noninterest expenses
Income before income taxes
Income taxes (benefit)
Net income
Share Data:
Earnings per share—basic
Earnings per share—diluted
Cash dividends per share 1
Book value per share
Tangible book value per share
Balance Sheet Data:
Assets
Loans and leases, net
Deposits
Shareholders’ equity
Financial Ratios:
Return on average equity
Return on average tangible equity
Return on average assets
Efficiency ratio 2, 3
Net interest margin 2
Net loans and leases to deposits
Net charge-offs to average loans & leases
Nonperforming loans and leases to total
loans and leases 4
Allowance for loan and lease losses to total
loans and leases
Average equity to average assets
Capital Ratios:
Leverage capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
$
22,256
$
24,032
$
25,925
$
26,402
$
27,066
7,365
1,804
16,470
225
(251)
476
0.05
0.05
0.00
9.07
7.37
$
$
$
$
$
$
8,530
2,269
15,811
1,960
374
1,586
0.26
0.26
0.29
8.87
7.15
$
$
$
$
$
$
1,743
2,168
14,201
12,149
4,578
7,571
1.30
1.30
0.57
10.95
7.98
$
$
$
$
$
$
450
2,599
14,833
13,718
5,240
8,478
1.40
1.39
0.55
10.22
7.23
$
$
$
$
$
$
320
2,443
14,388
14,801
5,739
9,062
1.42
1.39
0.53
10.00
7.14
$
$
$
$
$
$
$
578,940
$
594,418
$
563,157
$
573,685
$
604,003
338,533
465,122
89,544
0.53%
0.66%
0.08%
66.87%
4.49%
72.78%
2.12%
376,322
469,755
87,345
2.44%
3.31%
0.28%
58.45%
4.90%
80.11%
1.62%
412,356
437,061
63,447
12.39%
17.32%
1.32%
48.92%
5.03%
94.35%
0.42%
394,975
455,645
59,973
14.01%
19.78%
1.47%
49.49%
5.10%
86.68%
0.11%
382,993
493,875
62,371
14.48%
20.33%
1.50%
47.11%
5.03%
77.55%
0.03%
6.52%
5.46%
1.49%
1.86%
0.02%
2.19%
15.28%
12.55%
19.07%
20.33%
2.06%
11.36%
12.45%
17.13%
18.39%
1.41%
10.62%
8.32%
11.50%
10.25%
1.47%
10.52%
7.72%
10.70%
9.45%
1.51%
10.38%
7.81%
11.59%
10.34%
1 On July 27, 2009, the Company announced that the Board of Directors temporarily suspended the payment of cash dividends, until such time that it was prudent to
reestablish the payment of cash dividends. Regulatory approval will be required before the payment of cash dividends may be reestablished.
2 Fully taxable equivalent.
3 Excludes the amortization of intangible assets.
4 Non-performing loans and leases consist of loans and leases past due 90 days or more and still accruing and nonaccrual loans and leases.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
9
AM ER ICAN R I VE R B A NK SHARES AND SUBS IDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2010,
2009, and 2008.
Cautionary Statements Regarding Forward-Looking
Statements
Certain matters discussed or incorporated by reference in
this Annual Report including, but not limited to, matters
described herein,” are “forward-looking statements” within
the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, Section 27A of the Securities Act of
1933, as amended, and subject to the safe-harbor provisions
of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may contain words related to
future projections including, but not limited to, words such
as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,”
“should,” “could,” “would,” and variations of those words and
similar words that are subject to risks, uncertainties and other
factors that could cause actual results to differ materially from
those projected. Factors that could cause or contribute to
such differences include, but are not limited to, the following:
(1) the duration of financial and economic volatility and
decline and actions taken by the United States Congress
and governmental agencies, including the United States
Department of the Treasury, to deal with challenges to the
U.S. financial system; (2) the risks presented by a continued
economic recession, which could adversely affect credit quality,
collateral values, including real estate collateral, investment
values, liquidity and loan originations and loan portfolio
delinquency rates; (3) variances in the actual versus projected
growth in assets and return on assets; (4) potential continued
or increasing loan and lease losses; (5) potential increasing
levels of expenses associated with resolving non-performing
assets as well as regulatory changes; (6) changes in the interest
rate environment including interest rates charged on loans,
earned on securities investments and paid on deposits and
other borrowed funds; (7) competitive effects; (8) potential
declines in fee and other noninterest income earned associated
with economic factors as well as regulatory changes; (9) general
economic conditions nationally, regionally, and within our
operating markets could be less favorable than expected or
could have a more direct and pronounced effect on us than
expected and adversely affect our ability to continue internal
growth at historical rates and maintain the quality of our
earning assets; (10) changes in the regulatory environment
including government intervention in the U.S. financial
system; (11) changes in business conditions and inflation;
(12) changes in securities markets, public debt markets, and
other capital markets; (13) potential data processing and other
operational systems failures or fraud; (14) potential continued
decline in real estate values in our operating markets; (15)
the effects of uncontrollable events such as terrorism, the
threat of terrorism or the impact of the current military
conflicts in Afghanistan and Iraq and the conduct of the war
on terrorism by the United States and its allies, worsening
financial and economic conditions, natural disasters, and
disruption of power supplies and communications; (16)
changes in accounting standards, tax laws or regulations and
interpretations of such standards, laws or regulations; (17)
projected business increases following any future strategic
expansion could be lower than expected; (18) the goodwill we
have recorded in connection with acquisitions could become
impaired, which may have an adverse impact on our earnings;
(19) the reputation of the financial services industry could
experience further deterioration, which could adversely affect
our ability to access markets for funding and to acquire and
retain customers; and (20) the efficiencies we may expect to
receive from any investments in personnel and infrastructure
may not be realized. The factors set forth under “Item 1A -
Risk Factors” in our 2010 Form 10-K and other cautionary
statements and information contained 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 reports filed
with the Securities and Exchange Commission (the “SEC”) on
Forms 10-K, 10-Q and 8-K.
10
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
Stock-Based Compensation
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) “Accounting
for Contingencies,” which requires that losses be accrued
when it is probable that a loss has occurred at the balance
sheet date and such loss can be reasonably estimated; and (2)
“Accounting by Creditors for Impairment of a Loan,” which
requires that losses be accrued on impaired loans based on the
differences between the value of collateral, present value of
future cash flows or values that are observable in the secondary
market and the loan balance.
The allowance for loan and lease losses is determined based
upon estimates that can and do change when the actual risk,
loss events, or changes in other factors, occur. The analysis of
the allowance uses a historical loss view as one indicator of
future losses and as a result could differ from the loss incurred
in the future. If the allowance for loan and lease losses falls
below that deemed adequate (by reason of loan and lease
growth, actual losses, the effect of changes in risk ratings,
or some combination of these factors), the Company has a
strategy for supplementing the allowance for loan and lease
losses, over the short term. For further information regarding
our allowance for loan and lease losses, see “Allowance for
Loan and Lease Losses Activity.”
The Company recognizes compensation expense over the
vesting period in an amount equal to the fair value of all share-
based payments which consist of stock options and restricted
stock awarded to directors and employees. The fair value of
each award is estimated on the date of grant and amortized
over the service period using a Black-Scholes-Merton based
option valuation model that requires the use of assumptions.
Critical assumptions that affect the estimated fair value of each
award include expected stock price volatility, dividend yields,
option life and the risk-free interest rate.
Goodwill
Business combinations involving the Company’s acquisition
of the equity interests or net assets of another enterprise or
the assumption of net liabilities in an acquisition of branches
constituting a business may give rise to goodwill. Goodwill
represents the excess of the cost of an acquired entity over
the net of the amounts assigned to assets acquired and
liabilities assumed in transactions accounted for under the
purchase method of accounting. The value of goodwill is
ultimately derived from the Company’s ability to generate
net earnings after the acquisition. A decline in net earnings
could be indicative of a decline in the fair value of goodwill
and result in impairment. For that reason, goodwill is assessed
for impairment at a reporting unit level at least annually
following the year of acquisition. The Company performed
an evaluation of the goodwill, recorded as a result of the Bank
of Amador acquisition, during the fourth quarter of 2010
and determined that there was no impairment. While the
Company believes all assumptions utilized in its assessment
of goodwill for impairment are reasonable and appropriate,
changes in earnings, the effective tax rate, historical earnings
multiples and the cost of capital could all cause different
results for the calculation of the present value of future cash
flows.
Income Taxes
The Company files its income taxes on a consolidated basis
with its subsidiaries. The allocation of income tax expense
(benefit) represents each entity’s proportionate share of the
consolidated provision for income taxes.
The Company accounts for income taxes using the balance
sheet method, under which deferred tax assets and liabilities
are recognized for the tax consequences of temporary
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on
the date of enactment. On the consolidated balance sheet, net
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
11
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
deferred tax assets are included in accrued interest receivable
and other assets.
The Company accounts for uncertainty in income taxes
under “Accounting for Uncertainty in Income Taxes.” Under
the provisions of Accounting for Uncertainty in Income
Taxes, only tax positions that met the more-likely-than-not
recognition threshold are recognized. The benefit of a tax
position is recognized in the financial statements in the period
during which, based on all available evidence, management
believes it is more likely than not that the position will be
sustained upon examination, including the resolution of
appeals or litigation processes, if any. Tax positions taken are
not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more
than 50 percent likely of being realized upon settlement with
the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheet
along with any associated interest and penalties that would
be payable to the taxing authorities upon examination. The
election has been made to record interest expense related to tax
exposures in tax expense, if applicable, and the exposure for
penalties related to tax exposures in tax expense, if applicable.
Other Events
In February 2010, in connection with the Bank’s regularly
scheduled 2009 FDIC examination, the Bank entered into a
Memorandum of Understanding (the “Memorandum”) with
the FDIC and the California Commissioner of Financial
Institutions. The Memorandum covers actions to be taken
by the Board of Directors and management to, among other
matters, (i) enhance BSA compliance; (ii) reduce the Bank’s
level of classified assets and further strengthen and improve
the Bank’s asset quality; (iii) obtain regulatory approval prior
to paying any cash dividends; and (iv) maintain the Bank’s
Tier 1 Leverage capital ratio at not less than 8% and a Total
Risk-Based capital ratio of not less than 11%. As of December
31, 2010, the foregoing ratios for the Bank were 11.8%
and 19.1%, respectively. The Company believes that the
Bank is currently in compliance in all material respects with
the actions described in the Memorandum. Consequently,
the Company does not expect these actions to significantly
change its business strategy in any material respect; however,
noncompliance with provisions of the Memorandum could
result in regulatory enforcement actions that could have a
material adverse effect upon the Company.
Overview
The Company recorded net income in 2010 of $476,000,
down from $1,586,000 in 2009. Diluted earnings per share
for 2010 were $0.05, a decrease of $0.21 from the $0.26
recorded in 2009. For 2010, the Company realized a return
on average equity of 0.53% and a return on average assets of
0.08%, as compared to 2.44% and 0.28% for 2009.
12
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net income for 2009 was $5,985,000 (79.1%) lower than the $7,571,000 recorded in 2008. In 2008, diluted earnings per share
were $1.30, return on average assets was 1.32% and return on average equity was 12.39%. Table One below provides a summary
of the components of net income for the years indicated:
T A B L E O N E : C O M P O N E N T S O F N E T I N C O M E
DOLLARS IN THOUSANDS
FOR THE YEARS ENDED:
Net interest income*
Provision for loan and lease losses
Noninterest income
Noninterest expense
Benefit from (provision for) income taxes
Tax equivalent adjustment
Net income
Average total assets
Net income as a percentage of average total assets
* Fully taxable equivalent basis (FTE)
2010
2009
2008
$
22,465
$
24,331
$
26,277
(7,365)
1,804
(16,470)
251
(209)
476
584,114
0.08%
$
$
(8,530)
2,269
(15,811)
(374)
(299)
1,586
572,473
0.28%
(1,743)
2,168
(14,201)
(4,578)
(352)
7,571
575,046
1.32%
$
$
$
$
All share and per share data for 2008 has been adjusted for a
5% stock dividend distributed on December 18, 2008. There
were no stock dividends distributed in 2010 or 2009.
During 2010, total assets of the Company decreased
$15,478,000 (2.6%) to a total of $578,940,000 at year-end.
At December 31, 2010, net loans totaled $338,533,000, down
$37,789,000 (10.0%) from the ending balance on December
31, 2009. Deposits decreased $4,633,000 or 1.0% during
2010 resulting in ending deposit balances of $465,122,000.
Shareholders’ equity increased 2.5% during 2010, increasing
by $2,199,000 to end the year at $89,544,000. The Company
ended 2010 with a Tier 1 capital ratio of 12.6% and a total
risk-based capital ratio of 20.3% compared to Tier 1 capital
ratio of 12.5% and a total risk-based capital ratio of 18.4% at
the end of 2009.
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees
earned on interest earning assets (loans, securities, Federal
funds sold and interest-bearing deposits in other banks) over
the interest paid on deposits and borrowed funds. Net interest
margin is net interest income expressed as a percentage of
average earning assets.
The Company’s fully taxable equivalent net interest margin
was 4.49% in 2010, 4.90% in 2009, and 5.03% in 2008.
The fully taxable equivalent net interest income was down
$1,866,000 (7.7%) in 2010 compared to 2009. The fully
taxable equivalent net interest income was down $1,946,000
(7.4%) in 2009 compared to 2008.
The fully taxable equivalent interest income component
decreased from $29,421,000 in 2009 to $25,915,000 in
2010, representing an 11.9% decrease. The decrease in the
fully taxable equivalent interest income for 2010 compared
to the same period in 2009 is comprised of two components
- rate (down $2,695,000) and volume (down $811,000). The
rate decrease can be attributed to the overall lower interest
rate environment, forgone interest on nonaccrual loans, and
lower average loans replaced with higher average investment
securities. During 2010, foregone interest income on
nonaccrual loans was approximately $1,736,000, compared
to foregone interest of $1,281,000 during 2009. The average
balance of earning assets increased 0.9% from $496,202,000
in 2009 to $500,882,000 in 2010, however, much of the
increase relates to an increase in investment securities, offset
by a decrease in loan balances. When compared to 2009,
average loan balances were down $42,094,000 (10.4%) to
$362,445,000 for 2010 and average investment securities
were up $47,982,000 (53.3%) to $138,031,000 for 2010.
The overall low interest rate environment, the negative effect
of the foregone interest on loans, and the change in the asset
mix (lower loan totals and higher investment security totals)
resulted in a 76 basis point decrease in the yield on average
earning assets from 5.93% for 2009 to 5.17% for 2010. The
volume decrease of $811,000 occurred mainly as a result of the
decrease in average loans. The market in which the Company
operates continues to see a slowdown in new loan volume as
existing and potential new borrowers continue to pay down
debt and delay expansion plans.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
13
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The fully taxable equivalent interest income component
decreased from $33,905,000 in 2008 to $29,421,000 in
2009, representing a 13.2% decrease. The decrease in the fully
taxable equivalent interest income for 2009 compared to the
same period in 2008 is comprised of two components—rate
(down $3,100,000) and volume (down $1,384,000). The
decline in rates can be attributed to decreases implemented by
the Company on the loans and leases during 2007 and 2008
in response to the Federal Reserve Board (the “FRB”) decreases
in the Federal funds and discount rates. Decreases by the FRB
have resulted in ten rate reductions totaling 500 basis points
from September 2007 to December 31, 2009. In addition,
interest forgone on nonaccrual loans in 2009 increased when
compared to 2008. Net interest income forgone on nonaccrual
loans was approximately $1,281,000 during 2009 compared
to $647,000 during 2008. The overall decreasing interest rate
environment and the negative effect of the higher nonaccrual
loans resulted in a 54 basis point decrease in the yield on
average earning assets from 6.47% for 2008 to 5.93% for
2009. The volume decrease occurred due to a 5.0% decrease in
average earning assets. The overall decrease in the average assets
balance during that time period is mainly related to a decrease
in loans and leases and investment securities balances. Loan
and lease balances are down as the overall production for new
loans is down. The investment securities balances are lower
as the Company implemented a strategy to use the proceeds
from principal reductions and maturing investment securities
to provide funding for a decrease in average borrowings and
to increase average noninterest-bearing cash balances. The
increase in cash balances was used to bolster liquidity during
an unsettling time in the banking environment.
This strategy to reduce the balances in investment securities
resulted in a 15.8% decrease in average investment securities
from $106,949,000 during 2008 to $90,049,000 during
2009, while average noninterest-bearing cash balances
increased $21,804,000 or 113.2% from $19,260,000 during
2008 to $41,064,000 during 2009.
Interest expense was $1,640,000 (32.2%) lower in 2010
compared to 2009. The average balances on interest bearing
liabilities were $19,366,000 (5.0%) lower in 2010 compared
to 2009. The lower balances accounted for a $719,000
decrease in interest expense. Average borrowings were down
$29,287,000 (58.9%) as the Company replaced higher cost
borrowings with lower cost checking and money market
accounts. Average deposit balances increased $16,449,000
or 3.6% from $452,728,000 during 2009 to $469,177,000
during 2010. The Company continues to have success
attracting new deposit relationships, as a direct result of its
business development efforts. As a result of the lower overall
interest rate environment, the decrease in rates accounted for
a $921,000 reduction in interest expense for 2010 compared
to 2009. Rates paid on interest bearing liabilities decreased 38
basis points between 2009 to 2010 from 1.32% to 0.94%.
Interest expense decreased $2,538,000 (33.3%) in 2009
compared to 2008. The average balances of interest-bearing
liabilities were $3,276,000 (0.9%) higher in 2009 compared
to 2008. The higher balances, especially in the level of
average time deposits accounted for a $168,000 increase in
interest expense. This increase was offset by lower rates, which
accounted for a $2,706,000 decrease in interest expense in
2009. Rates paid on interest-bearing liabilities decreased 67
basis points between 2008 to 2009 from 1.99% to 1.32%.
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), computed on a daily average basis,
and changes in average interest rates.
14
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
T A B L E T W O : A N A L Y S I S O F N E T I N T E R E S T M A R G I N O N E A R N I N G A S S E T S
DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
(TAXABLE EQUIVALENT BASIS)
Assets:
Earning assets
Loans and leases 1
Taxable investment securities
Tax-exempt investment
securities 2
Corporate stock
Federal funds sold
Interest bearing deposits in
other banks
2010
2009
2008
Avg
Balance
Interest
Avg
Yield
Avg
Balance
Interest
Avg
Yield
Avg
Balance
Interest
Avg
Yield
$ 362,445 $ 22,227
6.13% $ 404,539 $ 25,378
6.27% $ 410,293 $ 28,512
6.95%
122,381
2,840
2.32%
67,480
2,763
4.09%
79,675
3,711
4.66%
15,628
843
5.39%
22,541
1,215
5.39%
27,102
1,428
5.27%
22
-
406
-
-
-
-
28
11
6
21.43%
-
-
172
486
22
12.79%
10
2.06%
5
1.23%
1,603
59
3.68%
4,838
222
4.59%
Total earning assets
500,882
25,915
5.17%
496,202
29,421
5.93%
522,566
33,905
6.47%
Cash & due from banks
Other assets
Allowance for loan & lease
losses
48,318
43,142
(8,228)
$ 584,114
Liabilities & Shareholders’ Equity:
Interest bearing liabilities:
41,064
42,208
(7,001)
$ 572,473
19,260
39,330
(6,110)
$ 575,046
NOW & MMDA
Savings
Time deposits
Other borrowings
$ 182,495
1,327
0.73%
$ 163,141
1,375
0.84%
$ 164,531
1,929
1.17%
41,510
224
0.54%
34,392
229
0.67%
36,033
324
0.90%
121,050
1,401
1.16%
137,601
2,399
1.74%
121,479
3,648
3.00%
20,458
498
2.43%
49,745
1,087
2.19%
59,560
1,727
2.90%
Total interest bearing liabilities
365,513
3,450
0.94%
384,879
5,090
1.32%
381,603
7,628
1.99%
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
124,122
5,221
494,856
89,258
$ 584,114
117,594
4,993
507,466
65,007
126,125
6,234
513,962
61,084
$ 572,473
$ 575,046
Net interest income & margin 3
$ 22,465
4.49%
$ 24,331
4.90%
$ 26,277
5.03%
1 Loan and lease interest includes loan and lease fees of $56,000, $46,000 and $250,000 in 2010, 2009 and 2008, 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% in 2010 and 2009 and 35% in 2008.
3 Net interest margin is computed by dividing net interest income by total average earning assets.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
15
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
T A B L E T H R E E :
A N A LY S I S O F V O L U M E A N D R AT E C H A N G E S O N N E T I N T E R E S T I N C O M E A N D E X P E N S E S
DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31, 2010 OVER 2009
Increase (decrease) due to change in:
Interest-earning assets:
Net loans and leases 1, 2
Taxable investment securities
Tax-exempt investment securities 3
Corporate stock
Federal funds sold & other
Interest bearing deposits in other banks
Total
Interest-bearing liabilities:
Demand deposits
Savings deposits
Time deposits
Other borrowings
Total
Interest differential
YEAR ENDED DECEMBER 31, 2009 OVER 2008
Increase (decrease) due to change in:
Interest-earning assets:
Net loans and leases 1, 2
Taxable investment securities
Tax-exempt investment securities 3
Corporate stock
Federal funds sold & other
Interest bearing deposits in other banks
Total
Interest-bearing liabilities:
Demand deposits
Savings deposits
Time deposits
Other borrowings
Total
Interest differential
Volume
Rate 4
Net Change
$
(2,641)
$
(510)
$
(3,151)
2,248
(373)
(1)
-
(44)
(811)
163
47
(289)
(640)
(719)
(2,171)
1
(5)
-
(10)
77
(372)
(6)
-
(54)
(2,695)
(3,506)
(211)
(52)
(709)
51
(921)
(48)
(5)
(998)
(589)
(1,640)
$
(92)
$
(1,774)
$
(1,866)
Volume
Rate 4
Net Change
$
(400)
(568)
(240)
(18)
(10)
(148)
(1,384)
(16)
(15)
484
(285)
168
$
(2,734)
$
(3,134)
(380)
27
2
-
(15)
(3,100)
(538)
(80)
(1,733)
(355)
(2,706)
(948)
(213)
(16)
(10)
(163)
(4,484)
(554)
(95)
(1,249)
(640)
(2,538)
$
(1,552)
$
(394)
$
(1,946)
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 $56,000, $46,000 and $250,000 for the years ended December 31, 2010, 2009 and 2008, 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% in 2010 and 2009 and 35% in 2008.
4 The rate/volume variance has been included in the rate variance.
16
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Loan and Lease Losses
The Company provided $7,365,000 for loan and lease losses in
2010 as compared to $8,530,000 for 2009. Net loan and lease
losses for 2010 were $7,689,000 as compared to $6,539,000
in 2009. In 2010, net loan and lease losses as a percentage of
average loans outstanding were 2.12% compared to 1.62% in
2009. In 2008, the Company provided $1,743,000 for loan
and lease losses and net charge-offs were $1,708,000. The
Company has continued to provide significant amounts to
the reserve for loan and lease losses for 2010 resulting from a
continued high level of nonperforming loans and leases, due
mainly to the overall challenging economy in the Company’s
market areas and the United States, overall. Although loan
chargeoffs increased from 2009 to 2010, the provision for loan
and lease losses decreased for 2010 compared to 2009. Many
of the loan chargeoffs in 2010 had specific reserves on those
loans which were reduced as the loan balances were partially
charged off. At December 31, 2010, specific reserves were
$1,619,000 compared to $3,810,000 as of December 31,
2009. For additional information see the “Allowance for Loan
and Lease Losses Activity.”
Service Charges and Fees and Other Income
Table Four below provides a summary of the components of noninterest income for the periods indicated
T A B L E F O U R : C O M P O N E N T S O F N O N I N T E R E S T I N C O M E
DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
Service charges on deposit accounts
Merchant fee income
Earnings on Bank owned life insurance
Income from residential lending division
Accounts receivable servicing fees
Gain (loss) on sale, call and impairment of securities
Other
$
2010
866
420
277
-
-
7
234
2009
2008
$
1,018
$
437
246
7
35
270
256
741
482
395
283
170
(119)
216
$
1,804
$
2,269
$
2,168
Noninterest income was down $465,000 (20.5%) to
$1,804,000 in 2010 from the 2009 level. The decrease from
2009 to 2010 was primarily related to lower service charges on
deposit accounts (down $152,000 or 14.9%) and lower gain
on sale of securities (down $263,000 or 97.4%). The lower
service charges on deposit accounts resulted from decreased
fees on overdrawn checking accounts (down $147,000 or
24.2%).
Noninterest income was up $101,000 (4.7%) to $2,269,000
in 2009 from the 2008 level. The increase from 2008 to
2009 was primarily related to higher service charges on
deposit accounts (up $277,000 or 37.4%) and gain on sale
of securities. The higher service charges on deposit accounts
resulted from increased fees on overdrawn checking accounts
(up $183,000 or 43.3%) and higher service fees on checking
accounts (up $86,000 or 34.1%). The difference in the gain
on sale of securities resulted from a loss in 2008 related to an
impairment charge of $245,000 on the Company’s investment
in Federal National Mortgage Association (“FNMA”)
preferred stock. During 2009, the Company also experienced
lower income from fees on accounts receivable servicing,
which resulted from lower overall volume (down $135,000 or
79.4%); lower fees from residential lending, which resulted
from lower volume (down $276,000); and lower income
from bank owned life insurance, which resulted from lower
yields on the bank owned life insurance investments (down
$149,000 or 37.7%).
Salaries and Benefits
Salaries and benefits were $7,876,000 (up $597,000 or
8.2%) for 2010 as compared to $7,279,000 in 2009. The
increase in salary and benefits was due in part to a decrease in
direct costs associated with the production of new loans. The
Company allocates the direct costs of originating loans as a
credit to salary expense in accordance with generally accepted
accounting principles. As loan volume decreases the Company
allocates less direct costs of loan production against salary
expense. The offset from direct cost reimbursement decreased
$221,000 (32.8%) from $674,000 in 2009 to $453,000
in 2010. Overall salary expense increased $80,000 (1.3%)
mainly due to the additional staff added to the loan collection
and workout department. Employee benefits, which include
employee health insurance, increased $279,000 (27.8%). The
average FTE’s decreased from 117 in 2009 to 113 during 2010
and, at the end of 2010, the full-time equivalent staff was 111,
down 7 from 118 at the end of 2009.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
17
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Salaries and benefits were $7,279,000 (down $408,000 or
5.3%) for 2009 as compared to $7,687,000 in 2008. The
decrease in salary and benefit expense is primarily related
to a decrease in the average full-time equivalent employees
(“FTE”). The average FTE’s decreased from 123 in 2008
to 117 during 2009 and, at the end of 2009, the full-time
equivalent staff was 118, down 4 from 122 at the end of 2008.
Other Real Estate Owned
The total other real estate owned (“OREO”) expense in
2010 was $1,210,000 compared to $1,441,000 in 2009. The
reduced expense ($231,000 or 16.0%) is related to lower
valuation allowances in 2010 as compared to 2009. OREO
expense increased from $1,000 in 2008 to $1,441,000 due to
an increase in the number of foreclosed properties in 2009.
Occupancy, Furniture and Equipment
Occupancy expense decreased $118,000 (8.5%) during
2010 to $1,271,000, compared to $1,389,000 in 2009. The
majority of the decrease relates to lower rent associated with
the Company’s banking offices. Furniture and equipment
expense was $720,000 in 2010 compared to $759,000 in
2009, representing a $39,000 (5.1%) decrease.
Occupancy expense decreased $106,000 (7.1%) during
2009 to $1,389,000, compared to $1,495,000 in 2008. The
majority of the decrease relates to lower rent associated with
the Company’s decision to relocate its banking office in Santa
Rosa. Furniture and equipment expense was $759,000 in
2009 compared to $774,000 in 2008, representing a $15,000
(1.9%) decrease. The decrease in furniture and equipment
expense relates primarily to lower technology related
maintenance.
Federal Deposit Insurance Corporation (“FDIC”)
FDIC assessments increased $653,000 (84.8%) during 2010
to $1,423,000, up from $770,000 in 2009. The increase
relates to increased assessments from the FDIC based on
the growth in the Company’s deposits balances, changes to
the Bank’s assessment category, and to cover higher expenses
incurred by the FDIC.
FDIC assessments increased $619,000 (409.9%) during 2009
to $770,000, up from $151,000 in 2008. The increase relates
to increased assessments from the FDIC.
Other Expenses
Table Five below provides a summary of the components of
the other noninterest expenses for the periods indicated:
DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
Professional fees
Telephone and postage
Directors’ expense
Outsourced item processing
Advertising and promotion
Stationery and supplies
Amortization of intangible assets
Other operating expenses
2010
2009
2008
$
1,191
$
1,061
$
336
371
414
198
208
242
375
390
369
232
205
263
1,010
1,278
$
3,970
$
4,173
$
936
403
321
391
339
274
286
1,143
4,093
Other expenses were $3,970,000 (down $203,000 or 4.9%)
for 2010 as compared to $4,173,000 for 2009. Professional
fees increased $130,000 (12.3%) due in part to higher legal,
accounting, and other professional services to comply with
changes in the regulatory environment and to resolve problem
loans. This increase was offset by reductions in several other
expense related items as the Company continued to focus on
reducing expenses and outside services. The overhead efficiency
ratio on a taxable equivalent basis for 2010 was 66.9% as
compared to 58.5% in 2009. Much of the increase is related to
the increase in salaries and benefits and FDIC assessments and
overall lower revenue.
Other expenses were $4,173,000 (up $80,000 or 2.0%) for
2009 as compared to $4,093,000 for 2008. Professional
fees increased $125,000 (13.4%) due in part to higher legal,
accounting, and other professional services to comply with
changes in the regulatory environment and to resolve problem
loans. This increase was offset by reductions in several other
expense related items as the Company continued to focus on
reducing expenses and services. The overhead efficiency ratio
on a taxable equivalent basis for 2009 was 58.5% as compared
to 48.9% in 2008.
(Benefit from) Provision for Income Taxes
The effective tax rate on income was (-111.6%), 19.1%, and
37.7% in 2010, 2009 and 2008, respectively. The effective
tax rate differs from the federal statutory tax rate due to state
tax (benefit) expense (net of federal tax effect) of ($66,000),
18
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$59,000, and $802,000 in these years. Tax-exempt income
of $894,000, $1,125,000, and $1,415,000 from investment
securities and bank owned life insurance in these years helped
to reduce the effective tax rate. The benefit recorded in 2010
and the lower effective tax rate in 2009 results from the
Company realizing the benefits of tax-free income related to
such items as municipal bonds and bank owned life insurance
against an overall lower amount of taxable income.
Balance Sheet Analysis
The Company’s total assets were $578,940,000 at December
31, 2010 as compared to $594,418,000 at December 31,
2009, representing a decrease of $15,478,000 (2.6%).
The average balances of total assets during 2010 were
$584,114,000, up $11,641,000 or 2.0% from the 2009 total
of $572,473,000.
Investment Securities
The Company classifies its investment securities as trading,
held-to-maturity or available-for-sale. The Company’s intent
is to hold all securities classified as held-to-maturity until
maturity and management believes that it has the ability to do
so. Securities available-for-sale may be sold to implement asset/
liability management strategies; as part of our contingency
funding plan; and in response to changes in interest rates,
prepayment rates and similar factors. Table Six below
summarizes the values of the Company’s investment securities
held on December 31 of the years indicated.
T A B L E S I X : I N V E S T M E N T S E C U R I T I E S C O M P O S I T I O N
DOLLARS IN THOUSANDS
AVAILABLE-FOR-SALE (AT FAIR VALUE)
Debt securities:
Mortgage-backed securities
Obligations of states and political subdivisions
Equity securities:
Corporate stock
2010
2009
2008
$
138,644
$
15,792
76,009
20,587
$
32,232
31,012
79
86
90
Total available-for-sale investment securities
$
154,515
$
96,682
$
63,334
Held-to-maturity (at amortized cost)
Debt securities:
Mortgage-backed securities
Total held-to-maturity investment securities
$
$
6,149
6,149
$
$
12,331
12,331
$
$
24,365
24,365
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, 2010, these categories accounted for
approximately 17%, 62%, 2%, 5%, 7%, 1%, 2% and 4%,
respectively, of the Company’s loan portfolio. This mix was
relatively unchanged compared to 19%, 58%, 2%, 7%, 7%,
1%, 2% and 4% at December 31, 2009. Continuing focus in
the Company’s market area, new borrowers developed through
the Company’s marketing efforts, and credit extensions
expanded to existing borrowers resulted in the Company
originating approximately $35 million in new loans in 2010.
Normal pay downs, loan chargeoffs, and loans transferred
to OREO, resulted in an overall decrease in total loans and
leases of $38,286,000 (10.0%) from December 31, 2009. The
market in which the Company operates continues to see a
slowdown in new loan volume as existing borrowers continue
to pay down debt and delay expansion plans. The Company
reported net decreases in balances for commercial loans
($14,360,000 or 19.8%), commercial real estate ($7,609,000
or 3.4%), multi-family real estate ($1,508,000 or 17.8%),
real estate construction ($11,511,000 or 41.9%), residential
real estate ($823,000 or 3.1%), lease financing receivable
($1,154,000 or 29.4%), agriculture ($270,000 or 3.6%), and
consumer loans ($1,051,000 or 7.4%). Table Seven below
summarizes the composition of the loan and lease portfolio for
the past five years as of December 31.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
19
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
T A B L E S E V E N : L O A N A N D L E A S E P O R T F O L I O C O M P O S I T I O N
DOLLARS IN THOUSANDS
DECEMBER 31,
Commercial
Real estate:
Commercial
Multi-family
Construction
Residential
Lease financing receivable
Agriculture
Consumer
Deferred loan fees, net
Allowance for loan and lease losses
2010
2009
2008
2007
2006
$
58,261
$
72,621
$
90,625
$
94,632
$
85,859
216,076
223,685
218,626
191,774
6,968
15,971
26,099
2,766
7,202
13,202
8,476
27,482
26,922
3,920
7,472
14,253
8,938
48,664
24,706
4,475
8,015
14,796
5,830
66,022
20,120
4,070
8,177
10,750
346,545
384,831
418,845
401,375
(427)
(7,585)
(600)
(7,909)
(571)
(5,918)
(517)
(5,883)
175,643
3,618
90,314
8,689
6,375
7,362
11,712
389,572
(705)
(5,874)
Total net loans and leases
$
338,533
$
376,322
$
412,356
$
394,975
$
382,993
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 homeowner equity 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. Up until 2008, American River Bank had a residential
lending division to assist customers in securing most forms of
longer term single-family mortgage financing. American River
Bank acted as a broker between American River Bank’s clients
and the loan wholesalers. American River Bank received an
origination fee for loans closed.
“Subprime” real estate loans generally refer to residential
mortgages made to higher-risk borrowers with lower credit
and/or income histories. Within the industry, many of these
loans were originated with adjustable interest rates that reset
upward after an introductory period. These “subprime”
loans coupled with declines in housing prices have led to an
increase in the banking industry’s default rates resulting in
many instances of increased foreclosure rates as the adjustable
interest rates reset to higher levels. The Company did not
have any such “subprime” loans at December 31, 2010 and
December 31, 2009.
Average loans and leases in 2010 were $362,445,000 which
represents a decrease of $42,094,000 (10.4%) compared to
the average in 2009. Average loans and leases in 2009 were
$404,539,000 which represented a decrease of $5,754,000
(1.4%) over the average in 2008.
Risk Elements
The Company assesses and manages credit risk on an ongoing
basis through a total credit culture that emphasizes excellent
credit quality, extensive internal monitoring and established
formal lending policies. Additionally, the Company contracts
with an outside loan review consultant to periodically review
the existing loan and lease portfolio. Management believes
its ability to identify and assess risk and return characteristics
of the Company’s loan and lease portfolio is critical for
profitability and growth. Management strives to continue
its emphasis on credit quality in the loan and lease approval
process, through active credit administration and regular
monitoring. With this in mind, management has designed
and implemented a comprehensive loan and lease review and
grading system that functions to continually assess the credit
risk inherent in the loan and lease portfolio. In addition, the
Company is taking actions to further strengthen and improve
20
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
its asset quality in accordance with an informal agreement
arising out of its 2009 regulatory examination including,
among other matters, enhancement of existing procedures
for appraisals and re-appraisals on secured loans and other
real estate owned, and problem loan identification, including
identification of impaired loans and leases and identification of
troubled debt restructured loans (“TDRs”).
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.
American River Bank operates in Sonoma County, through
North Coast Bank, a division of American River Bank, whose
business is focused on businesses within the two communities
in which it has offices (Santa Rosa and Healdsburg) and in
Amador County, through Bank of Amador, a division of
American River Bank, whose business is focused on businesses
and consumers within the three communities in which it has
offices (Jackson, Pioneer, and Ione), as well as a diversified
residential construction loan business in numerous Northern
California counties. The economy of Sonoma County
is diversified with professional services, manufacturing,
agriculture and real estate investment and construction,
while the economy of Amador County is reliant upon
government, services, retail trade, manufacturing industries
and Indian gaming.
The Company has significant extensions of credit and
commitments to extend credit that are secured by real estate.
The ultimate repayment of these loans is generally dependent
on personal or business cash flows or the sale or refinancing
of the real estate. The Company monitors the effects of
current and expected market conditions and other factors
on the collectability of real estate loans. The more significant
factors management considers involve the following: lease
rate and terms, vacancy rates, absorption and sale rates; real
estate values, supply and demand factors, and rates of return;
operating expenses; inflation; and sufficiency of repayment
sources independent of the real estate including, in some
instances, personal guarantees. In extending credit and
commitments to borrowers, the Company generally requires
collateral and/or guarantees as security. The repayment
of such loans is expected to come from cash flow or from
proceeds from the sale of selected assets of the borrowers.
The Company’s requirement for collateral and/or guarantees
is determined on a case-by-case basis in connection with
management’s evaluation of the creditworthiness of the
borrower. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, income-
producing properties, residences and other real property.
The Company secures its collateral by perfecting its security
interest in business assets, obtaining deeds of trust, or outright
possession among other means.
In management’s judgment, a concentration exists in real
estate loans which represented approximately 76.5% of the
Company’s loan and lease portfolio at December 31, 2010,
up from 74.5% at December 31, 2009. Management believes
that the residential land and residential construction portion
of the Company’s loan portfolio carries more than the normal
credit risk it has seen in the past several years due primarily
to severely curtailed demand for new and resale residential
property, a large supply of unsold residential land and new and
resale homes, and observed reductions in values throughout
the Company’s market area. Management has responded by
evaluating loans that it considers to carry any significant risk
above the normal risk of collectability and taking actions
where possible to reduce credit risk exposure by methods
that include, but are not limited to, seeking liquidation of the
loan by the borrower, seeking additional tangible collateral or
other repayment support, converting the property through
judicial or non-judicial foreclosure proceedings, and other
collection techniques.
Management currently believes that it maintains its allowance
for loan and lease losses at levels adequate to reflect the loss
risk inherent in its total loan portfolio. A continued substantial
further decline in the economy in general, or a continued
additional decline in real estate values in the Company’s
primary market areas in particular, could have an adverse
impact on the collectability of real estate loans and require an
increase in the provision for loan and lease losses. This could
adversely affect the Company’s future prospects, results of
operations, profitability and stock price. Management believes
that its lending practices and underwriting standards will tend
to minimize losses in an economic downturn; however, it is
uncertain whether losses will occur under such circumstances.
The Company’s loan practices 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 or contracted
third-party professionals.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
21
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonaccrual, Past Due and Restructured
Loans and Leases
Management generally places loans and leases on nonaccrual
status when they become 90 days past due or if a loss is
expected, unless the loan or lease is well secured and in the
process of collection. Loans and leases are partially or fully
charged off when, in the opinion of management, collection
of such amount appears unlikely.
The recorded investments in nonaccrual loans and leases and
loans and leases that were 90 days or more past due and on
accrual totaled $22,571,000 and $20,964,000 at December
31, 2010 and 2009, respectively. Of the $22,571,000 in
non-performing loans and leases at December 31, 2010,
there were twenty-nine real estate loans totaling $18,735,000;
fifteen commercial loans totaling $3,491,000; seven consumer
loans totaling $317,000; and three leases totaling $28,000.
At December 31, 2009, the $20,964,000 in non-performing
loans consisted of twenty-seven real estate loans totaling
$14,048,000; thirteen commercial loans totaling $6,143,000;
seven consumer loans totaling $718,000; and five leases
totaling $55,000.
The net interest due on nonaccrual loans and leases but
excluded from interest income was approximately $1,736,000
during 2010, $1,281,000 during 2009, and $647,000 during
2008. Interest income recognized from payments received on
nonaccrual loans and leases was approximately $338,000 in
2010, $79,000 in 2009 and in 2008 it was not significant.
Table Eight below sets forth nonaccrual loans and leases and
loans and leases past due 90 days or more and on accrual as of
year-end for the past five years.
T A B L E E I G H T : N O N P E R F O R M I N G L O A N S A N D L E A S E S
DOLLARS IN THOUSANDS
December 31,
Past due 90 days or more and still accruing:
Commercial
Real estate
Lease financing receivable
Consumer and other
Nonaccrual:
Commercial
Real estate
Lease financing receivable
Consumer and other
2010
2009
2008
2007
2006
$
-
-
-
-
3,491
18,735
28
317
$
-
$
-
$
-
$
-
-
-
6,143
14,048
55
718
444
22
8
261
5,487
19
-
455
-
-
148
6,787
50
-
-
13
-
-
-
12
53
-
78
Total non-performing loans and leases
$
22,571
$
20,964
$
6,241
$
7,440
$
Management monitors the Company’s performance metrics
including those ratios related to non-performing loans and
leases. Since 2008, the Company has experienced an increase
in the non-performing loan and lease ratios. However, these
increases do not directly impact the Company’s allowance
for loan and lease losses as management monitors each of the
loans and leases for loss potential or probability of loss on an
individual basis using generally accepted accounting principles.
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, 2010. Management is
not aware of any potential problem loans, which were accruing
and current at December 31, 2010, where serious doubt exists
as to the ability of the borrower to comply with the present
repayment terms and that would result in a significant loss to
the Company.
Impaired Loans and Leases
The Company considers a loan to be impaired when, based
on current information and events, it is probable that it will
be unable to collect all amounts due (principal and interest)
according to the original contractual terms of the loan or
lease agreement. The measurement of impairment may be
based on (i) the present value of the expected cash flows of
the impaired loan or lease discounted at the loan or lease’s
original effective interest rate, (ii) the observable market
price of the impaired loan or lease, or (iii) the fair value of
the collateral of a collateral-dependent loan or lease. The
Company generally does not apply this definition to smaller-
balance loans that are collectively evaluated for credit risk. In
assessing whether a loan or lease is impaired, the Company
reviews all loans or leases graded substandard or lower with
outstanding principal balances in excess of $100,000 as well as
loans considered troubled debt restructures with outstanding
principal balances in excess of $25,000, except in the instance
22
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
where management believes it is prudent to do otherwise. The
recorded investment in loans and leases that were considered
to be impaired totaled $40,237,000 at December 31, 2010
and had a related valuation allowance of $1,619,000. The
average recorded investment in impaired loans and leases
during 2010 was approximately $44,594,000. As of December
31, 2009, the recorded investment in loans and leases that
were considered to be impaired totaled $41,937,000 and
had a related valuation allowance of $3,810,000. The average
recorded investment in impaired loans and leases during
2009 was approximately $29,947,000. As of December 31,
2008, the recorded investment in loans and leases that were
considered to be impaired totaled $6,083,000 and had a
related valuation allowance of $788,000. The average recorded
investment in impaired loans and leases during 2008 was
approximately $8,291,000.
As of December 31, 2010, the Company had sixty TDRs,
and of these there were seventeen extensions totaling
$3,990,000, fifteen term outs totaling $1,744,000, ten rate
reductions totaling $6,249,000, six changes to amortizing
loans totaling $3,252,000, five interest only structure changes
totaling $7,006,000, and one court ordered restructure
totaling $683,000. All were performing as agreed except for
five rate reductions totaling $4,427,000, three extensions
totaling $101,000, two interest only structure changes
totaling $2,190,000, and one term out totaling $16,000. The
Company requires that TDRs can be returned to accrual status
after the borrower makes six consecutive payments on the
restructured loan or lease and the borrower has demonstrated
the capacity to continue to make payments.
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 the following:
(i) history of actual charge-offs (ii) local and regional economic
conditions, (iii) the financial condition of the borrowers,
(iv) loan impairment and the related level of expected charge-
offs, (v) evaluation of industry trends, (vi) industry and other
concentrations, (vii) loans and leases which are contractually
current as to payment terms but demonstrate a higher
degree of risk as identified by management, (viii) continuing
evaluations of the performing loan portfolio, (ix) ongoing
review and evaluation of problem loans identified as having
loss potential, (x) quarterly review by the Board of Directors,
and (xi) assessments by banking regulators and other third
parties. Management and the Board of Directors evaluate the
ALLL and determine its appropriate level considering objective
and subjective measures, such as knowledge of the borrowers’
business, valuation of collateral, the determination of impaired
loans or leases and exposure to potential losses.
The allowance for loan and lease losses totaled $7,585,000
or 2.19% of total loans and leases at December 31,
2010, $7,909,000 or 2.06% of total loans and leases at
December 31, 2009, and $5,918,000 or 1.41% at December
31, 2008. The Company establishes general and specific
reserves in accordance with generally accepted accounting
principles. The ALLL is composed of 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 allowance for loans and leases as a percentage of non-
performing loans and leases was 33.6% at December 31,
2010 and 37.7% at December 31, 2009. The allowance for
loans and leases as a percentage of impaired loans and leases
was 18.9% at December 31, 2010 and December 31, 2009.
Of the total non-performing and impaired loans and leases
outstanding as of December 31, 2010, there were $13,950,000
in loans or leases that had been reduced by partial charge-offs
of $6,478,000. As these loan or lease balances are charged
off the remaining balances, following analysis, normally
do not require specific reserves and are not eligible for
general reserves. The impact on credit ratios is such that the
Company’s allowance for loan and lease losses as a percentage
may be lower, however, the partial charge-offs have reduced
the potential future losses related to those credits.
At December 31, 2010, there were $22,168,000 in impaired
loans or leases that did not carry a specific reserve. Of this
amount, $10,861,000 were loans or leases that had previous
partial charge-offs and $11,307,000 in loans or leases that
were analyzed and determined not to require a specific reserve
or charge-off because the collateral value or discounted cash
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
23
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
flow value exceeded the loan or lease balance. The Company
has been operating in a market that has experienced significant
decreases in real estate values of commercial, residential, land,
and construction properties. As such, the Company is focused
on monitoring collateral values for those loans considered
collateral dependent. The collateral evaluations performed by
the Company are updated as necessary, which is generally once
every six months, and are reviewed by a qualified credit officer.
The Company’s policy with regard to loan or lease charge-
offs continues to be that a loan or lease is charged off against
the allowance for loan and lease losses when management
believes that the collectability of the principal is unlikely.
Generally, a loan or lease is charged off when estimated losses
related to impaired loans and leases are identified. If the loan
is collateralized by real estate the impaired portion will be
charged off to the allowance for loan and lease losses unless
it in the process of collection, in which case a specific reserve
may be warranted. If the collateral is other than real estate the
Company will typically charge off the impaired portion of a
loan, unless it is in the process of collection, in which case a
specific reserve may be warranted.
It is the policy of management to maintain the allowance
for loan and lease losses at a level believed to be adequate for
known and inherent risks in the portfolio. Our methodology
incorporates a variety of risk considerations, both quantitative
and qualitative, in establishing an allowance for loan and
lease losses that management believes is appropriate at each
reporting date. Based on information currently available
to analyze inherent credit risk, which includes but is not
limited to economic factors, overall credit quality, historical
delinquencies and a history of actual charge-offs, management
believes that the provision for loan and lease losses and the
allowance for loan and lease losses are prudent and adequate.
Adjustments may be made based on differences from estimated
loan and lease growth, the types of loans constituting this
growth, changes in risk ratings within the portfolio, and
general economic conditions. However, no prediction of the
ultimate level of loans and leases charged off in future periods
can be made with any certainty.
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 adjustments to the allowance
based on their judgment of information available to them at
the time of their examination. Table Nine summarizes, for the
periods indicated, the activity in the ALLL.
24
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
T A B L E N I N E : A L L O W A N C E F O R L O A N A N D L E A S E L O S S E S
DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
2010
2009
2008
2007
2006
Average loans and leases outstanding
$
362,445
$
404,539
$
410,293
$
390,488
$
381,465
$
7,909
$
5,918
$
5,883
$
5,874
$
5,679
Allowance for loan & lease losses at beginning
of period
Loans and leases charged off:
Commercial
Real estate
Consumer
Lease financing receivable
Total
Recoveries of loans and leases previously charged off:
Commercial
Real estate
Consumer
Lease financing receivable
Total
Net loans and leases charged off
Additions to allowance charged to operating
2,570
5,048
173
30
7,821
63
68
1
-
132
7,689
2,944
3,257
216
171
6,588
33
1
8
7
49
422
1,114
139
59
1,734
12
-
-
14
26
6,539
1,708
301
72
105
70
548
41
-
-
66
107
441
450
71
-
1
78
150
6
-
9
10
25
125
320
expenses
7,365
8,530
1,743
Allowance for loan and lease losses at end
of period
$
7,585
$
7,909
$
5,918
$
5,883
$
5,874
Ratio of net charge-offs to average loans
and leases outstanding
Provision for loan and lease losses to average
2.12%
1.62%
loans and leases outstanding
2.03%
2.11%
.42%
.42%
.11%
.12%
.03%
.08%
Allowance for loan and lease losses to loans and
leases, net of deferred fees, at end of period
2.19%
2.06%
1.41%
1.47%
1.51%
As part of its loan review process, management has allocated
the overall allowance based on specific identified problem
loans and leases, qualitative factors, uncertainty inherent in
the estimation process and historical loss data. A risk exists
that future losses cannot be precisely quantified or attributed
to particular loans or leases or classes of loans and leases.
Management continues to evaluate the loan and lease portfolio
and assesses current economic conditions that will affect
management’s conclusion as to future allowance levels. Table
Ten below summarizes the allocation of the allowance for loan
and lease losses for the five years ended December 31, 2010.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
25
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
T A B L E T E N : A L L O W A N C E F O R L O A N A N D L E A S E L O S S E S B Y L O A N C A T E G O R Y
DOLLARS IN THOUSANDS
Commercial
Real estate
Agriculture
Consumer
Lease financing receivable
December 31, 2010
December 31, 2009
December 31, 2008
Percent of
Loans In
Each
Category
to Total Loans
$
16.8%
76.5%
2.1%
3.8%
0.8%
Amount
2,178
5,009
203
426
93
Percent of
Loans In
Each
Category
to Total Loans
18.9%
74.5%
1.9%
3.7%
1.0%
Amount
$
1,644
4,030
8
170
66
Percent of
Loans In
Each
Category
to Total Loans
21.6%
71.8%
1.9%
3.5%
1.2%
$
Amount
2,556
4,574
228
220
7
Total allocated
$
7,585
100.0%
$
7,909
100.0%
$
5,918
100.0%
December 31, 2007
December 31, 2006
Percent of
Loans In
Each
Category
to Total Loans
$
23.6%
70.7%
2.0%
2.7%
1.0%
Amount
1,269
4,332
7
131
135
Percent of
Loans In
Each
Category
to Total Loans
22.1%
71.4%
1.9%
3.0%
1.6%
$
Amount
1,369
4,314
8
108
84
Commercial
Real estate
Agriculture
Consumer
Lease financing receivable
Total allocated
$
5,883
100.0%
$
5,874
100.0%
book value of the properties by $705,000. During 2009,
the valuation process resulted in $1,074,000 in book value
reductions.
Deposits
At December 31, 2010, total deposits were $465,122,000
representing a decrease of $4,633,000 (1.0%) from the
December 31, 2009 balance of $469,755,000. The Company’s
deposit growth plan for 2010 was to concentrate its efforts
on increasing noninterest-bearing demand, interest-bearing
money market and NOW accounts, and savings accounts.
Due to these efforts, the Company experienced increases
during 2010 in noninterest-bearing ($8,308,000 or 7.0%),
money market ($6,022,000 or 4.6%) and savings ($9,303,000
or 25.7%) and decreases in time deposits ($23,187,000 or
17.4%) and interest-bearing checking ($5,079,000 or 10.1%).
The allocation presented should not be interpreted as an
indication that charges to the allowance for loan and lease
losses will be incurred in these amounts or proportions, or that
the portion of the allowance allocated to each loan and lease
category represents the total amounts available for charge-offs
that may occur within these categories.
Other Real Estate Owned
During 2010, the Company received $3,195,000 from the
net proceeds of the sale of nineteen OREO properties with
net losses of $103,000 recognized on these sales. There was
$2,796,000 in other real estate owned at December 31, 2010
with a valuation allowance of $100,000 and $2,523,000 in
other real estate owned at December 31, 2009 with a valuation
allowance of $15,000.
The balance in OREO at December 31, 2010 consisted of
twelve properties acquired through foreclosure. The balance in
OREO at December 31, 2009 consisted of thirteen properties.
During 2010, the Company acquired eighteen properties
through foreclosure totaling $4,692,000. The Company
periodically obtains property valuations to determine whether
the recorded book value is considered fair value. During 2010,
this valuation process resulted in the Company reducing the
26
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Borrowed Funds
Other borrowings outstanding as of December 31, 2010 consist of advances from the Federal Home Loan Bank (the “FHLB”).
The following table summarizes these borrowing:
DOLLARS IN THOUSANDS
Short-term borrowings:
FHLB advances
Long-term borrowings:
FHLB advances
2010
2009
2008
Amount
Rate
Amount
Rate
Amount
Rate
$
7,000
2.40%
$
14,500
2.84%
$
43,231
1.83%
$
10,000
2.41%
$
17,000
2.40%
$
14,000
3.19%
The maximum amount of short-term borrowings at any month-end during 2010, 2009 and 2008, was $9,500,000, $69,448,000,
and $59,000,000, 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
Amount
Maturity
Average rates
Short-term
$
7,000
2011
2.40%
Long-term
$
10,000
2012 to 2014
2.41%
The Company has also been issued a total of $9,000,000 as of
December 31, 2010 and $8,000,000 as of December 31, 2009
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 2010 or 2009 and management does not
expect to draw upon these lines in the foreseeable future.
Capital Resources
The current and projected capital position of the Company
and the impact of capital plans and long-term strategies are
reviewed regularly by management. The Company’s capital
position represents the level of capital available to support
continuing operations and expansion.
The Company, through a Board of Directors authorized plan,
may repurchase, as conditions warrant, up to 6.5% annually
of the Company’s common stock. The repurchases are to be
made from time to time in the open market as conditions
allow and will be structured to comply with SEC Rule 10b-18.
Management reports monthly to the Board of Directors on
the status of the repurchase program. The Board of Directors
has reserved the right to suspend, terminate, modify or cancel
the repurchase program at any time for any reason. Effective
July 27, 2009, the Company temporarily suspended the
stock repurchases. The Company relies on distributions from
the Bank in the form of cash dividends in order to fund its
repurchase program. As a result of a regularly scheduled FDIC
examination in 2009, the Company entered into an informal
agreement in February 2010 with the FDIC and the DFI
to take certain actions including restricting the payment
of cash dividends. As a result, any future cash dividends
from the Bank will require prior approval from its regulators.
The Company did not repurchase any shares in 2010 or
2009, repurchased 115,815 shares in 2008, 426,668 shares
in 2007, 299,410 shares in 2006, 92,986 shares in 2005,
11,869 shares in 2004, 1,915 shares in 2003 and 83,747
shares in 2002. Share amounts have been adjusted for stock
dividends and/or splits.
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. As a result of a regularly
scheduled 2009 FDIC examination, the Company entered
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
27
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
into an informal agreement with the FDIC and the DFI to
take certain actions including maintaining the Bank’s Tier 1
Leverage capital ratio at not less than 8% and a Total Risk-
Based capital ratio of not less than 11%. As of December 31,
2010, the foregoing capital ratios for the Bank were 11.8%
and 19.2%, respectively. We believe that we are currently in
compliance in all material respects with the actions described
in the agreement, including the capital ratios as described
above. See “Other Events” herein for more information
regarding the informal agreement.
At December 31, 2010, shareholders’ equity was $89,544,000,
representing an increase of $2,199,000 (2.5%) from
$87,345,000 at December 31, 2009. The increase results
from the addition of the net income for the period, the
stock based compensation expense, and the increase in
other comprehensive income. In 2009, shareholders’ equity
increased $23,898,000 (37.7%) from 2008. This increase was
attributable principally to the public offering the Company
undertook in the fourth quarter of 2009. The ratio of
total risk-based capital to risk adjusted assets was 20.3% at
December 31, 2010 compared to 18.4% at December 31,
2009. Tier 1 risk-based capital to risk-adjusted assets was
19.1% at December 31, 2010 and 17.1% at December 31,
2009.
Table Eleven below lists the Company’s actual capital ratios at
December 31, 2010 and 2009 as well as the minimum capital
ratios for capital adequacy.
T A B L E E L E V E N : C A P I T A L R A T I O S
Capital to Risk-Adjusted Assets
Leverage ratio
Tier 1 Risk-Based Capital
Total Risk-Based Capital
At December 31,
Minimum Regulatory
2010
12.6%
19.1%
20.3%
2009
Capital Requirements
12.4%
17.1%
18.4%
4.00%
4.00%
8.00%
Capital ratios are reviewed on a regular basis to ensure that
capital exceeds the prescribed regulatory minimums and is
adequate to meet future needs. American River Bank’s ratios
are in excess of the regulatory definition of “well capitalized.”
The Company filed an application with the U.S. Treasury to
preserve its opportunity to participate in the Capital Purchase
Program (“CPP”) and received approval of its application
on November 21, 2008. However, the Board of Directors
subsequently determined that participation in the CPP was
not in the best interests of the Company and its shareholders
after evaluation of the CPP and due diligence reviews of the
CPP agreements and documentation and other financial
factors, and with advice of such advisors as the Company’s
Board of Directors deemed appropriate. The Company
gave notice to the U.S. Treasury on January 20, 2009 of its
intention not to participate in the CPP and instead raised
$25.3 million (in gross proceeds) in a public offering in
December 2009 to augment capital.
Management believes that the Company’s capital is adequate
to support current operations and anticipated growth and
currently foreseeable 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
28
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
environments. The Company uses simulation models to
forecast earnings, net interest margin and market value
of equity.
Simulation of earnings is the primary tool used to measure
the sensitivity of earnings to interest rate changes. Using
computer-modeling techniques, the Company is able to
estimate the potential impact of changing interest rates on
earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans and leases, securities and interest bearing
liabilities (i.e. deposits/borrowings) positions as the beginning
base. The forecast balance sheet is processed against three
interest rate scenarios. The scenarios include a 200 basis point
rising rate forecast, a flat rate forecast and a 200 basis point
falling rate forecast which take place within a one year time
frame. The net interest income is measured during the year
assuming a gradual change in rates over the twelve-month
horizon. The simulation modeling indicated below attempts
to estimate changes in the Company’s net interest income
utilizing a forecast balance sheet projected from year-end
balances. Table Twelve below summarizes the effect on net
interest income (NII) of a ±200 basis point change in interest
rates as measured against a constant rate (no change) scenario.
T A B L E T W E L V E :
I N T E R E S T R A T E R I S K S I M U L A T I O N O F N E T I N T E R E S T A S O F D E C E M B E R 3 1 , 2 0 1 0
DOLLARS IN THOUSANDS
Variation from a constant rate scenario
+200bp
-200bp
$ Change in NII
from Current 12 Month Horizon
$
$
289
(1,739)
The simulations of earnings do not incorporate any
management actions, which might moderate the negative
consequences of interest rate deviations. Therefore, they do not
reflect likely actual results, but serve as reasonable estimates of
interest rate risk.
Interest Rate Sensitivity Analysis. Interest rate sensitivity is a
function of the repricing characteristics of the portfolio of
assets and liabilities. These repricing characteristics are the time
frames within which the interest-bearing assets and liabilities
are subject to change in interest rates either at replacement,
repricing or maturity. Interest rate sensitivity management
focuses on the maturity of assets and liabilities and their
repricing during periods of changes in market interest rates.
Interest rate sensitivity is measured as the difference between
the volumes of assets and liabilities in the current portfolio
that are subject to repricing at various time horizons. The
differences are known as interest sensitivity gaps. A positive
cumulative gap may be equated to an asset sensitive position.
An asset sensitive position in a rising interest rate environment
will cause a bank’s interest rate margin to expand. This results
as floating or variable rate loans reprice more rapidly than
fixed rate certificates of deposit that reprice as they mature
over time. Conversely, a declining interest rate environment
will cause the opposite effect. A negative cumulative gap may
be equated to a liability sensitive position. A liability sensitive
position in a rising interest rate environment will cause a
bank’s interest rate margin to contract, while a declining
interest rate environment will have the opposite effect.
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other
commercial concerns, primarily because its assets and liabilities
are largely monetary. In general, inflation primarily affects
the Company through its effect on market rates of interest,
which affects the Company’s ability to attract loan customers.
Inflation affects the growth of total assets by increasing the
level of loan demand, and potentially adversely affects capital
adequacy because loan growth in inflationary periods can
increase at rates higher than the rate that capital grows through
retention of earnings which may be generated in the future.
In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a material
effect upon the results of operations of the Company during
the years ended December 31, 2010, 2009 and 2008.
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,
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
29
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2010 were approximately $42,448,000 and $10,033,000,
respectively. Such loan commitments relate primarily to
revolving lines of credit and other commercial loans and to
real estate construction loans. Since some of the commitments
are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
The Company’s sources of liquidity consist of cash and
due from correspondent banks, overnight funds sold to
correspondent banks, unpledged marketable investments and
loans held for sale. On December 31, 2010, consolidated
liquid assets totaled $128.1 million or 22.1% of total
assets compared to $79.8 million or 13.4% of total assets
on December 31, 2009. In addition to liquid assets, the
Company maintains a short-term line of credit in the amount
of $10,000,000 with a correspondent bank. At December 31,
2010, the Company had $10,000,000 available under this
credit line. Additionally, American River Bank is a member
of the FHLB. At December 31, 2010, American River
Bank could have arranged for up to $81,165,000 in secured
borrowings from the FHLB. These borrowings are secured
by pledged mortgage loans and investment securities. At
December 31, 2010, the Company had $55,165,000 available
under these secured borrowing arrangements. American
River Bank also has a secured borrowing arrangement with
the Federal Reserve Bank. The borrowing can be secured
by pledging selected loans and investment securities. At
December 31, 2010, the Company’s borrowing capacity at
the Federal Reserve Bank was $30,702,000.
The Company serves primarily a business and professional
customer base and, as such, its deposit base is susceptible to
economic fluctuations. Accordingly, management strives to
maintain a balanced position of liquid assets to volatile and
cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect
of interest rate fluctuations on the marketability of both assets
and liabilities. The Company can sell any of its unpledged
securities held in the available-for-sale category to meet
liquidity needs. These securities are also available to pledge as
collateral for borrowings if the need should arise. American
River Bank can also pledge additional securities to borrow
from the Federal Reserve Bank and the FHLB.
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.
T A B L E T H I R T E E N : C E R T I F I C A T E S O F D E P O S I T M A T U R I T I E S
DOLLARS IN THOUSANDS
DECEMBER 31, 2010
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Less than $100,000
Over $100,000
$
9,206
7,255
8,693
6,937
$
44,878
9,239
11,996
12,034
$
32,091
$
78,147
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.
T A B L E F O U R T E E N : L O A N A N D L E A S E M A T U R I T I E S G R O S S L O A N S A N D L E A S E S
DOLLARS IN THOUSANDS
DECEMBER 31, 2010
Commercial
Real estate
Agriculture
Consumer
Leases
Total
30
$
One year
or less
25,958
44,295
963
1,164
63
$
One year
through
five years
27,091
92,509
6,239
4,575
2,590
Over
five years
Total
$
5,212
$
58,261
128,310
265,114
-
7,463
113
7,202
13,202
2,766
$
72,443
$
133,004
$
141,098
$
346,545
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and leases shown above with maturities greater than one
year include $192,244,000 of floating interest rate loans and
$81,858,000 of fixed rate loans and leases.
The carrying amount, maturity distribution and weighted
average yield of the Company’s investment securities available-
for-sale and held-to-maturity portfolios are presented in Table
Fifteen below. The yields on tax-exempt obligations have been
computed on a tax equivalent basis. Table Fifteen does not
include FHLB Stock, which does not have stated maturity
dates or readily available market values. The balance in FHLB
Stock at December 31, 2010, 2009 and 2008 was $3,486,000,
$3,922,000 and $3,922,000, respectively.
T A B L E F I F T E E N : S E C U R I T I E S M A T U R I T I E S A N D W E I G H T E D A V E R A G E Y I E L D S
DOLLARS IN THOUSANDS
DECEMBER 31,
(TAXABLE EQUIVALENT BASIS)
Available-for-sale securities:
State and political subdivisions
2010
2009
2008
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
Maturing within 1 year
$
499
5.24%
$
3,749
4.40%
$
2,055
4.42%
Maturing after 1 year but within
5 years
Maturing after 5 years but within
10 years
Maturing after 10 years
Mortgage-backed securities
Other
Non-maturing
5,782
6.07%
7,397
6.10%
12,228
5.42%
5,511
4,000
138,644
5.78%
5.47%
2.84%
4,473
4,968
76,009
6.21%
5.77%
3.50%
11,782
4,948
32,232
79
0.00%
86
0.00%
89
Total investment securities
$ 154,515
3.14%
$ 96,682
3.97%
$
63,334
Held-to-maturity securities:
Mortgage-backed securities
Total investment securities
$
$
6,149
6,149
4.49%
$
12,331
4.49%
$ 12,331
4.48%
4.48%
$
$
24,365
24,365
6.08%
5.77%
4.89%
0.00%
5.26%
4.89%
4.89%
The carrying values of available-for-sale securities include
net unrealized gains of $2,848,000, $377,000 and $673,000
at December 31, 2010, 2009 and 2008, respectively. The
carrying values of held-to-maturity securities do not include
unrealized gains or losses; however, the net unrealized gains
at December 31, 2010, 2009 and 2008 were $323,000,
$558,000 and $524,000, 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.
As of December 31, 2010, 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 55% to 75%. In addition, the majority of the
Company’s commitments have variable interest rates.
The Company’s exposure to credit loss in the event of
nonperformance by the other party for commitments to
extend credit and letters of credit is represented by the
contractual amount of those instruments. The Company uses
the same credit policies in making commitments and letters
of credit as it does for loans included on the consolidated
balance sheet. The following financial instruments represent
off-balance-sheet credit:
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
31
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DOLLARS IN THOUSANDS
DECEMBER 31,
Commitments to extend credit:
2010
2009
Revolving lines of credit secured by 1-4 family residences
$
5,964
$
6,615
Commercial real estate, construction and land
development commitments secured by real estate
Other unused commitments, principally commercial loans
Letters of credit
12,746
23,738
42,448
10,033
$
$
18,202
43,008
67,825
10,190
$
$
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, 2010. Included
in the table are amounts payable under the Company’s
Deferred Compensation and Deferred Fees Plans and are
listed in the “Other Long-Term Liabilities…” category. At
December 31, 2010, these amounts represented $2,330,000
and are anticipated to be primarily payable at least five years
in the future.
T A B L E S I X T E E N : C O N T R A C T U A L O B L I G A T I O N S
DOLLARS IN THOUSANDS
PAYMENTS DUE BY PERIOD
Long-Term Debt
Capital Lease Obligations
Operating Leases
Purchase Obligations
Other Long-Term Liabilities Reflected on the
Company’s Balance Sheet under GAAP
Total
Less Than
1 Year
1–3 Years
3–5 Years
More Than
5 Years
$
10,000
$
-
5,026
-
2,330
-
-
783
-
-
$
5,000
$
5,000
$
-
1,571
-
-
-
1,400
-
-
-
-
1,272
-
2,330
3,602
Total
$
17,356
$
783
$
6,571
$
6,400
$
32
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—SELECTED QUARTERLY INFORMATION (UNAUDITED)
S E L E C T E D Q U A R T E R L Y I N F O R M A T I O N U N A U D I T E D
IN THOUSANDS, EXCEPT PER SHARE AND PRICE RANGE OF COMMON STOCK
2010
Interest income
Net interest income
Provision for loan and lease losses
Noninterest income
Noninterest expense
Income (loss) before taxes
Net income
Basic earnings per share
Diluted earnings per share
Cash dividends per share
Price range, common stock
2009
Interest income
Net interest income
Provision for loan and lease losses
Noninterest income
Noninterest expense
Income (loss) before taxes
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Cash dividends per share
Price range, common stock
March 31,
June 30,
September 30, December 31,
$
$
$
$
6,714
5,772
1,641
461
4,185
407
306
.03
.03
-
$
$
6,473
5,582
2,011
460
4,055
(24)
54
.01
.01
-
$
$
6,344
5,506
2,025
441
3,972
(50)
39
.00
.00
-
6,175
5,396
1,688
442
4,258
(108)
77
.01
.01
-
$ 7.50–8.50
$ 7.25–8.91
$ 5.65–7.58
$ 5.50–6.49
$
$
$
$
7,751
6,339
1,229
510
3,601
2,019
1,283
.22
.22
.143
$
$
7,321
6,018
3,800
649
4,239
(1,372)
(704)
(0.12)
(0.12)
.143
$
7,163
5,928
1,001
597
4,268
1,256
6,887
5,747
2,500
513
3,703
57
827
180
$
.14
.14
-
.03
.03
-
$ 7.02–10.97
$ 7.90–12.15
$ 7.45–10.99
$ 6.00–7.98
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
33
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
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, 2010, presented in conformity with accounting
principles generally accepted in the United States of America. In making this assessment, management used the criteria applicable
to the Company as set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—
Integrated Framework. Based upon such assessment, management believes that, as of December 31, 2010, the Company’s internal
control over financial reporting is effective based upon those criteria.
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public
accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission
that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
David T. Taber
President and Chief Executive Officer
Mitchell A. Derenzo
Executive Vice President and Chief Financial Officer
34
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2010 and 2009 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, 2010. 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. The Company is not required to have, nor were we engaged to perform an
audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements, 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, 2010 and 2009, 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, 2010, in
conformity with accounting principles generally accepted in the United States of America.
Sacramento, California
March 3, 2011
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
35
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— CONSOLIDATED BALANCE SHEET
C O N S O L I D A T E D B A L A N C E S H E E T
DOLLARS IN THOUSANDS
DECEMBER 31, 2010 AND 2009
Assets
Cash and due from banks
Interest-bearing deposits in banks
Investment securities (Note 5):
Available-for-sale, at fair value
Held-to-maturity, at amortized cost
Loans and leases, less allowance for loan and lease losses of
$7,585 in 2010 and $7,909 in 2009 (Notes 6, 7, 12 and 17)
Premises and equipment, net (Note 8)
Federal Home Loan Bank of San Francisco stock
Other real estate owned, net (Note 2)
Goodwill (Note 4)
Intangible assets (Note 4)
Accrued interest receivable and other assets (Notes 11 and 16)
Liabilities And Shareholders’ Equity
Deposits:
Noninterest-bearing
Interest-bearing (Note 9)
Total deposits
Short-term borrowings (Note 10)
Long-term borrowings (Note 10)
Accrued interest payable and other liabilities (Note 16)
Total liabilities
Commitments and contingencies (Note 12)
Shareholders’ equity (Notes 13 and 14):
Common stock—no par value; 20,000,000 shares authorized;
issued and outstanding—9,874,867 shares in 2010 and 9,845,533 shares in 2009
Retained earnings
Accumulated other comprehensive income, net of taxes (Notes 5 and 18)
Total shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
2010
2009
$
31,871
$
58,493
2,248
154,515
6,149
96,682
12,331
338,533
376,322
2,026
3,486
2,696
16,321
402
20,693
2,094
3,922
2,508
16,321
644
25,101
$
578,940
$
594,418
$
126,636
$
118,328
338,486
465,122
7,000
10,000
7,274
489,396
71,814
16,021
1,709
89,544
351,427
469,755
14,500
17,000
5,818
507,073
71,578
15,545
222
87,345
$
578,940
$
594,418
36
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—CONSOLIDATED STATEMENT OF INCOME
C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
FOR THE YEARS ENDED DECEMBER 31,
Interest income:
Interest and fees on loans and leases
Interest on Federal funds sold
Interest on deposits in banks
Interest and dividends on investment securities:
Taxable
Exempt from Federal income taxes
Dividends
Total interest income
Interest expense:
Interest on deposits (Note 9)
Interest on borrowings (Note 10)
Total interest expense
Net interest income
Provision for loan and lease losses (Note 7)
Net interest income after provision for loan and lease losses
Noninterest income:
Service charges
Gain (loss) on sale, call and impairment of investment securities (Note 5)
Other income (Note 15)
Total noninterest income
Noninterest expense:
Salaries and employee benefits (Notes 6 and 16)
FDIC assessments
Occupancy (Notes 8, 12 and 17)
Other real estate expense
Furniture and equipment (Notes 8 and 12)
Other expense (Notes 4 and 15)
Total noninterest expense
Income before provision for income taxes
(Benefit from) provision for income taxes (Note 11)
Net income
Basic earnings per share (Note 13)
Diluted earnings per share (Note 13)
Cash dividends per share of issued and outstanding
common stock, adjusted for stock dividends
2010
2009
2008
$
22,227
$
25,378
$
28,512
5
59
2,840
634
25,706
2,952
498
3,450
22,256
7,365
14,891
866
7
931
1,804
7,876
1,423
1,271
1,210
720
3,970
2,763
917
5
29,122
4,003
1,087
5,090
24,032
8,530
15,502
1,018
270
981
2,269
7,279
770
1,389
1,441
759
4,173
16,470
15,811
225
(251)
476
0.05
0.05
-
$
$
$
$
1,960
374
1,586
0.26
0.26
0.29
$
$
$
$
$
$
$
$
10
222
3,711
1,080
18
33,553
5,901
1,727
7,628
25,925
1,743
24,182
741
(119)
1,546
2,168
7,687
151
1,495
1
774
4,093
14,201
12,149
4,578
7,571
1.30
1.30
0.57
The accompanying notes are an integral part of these consolidated financial statements.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
37
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y
DOLLARS IN THOUSANDS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Net of Taxes)
Total
Shareholders’
Equity
Total
Comprehensive
Income
Balance, January 1, 2008
5,590,277
$
45,668
$
14,204
$
101
$
59,973
Comprehensive income (Note 18):
Net income
Other comprehensive income, net of tax:
Net change in unrealized gains on available-
for-sale investment securities
Total comprehensive income
Cash dividend ($0.57 per share)
(Note 14)
Fractional shares redeemed for
stock dividend
5% stock dividend (Note 13)
Stock options exercised
Stock option compensation
275,048
37,258
Retirement of common stock (Note 13)
(110,300)
Balance, December 31, 2008
5,792,283
Comprehensive income (Note 18):
Net income
Other comprehensive loss, net of tax:
Net change in unrealized gains on
available-for-sale investment securities
Total comprehensive income
Cash dividend ($0.29 per share)
(Note 14)
Issuance of new shares, net of
7,571
7,571
$
7,571
296
296
296
$
7,867
(3,317)
(2,841)
15,617
397
(3,317)
(10)
354
290
(1,710)
63,447
(10)
2,841
354
290
(1,710)
47,433
1,586
1,586
$
1,586
(175)
(175)
(175)
$
1,411
(1,658)
(1,658)
23,901
34
210
issuance costs ($6.25 per share)
4,048,000
23,901
Stock options exercised
Stock option compensation
5,250
34
210
Balance, December 31, 2009
9,845,533
71,578
15,545
222
87,345
Comprehensive income (Note 18):
Net income
Other comprehensive income, net of tax:
Net change in unrealized gains on available-
for-sale investment securities (Note 5)
Total comprehensive income
Restricted stock awarded and
476
476
$
476
1,487
1,487
1,487
1,963
$
related compensation expense
29,334
Stock option compensation
47
189
47
189
Balance, December 31, 2010
9,874,867
$
71,814
$
16,021
$
1,709
$
89,544
The accompanying notes are an integral part of these consolidated financial statements.
38
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES—CONSOLIDATED STATEMENT OF CASH FLOWS
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
DOLLARS IN THOUSANDS
FOR THE YEARS ENDED DECEMBER 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses
(Decrease) increase in deferred loan and lease origination fees, net
Depreciation and amortization
Amortization of investment security premiums and discounts, net
Provision for accounts receivable servicing receivable allowance for losses
(Gain) loss on sale, call and impairment of investment securities
Increase in cash surrender value of life insurance policies
Provision for deferred income taxes
Stock-based compensation expense
Tax benefit from exercise of stock options
Loss on sale/write-down of other real estate owed
Decrease (increase) in accrued interest receivable and other assets
Increase (decrease) in accrued interest payable and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from the sale of investment securities
Proceeds from called available-for-sale investment securities
Proceeds from matured available-for-sale investment securities
Purchases of available-for-sale investment securities
Proceeds from principal repayments for available-for-sale
2010
2009
2008
$
476
$
1,586
$
7,571
7,365
(173)
785
2,689
(4)
(7)
(277)
(327)
236
908
3,991
1,456
17,118
9,032
670
3,365
8,530
29
832
399
171
(270)
(246)
(957)
210
(12)
1,106
(6,705)
1,228
5,901
9,995
1,080
2,954
1,743
54
822
137
119
(395)
(446)
290
(85)
1,762
(1,035)
10,537
24,225
1,455
11,615
(90,443)
(61,448)
(29,629)
mortgage-backed securities
19,204
13,517
8,137
Proceeds from principal repayments for held-to-maturity
mortgage-backed securities
Net (increase) decrease in interest-bearing deposits in banks
Net decrease (increase) in loans and leases
Net decrease in accounts receivable servicing receivables
Proceeds from sale of other real estate owned
Purchases of equipment
Capitalized additions to other real estate owned
Net decrease (increase) in FHLB stock
Net cash (used in) provided by investing activities
(Continued)
6,310
(2,248)
26,307
40
3,195
(475)
436
(24,607)
12,163
4,248
23,238
1,029
2,808
(548)
(26)
9,010
10,469
703
(21,335)
430
61
(670)
(1,122)
4,339
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
39
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES— CONSOLIDATED STATEMENT OF CASH FLOWS
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S C O N T I N U E D
DOLLARS IN THOUSANDS
FOR THE YEARS ENDED DECEMBER 31,
Cash flows from financing activities:
2010
2009
2008
Net increase (decrease) in demand, interest-bearing and savings deposits
$
18,554
$
32,249
$
(35,198)
Net (decrease) increase in time deposits
(Decrease) increase in long-term borrowings
Decrease in short-term borrowings
Exercise of stock options
Tax benefit from exercise of stock options
Cash paid to repurchase common stock
Payment of cash dividends
Cash paid for fractional shares
Net proceeds from stock issuance
Net cash (used in) provided by in financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
(23,187)
(7,000)
(7,500)
(19,133)
(26,622)
58,493
445
3,000
(28,731)
22
12
(2,486)
23,901
28,412
43,323
15,170
16,614
14,000
(8,372)
269
85
(1,710)
(3,329)
(10)
(17,651)
(2,775)
17,945
Cash and cash equivalents at end of year
$
31,871
$
58,493
$
15,170
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense
Income taxes
Non-cash investing activities:
Real estate acquired through foreclosure
Net change in unrealized gains on available-for-sale
investment securities
Non-cash financing activities:
Dividends declared and unpaid
The accompanying notes are an integral part of these consolidated financial statements.
$
$
$
$
3,526
190
4,274
2,471
$
$
$
$
5,208
2,452
4,793
$
$
$
(296)
$
$
7,913
5,010
2,158
502
828
40
T H I S P A G E H A S B E E N I N T E N T I O N A L L Y L E F T B L A N K .
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
41
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 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” or the “Bank”). 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, two banking offices in
Sonoma County under the name North Coast Bank, a division
of ARB, and three banking offices in Amador County under
the name Bank of Amador, a division of ARB. The Company
also owns one inactive subsidiary, American River Financial.
ARB does not offer trust services or international banking
services and does not plan to do so in the near future. The
deposits of ARB are insured by the Federal Deposit Insurance
Corporation (the “FDIC”) up to applicable legal limits.
The Bank was participating in the Federal Deposit Insurance
Corporation’s (FDIC) Transaction Account Guarantee
Program. Under that program, through December 31, 2010,
all noninterest-bearing transaction accounts were
fully guaranteed by the FDIC for the entire amount in the
account. Coverage under the Transaction Account Guarantee
Program was in addition to and separate from the coverage
available under the FDIC’s general deposit insurance rules.
Although coverage under the Transaction Account Guarantee
Program expired December 31, 2010, the FDIC adopted
a final rule amending its deposit insurance regulations on
November 15, 2010 to implement Section 343 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act
providing for unlimited deposit insurance for noninterest-
bearing transaction accounts for two years starting December
31, 2010.
In February 2010, in connection with the Bank’s regularly
scheduled 2009 FDIC examination, the Bank entered into
a Memorandum of Understanding (Memorandum) with
the FDIC and the California Department of Financial
Institutions (the “DFI”). The Memorandum covers actions
to be taken by the Board of Directors and management to
enhance BSA compliance; reduce the Bank’s level of classified
assets and further strengthen and improve the Bank’s asset
quality; requesting regulatory approval prior to paying any
cash dividends; and maintaining the Bank’s Tier 1 leverage
capital ratio at not less than 8% and a total risk-based capital
ratio of not less than 11%. As of December 31, 2010, the
foregoing capital ratios for the Bank were 11.8% and 19.2%,
respectively. The Company believes that it is currently in
compliance in all material respects with the actions described
in the Memorandum. Consequently, the Company does not
expect these actions to significantly change its business strategy
in any material respect.
42
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 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.
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.
Reclassifications
Certain reclassifications have been made to prior years’
balances to conform to classifications used in 2010.
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.
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:
• 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.
• Held-to-maturity securities, which management has the
positive intent and ability to hold to maturity, reported at
amortized cost, adjusted for the accretion of discounts and
amortization of premiums.
Management determines the appropriate classification of its
investments at the time of purchase and may only change the
classification in certain limited circumstances. All transfers
between categories are accounted for at fair value. There were
no transfers in the years ended December 31, 2010 and 2009.
As of December 31, 2010 and 2009, the Company did not
have any trading securities.
An investment security is impaired when its carrying value
is greater than its fair value. Investment securities that are
impaired are evaluated 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 and management does
not intend to sell the security or it is more likely than not that
management will not be required to sell the security before
recovery, only the portion of the impairment loss representing
credit exposure is recognized as a charge to earnings, with
the balance recognized as a charge to other comprehensive
income (loss). If management intends to sell the security or it
is more likely than not that management will be required to
sell the security before recovering its forecasted cost, the entire
impairment loss is recognized as a charge to earnings.
Federal Home Loan Bank Stock
Investments in Federal Home Loan Bank of San Francisco
(the “FHLB”) stock are carried at cost and are redeemable at
par with certain restrictions. Investments in FHLB stock are
necessary to participate in FHLB programs.
Loans and Leases
Loans and leases are reported at the principal amounts
outstanding, adjusted for unearned income, deferred loan
origination fees and costs, purchase premiums and discounts,
write-downs and the allowance for loan and lease losses. Loan
and lease origination fees, net of certain deferred origination
costs, and purchase premiums and discounts, are recognized as
an adjustment to the yield of the related loans and leases.
The accrual of interest on loans and leases is discontinued
when, in the opinion of management, there is an indication
that the borrower may be unable to meet payment
requirements within an acceptable time frame relative to the
terms stated in the loan agreement. Upon such discontinuance,
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
43
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
all unpaid accrued interest is reversed against current income
unless the loan or lease is well secured and in the process of
collection. Interest received on nonaccrual loans and leases is
either applied against principal or reported as interest income,
according to management’s judgment as to the collectibility
of principal. Generally, loans and leases are restored to
accrual status when the obligation is brought current and
has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
Direct financing leases are carried net of unearned income.
Income from leases is recognized by a method that
approximates a level yield on the outstanding net investment
in the lease.
Loan Sales and Servicing
Included in the loan and lease portfolio are Small Business
Administration (SBA) loans and Farm Service Agency
guaranteed loans that may be sold in the secondary market. At
the time the loan is sold, the related right to service the loan
is either retained, with the Company earning future servicing
income, or released in exchange for a one-time servicing-
released premium. A portion of this premium may be required
to be refunded if the borrower defaults or the loan prepays
within ninety days of the settlement date. There were no sales
of loans subject to these recourse provisions at December
31, 2010, 2009 and 2008. 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,
2010 and 2009.
SBA and Farm Service Agency loans with unpaid balances of
$449,000 and $503,000 were being serviced for others as of
December 31, 2010 and 2009, respectively. The Company
also serviced loans that are participated with other financial
institutions totaling $6,673,000 and $6,764,000 as of
December 31, 2010 and 2009, respectively.
Servicing rights acquired through 1) a purchase or 2) the
origination of loans which are sold or securitized with
servicing rights retained are recognized as separate assets
or liabilities. Servicing assets or liabilities are recorded at
the difference between the contractual servicing fees and
adequate compensation for performing the servicing, and are
subsequently amortized in proportion to and over the period
of the related net servicing income or expense. Servicing assets
are periodically evaluated for impairment. Servicing assets were
not considered material for disclosure purposes at December
31, 2010 and 2009.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of credit
losses inherent in the Company’s credit portfolio that have
been incurred as of the balance-sheet date. The allowance is
established through a provision for loan and lease losses which
is charged to expense. Additions to the allowance are expected
to maintain the adequacy of the total allowance after credit
losses and loan growth. Credit exposures determined to be
uncollectible are charged against the allowance. Cash received
on previously charged off amounts is recorded as a recovery to
the allowance. The overall allowance consists of two primary
components, specific reserves related to impaired credits and
general reserves for inherent losses related to credits that are
not impaired.
A loan or lease is considered impaired when, based on current
information and events, it is probable that the Company will
be unable to collect all amounts due, including principal and
interest, according to the contractual terms of the original
agreement. Loans determined to be impaired are individually
evaluated for impairment. When a loan or lease is impaired,
the Company measures impairment based on the present
value of expected future cash flows discounted at the credit’s
effective interest rate, except that as a practical expedient,
it may measure impairment based on a credit’s observable
market price, or the fair value of the collateral if the credit is
collateral dependent. A loan or lease is collateral dependent if
the repayment of the credit is expected to be provided solely
by the underlying collateral.
A restructuring of a debt constitutes a troubled debt
restructuring (“TDR”) if the Company for economic or legal
reasons related to the borrower’s financial difficulties grants
a concession to the borrower that it would not otherwise
consider. Restructured workout loans typically present an
elevated level of credit risk as the borrowers are not able to
perform according to the original contractual terms. Loans or
leases that are reported as TDRs are considered impaired and
measured for impairment as described above.
The determination of the general reserve for loans and
leases that are not impaired is based on estimates made by
management, to include, but not limited to, consideration
of historical losses by portfolio segment, internal asset
classifications, and qualitative factors to include economic
trends in the Company’s service areas, industry experience and
trends, geographic concentrations, estimated collateral values,
the Company’s underwriting policies, the character of the
credit portfolio, and probable losses inherent in the portfolio
taken as a whole.
The Company determines a separate allowance for each
portfolio segment. These portfolio segments include
commercial and industrial, real estate construction (including
land and development loans), residential real estate, multi-
44
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
family real estate, commercial real estate, leases, agriculture
and consumer loans. The allowance for loan and lease losses
attributable to each portfolio segment, which includes both
impaired credits and credits that are not impaired, is combined
to determine the Company’s overall allowance, which is
included on the consolidated balance sheet and available for
all loss exposures.
The Company assigns a risk rating to all loans except pools of
homogeneous loans and periodically performs detailed reviews
of all such loans over a certain threshold to identify credit risks
and to assess the overall collectability of the portfolio. These
risk ratings are also subject to examination by independent
specialists engaged by the Company and the Company’s
regulators. During these internal reviews, management
monitors and analyzes the financial condition of borrowers
and guarantors, trends in the industries in which borrowers
operate and the fair values of collateral securing these loans.
These credit quality indicators are used to assign a risk rating
to each individual credit. The risk ratings can be grouped into
six major categories, defined as follows:
Pass—A pass loan is a strong credit with no existing or
known potential weaknesses deserving of management’s
close attention.
Watch—A watch credit is a loan or lease that otherwise meets
the definition of a standard or minimum acceptable quality
loan, but which requires more than normal attention due to
any of the following items: deterioration of borrower financial
condition less severe than those warranting more adverse
grading, deterioration of repayment ability and/or collateral
value, increased leverage, adverse effects from a downturn in
the economy, local market or industry, adverse changes in local
or regional employer, management changes (including illness,
disability, and death), and adverse legal action. Payments are
current per the terms of the agreement. If conditions persist or
worsen, a more severe risk grade may be warranted.
Special Mention—A special mention credit is a loan or lease
that has potential weaknesses that deserve management’s
close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment prospects for
the credit or in the Company’s position at some future date.
Special Mention credits are not adversely classified and do
not expose the Company to sufficient risk to warrant adverse
classification.
Substandard—A substandard credit is a loan or lease that is
not adequately protected by the current sound worth and
paying capacity of the borrower or the value of the collateral
pledged, if any. Credits classified as substandard have a well-
defined weakness or weaknesses that jeopardize the liquidation
of the debt. Well defined weaknesses include a project’s lack
of marketability, inadequate cash flow or collateral support,
failure to complete construction on time or a project’s failure
to fulfill economic expectations. They are characterized by the
distinct possibility that the Company will sustain some loss if
the deficiencies are not corrected.
Doubtful—Credits classified as doubtful are loans or leases
that have all the weaknesses inherent in those classified as
substandard with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently
known facts, conditions and values, highly questionable
and improbable.
Loss—Credits classified as loss are loans or leases considered
uncollectible and charged off immediately.
The general reserve component of the allowance for loan
and lease losses also consists of reserve factors that are based
on management’s assessment of the following for each
portfolio segment: (1) inherent credit risk, (2) historical losses
and (3) other qualitative factors. These reserve factors are
inherently subjective and are driven by the repayment risk
associated with each portfolio segment described below.
Land and construction—Land and construction loans generally
possess a higher inherent risk of loss than other real estate
portfolio segments. A major risk arises from the necessity to
complete projects within specified cost and time lines. Trends
in the construction industry significantly impact the credit
quality of these loans, as demand drives construction activity.
In addition, trends in real estate values significantly impact the
credit quality of these loans, as property values determine the
economic viability of construction projects.
Commercial real estate—Commercial real estate mortgage loans
generally possess a higher inherent risk of loss than other real
estate portfolio segments, except land and construction loans.
Adverse economic developments or an overbuilt market impact
commercial real estate projects and may result in troubled
loans. Trends in vacancy rates of commercial properties impact
the credit quality of these loans. High vacancy rates reduce
operating revenues and the ability for properties to produce
sufficient cash flow to service debt obligations.
Commercial and industrial—Commercial and industrial
loans generally possess a lower inherent risk of loss than real
estate portfolio segments because these loans are generally
underwritten to existing cash flows of operating businesses.
Debt coverage is provided by business cash flows and
economic trends influenced by unemployment rates and other
key economic indicators are closely correlated to the credit
quality of these loans.
Multi-family—Multi-family loans are non-construction term
mortgages for the acquisition, refinance, or improvement
of residential rental properties with generally more than 4
dwelling units. Underwriting is generally based on borrower
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
45
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
creditworthiness, sufficiency of net operating income to service
the bank loan payment, and a prudent loan-to-value ratio,
among other factors.
Residential—Residential loans are generally loans to purchase
or refinance 1-4 unit single-family residences, either owner-
occupied or investor-owned. Some residential loans are short
term to match their intended source of repayment through sale
or refinance. The remainder are fixed or floating-rate term first
mortgages with an original maturity between 2 and 10 years,
generally with payments based on a 25-30 year amortization.
Leases—Leases originated by the bank are non-consumer
finance leases (as contrasted with operating leases) for the
acquisition of titled and non-titled business equipment. Leases
are generally amortized over a period from 36 to 84 months,
depending on the useful life of the equipment acquired.
Residual (balloon) payments at lease end range from 0-20% of
original cost, and are a non-optional obligation of the lessee.
Lessees are contractually responsible for all costs, expenses,
taxes, and liability associated with the leased equipment.
Agricultural land and production—Loans secured by crop
production and livestock are especially vulnerable to two risk
factors that are largely outside the control of Company and
borrowers: commodity prices and weather conditions.
Home equity lines of credit—The degree of risk in residential
real estate lending depends primarily on the loan amount
in relation to collateral value, the interest rate and the
borrower’s ability to repay in an orderly fashion. These loans
generally possess a lower inherent risk of loss than other real
estate portfolio segments. Economic trends determined by
unemployment rates and other key economic indicators are
closely correlated to the credit quality of these loans. Weak
economic trends indicate that the borrowers’ capacity to repay
their obligations may be deteriorating.
Installment—An installment loan portfolio is usually
comprised of a large number of small loans scheduled to be
amortized over a specific period. Most installment loans are
made directly for consumer purchases, but business loans
granted for the purchase of heavy equipment or industrial
vehicles may also be included. Economic trends determined
by unemployment rates and other key economic indicators
are closely correlated to the credit quality of these loans. Weak
economic trends indicate that the borrowers’ capacity to repay
their obligations may be deteriorating.
Although management believes the allowance to be adequate,
ultimate losses may vary from its estimates. At least quarterly,
the Board of Directors reviews the adequacy of the allowance,
including consideration of the relative risks in the portfolio,
current economic conditions and other factors. If the Board
of Directors and management determine that changes are
warranted based on those reviews, the allowance is adjusted. In
addition, the Company’s primary regulators, the FDIC and the
DFI, as an integral part of their examination process, review
the adequacy of the allowance. These regulatory agencies may
require additions to the allowance based on their judgment
about information available at the time of their examinations.
Allowance for Credit Losses on Off-Balance-
Sheet Credit Exposures
The Company also maintains a separate allowance for
off-balance-sheet commitments. Management estimates
anticipated losses using historical data and utilization
assumptions. The allowance for off-balance-sheet
commitments is included in accrued interest payable
and other liabilities on the consolidated balance sheet.
Other Real Estate Owned
Other real estate owned 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 may
be 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. During 2010, the Company received
$3,195,000 in net proceeds from the sale of other real
estate owned with net losses of $103,000 recognized on the
sale. During 2009, the Company received $2,808,000 in
net proceeds from the sale of other real estate owned with
net losses of $17,000 recognized on the sale. The recorded
investment in other real estate owned totaled $2,796,000 and
$2,523,000 at December 31, 2010 and 2009, respectively, and
had related valuation allowances of $100,000 and $15,000,
respectively.
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
46
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets is evaluated by management based upon an event or
changes in circumstances surrounding the underlying assets
which indicate long-lived assets may be impaired.
Goodwill and Intangible Assets
Business combinations involving the Company’s acquisition
of equity interests or net assets of another enterprise or the
assumption of net liabilities in an acquisition of branches
constituting a business may give rise to goodwill. Goodwill
represents the excess of the cost of an acquired entity over the
net of the amounts assigned to assets acquired and liabilities
assumed in transactions accounted for under the purchase
method of accounting. The value of goodwill is ultimately
derived from the Company’s ability to generate net earnings
after the acquisition and is not deductible for tax purposes.
A decline in net earnings could be indicative of a decline in
the fair value of goodwill and result in impairment. For that
reason, goodwill is assessed for impairment at least annually.
Intangible assets are comprised of core deposit intangibles
which represent the estimated fair value of the long-term
deposit relationships that were assumed when the Company
acquired Bank of Amador in December 2004. Core deposit
intangibles are amortized using a method that approximates
the expected run-off of the deposit base, which, in this case,
is eight years. Management evaluates the recoverability and
remaining useful life annually to determine whether events or
circumstances warrant a revision to the intangible assets or the
remaining amortization period.
Income Taxes
The Company files its income taxes on a consolidated basis
with its subsidiaries. The allocation of income tax expense
(benefit) represents each entity’s proportionate share of the
consolidated provision for income taxes.
The Company accounts for income taxes using the balance
sheet method, under which deferred tax assets and liabilities
are recognized for the tax consequences of temporary
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on
the date of enactment. The deferred provision for income taxes
is the result of the net change in the deferred tax asset and
deferred tax liability balances during the year. This amount,
combined with the current taxes payable or refundable,
results in the income tax expense for the current year. On the
consolidated balance sheet, net deferred tax assets are included
in accrued interest receivable and other assets.
The determination of the amount of deferred income tax
assets which are more likely than not to be realized is primarily
dependent on projections of future earnings, which are subject
to uncertainty and estimates that may change given economic
conditions and other factors. The realization of deferred
income tax assets is assessed and a valuation allowance is
recorded if it is “more likely than not” that all or a portion of
the deferred tax assets will not be realized. “More likely than
not” is defined as greater than a 50% chance. All available
evidence, both positive and negative is considered to determine
whether, based on the weight of that evidence, a valuation
allowance is needed. Based upon the Company’s analysis of
available evidence, the Company determined that it is “more
likely than not” that all of the deferred income tax assets as
of December 31, 2010 and 2009 will be fully realized and
therefore no valuation allowance was recorded.
The Company uses a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial
statements tax positions taken or expected to be taken on a
tax return. A tax position is recognized as a benefit only if it is
“more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed
to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. Interest expense and
penalties associated with unrecognized tax benefits, if any, are
classified as income tax expense in the consolidated statement
of income.
Comprehensive Income
Comprehensive income is reported in addition to net
income for all periods presented. Comprehensive income
is a more inclusive financial reporting methodology that
includes disclosure of other comprehensive income (loss)
that historically has not been recognized in the calculation of
net income. Unrealized gains and losses on the Company’s
available-for-sale investment securities are included in other
comprehensive income (loss), adjusted for realized gains or
losses included in net income. Total comprehensive income
and the components of accumulated other comprehensive
income (loss) are presented in the consolidated statement of
changes in shareholders’ equity.
Earnings Per Share
Basic earnings per share (“EPS”), which excludes dilution,
is computed by dividing income available to common
shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock, such as stock options, result
in the issuance of common stock that 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. There were no stock
splits or stock dividends in 2010.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
47
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
At December 31, 2010, the Company has two stock-based
compensation plans, which are described more fully in
Note 13. Compensation expense, net of related tax benefits,
recorded in 2010, 2009 and 2008 totaled $204,000, $155,000
and $254,000, or $0.02, $0.03 and $0.04 per diluted share,
respectively. Compensation expense is recognized over the
vesting period on a straight line accounting basis.
The fair value of each option award is estimated on the date
of grant using a Black-Scholes-Merton based option valuation
model that uses the assumptions noted in the following table.
Because Black-Scholes-Merton based option valuation models
incorporate ranges of assumptions for inputs, those ranges are
disclosed. Expected volatilities are based on historical volatility
of the Company’s stock and other factors. The Company
uses historical data to estimate option exercise and employee
termination within the valuation model. The expected term
of options granted represents the period of time that options
granted are expected to be outstanding. The risk-free rate for
periods within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
Restricted stock awards are grants of shares of the Company’s
common stock that are subject to forfeiture until specific
conditions or goals are met. Conditions may be based on
continuing employment or service and/or achieving specified
performance goals. During the period of restriction, Plan
participants holding restricted share awards have no voting or
cash dividend rights. The restrictions lapse in accordance with
a schedule or with other conditions determined by the Board
of Directors as reflected in each award agreement. Upon the
vesting of each restricted stock award, the Company issues the
associated common shares from its inventory of authorized
common shares. All outstanding awards under the Plan
immediately vest in the event of a change of control of the
Company. The shares associated with any awards that fail to
vest become available for re-issuance under the Plan.
Dividend yield
Expected volatility
Risk-free interest rate
Expected option life in years
Weighted average fair value
of options granted during
the year
2009
6.74%
24.6%
2.18%
7
2008
3.53% to 4.62%
21.3% to 24.3%
3.38% to 3.45%
7
$
0.69
$
2.75
There were no options granted in 2010 under either stock-
based compensation plans.
The following is a summary of stock-based compensation
information as of or for the years ended December 31, 2010,
2009 and 2008:
DOLLARS IN THOUSANDS
Total intrinsic value of options exercised
Aggregate cash received for option exercises
Total fair value of options vested
Total compensation cost, options and restricted stock
Tax benefit recognized
Net compensation cost, options and restricted stock
Total compensation cost for nonvested option awards not yet recognized
Weighted average years for compensation cost for nonvested options to be
recognized
Total compensation cost for restricted stock not yet recognized
Weighted average years for compensation cost for restricted stock to be recognized
There were no restricted stock awards in 2009 or 2008.
2010
2009
2008
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
-
248
236
32
204
216
1.1
158
1.7
$
$
$
$
$
$
$
28
22
298
210
55
155
377
1.5
285
269
254
290
36
254
717
2.9
48
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Adoption of New Financial Accounting Standards
Transfers of Financial Assets
In June 2009, the Financial Accounting Standards Board
(“FASB”) issued FASB Accounting Standards Update (“ASU”)
2009-16, Accounting for Transfers of Financial Assets
(Statement 166), which amends previously issued accounting
guidance to enhance accounting and reporting for transfers
of financial assets, including securitizations or continuing
exposure to the risks related to transferred financial assets.
Prior to the issuance of Statement 166, transfers under
participation agreements and other partial loan sales fell under
the general guidance for transfers of financial assets. Statement
166 introduces a new definition for a participating interest
along with the requirement for partial loan sales to meet the
definition of a participating interest for sale treatment to
occur. If a participation or other partial loan sale does not
meet the definition, the portion sold should remain on the
books and the proceeds recorded as a secured borrowing until
the definition is met. Additionally, existing provisions were
retained which require (i) the transferred assets to be isolated
from the originating institution (transferor), (ii) that the
transferor does not maintain effective control through certain
agreements to repurchase or redeem the transferred assets and
(iii) that the purchasing institution (transferee) has the right
to pledge or exchange the assets acquired. The new provisions
became effective on January 1, 2010 and early adoption was
not permitted. The impact of adoption was not material to
the Company’s consolidated financial position, results of
operations or cash flows.
Fair Value Measurements
In January 2010, the FASB issued FASB ASU 2010-06,
Improving Disclosures about Fair Value Measurements,
which amends and clarifies existing standards to require
additional disclosures regarding fair value measurements.
Specifically, the standard requires disclosure of the amounts
of significant transfers between Level 1 and Level 2 of the
fair value hierarchy and the reasons for these transfers, the
reasons for any transfers in or out of Level 3, and information
in the reconciliation of recurring Level 3 measurements about
purchases, sales, issuances and settlements on a gross basis.
This standard clarifies that reporting entities are required
to provide fair value measurement disclosures for each
class of assets and liabilities—previously separate fair value
disclosures were required for each major category of assets
and liabilities. This standard also clarifies the requirement
to disclose information about both the valuation techniques
and inputs used in estimating Level 2 and Level 3 fair
value measurements. Except for the requirement to disclose
information about purchases, sales, issuances, and settlements
in the reconciliation of recurring Level 3 measurements on a
gross basis, these disclosures are effective for the year ended
December 31, 2010. The requirement to separately disclose
purchases, sales, issuances, and settlements of recurring Level 3
measurements becomes effective for the Company for the year
beginning on January 1, 2011. The Company adopted this
new accounting standard as of January 1, 2010 and the impact
of adoption was not material to the Company’s consolidated
financial position, results of operations or cash flows.
Disclosures about Credit Quality
In July 2010, the FASB issued FASB ASU 2010-20,
Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses. ASU 2010-20 requires
more robust and disaggregated disclosures about the credit
quality of financing receivables (loans) and allowances for
loan and lease losses, including disclosure about credit quality
indicators, past due information and modifications of finance
receivables. The disclosures as of the end of a reporting period
are effective for interim and annual reporting periods ending
on and after December 15, 2010. The disclosures about
activity that occurs during a reporting period are effective
for interim and annual reporting periods beginning on or
after December 15, 2010. The adoption of this guidance
has significantly expanded disclosure requirements related to
accounting policies and disclosures related to the allowance
for loan and lease losses but did not have an impact on
the Company’s consolidated financial position, results of
operations or cash flows.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
49
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 3: FAIR VALUE MEASUREMENTS
The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:
DOLLARS IN THOUSANDS
Financial assets:
Cash and due from banks
Interest-bearing deposits in banks
Investment securities
Loans and leases, net
FHLB stock
Accounts receivable servicing
receivables
Accrued interest receivable
Cash surrender value of life
insurance policies
Financial liabilities:
Deposits
Short-term borrowings
Long-term borrowings
Accrued interest payable
December 31, 2010
December 31, 2009
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
$
31,871
$
31,871
$
58,493
$
58,493
2,248
160,664
338,533
3,486
2,248
160,987
332,964
3,486
1,876
1,876
109,013
376,322
3,922
35
1,941
109,571
370,057
3,922
35
1,941
11,019
11,019
10,742
10,742
$
465,122
$
465,985
$
469,755
$
470,530
7,000
10,000
268
7,000
10,523
268
14,500
17,000
344
14,500
17,816
344
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, 2010 and 2009:
Cash and due from banks: For cash and due from banks, 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.
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,
50
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 3: FAIR VALUE MEASUREMENTS (CONTINUED)
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.
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, 2010 and 2009.
FHLB stock: The carrying amount of FHLB stock
approximates its fair value. This investment is carried at cost
and is redeemable at par with certain restrictions.
Accounts receivable servicing receivables: The carrying amount of
accounts receivable servicing receivables approximates their fair
value because of the relatively short period of time between the
origination of the receivables and their expected collection.
Cash surrender value of life insurance policies: The fair value of
life insurance policies are based on cash surrender values at
each reporting date as provided by insurers.
Deposits: The fair values for non-maturing deposits are, by
definition, equal to the amount payable on demand at the
reporting date represented by their carrying amount. Fair
values for fixed-rate certificates of deposit are estimated using
a discounted cash flow analysis using interest rates offered
at each reporting date for certificates with similar remaining
maturities. The carrying amount of accrued interest payable
approximates its fair value.
Short-term and long-term borrowings: The fair value of short-
term borrowings is estimated to be the carrying amount.
The fair value of long-term borrowings is estimated using a
discounted cash flow analysis using interest rates currently
available for similar debt instruments.
The following tables present information about the Company’s
assets and liabilities measured at fair value on a recurring and
nonrecurring basis as of December 31, 2010 and 2009. They
indicate the fair value hierarchy of the valuation techniques
utilized by the Company to determine such fair value. In
general, fair values determined by Level 1 inputs utilize
quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access.
Fair values determined by Level 2 inputs utilize inputs other
than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2
inputs include quoted prices for similar assets and liabilities
in active markets, and inputs other than quoted prices that
are observable for the asset or liability, such as interest rates
and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the asset
or liability, and include situations where there is little, if any,
market activity for the asset or liability. In certain cases, the
inputs used to measure fair value may fall into different levels
of the fair value hierarchy. In such cases, the level in the fair
value hierarchy within which the fair value measurement in
its entirety falls has been determined based on the lowest level
input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a
particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the asset
or liability.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
51
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 3: FAIR VALUE MEASUREMENTS (CONTINUED)
DOLLARS IN THOUSANDS
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Losses
December 31, 2010
Fair Value
Assets and liabilities measured on a
recurring basis:
Available-for-sale securities:
Mortgage-backed securities
$
138,644
$
138,644
Obligations of states and
political subdivisions
Corporate stock
Total recurring
Assets and liabilities measured on a
nonrecurring basis:
Impaired loans:
Commercial:
Commercial
Real estate:
Commercial
Multi-family
Construction
Residential
Other:
Leases
Agriculture
Consumer
Other real estate owned
15,792
79
$
154,515
$
$
75
75
15,792
4
$
154,440
$
-
$
-
$
4,197
$
3,870
$
327
$
(275)
18,504
1,214
2,298
2,098
27
129
490
2,696
6,388
2,298
1,085
129
2,696
12,116
1,214
1,013
27
490
(381)
(93)
(952)
(162)
109
(908)
Total nonrecurring
$
31,653
$
-
$
16,466
$
15,187
$
(2,662)
52
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 3: FAIR VALUE MEASUREMENTS (CONTINUED)
DOLLARS IN THOUSANDS
December 31, 2009
Fair Value
Assets and liabilities measured on a
recurring basis:
Available-for-sale securities:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Losses
Mortgage-backed securities
$
76,009
$
76,009
Obligations of states and
political subdivisions
Corporate stock
Total recurring
Assets and liabilities measured on a
nonrecurring basis:
Impaired loans:
Commercial:
Commercial
Real estate:
Commercial
Multi-family
Construction
Residential
Other:
Leases
Agriculture
Consumer
Other real estate owned
20,587
86
$
96,682
$
$
78
78
20,587
8
$
96,604
$
-
$
-
$
5,092
$
4,614
$
478
$
(1,238)
7,946
3,758
822
21
322
500
2,508
6,919
1,027
(923)
2,929
822
21
322
454
2,508
829
(1,453)
46
(19)
(1,089)
Total nonrecurring
$
20,969
$
-
$
18,589
$
2,380
$
(4,722)
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
53
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 3: FAIR VALUE MEASUREMENTS (CONTINUED)
There were no significant transfers between Levels 1 and 2
during the years ended December 31, 2010 and 2009.
Impaired loans with a carrying value of $30,711,000 at
December 31, 2010 were written down to $28,957,000,
resulting in an impairment charge of $1,754,000, which was
included in earnings for the period. Impaired loans with a
carrying value of $22,094,000 at December 31, 2009 were
written down to a fair value of $18,461,000, resulting in an
impairment charge of $3,633,000, which was included in
earnings for the period.
Other real estate owned with a carrying value of $3,604,000
at December 31, 2010 was written down to $2,696,000,
resulting in an impairment charge of $908,000, which was
included in earnings for the period. Other real estate owned
with a carrying value of $3,597,000 at December 31, 2009
was written down to a fair value of $2,508,000, resulting in
an impairment charge of $1,089,000, which was included in
earnings for the period.
There were no material changes in the valuation techniques
used during 2010. The following methods were used
to estimate the fair value of each class of financial
instrument above:
Available-for-sale securities—Fair values for investment
securities are based on quoted market prices, if available,
or evaluated pricing models that vary by asset class and
incorporate available trade, bid and other market information.
Pricing applications apply available information, as applicable,
through processes such as benchmark curves, benchmarking to
like securities, sector groupings and matrix pricing.
Impaired loans—The fair value of impaired loans is based on
the fair value of the collateral for all collateral dependent loans
and is estimated using a discounted cash flow model for other
impaired loans.
Other real estate owned—Other real estate owned represents
real estate which the Company has taken control of in partial
or full satisfaction of loans. The fair value of other real estate
owned is based on property appraisals at the time of transfer
and as appropriate thereafter, less costs to sell.
NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2010 and 2009, goodwill totaled
$16,321,000. Goodwill is evaluated annually for impairment
under the provisions of the codification Topic 350, Goodwill
and Other Intangibles. Management determined that no
impairment recognition was required for the years ended
December 31, 2010, 2009 and 2008. Goodwill is not
deductible for tax purposes.
Other intangible assets are comprised of core deposit
intangibles totaling $402,000 and $644,000 at December 31,
2010 and 2009, respectively. Amortization of the intangible
included in other expense totaled $242,000, $263,000 and
$286,000 for the years ended December 31, 2010, 2009 and
2008, respectively. The remaining balance will be amortized
over the next 1.9 years and is estimated as follows
DOLLARS IN THOUSANDS:
YEAR ENDING DECEMBER 31,
2011
2012
$
$
219
183
402
54
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 5: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at December 31, 2010 and 2009 consisted of the following:
DOLLARS IN THOUSANDS
Available-for-Sale
Debt securities:
2010
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
U.S. Government guaranteed mortgage-backed securities
$
135,915
$
3,156
$
Obligations of states and political subdivisions
Equity securities:
Corporate stock
15,675
77
242
8
(427)
(125)
$
138,644
15,792
(6)
79
$
151,667
$
3,406
$
(558)
$
154,515
2009
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Debt securities:
U.S. Government guaranteed mortgage-backed securities
$
Obligations of states and political subdivisions
Equity securities:
Corporate stock
75,823
20,400
$
82
772
347
11
$
$
(586)
(160)
76,009
20,587
(7)
86
$
96,305
$
1,130
$
(753)
$
96,682
Net unrealized gains on available-for-sale investment securities
totaling $2,848,000 were recorded, net of $1,139,000 in tax
liabilities, as accumulated other comprehensive income within
shareholders’ equity at December 31, 2010. Proceeds and
gross realized gains from the sale and call of available-for-sale
investment securities for the year ended December 31, 2010
totaled $9,702,000 and $7,000, respectively. There were no
transfers of available-for-sale investment securities during the
year ended December 31, 2010.
Net unrealized gains on available-for-sale investment securities
totaling $377,000 were recorded, net of $155,000 in tax
liabilities, as accumulated other comprehensive income within
shareholders’ equity at December 31, 2009. Proceeds and
gross realized gains from the sale and call of available-for-sale
investment securities for the year ended December 31, 2009
totaled $11,075,000 and $270,000, respectively. There were
no transfers of available-for-sale investment securities during
the year ended December 31, 2009.
Proceeds and gross realized gains from the sale and call of
available-for-sale investment securities for the year ended
December 31, 2008 totaled $25,680,000 and $126,000,
respectively.
During 2008 management determined that one equity security
(FNMA Preferred Stock) had a loss considered to be other-
than-temporary. The Company recorded an impairment
charge of $245,000 in 2008.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
55
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 5: INVESTMENT SECURITIES (CONTINUED)
Held-to-Maturity
Debt securities:
U.S. Government guaranteed
mortgage-backed securities
Debt securities:
U.S. Government guaranteed
mortgage-backed securities
2010
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
6,149
$
323
$
-
$
6,472
2009
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
12,331
$
558
$
-
$
12,889
There were no sales or transfers of held-to-maturity investment securities for the years ended December 31, 2010, 2009 and 2008.
The amortized cost and estimated fair value of investment securities at December 31, 2010 by contractual maturity are shown
below (dollars in thousands).
Within one year
After one year through five years
After five years through ten years
After ten years
Investment securities not due at
a single maturity date:
Mortgage-backed securities
Corporate stock
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
$
495
$
5,657
5,433
4,090
15,675
499
5,782
5,511
4,000
15,792
135,915
138,644
77
79
$
151,667
$
154,515
$
$
6,149
6,149
$
$
6,472
6,472
56
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
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.
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, 2010
and 2009, respectively.
Investment securities with amortized costs totaling
$47,729,000 and $58,510,000 and estimated fair values
totaling $49,839,000 and $59,816,000 were pledged to
Investment securities with unrealized losses at December 31,
2010 and 2009 are summarized and classified according to the
duration of the loss period as follows:
DOLLARS IN THOUSANDS
Available-for-Sale
Debt securities:
U.S. Government guaran-
teed mortgage-backed
securities
Obligations of states
and political sub-
divisions
Corporate stock
Available-for-Sale
Debt securities:
U.S. Government guaran-
teed mortgage-backed
securities
Obligations of states
and political sub-
divisions
Corporate stock
2010
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
29,535
$
(427)
$
29,535
$
(427)
5,169
5
(125)
(2)
$
34,709
$
(554)
$
$
5
5
$
$
(4)
(4)
5,169
10
$
34,714
$
(125)
(6)
(558)
2009
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
41,046
$
(527)
$
2,752
$
(59)
$
43,798
$
(586)
4,081
5
(80)
(3)
2,641
3
(80)
(4)
6,722
8
$
45,132
$
(610)
$
5,396
$
(143)
$
50,528
$
(160)
(7)
(753)
At December 31, 2010, the Company held 168 securities of
which 29 were in a loss position for less than twelve months
and 5 were in a loss position for twelve months or more. Of
the 34 securities 15 are mortgage-backed securities, 11 are
obligations of states and political sub-divisions and 8 are
corporate stocks.
The unrealized loss on the Company’s investments in
mortgage-backed securities and obligations of states and
political sub-divisions is primarily driven by interest rates.
Because the decline in market value is attributable to a change
in interest rates and not credit quality, and because the
Company has the ability and intent to hold these investments
until recovery of fair value, which may be maturity,
management does not consider these investments to be other-
than-temporarily impaired.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
57
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 6: LOANS AND LEASES
Outstanding loans and leases are summarized as follows:
DOLLARS IN THOUSANDS
DECEMBER 31,
Real estate—commercial
Real estate—construction
Real estate—multi-family
Real estate—residential
Commercial
Lease financing receivable
Agriculture
Consumer
Deferred loan and lease origination fees, net
Allowance for loan and lease losses
2010
2009
$
216,076
$
223,685
15,971
6,968
26,099
58,261
2,766
7,202
13,202
27,482
8,476
26,922
72,621
3,920
7,472
14,253
346,545
384,831
(427)
(7,585)
(600)
(7,909)
$
338,533
$
376,322
Certain loans are pledged as collateral for available borrowings with the FHLB and the Federal Reserve Bank of San Francisco
(the “FRB”). Pledged loans totaled $201,749,000 and $222,923,000 at December 31, 2010 and 2009, respectively (see Note 10).
The components of the Company’s lease financing receivable are summarized as follows:
DOLLARS IN THOUSANDS
DECEMBER 31,
Future lease payments receivable
Residual interests
Unearned income
Net lease financing receivable
Future lease payments receivable are as follows:
DOLLARS IN THOUSANDS
YEAR ENDING DECEMBER 31,
2011
2012
2013
2014
2015
Total lease payments receivable
2010
2009
$
2,908
$
4,246
104
(246)
85
(411)
$
2,766
$
3,920
$
1,165
955
553
151
84
$
2,908
Salaries and employee benefits totaling $453,000, $674,000 and $910,000 have been deferred as loan and lease origination costs
for the years ended December 31, 2010, 2009 and 2008, respectively.
58
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 7: ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses were as follows:
DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
Balance, beginning of year
Provision charged to operations
Losses charged to allowance
Recoveries
Balance, end of year
$
$
2010
7,909
7,365
(7,821)
132
2009
5,918
8,530
(6,588)
49
$
2008
5,883
1,743
(1,734)
26
$
7,585
$
7,909
$
5,918
Allocation of the allowance for loan and lease losses as of December 31, 2010 by portfolio segment and by impairment
methodology:
DOLLARS IN THOUSANDS
Allowance for Loan and Lease Losses
Real Estate
Other
Commercial Commercial
Multi-Family Construction Residential
Leases
Agriculture
Consumer Unallocated
Total
Ending balance allocated to portfolio segments $ 2,574 $
2,715
$
115
$ 1,090
$
581
$
7
$
131
$
221
$
151 $ 7,585
Ending balance:
Individually evaluated for impairment
$
274 $
1,160
$
22
$
-
$
152
$
-
$
-
$
11
$
- $ 1,619
Ending balance:
Collectively evaluated for impairment
$ 2,300 $
1,555
$
93
$ 1,090
$
429
$
7
$
131
$
210
$
151 $ 5,966
Loans
Ending balance
Ending balance:
$ 58,261 $ 216,076
$ 6,968
$ 15,971
$ 26,099
$ 2,766
$ 7,202
$ 13,202
$
- $ 346,545
Individually evaluated for impairment
$ 8,257 $ 21,186
$ 2,596
$ 4,695
$ 2,676
$
-
$
129
$
698
$
- $ 40,237
Ending balance:
Collectively evaluated for impairment
$ 50,004 $ 194,890
$ 4,372
$ 11,276
$ 23,423
$ 2,766
$ 7,073
$ 12,504
$
- $ 306,308
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
59
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 7: ALLOWANCE FOR LOAN AND LEASE LOSSES (CONTINUED)
The loan portfolio allocated by management’s internal risk ratings as of December 31, 2010:
DOLLARS IN THOUSANDS
Grade:
Pass
Watch
Special mention
Substandard
Doubtful
Total
Grade:
Pass
Watch
Special mention
Substandard
Doubtful
Total
Credit Risk Profile by Internally Assigned Grade
Real Estate
Commercial
Commercial
Multi-Family
Construction
Residential
$
39,335
$
175,319
$
3,515
4,228
11,012
171
11,021
11,713
18,023
$
4,371
1,214
1,383
7,884
1,632
1,178
5,277
$
21,928
953
3,218
$
58,261
$
216,076
$
6,968
$
15,971
$
26,099
Other Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Leases
Agriculture
Consumer
$
2,740
$
6,484
$
12,277
589
129
26
514
178
217
16
$
2,766
$
7,202
$
13,202
Aging analysis of the loan portfolio at December 31, 2010:
DOLLARS IN THOUSANDS
30-59 Days
Past Due
60-89 Days
Past Due
Past Due
Greater
Than
90 Days
Total Past
Due
Current
Past Due
Greater Than
90 Days and
Accruing
Total Loans
Nonaccrual
Commercial:
Commercial
$
219
$
19
$
3,346
$
3,584
$
54,677
$
58,261
$
3,491
Real estate:
Commercial
Multi-family
Construction
Residential
Other:
Leases
Agriculture
Consumer
1,207
3,140
10,101
14,448
201,628
216,076
795
1,835
366
123
8
1,383
2,859
1,149
28
129
221
1,383
4,694
2,310
28
129
352
5,585
11,277
23,789
2,738
7,073
12,850
6,968
15,971
26,099
2,766
7,202
13,202
10,975
1,383
4,694
1,554
28
129
317
Total
$
2,344
$
5,368
$
19,216
$
26,928
$ 319,617
$ 346,545
$
-
$ 22,571
60
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 7: ALLOWANCE FOR LOAN AND LEASE LOSSES (CONTINUED)
Impaired loans as of and for the year ended December 31, 2010:
DOLLARS IN THOUSANDS
With no related allowance
recorded:
Commercial:
Commercial
Real estate:
Commercial
Multi-family
Construction
Residential
Other:
Agriculture
Consumer
With an allowance recorded:
Commercial:
Commercial
Real estate:
Commercial
Multi-family
Residential
Other:
Consumer
Total:
Commercial:
Commercial
Real estate:
Commercial
Multi-family
Construction
Residential
Other:
Agriculture
Consumer
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
5,026
$
5,418
$
5,042
$
9,066
1,382
4,695
1,663
129
207
12,149
2,382
7,064
1,835
322
207
14,013
1,383
6,545
1,593
206
317
137
424
70
43
50
4
16
$
22,168
$
29,377
$
-
$
29,099
$
744
$
3,231
$
3,231
$
274
$
3,452
$
12,120
1,214
1,013
12,584
1,214
1,013
1,160
22
152
9,369
1,321
861
491
491
11
492
$
18,069
$
18,533
$
1,619
$
15,495
$
$
8,257
$
8,649
$
274
$
8,494
$
21,186
2,596
4,695
2,676
129
698
24,733
3,596
7,064
2,848
322
698
1,160
22
152
11
23,382
2,704
6,545
2,454
206
809
196
456
44
51
24
771
333
880
114
43
101
4
40
$
40,237
$
47,910
$
1,619
$
44,594
$
1,515
The recorded investment in loans and leases that were
considered to be impaired totaled $40,237,000 at December
31, 2010 and had a related valuation allowance of $1,619,000.
The average recorded investment in impaired loans and leases
during 2010 was approximately $44,594,000.
The recorded investment in loans and leases that were
considered to be impaired totaled $41,937,000 at December
31, 2009 and had a related valuation allowance of $3,810,000.
The average recorded investment in impaired loans and leases
during 2009 was approximately $29,947,000.
Non-accrual loans and leases totaled approximately
$22,571,000 and $20,964,000 at December 31, 2010 and
2009, respectively. There were no loans and leases past due 90
days or more and still accruing interest at December 31, 2010
and 2009. Interest income on non-accrual loans is generally
recognized on a cash basis and was approximately $338,000
and $79,000 for the years ended December 31, 2010 and
2009, and not significant for 2008. Interest foregone on non-
accrual loans was approximately $1,736,000, $1,281,000 and
$647,000 for the years ended December 31, 2010, 2009 and
2008, respectively.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
61
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 8: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
DOLLARS IN THOUSANDS
DECEMBER 31,
Land
Building and improvements
Furniture, fixtures and equipment
Leasehold improvements
Less accumulated depreciation and amortization
$
$
2010
206
734
5,180
1,567
7,687
2009
206
730
7,017
1,758
9,711
(5,661)
(7,617)
$
2,026
$
2,094
Depreciation and amortization included in occupancy and furniture and equipment expense totaled $543,000, $569,000 and
$539,000 for the years ended December 31, 2010, 2009 and 2008, respectively.
NOTE 9: INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
DOLLARS IN THOUSANDS
DECEMBER 31,
Savings
Money market
NOW accounts
Time, $100,000 or more
Other time
2010
2009
$
45,537
$
36,234
137,636
45,075
78,147
32,091
131,614
50,154
98,061
35,364
$
338,486
$
351,427
The Company held $29,000,000 in certificates of deposit for the State of California as of December 31, 2010 and 2009. This
amount represents 6.2% of total deposit balances at December 31, 2010 and 2009.
Aggregate annual maturities of time deposits are as follows:
DOLLARS IN THOUSANDS
YEAR ENDING DECEMBER 31,
2011
2012
2013
2014
2015
Thereafter
62
$
91,267
9,350
5,952
1,333
2,249
87
$
110,238
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 9: INTEREST-BEARING DEPOSITS (CONTINUED)
Interest expense recognized on interest-bearing deposits consisted of the following:
DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
Savings
Money market
NOW accounts
Time, $100,000 or more
Other time
2010
2009
$
224
$
229
$
1,268
59
806
595
1,304
71
1,481
918
$
2,952
$
4,003
$
2008
324
1,861
68
2,249
1,399
5,901
NOTE 10: BORROWING ARRANGEMENTS
The Company has a $10,000,000 unsecured short-term
borrowing arrangement to purchase Federal funds with one
of its correspondent banks. There were no advances under the
borrowing arrangement as of December 31, 2010 and 2009.
In addition, the Company has a line of credit available with
the FHLB 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 $17,000,000
were outstanding from the FHLB at December 31, 2010,
bearing fixed interest rates ranging from 1.85% to 3.78%
and maturing between March 2, 2011 and January 13, 2014.
Advances totaling $31,500,000 were outstanding from the
DOLLARS IN THOUSANDS
Short-term portion of borrowings
Long-term borrowings
FHLB at December 31, 2009, bearing fixed interest rates
ranging from 1.60% to 3.78% and maturing between January
19, 2010 and January 13, 2014. Amounts available under the
borrowing arrangement with the FHLB at December 31, 2010
and 2009 totaled $55,160,000 and $54,047,000, respectively.
In addition, the Company entered into a secured borrowing
agreement with the FRB in 2008. The borrowing is secured by
pledging selected loans (see Note 6) and investment securities
(see Note 5). There were no advances outstanding as of
December 31, 2010 and 2009. Amounts available under the
borrowing arrangement with the FRB at December 31, 2010
and 2009 totaled $30,702,000 and $36,353,000, respectively.
The following table summarizes these borrowings:
December 31,
2010
2009
Weighted
Average
Amount
Rate
Amount
$
$
7,000
10,000
17,000
2.40%
2.41%
2.40%
$
$
14,500
17,000
31,500
Weighted
Average
Rate
2.84%
2.40%
2.60%
The Company has also been issued $9,000,000 in letters of
credit by the FHLB, included in the amounts available from
the FHLB previously discussed, 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 2010 and management does not expect
these lines to be drawn in the future.
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AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 11: INCOME TAXES
The (benefit from) provision for income taxes for the years ended December 31, 2010, 2009, and 2008 consisted of the following:
DOLLARS IN THOUSANDS
2010
Current
Deferred
Benefit from income taxes
2009
Current
Deferred
Provision for income taxes
2008
Current
Deferred
Provision for income taxes
Deferred tax assets (liabilities) consisted of the following:
DOLLARS IN THOUSANDS
DECEMBER 31,
Deferred tax assets:
Allowance for loan and lease losses
Future benefit of state tax deduction
Other real estate owned
Deferred compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Core deposit intangible
Unrealized gains on available-for-sale investment
securities
Investment mark to market
Future liability of state deferred tax assets
Deferred loan costs
Federal Home Loan Bank stock dividends
Premises and equipment
Total deferred tax liabilities
Net deferred tax assets
Federal
State
Total
$
$
$
$
$
$
2
$
74
$
(140)
(187)
(138)
$
(113)
$
824
(540)
284
3,617
(263)
3,354
$
$
$
$
507
(417)
90
1,407
(183)
1,224
$
$
$
$
76
(327)
(251)
1,331
(957)
374
5,024
(446)
4,578
2010
2009
$
3,401
$
3,546
123
280
1,715
218
5,882
(289)
(155)
(24)
(372)
(355)
(268)
703
1,747
236
6,087
(180)
(1,139)
(17)
(459)
(310)
(238)
(15)
(2,358)
(1,463)
$
3,729
$
4,419
64
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 11: INCOME TAXES (CONTINUED)
The Company and its subsidiaries file income tax returns
in the United States and California jurisdictions. There
are currently no pending federal, state or local income tax
examinations by tax authorities. With few exceptions, the
Company is no longer subject to the examination by federal
taxing authorities for the years ended before December 31,
2006 and by state and local taxing authorities for years before
December 31, 2005. The unrecognized tax benefits and
changes therein and the interest and penalties accrued by the
Company as of December 31, 2010 were not significant.
The provision for income taxes differs from amounts
computed by applying the statutory Federal income tax rate of
34.0% in 2010, 34.0% in 2009 and 35.0% in 2008 to income
before income taxes. The significant items comprising these
differences consisted of the following:
YEAR ENDED DECEMBER 31,
Federal income tax statutory rate
State franchise tax, net of Federal tax effect
Tax benefit of interest on obligations of states and political subdivisions
Tax-exempt income from life insurance policies
Stock option compensation expense
Other
Effective tax rate
2010
34.0 %
(29.5)%
(93.0)%
(42.0)%
17.0 %
1.9 %
(111.6)%
2009
34.0 %
3.0 %
(15.2)%
(4.3)%
1.3 %
0.3 %
19.1 %
2008
35.0 %
6.6 %
(2.9)%
(1.1)%
0.5 %
(0.4)%
37.7 %
NOTE 12: COMMITMENTS AND CONTINGENCIES
Leases
The Company leases branch facilities, administrative offices
and various equipment under noncancelable operating leases
which expire on various dates through the year 2019. Certain
of the leases have five year renewal options. One of the branch
facilities is leased from a current member of the Company’s
Board of Directors (see Note 17).
Future minimum lease payments are as follows:
DOLLARS IN THOUSANDS
YEAR ENDING DECEMBER 31,
2011
2012
2013
2014
2015
Thereafter
$
$
783
783
788
729
671
1,272
5,026
Rental expense included in occupancy, furniture and
equipment expense totaled $956,000, $1,050,000 and
$1,110,000 for the years ended December 31, 2010, 2009 and
2008, 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 consolidated balance sheet.
The Company’s exposure to credit loss in the event of
nonperformance by the other party for commitments to
extend credit and standby letters of credit is represented by
the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and
standby letters of credit as it does for loans included on the
consolidated balance sheet.
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AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 12: COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following financial instruments represent off-balance-sheet credit risk:
DOLLARS IN THOUSANDS
DECEMBER 31,
Commitments to extend credit:
Revolving lines of credit secured by 1-4 family residences
Commercial real estate, construction and land
development commitments secured by real estate
Other unused commitments, principally commercial loans
Standby letters of credit
2010
2009
$
5,964
$
6,615
12,746
23,738
42,448
10,033
$
$
18,202
43,008
67,825
10,190
$
$
At inception, real estate commitments are generally secured
by property with a loan to value ratio of 55% 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,
2010 and 2009. The Company recognizes these fees as
revenue over the term of the commitment or when the
commitment is used.
Significant Concentrations of Credit Risk
The Company grants real estate mortgage, real estate
construction, commercial, agricultural and consumer loans
to clients throughout Sacramento, Placer, Yolo, Amador, El
Dorado, and Sonoma counties.
In management’s judgment, a concentration exists in real
estate-related loans which represented approximately 76% and
74% of the Company’s loan portfolio at December 31, 2010
and 2009, respectively. A continued substantial decline in
the economy in general, or a continued decline in real estate
values in the Company’s primary market areas in particular,
could have an adverse impact on collectibility of these loans.
However, personal and business income represent the primary
source of repayment for a majority of these loans.
Correspondent Banking Agreements
The Company maintains funds on deposit with other federally
insured financial institutions under correspondent banking
agreements. The Company did not have any uninsured
deposits at December 31, 2010.
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.
66
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 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
FOR THE YEAR ENDED
December 31, 2010
Basic earnings per share
Effect of dilutive stock options
Diluted earnings per share
December 31, 2009
Basic earnings per share
Effect of dilutive stock options
Diluted earnings per share
December 31, 2008
Basic earnings per share
Effect of dilutive stock options
Diluted earnings per share
Weighted
Average
Number of
Shares
Outstanding
Net
Income
Per-Share
Amount
$
$
476
9,846
$
0.05
3
476
9,849
$
0.05
$
1,586
6,031
$
0.26
$
1,586
6,038
$
0.26
7
$
7,571
5,811
$
1.30
$
7,571
5,825
$
1.30
14
Stock Based Compensation
In 2000, the Board of Directors adopted and the Company’s
shareholders approved a stock option plan (the “2000
Plan”), under which 379,571 options remain outstanding
at December 31, 2010. On March 17, 2010, the Board of
Directors adopted the 2010 Equity Incentive Plan. The 2010
Plan was approved by the Company’s shareholders on May 20,
2010. The total number of authorized shares that are available
for issuance under the 2010 Plan is 1,447,495. The 2010
Plan provides for the following types of stock-based awards:
incentive stock options; nonqualified stock options; stock
appreciation rights; restricted stock; restricted performance
stock; unrestricted Company stock; and performance units.
Awards granted under the 2000 Plan were either incentive
stock options or nonqualified stock options. The 2010 Plan
and the 2000 Plan (collectively the “Plans”), under which
equity incentives may be granted to employees and directors
under incentive and nonstatutory agreements, 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 option awards
under the Plans expire on dates determined by the Board of
Directors, but not later than ten years from the date of award.
The vesting period is generally five years; however, the vesting
period can be modified at the discretion of the Company’s
Board of Directors. Outstanding option awards under the
Plans are exercisable until their expiration; however, no new
options will be awarded under the 2000 Plan. The Plans do
not provide for the settlement of awards in cash and new
shares are issued upon exercise of an option.
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
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AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 13: SHAREHOLDERS’ EQUITY (CONTINUED)
A summary of the outstanding and vested stock option activity for the year ended December 31, 2010 is as follows:
Outstanding
Nonvested
Balance, January 1, 2010
Options vested
Options expired or canceled
Balance, December 31, 2010
A summary of options as of December 31, 2010 is as follows:
Weighted average exercise price of nonvested stock options
Aggregate intrinsic value of nonvested stock options
Weighted average remaining contractual term in years of
nonvested stock options
Number of vested stock options
Weighted average exercise price per share
Aggregate intrinsic value
Weighted average remaining contractual term in years
RANGE OF EXERCISE PRICES
$ 8.50-11.66
$ 11.67-12.37
$ 12.38-12.65
$ 12.66-16.18
$ 16.19-16.77
$ 16.78-18.10
$ 18.11-18.23
$ 18.24-24.07
Weighted
Average
Exercise
Price
Per Share
$
$
$
17.20
22.15
17.18
Shares
381,021
(1,450)
379,571
Shares
180,597
(59,352)
(1,450)
119,795
Number of
Options
Outstanding
December 31,
2010
Weighted
Average
Remaining
Contractual
Life
61,903
33,562
8.14 years
2.22 years
1,575
7.39 years
927
2.39 years
58,942
48,399
36,174
7.15 years
3.31 years
4.27 years
138,089
5.50 years
379,571
Weighted
Average
Fair Value
Per Share
$
$
$
$
$
$
$
$
3.19
4.08
5.12
2.73
15.09
-
7.18
259,776
18.15
-
4.72
Number of
Options
Exercisable
December 31,
2010
12,398
33,562
630
927
23,576
48,399
36,169
104,115
259,776
During the third quarter of 2010, the Company awarded
29,334 shares of restricted common stock under the
Company’s 2010 Equity Incentive Plan to certain employees
and to directors. Grant date fair value is determined by the
market price of the Company’s common stock at the date of
grant. The aggregate value of these shares at the grant date
amounts to approximately $205,000 or $6.99 per share and
is recognized ratably as compensation expense or director
expense over the vesting periods. The shares of common
stock granted pursuant to such agreements vest in increments
over one to five years from the date of grant. The Company
recognized $47,000 in compensation expense and director
expense related to restricted stock in 2010. The intrinsic value
of the restricted stock outstanding at December 31, 2010 was
approximately $176,000. The weighted average contractual
term over which the restricted stock will vest is 1.68 years as
of December 31, 2010. The shares awarded to employees and
directors under the restricted stock agreements vest on the
applicable vesting dates only to the extent the recipient of the
shares is then an employee or a director of the Company or
one of its subsidiaries, and each recipient will forfeit all of the
shares that have not vested on the date his or her employment
or service is terminated. New shares are issued upon vesting of
the restricted common stock.
Common Stock Repurchase Program
On January 16, 2008, the Board of Directors of the Company
authorized a stock repurchase program that allows for the
repurchase of up to six and one half percent (6.5%) annually
of the Company’s outstanding shares of common stock.
The repurchases under this plan can be made from time to
time in the open market as conditions allow. Management
reports monthly to the Board of Directors on the status of the
68
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 13: SHAREHOLDERS’ EQUITY (CONTINUED)
repurchase program. The Board of Directors has reserved the
right to suspend, terminate, modify or cancel the repurchase
programs at any time for any reason. The 6.5% percent
program announced in 2008 replaced a program announced in
2001 whereby the Company had the ability to repurchase up
to five percent (5.0%) annually of the Company’s outstanding
shares of common stock. On July 24, 2009, the Board
of Directors temporarily suspended the Company’s stock
repurchase program.
NOTE 14: REGULATORY MATTERS
Dividends
Upon declaration by the Board of Directors of the Company,
all shareholders of record will be entitled to receive dividends.
The California Financial Code restricts the total dividend
payment of any state banking association in any calendar
year to the lesser of (1) the bank’s retained earnings or
(2) the bank’s net income for its last three fiscal years, less
distributions made to shareholders during the same three-year
period. In addition, subject to prior regulatory approval, any
state banking association may request an exception to this
restriction. In May, September and December 2008, and
in March and June of 2009, ARB requested, and received
approval for, equal payments of $1,000,000. The effect of
the payments is such that ARB could continue to provide
dividends to the Company.
In 2009 and 2008, the Company declared cash dividends in
the amount of $0.29 and $0.57, respectively, per common
share. The amounts have been adjusted to reflect 5% stock
dividends declared in 2008. 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. On July 24, 2009, the
Board of Directors temporarily suspended the payment of
cash dividends until such time as it is prudent to reestablish
payment of cash dividends. As a result there were no cash
dividends declared or paid in 2010. Currently, any future cash
dividends from the Bank to the Company will require prior
regulatory approval.
Stock Dividend
The Board of Directors declared a 5% stock dividend
November 19, 2008. As appropriate, per share and relevant
data in the consolidated financial statements have been
retroactively restated to reflect the stock dividend.
Regulatory Capital
The Company and ARB are subject to certain regulatory
capital requirements administered by the Board of Governors
of the Federal Reserve System and the FDIC. Failure to meet
these minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material
effect on the Company’s consolidated financial statements.
As a result of a regularly scheduled 2009 FDIC examination,
management entered into a Memorandum of Understanding
(MOU) with its regulators to take certain actions, including
maintenance of certain capital ratios as described in “Note 1,
The Business of the Company” herein.
Under capital adequacy guidelines, the Company and ARB
must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices.
These quantitative measures are established by regulation and
require that minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and of Tier 1 capital to average
assets be maintained. Capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
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AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 14: REGULATORY MATTERS (CONTINUED)
ARB is also subject to additional capital guidelines under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, ARB must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as
set forth in the table below.
DOLLARS IN THOUSANDS
Leverage Ratio
American River Bankshares and Subsidiaries
Minimum regulatory requirement
American River Bank
Minimum requirement for “Well-Capitalized” institution
under prompt corrective action provisions
Minimum regulatory requirement
Tier 1 Risk-Based Capital Ratio
American River Bankshares and Subsidiaries
Minimum regulatory requirement
American River Bank
Minimum requirement for “Well-Capitalized” institution
under prompt corrective action provisions
Minimum regulatory requirement
Total Risk-Based Capital Ratio
American River Bankshares and Subsidiaries
Minimum regulatory requirement
American River Bank
Minimum requirement for “Well-Capitalized” institution
under prompt corrective action provisions
Minimum regulatory requirement
Management believes that the Company and ARB met all
their capital adequacy requirements as of December 31, 2010
and 2009.
December 31,
2010
2009
Amount
Ratio
Amount
Ratio
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
71,112
22,663
66,371
28,207
22,566
71,112
14,913
66,371
22,239
14,826
75,809
30,058
71,041
37,357
29,886
12.6%
4.0%
11.8%
5.0%
4.0%
19.1%
4.0%
17.9%
6.0%
4.0%
20.3%
8.0%
19.2%
10.0%
8.0%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
70,158
22,535
65,385
28,059
22,447
70,158
16,384
65,385
24,463
16,309
75,313
32,989
70,516
41,050
32,840
12.4%
4.0%
11.7%
5.0%
4.0%
17.1%
4.0%
16.0%
6.0%
4.0%
18.4%
8.0%
17.3%
10.0%
8.0%
70
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 15: OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income consisted of the following:
DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
Merchant fee income
Accounts receivable servicing fees
Income from residential lending division
Increase in cash surrender value of life insurance
policies (Note 16)
Other
Other noninterest expense consisted of the following:
DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
Professional fees
Outsourced item processing
Directors’ expense
Telephone and postage
Amortization of intangible assets
Stationery and supplies
Advertising and promotion
Other operating expenses
2010
2009
2008
$
420
$
437
$
35
7
246
256
981
277
234
931
$
$
482
170
283
395
216
$
1,546
2010
2009
2008
$
1,191
$
1,061
$
414
371
336
242
208
198
369
390
375
263
205
232
1,010
1,278
$
3,970
$
4,173
$
936
391
321
403
286
274
339
1,143
4,093
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AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 16: EMPLOYEE BENEFIT PLANS
American River Bankshares 401(k) Plan
The American River Bankshares 401(k) Plan has been in place
since January 1, 1993 and is available to all employees. Under
the plan, the Company will match 100% of each participants’
contribution up to 3% of annual compensation plus 50% of
the next 2% of annual compensation. Employer Safe Harbor
matching contributions are 100% vested upon entering
the plan. The Company’s contributions totaled $173,000,
$176,000 and $200,000 for the years ended December 31,
2010, 2009 and 2008, 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 accrues interest on the participants’
deferred balances at a rate based on U.S. Government Treasury
rates plus 4.0%. This rate was 6.5% at December 31, 2010.
Deferred compensation, including interest earned, totaled
$2,330,000, $2,167,000 and $2,023,000 at December 31,
2010, 2009 and 2008, respectively. The expense recognized
under this plan totaled $150,000, $116,000 and $142,000
for the years ended December 31, 2010, 2009 and 2008,
respectively.
Salary Continuation Plan
The Company has agreements to provide certain current
executives, or their designated beneficiaries, with annual
benefits for up to 15 years after retirement or death. These
benefits are substantially equivalent to those available under
life insurance policies purchased by the Company on the
lives of the executives. The Company accrues for these future
benefits from the effective date of the agreements until the
executives’ expected final payment dates in a systematic and
rational manner. As of December 31, 2010 and 2009, the
Company had accrued $867,000 and $764,000, respectively,
for potential benefits payable. This payable approximates the
then present value of the benefits expected to be provided at
retirement. The expense recognized under this plan totaled
$153,000, $141,000 and $188,000 for the years ended
December 31, 2010, 2009 and 2008, respectively.
In connection with these plans, the Company invested in
single premium life insurance policies with cash surrender
values totaling $11,019,000 and $10,742,000 at December
31, 2010 and 2009, respectively. On the consolidated balance
sheet, the cash surrender value of life insurance policies is
included in accrued interest receivable and other assets.
Tax-exempt income on these policies, net of expense, totaled
approximately $277,000, $246,000 and $395,000 for the
years ended December 31, 2010, 2009 and 2008, respectively.
72
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 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 2010:
DOLLARS IN THOUSANDS
Balance, January 1, 2010
Disbursements
Amounts repaid
$
4,051
38
(113)
Balance, December 31, 2010
$
3,976
Undisbursed commitments to related parties,
December 31, 2010
$
5
The Company also leases one of its branch facilities from a current member of the Company’s Board of Directors. Rental payments
to the Director totaled $101,000, $87,000 and $85,000 for the years ended December 31, 2010, 2009 and 2008, respectively.
NOTE 18: OTHER COMPREHENSIVE INCOME (LOSS)
At December 31, 2010, 2009 and 2008, the Company had other comprehensive income (loss) as follows:
DOLLARS IN THOUSANDS
For the Year Ended December 31, 2010
Other comprehensive income:
Unrealized holding gain
Less reclassification adjustment for realized
gains included in net income
For the Year Ended December 31, 2009
Other comprehensive loss:
Unrealized holding loss
Less reclassification adjustment for realized
gains included in net income
For the Year Ended December 31, 2008
Other comprehensive income:
Unrealized holding gains
Less reclassification adjustment for realized
gains included in net income
Before Tax
Tax
(Expense)
Benefit
After Tax
$
2,478
$
(987)
$
1,491
7
(3)
4
$
2,471
$
(984)
$
1,487
$
$
$
$
(26)
$
10
$
(16)
270
(111)
(296)
$
121
$
159
(175)
628
$
(258)
$
126
502
(52)
$
(206)
$
370
74
296
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
73
AM ERI CAN RI VER BA NK SHARES A ND SUB SIDIAR IES—NOTES TO CONSOLID ATED FINANCIA L STATEMENTS
NOTE 19: PARENT ONLY CONDENSED FINANCIAL STATEMENTS
C O N D E N S E D B A L A N C E S H E E T
DOLLARS IN THOUSANDS
FOR THE YEARS ENDED DECEMBER 31,
Assets
Cash and due from banks
Investment in subsidiaries
Other assets
Liabilities and Shareholders’ Equity
Liabilities:
Other liabilities
Total liabilities
Shareholders’ equity:
Common stock
Retained earnings
Accumulated other comprehensive income, net of taxes
Total shareholders’ equity
C O N D E N S E D S T A T E M E N T O F I N C O M E
DOLLARS IN THOUSANDS
FOR THE YEARS ENDED DECEMBER 31,
Income:
2010
2009
$
6,157
$
84,803
2,461
6,067
82,572
2,165
$
93,421
$
90,804
$
3,877
$
3,877
71,814
16,021
1,709
89,544
3,459
3,459
71,578
15,545
222
87,345
$
93,421
$
90,804
2010
2009
2008
Dividends declared by subsidiaries—eliminated in consolidation
$
Management fee from subsidiaries—eliminated in consolidation
$
4,057
$
1,655
4,057
26
5,738
2,696
404
325
684
4,109
1,629
(49)
1,580
6
4,560
3,706
39
8,305
2,582
390
248
668
3,888
4,417
3,113
7,530
41
7,571
$
1,586
$
Other income
Total income
Expenses:
Salaries and employee benefits
Professional fees
Directors’ expense
Other expenses
Total expenses
(Loss) income before equity in undistributed income of subsidiaries
Equity in undistributed (distributed) income of subsidiaries
Income before income taxes
Income tax benefit
Net income
29
4,086
3,125
360
308
645
4,438
(352)
699
347
129
476
$
74
AMERICAN RIVER BANKSHARES AND SUBS IDIARI ES—NOTES TO CONS OLIDATED FIN AN CI A L S TAT EME NT S
NOTE 19: PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
DOLLARS IN THOUSANDS
FOR THE YEARS ENDED DECEMBER 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
(Distributed) undistributed earnings of
subsidiaries
Decrease in dividends receivable from
subsidiaries
Equity-based compensation expense
Increase in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of equipment
Investment in subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Cash dividends paid
Exercise of stock options, including tax benefit
Cash paid to repurchase common stock
Cash paid for fractional shares
Net proceeds from stock issuance
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
2010
2009
2008
$
476
$
1,586
$
7,571
(699)
49
(3,113)
236
(193)
418
238
(148)
(148)
-
90
6,067
210
(267)
495
2,073
(50)
(19,000)
(19,050)
(2,486)
33
23,901
21,448
4,471
1,596
840
291
(104)
220
5,705
(26)
(26)
(3,328)
354
(1,710)
(10)
(4,694)
985
611
Cash and cash equivalents at end of year
$
6,157
$
6,067
$
1,596
2 0 1 0 A N N U A L R E P O R T A M E R I C A N R I V E R B A N K S H A R E S
75
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