[AMERICAN RIVER HOLDINGS LOGO] [NORTH COAST BANK, N.A. LOGO]
August 10, 2000
American River Holdings and North Coast Bank, N.A. Shareholders:
The boards of directors of American River Holdings and North Coast
Bank, N.A. have agreed on a merger which would result in North Coast Bank, N.A.
becoming a separate banking subsidiary of American River Holdings. Each of us
will hold shareholders meetings to consider and vote on the merger proposal.
American River Holdings shareholders will also be asked to approve proposals for
the American River Holdings 2000 Stock Option Plan, the classification of the
American River Holdings board of directors, the elimination of cumulative voting
in the election of directors, the election of directors of American River
Holdings, and the ratification of the appointment of Perry-Smith LLP as
independent accountants for the year 2000. These proposals are described in the
accompanying document. The merger agreement is attached to this document as
Annex A.
In the merger, each share of North Coast Bank, N.A. common stock
outstanding at the effective time of the merger will be converted into a number
of shares of American River Holdings common stock based upon a fixed conversion
ratio of .9644 of a share of American River Holdings common stock for each share
of North Coast Bank, N.A. common stock. The conversion ratio is described in the
accompanying document. American River Holdings common stock is not listed on any
exchange, but is quoted on the OTC Bulletin Board under the symbol "AMRB.OB" and
closed at $13.38 on August 10, 2000.
The places, dates and times of the meetings are described in the
accompanying notices of the respective meetings of shareholders of American
River Holdings and North Coast Bank, N.A. Whether or not you plan to attend your
respective meeting, please sign, date and promptly return the enclosed proxy
card.
YOU SHOULD CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS"
COMMENCING ON PAGE 15 IN THE ACCOMPANYING DOCUMENT.
/s/ DAVID T. TABER /s/ KATHY A. PINKARD
------------------------------- -------------------------------
David T. Taber Kathy A. Pinkard
President and Chief Executive Officer President and Chief Executive Officer
--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulators have approved this transaction or the shares of American River
Holdings common stock to be issued under the accompanying document or determined
if the document is accurate or adequate. Any representation to the contrary is a
criminal offense.
The shares of American River Holdings common stock offered by this
joint proxy statement/ prospectus are not savings accounts, deposits or other
obligations of American River Bank or North Coast Bank, N.A. or any subsidiary
of any of the parties and are not insured by the Federal Deposit Insurance
Corporation or any other governmental agency.
--------------------------------------------------------------------------------
THE DATE OF THE ACCOMPANYING DOCUMENT IS AUGUST 10, 2000, AND IS FIRST BEING
MAILED TO AMERICAN RIVER HOLDINGS AND NORTH COAST BANK, N.A. SHAREHOLDERS ON OR
ABOUT AUGUST 18, 2000.
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[AMERICAN RIVER HOLDINGS LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 21, 2000
To the shareholders of American River Holdings:
Notice is hereby given that an annual meeting of shareholders of
American River Holdings will be held on September 21, 2000, at 5:30 p.m., local
time, at 1545 River Park Drive, Suite 107, Sacramento, California for the
following purposes:
1. To consider and vote on a proposal to approve the Agreement and
Plan of Reorganization and Merger, dated as of March 1, 2000,
among American River Holdings, North Coast Bank, N.A. and ARH
Interim National Bank, the Agreement of Merger attached as exhibit
A to the Agreement and Plan of Reorganization and Merger, and the
transactions contemplated by these agreements, including the
resulting issuance of shares of American River Holdings common
stock in connection with the merger of North Coast Bank, N.A. into
ARH Interim National Bank. The terms and conditions of the
transaction are more fully described in the accompanying document.
2. To approve the American River Holdings 2000 Stock Option Plan.
3. To approve amendments to the American River Holdings articles of
incorporation and bylaws to provide for the classification of the
board of directors.
4. To approve amendments to the American River Holdings articles of
incorporation and bylaws to eliminate cumulative voting in the
election of directors.
5. To elect the nine incumbent directors of American River Holdings.
6. To ratify the appointment of Perry-Smith LLP as independent
accountants for the year 2000.
7. To transact such other business as may properly be brought before
the annual meeting or any adjournments or postponements of the
annual meeting.
The board of directors of American River Holdings has unanimously
approved the transactions described above and unanimously recommends that you
vote in favor of the proposals at the annual meeting.
Section 3.3 of the Bylaws of American River Holdings provides for the
nomination of directors as follows:
SECTION 3.3. NOMINATIONS OF DIRECTORS. Nominations for election of
members of the board may be made by the board or by any holder of any
outstanding class of capital stock of the corporation entitled to vote
for the election of directors. Notice of intention to make any
nominations (other than for persons named in the notice of the meeting
called for the election of directors) shall be made in writing and
shall be delivered or mailed to the president of the corporation by the
later of: (i) the close of business twenty-one (21) days prior to any
meeting of shareholders called for the election of directors; or (ii)
ten (10) days after the date of mailing of notice of the meeting to
shareholders. Such notification shall contain the following information
to the extent known to the notifying shareholder: (a) the name and
address of each proposed nominee; (b) the principal occupation of each
proposed nominee; (c) the number of shares of capital stock of the
corporation owned by each proposed nominee; (d) the name and residence
address of the notifying shareholder; (e) the number of shares of
capital stock
<PAGE>
of the corporation owned by the notifying shareholder; (f) the number
of shares of capital stock of any bank, bank holding company, savings
and loan association or other depository institution owned beneficially
by the nominee or by the notifying shareholder and the identities and
locations of any such institutions; and (g) whether the proposed
nominee has ever been convicted of or pleaded nolo contendere to any
criminal offense involving dishonesty or breach of trust, filed a
petition in bankruptcy or been adjudged bankrupt. The notification
shall be signed by the nominating shareholder and by each nominee, and
shall be accompanied by a written consent to be named as a nominee for
election as a director from each proposed nominee. Nominations not made
in accordance with these procedures shall be disregarded by the
chairperson of the meeting, and upon his or her instructions, the
inspectors of election shall disregard all votes cast for each such
nominee. The foregoing requirements do not apply to the nomination of a
person to replace a proposed nominee who has become unable to serve as
a director between the last day for giving notice in accordance with
this paragraph and the date of election of directors if the procedure
called for in this paragraph was followed with respect to the
nomination of the proposed nominee.
Shareholders of record at the close of business on July 25, 2000, are
entitled to notice of the annual meeting and to vote at the annual meeting or
any adjournments or postponements of the annual meeting.
By Order Of The Board Of Directors,
/s/ MARJORIE G. TAYLOR
-----------------------------------
Marjorie G. Taylor
Secretary
Sacramento, California
August 10, 2000
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WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF YOU MAIL THE PROXY CARD IN THE UNITED
STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
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<PAGE>
[NORTH COAST BANK, N.A. LOGO]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 21, 2000
To the shareholders of North Coast Bank, N.A.:
Notice is hereby given that a special meeting of shareholders of North
Coast Bank, N.A. will be held on September 21, 2000, at 6:00 p.m., local time,
at 50 Santa Rosa Avenue, Santa Rosa, California for the following purposes:
1. To consider and vote on a proposal to approve the Agreement and
Plan of Reorganization and Merger, dated as of March 1, 2000,
among American River Holdings, North Coast Bank, N.A. and ARH
Interim National Bank, the Agreement of Merger attached as exhibit
A to the Agreement and Plan of Reorganization and Merger, and the
transactions contemplated by these agreements, including the
merger of North Coast Bank, N.A. into ARH Interim National Bank.
The terms and conditions of the transaction are more fully
described in the accompanying document.
2. To transact such other business as may properly be brought before
the special meeting or any adjournments or postponements of the
special meeting.
The board of directors of North Coast Bank, N.A. has unanimously
approved the transaction described above and unanimously recommends that you
vote in favor of the proposal at the special meeting.
Shareholders of record at the close of business on July 25, 2000 are
entitled to notice of the special meeting and to vote at the special meeting or
any adjournments or postponements of the special meeting.
By Order Of The Board Of Directors,
/s/ LEO J. BECNEL
-----------------------------------
Leo J. Becnel
Secretary
Santa Rosa, California
August 10, 2000
-------------------------------------------------------------------------------
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF YOU MAIL THE PROXY CARD IN THE UNITED
STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
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<PAGE>
TABLE OF CONTENTS
PAGE
QUESTIONS AND ANSWERS ABOUT THE MERGER AGREEMENT AND MERGER....................1
SUMMARY........................................................................3
Information About American River Holdings and North Coast Bank, N.A......3
Purchase Price...........................................................3
Fractional Shares........................................................3
Reasons for the Merger Agreement and Merger; Recommendations of
the Boards of Directors................................................4
Recommendations to Shareholders..........................................4
Opinion of American River Holdings' Financial Advisor....................4
Opinion of North Coast Bank, N.A.'s Financial Advisor....................4
Accounting Treatment.....................................................5
Federal Income Tax Consequences..........................................5
Interests of American River Holdings and North Coast Bank, N.A.
Officers and Directors in the Merger...................................5
Dissenters' Rights.......................................................6
Comparative Per Share Market Price.......................................6
Comparative Dividend Information.........................................6
Comparison of Shareholder Rights.........................................7
Regulatory Approvals.....................................................7
Conditions to the Completion of the Merger...............................7
Termination of the Merger Agreement......................................8
Termination Fees.........................................................9
Fees and Expenses of the Merger..........................................9
Recent Developments......................................................9
Selected Historical and Pro Forma Financial Data........................10
American River Holdings.................................................11
North Coast Bank, N.A...................................................12
American River Holdings and North Coast Bank, N.A.......................13
Historical and Pro Forma Per Share Data.................................14
RISK FACTORS..................................................................15
Customers of North Coast Bank, N.A. May Not Be Retained.................15
American River Holdings May Not Be Able to Realize Anticipated
Operating Cost Savings................................................15
The Price of American River Holdings Common Stock May Decline...........15
Additional Shares of American River Holdings Common Stock Could
Be Issued Which Could Result in a Decline in the Market
Price of the Stock....................................................15
Deterioration of the Real Estate Market Could
Have an Adverse Effect Upon Performance...............................16
Environmental Liability Associated with Commercial and
Real Estate Lending Could Result in Losses............................16
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS..............................17
THE MEETINGS..................................................................19
Dates, Times and Places.................................................19
Matters to be Considered at the Meetings................................19
Record Date; Stock Entitled to Vote; Quorum.............................19
Number of Votes; Cumulative Voting......................................20
Votes Required..........................................................20
Voting of Proxies.......................................................21
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TABLE OF CONTENTS
PAGE
Effect of Non-Approval of Proposals.....................................23
INFORMATION ABOUT AMERICAN RIVER HOLDINGS AND SUBSIDIARIES....................24
General Development of Business.........................................24
Properties..............................................................25
Legal Proceedings.......................................................26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF AMERICAN RIVER HOLDINGS................................27
Introduction............................................................27
Results of Operations...................................................27
Net Interest Income and Net Interest Margin.............................27
Provision for Loan Losses...............................................32
Service Charges and Fees and Other Income...............................32
Salaries and Benefits...................................................33
Occupancy, Furniture and Equipment......................................33
Other Expenses..........................................................34
Provision for Taxes.....................................................34
Balance Sheet Analysis..................................................34
Loans...................................................................34
Risk Elements...........................................................36
Nonaccrual, Past Due and Restructured Loans.............................36
Allowance for Loan Losses Activity......................................37
Other Real Estate.......................................................40
Deposits................................................................41
Capital Resources.......................................................41
Market Risk Management..................................................42
Inflation...............................................................46
Liquidity...............................................................46
Off-Balance Sheet Items.................................................50
Disclosure of Fair Value................................................50
Year 2000...............................................................51
Accounting Pronouncements...............................................51
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................51
INFORMATION ABOUT NORTH COAST BANK, N.A.......................................52
General Development of Business.........................................52
Properties..............................................................53
Legal Proceedings.......................................................53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF NORTH COAST BANK, N.A..........................54
Introduction............................................................54
Results of Operations...................................................54
Net Interest Income and Net Interest Margin.............................54
Provision for Loan Losses...............................................59
Service Charges and Fees and Other Income...............................59
Salaries and Benefits...................................................60
Occupancy, Furniture and Equipment......................................60
Other Expenses..........................................................60
Provision for Taxes.....................................................60
Balance Sheet Analysis..................................................61
Loans...................................................................61
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TABLE OF CONTENTS
PAGE
Risk Elements...........................................................62
Non-accrual, Past Due and Restructured Loans............................63
Allowance for Loan Losses Activity......................................63
Other Real Estate.......................................................65
Deposits................................................................65
Capital Resources.......................................................65
Market Risk Management..................................................66
Inflation...............................................................69
Liquidity...............................................................69
Off-Balance Sheet Items.................................................73
Disclosure of Fair Value................................................73
Year 2000...............................................................73
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................73
NORTH COAST BANK, N.A. MANAGEMENT AND CERTAIN SECURITY HOLDERS................75
Security Ownership of Certain Beneficial Owners and Management..........75
Background and Business Experience of Management........................76
Committees of the Board of Directors....................................78
Compensation of Directors...............................................78
Executive Compensation..................................................79
Employment Contracts and Termination of Employment and
Change in Control Arrangements........................................81
Section 16(a) Beneficial Ownership Reporting Compliance.................82
Transactions with Management and Others.................................82
Certain Business Relationships..........................................82
Indebtedness of Management..............................................82
SUPERVISION AND REGULATION....................................................83
General.................................................................83
Capital Standards.......................................................84
Prompt Corrective Action................................................85
Additional Regulations..................................................86
Limitations on Dividends................................................87
COMPETITION...................................................................88
Competitive Data........................................................88
General Competitive Factors.............................................89
Impact of Legislative and Regulatory Proposals..........................90
PROPOSAL NO. 1 TO APPROVE THE MERGER AGREEMENT AND MERGER....................93
Background of the Merger Agreement and Merger...........................93
Reasons for the Merger Agreement and Merger; Recommendations
of the Boards of Directors............................................95
Opinion of American River Holdings' Financial Advisor...................98
Opinion of North Coast Bank, N.A.'s Financial Advisor..................102
Effective Date and Time of the Merger..................................108
Purchase Price.........................................................108
Fractional Shares......................................................108
Conversion of Shares of North Coast Bank, N.A. Common Stock............108
Exchange of North Coast Bank, N.A. Stock Certificates..................109
Treatment of Stock Options.............................................109
Interests of American River Holdings and North Coast
Bank, N.A. Officers and Directors in the Merger......................110
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TABLE OF CONTENTS
PAGE
Conduct of Business Pending the Merger.................................111
Additional Agreements..................................................114
Representations and Warranties.........................................115
Conditions to the Completion of the Merger.............................117
Termination of the Merger Agreement....................................121
Termination Fees.......................................................123
Fees and Expenses of the Merger........................................123
Amendment..............................................................124
Extension; Waiver......................................................124
Management and Operations Following the Merger.........................124
Required Regulatory Approvals..........................................125
Federal Income Tax Consequences........................................127
Accounting Treatment...................................................128
Trading Markets for Stock..............................................129
Resales of American River Holdings Common Stock........................129
DISSENTERS' RIGHTS...........................................................129
Dissenters' Rights of American River Holdings Shareholders.............129
Dissenters' Rights of North Coast Bank, N.A. Shareholders..............131
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.................133
Unaudited Pro Forma Condensed Combined Balance Sheet As
Of March 31, 2000....................................................134
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Month Period Ended March 31, 2000......................135
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Month Period Ended March 31, 1999......................136
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1999.................................137
Unaudited Pro Forma Condensed Combined Statement of
Operations For the Year Ended December 31, 1998......................138
Unaudited Pro Forma Condensed Combined Statement of
Operations For the Year Ended December 31, 1997......................139
Notes To Unaudited Pro Forma Condensed
Combined Financial Statements........................................140
MARKET PRICE AND DIVIDEND INFORMATION........................................141
Market Quotations......................................................141
Dividends and Dividend Policy..........................................142
COMPARISON OF SHAREHOLDER RIGHTS.............................................143
General................................................................143
Anti-Takeover Measures.................................................143
Quorum Requirements....................................................144
Indemnification of Directors and Executive Officers....................144
Shareholder Meetings and Action by Written Consent.....................146
Cumulative Voting......................................................147
Amendment of Articles and Bylaws.......................................147
Filling Vacancies on the Board of Directors............................147
Call of Annual or Special Meeting of Shareholders and
Action by Shareholders Without a Meeting.............................148
Classified Board Provisions............................................148
DESCRIPTION OF AMERICAN RIVER HOLDINGS CAPITAL STOCK.........................149
Common Stock...........................................................149
DESCRIPTION OF NORTH COAST BANK, N.A. CAPITAL STOCK..........................149
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TABLE OF CONTENTS
PAGE
Common Stock...........................................................149
PROPOSAL NO. 2 APPROVAL OF THE AMERICAN RIVER HOLDINGS 2000
STOCK OPTION PLAN......................................................151
Introduction...........................................................151
Summary of 2000 Plan...................................................151
New Plan Benefits......................................................155
Vote Required for Approval.............................................155
Recommendation of Management...........................................156
PROPOSAL NO. 3 APPROVAL OF AMENDMENTS TO THE AMERICAN RIVER
HOLDINGS ARTICLES OF INCORPORATION AND BYLAWS TO PROVIDE
FOR THE CLASSIFICATION OF THE BOARD OF DIRECTORS.......................157
Appointment of North Coast Bank, N.A. Directors........................157
Classification of Directors............................................157
Election of Classified Directors.......................................157
California Corporations Code...........................................158
Amendment of Bylaws....................................................158
Effects of Classification of Board.....................................158
Vote Required for Approval.............................................160
Recommendation of Management...........................................160
PROPOSAL NO. 4 APPROVAL OF AMENDMENTS TO THE AMERICAN RIVER
HOLDINGS ARTICLES OF INCORPORATION AND BYLAWS TO ELIMINATE
CUMULATIVE VOTING IN THE ELECTION OF DIRECTORS.........................161
Introduction...........................................................161
Cumulative Voting......................................................161
Reasons for the Amendment..............................................162
Other Effects..........................................................162
Conforming Bylaw Amendment.............................................162
Vote Required for Approval.............................................162
Recommendation of Management...........................................163
PROPOSAL NO. 5 ELECTION OF AMERICAN RIVER HOLDINGS DIRECTORS.................164
Security Ownership of Certain Beneficial Owners and Management.........164
Background and Business Experience of Management.......................167
Committees of the Board of Directors...................................179
Compensation of Directors..............................................170
Board Compensation Committee Report on Executive Compensation..........171
Executive Compensation.................................................173
Employment Contracts and Termination of Employment and
Change in Control Arrangements.......................................175
Comparison Of American River Holdings Shareholder Return...............177
Section 16(a) Beneficial Ownership Reporting Compliance................178
Transactions with Management and Others................................178
Certain Business Relationships.........................................178
Indebtedness of Management.............................................178
PROPOSAL NO. 6 RATIFICATION OF THE APPOINTMENT OF PERRY-SMITH LLP
AS INDEPENDENT ACCOUNTANTS FOR THE YEAR 2000...........................180
Vote Required for Approval.............................................180
Recommendation of Management...........................................180
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES FINANCIAL STATEMENTS................181
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TABLE OF CONTENTS
PAGE
CONSOLIDATED BALANCE SHEET (Unaudited) March 31, 2000
and December 31, 1999................................................182
CONSOLIDATED STATEMENT OF INCOME (Unaudited) For the Three Month
Periods Ended March 31, 2000 and 1999................................183
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited) For the Three Month Period Ended March 31, 2000
and the Year Ended December 31, 1999.................................184
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the
Three Month Periods Ended March 31, 2000 and 1999....................185
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited).................187
INDEPENDENT AUDITOR'S REPORT...........................................199
CONSOLIDATED BALANCE SHEET December 31, 1999 and 1998.................200
CONSOLIDATED STATEMENT OF INCOME For the Years Ended
December 31, 1999, 1998 and 1997.....................................201
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997.................203
CONSOLIDATED STATEMENT OF CASH FLOWS For the Years
Ended December 31, 1999, 1998 and 1997...............................205
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................208
NORTH COAST BANK, N.A. FINANCIAL STATEMENTS..................................237
BALANCE SHEET (Unaudited) March 31, 2000 and December 31, 1999.........238
STATEMENT OF INCOME (Unaudited) For the Three Month
Periods Ended March 31, 2000 and 1999................................239
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the Three Month Period Ended March 31, 2000 and
The Year Ended December 31, 1999.....................................240
STATEMENT OF CASH FLOWS (Unaudited) For the
Three Month Periods Ended March 31, 2000 and 1999....................241
NOTES TO FINANCIAL STATEMENTS (Unaudited)..............................243
INDEPENDENT AUDITOR'S REPORT Perry-Smith LLP...........................252
INDEPENDENT AUDITOR'S REPORT Richardson & Company......................253
BALANCE SHEET December 31, 1999 and 1998..............................254
STATEMENT OF INCOME For the Years Ended
December 31, 1999, 1998 and 1997.....................................255
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Years
Ended December 31, 1999, 1998 and 1997...............................256
STATEMENT OF CASH FLOWS For the Years Ended
December 31, 1999, 1998 and 1997.....................................258
NOTES TO FINANCIAL STATEMENTS..........................................260
EXPERTS......................................................................284
LEGAL MATTERS................................................................284
SHAREHOLDER PROPOSALS........................................................284
SOLICITATION OF PROXIES......................................................284
ANNUAL DISCLOSURE STATEMENT..................................................284
ANNUAL REPORT................................................................285
OTHER MATTERS................................................................285
WHERE YOU CAN FIND MORE INFORMATION..........................................285
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<PAGE>
TABLE OF ANNEXES
ANNEX A Merger Agreement (Agreement and Plan of Reorganization and
Merger, dated as of March 1, 2000, and Exhibits A, B, C, D and
E)
ANNEX B Hoefer & Arnett Incorporated Fairness Opinion
ANNEX C Seapower Carpenter Capital, Inc., dba Carpenter and Company
Fairness Opinion
ANNEX D Chapter 13 Dissenters' Rights
ANNEX E Title 12, United States Code, Section 215a (b), (c) and (d),
and OCC Circular No. 259
ANNEX F American River Holdings 2000 Stock Option Plan
ANNEX G Amendments to the American River Holdings Articles of
Incorporation and Bylaws to Provide for the Classification of
the Board of Directors
ANNEX H Amendments to the American River Holdings Articles of
Incorporation and Bylaws to Eliminate Cumulative Voting
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<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER AGREEMENT AND MERGER
Q: WHOM SHOULD I CONTACT WITH QUESTIONS OR TO OBTAIN ADDITIONAL COPIES
OF THIS DOCUMENT?
A: Either of the following:
American River Holdings
1545 River Park Drive, Suite 107
Sacramento, California 95815
Attention: David T. Taber, President
and Chief Executive Officer
(916) 565-6100
North Coast Bank, N.A.
50 Santa Rosa Avenue
Santa Rosa, California 95404
Attention: Kathy A. Pinkard, President
and Chief Executive Officer
(707) 528-6300
See also "Where You Can Find More Information" on page 285.
Q: WHY IS THIS MERGER PROPOSED?
A: American River Holdings and North Coast Bank, N.A. are proposing
this transaction because the boards of directors have concluded that as a larger
organization in multiple and diverse markets, the combined companies will be
stronger in terms of growth opportunities and profitability and will also have
the advantage of centralization of management and operations functions, revenue
enhancement, and economies of scale.
Q: WHAT WILL NORTH COAST BANK, N.A. SHAREHOLDERS RECEIVE IN THIS
TRANSACTION?
A: Each share of North Coast Bank, N.A. common stock you own, except
for dissenting shares, will be converted into .9644 of a share of American River
Holdings common stock. Any fractional shares will be paid in cash.
Q: WHAT WILL HAPPEN TO NORTH COAST BANK, N.A. IN THIS MERGER?
A: North Coast Bank, N.A. will become a subsidiary of American River
Holdings. American River Holdings will then have two bank subsidiaries: American
River Bank and North Coast Bank, N.A.
Q: WHAT RISKS SHOULD I CONSIDER?
A: You should carefully read the information set forth in this document
and also consider other specified risk factors. See "Risk Factors" on page 15.
Q: WHAT SHOULD I DO NOW?
A: Simply indicate on your proxy card how you want to vote and then
sign and mail your proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at your meeting. See "Voting of
Proxies" on page 21, for information regarding voting procedures.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will not vote your shares for you unless you provide
instructions to your broker on how to vote. See "Voting of Proxies" on page 21.
Q: SHOULD I SEND IN MY NORTH COAST BANK, N.A. STOCK CERTIFICATES NOW?
A: No. After the merger is completed, the exchange agent appointed by
American River Holdings will send you written instructions for exchanging your
North Coast Bank, N.A. stock certificates.
1
<PAGE>
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing this merger as quickly as possible.
We currently expect to complete this merger on or before October 31, 2000.
Q: WHY HAVE YOU SENT ME THIS DOCUMENT?
A: This document contains important information regarding the proposed
merger. We urge you to read this document carefully, including its exhibits and
attachments. You may also want to review additional information described under
"Where You Can Find More Information" on page 285.
Q: HOW WILL MY SHARES OF AMERICAN RIVER HOLDINGS COMMON STOCK BE TRADED
AFTER THE MERGER?
A: American River Holdings will apply for listing of the shares of its
common stock for trading on the Nasdaq National Market, to be effective on or as
soon as practicable following the effective time of the merger. Assuming that
the merger is consummated, we expect that the application will be approved.
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION IN THIS DOCUMENT AND MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER AGREEMENT AND THE MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE
TERMS OF THE MERGER AGREEMENT AND THE MERGER, YOU SHOULD CAREFULLY READ THIS
ENTIRE DOCUMENT AND THE OTHER INFORMATION TO WHICH WE HAVE REFERRED YOU. SEE
"WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 285. THE MERGER AGREEMENT IS
ATTACHED AS ANNEX A TO THIS DOCUMENT. WE ENCOURAGE YOU TO READ THE MERGER
AGREEMENT. IT IS THE LEGAL DOCUMENT THAT GOVERNS THE PROPOSED TRANSACTION.
INFORMATION ABOUT AMERICAN RIVER HOLDINGS AND NORTH COAST BANK, N.A. (pages 24
and 52)
American River Holdings
1545 River Park Drive, Suite 107
Sacramento, California 95815
(916) 565-6100
American River Holdings is a bank holding company incorporated under
the laws of the State of California in 1995. American River Holdings' banking
subsidiary, American River Bank, is a California banking corporation
incorporated in 1983, which presently operates four banking offices in Placer
and Sacramento Counties, in the cities of Sacramento (two offices), Fair Oaks
(one office) and Roseville (one office) and serves small to medium-sized
businesses, professionals, merchants and individuals within its marketplace.
American River Holdings' non-banking subsidiary, First Source Capital,
was formed in July 1999 to conduct lease financing for most types of business
assets, from computer software to heavy earth-moving equipment.
North Coast Bank, N.A.
50 Santa Rosa Avenue
Santa Rosa, California 95404
(707) 528-6300
North Coast Bank, N.A., formerly Windsor Oaks National Bank, is a
national banking association, organized in 1990 with its administrative
headquarters in Santa Rosa, California. North Coast Bank, N.A. is locally owned
and presently operates three banking offices within its primary service area of
Sonoma County, in the cities of Healdsburg, Santa Rosa and Windsor. North Coast
Bank, N.A. also services Napa, Marin and Mendocino Counties through loan
relationships in these areas. North Coast Bank N.A.'s primary business is
servicing the business or commercial banking needs of small to mid-sized
businesses within Sonoma County.
PURCHASE PRICE (page 108)
North Coast Bank, N.A. shareholders who do not perfect dissenters'
rights will receive .9644 of a share of American River Holdings common stock for
each share of North Coast Bank, N.A. common stock.
FRACTIONAL SHARES (page 108)
Each North Coast Bank, N.A. shareholder entitled to a fraction of a
share of American River Holdings common stock will be paid an amount in cash in
lieu of fractional shares equal to the average of the closing bid and asked
prices for a share of American River Holdings common stock quoted on the OTC
Bulletin Board for each of the twenty trading days ending on the third business
day immediately
3
<PAGE>
preceding the effective date, multiplied by the fraction of a share of American
River Holdings common stock to which such holder otherwise would be entitled and
rounded to the nearest penny.
REASONS FOR THE MERGER AGREEMENT AND MERGER; RECOMMENDATIONS OF THE BOARDS OF
DIRECTORS (page 95)
The boards of directors of American River Holdings and North Coast
Bank, N.A. believe that the merger is in the best interests of their respective
institutions, shareholders, communities and banking customers. Each board
expects that American River Holdings, as a larger organization in multiple and
diverse markets, will be stronger in terms of growth opportunities and
profitability than is either institution at present. American River Holdings
will also have the advantage of centralization of management and operations
functions, revenue enhancement, and economies of scale. Furthermore, it is
believed that American River Holdings, as a stronger independent financial
institution with a primary market area covering a greater geographic area, will
be better able to compete with major banks in the communities now served by each
company.
RECOMMENDATIONS TO SHAREHOLDERS (pages 96 and 98)
American River Holdings Shareholders. The board of directors of
American River Holdings believes that the merger is fair to you and in your best
interests and unanimously recommends that you vote "FOR" the proposal to approve
the merger agreement and the merger and the issuance of shares of American River
Holdings common stock in connection with the merger. The board of directors also
unanimously recommends that you vote "FOR" the proposals to approve the American
River Holdings 2000 Stock Option Plan, the classification of the American River
Holdings board of directors, the elimination of cumulative voting in the
election of directors, the election of management's nominees as directors, and
to ratify the appointment of Perry-Smith LLP as independent accountants for the
year 2000.
North Coast Bank, N.A. Shareholders. The board of directors of North
Coast Bank, N.A. believes that the merger is fair to you and in your best
interests and unanimously recommends that you vote "FOR" the proposal to approve
the merger agreement and the merger.
In evaluating the recommendations of the boards of directors summarized
above, shareholders should carefully consider the matters described under "Risk
Factors" on page 15 and "Background of the Merger Agreement and Merger" on page
93 and "Reasons for the Merger Agreement and Merger; Recommendations of the
Boards of Directors" on page 95.
OPINION OF AMERICAN RIVER HOLDINGS' FINANCIAL ADVISOR (page 98)
Hoefer & Arnett Incorporated has rendered an opinion, dated March 1,
2000 and updated to August 17, 2000, to American River Holdings' board of
directors that the conversion ratio in the merger is fair, from a financial
point of view, to the holders of American River Holdings common stock. American
River Holdings shareholders are urged to read the opinion of Hoefer & Arnett
Incorporated in its entirety. The opinion of Hoefer & Arnett Incorporated, which
includes a discussion of the fees to be paid to Hoefer & Arnett Incorporated, is
attached to this document as Annex B.
OPINION OF NORTH COAST BANK, N.A.'S FINANCIAL ADVISOR (page 102)
Seapower Carpenter Capital, Inc., dba Carpenter and Company has
rendered an opinion, dated March 1, 2000 and updated to August 17, 2000, to the
North Coast Bank, N.A. board of directors that the merger consideration in the
merger is fair, from a financial point of view, to the shareholders of
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<PAGE>
North Coast Bank, N.A., as of the date of the opinion. North Coast Bank, N.A.
shareholders are urged to read the Carpenter and Company fairness opinion in its
entirety. The Carpenter and Company fairness opinion, which sets forth
assumptions made, matters considered and limits of review undertaken, by
Carpenter and Company, and a discussion of the fees to be paid to Carpenter and
Company, is attached to this document as Annex C.
ACCOUNTING TREATMENT (page 128)
American River Holdings expects to account for the merger as a "pooling
of interests." Under the pooling of interests accounting method, American River
Holdings will carry forward on its books the assets and liabilities of North
Coast Bank, N.A. at their historical recorded values.
FEDERAL INCOME TAX CONSEQUENCES (page 127)
The merger agreement and merger have been structured so that, in
general, American River Holdings and North Coast Bank, N.A. and the shareholders
of American River Holdings and North Coast Bank, N.A. will not recognize gain or
loss for federal income tax purposes in the merger, except for taxes payable
because of cash received by North Coast Bank, N.A. shareholders instead of
fractional shares or because of dissenting shares. It is a condition, at the
closing of the merger, that American River Holdings and North Coast Bank, N.A.
receive a tax opinion to the effect, among other matters, that the merger should
qualify as a tax-free reorganization.
TAX MATTERS ARE VERY COMPLICATED. THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. WE URGE YOU TO CONSULT YOUR
OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE MERGER,
INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
INTERESTS OF AMERICAN RIVER HOLDINGS AND NORTH COAST BANK, N.A. OFFICERS AND
DIRECTORS IN THE MERGER (page 110)
Some of American River Holdings' and North Coast Bank, N.A.'s directors
and officers may have interests in the merger that are different from, or in
addition to, yours as further discussed below. As a result, these directors and
officers may be more likely to vote to approve the merger agreement and the
merger than shareholders of American River Holdings and North Coast Bank, N.A.
generally.
The merger agreement provides that the directors and executive officers
of American River Holdings and North Coast Bank, N.A. will continue to serve as
directors and executive officers following the merger. Consequently, they will
be entitled to, as applicable, director fees, executive compensation,
acceleration of the vesting of stock options to fully vested status,
continuation of indemnification rights and other benefits which may be available
to directors and executive officers. The merger will constitute a "change of
control" as defined under the employment agreement and the change of control
agreements between North Coast Bank, N.A. and its executive officers, Kathy A.
Pinkard, Debbie K. Fakalata and David A. Wattell, respectively, which entitles
them to severance benefits upon termination of employment. The members of our
boards of directors knew about these additional interests, and considered them,
when they approved the transactions contemplated by the merger agreement,
including the merger.
At the close of business on July 25, 2000, directors and executive
officers of American River Holdings and North Coast Bank, N.A., and their
affiliates, respectively, beneficially owned and were entitled to vote
approximately 662,517 and 276,652 shares of their respective common stock
including exercisable stock options, which represented approximately 33.4% and
42.8%, respectively, of the shares outstanding on that date. Each of those
directors and executive officers has agreed to vote the shares
5
<PAGE>
owned by him or her in favor of the transactions contemplated by the merger
agreement, including the merger. The vote required for approval of the merger is
a majority of the outstanding shares of American River Holdings common stock and
two-thirds of the outstanding shares of North Coast Bank, N.A.
DISSENTERS' RIGHTS (page 129)
American River Holdings. Dissenters' rights will be available to the
shareholders of American River Holdings in accordance with Chapter 13 of the
California General Corporation Law ("Chapter 13"). A copy of Chapter 13 is
attached as Annex D to this document and should be read for more complete
information concerning dissenters' rights. If the merger is consummated,
shareholders of American River Holdings who dissent from the merger by complying
with the procedures set forth in Chapter 13 would be entitled to receive an
amount equal to the fair market value of their shares as of March 1, 2000, the
last business day before the public announcement of the merger. The bid, asked
and closing prices for American River Holdings common stock quoted on the OTC
Bulletin Board on March 1, 2000 were $12.50, $13.50, and $12.50, respectively.
THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 MUST BE FOLLOWED EXACTLY OR ANY
DISSENTERS' RIGHTS MAY BE LOST.
North Coast Bank, N.A. If the merger agreement is approved by the
required vote of North Coast Bank, N.A. shareholders, and is not abandoned or
terminated, shareholders of North Coast Bank, N.A. who voted "AGAINST" the
merger or who give notice in writing at or prior to the special meeting that the
shareholder dissents, may be entitled to dissenters' rights under Section
215a(b), (c) and (d) of Title 12 of the United States Code. A copy of Section
215a(b), (c) and (d) and Office of the Comptroller of the Currency Banking
Circular 259 are attached as Annex E to this document and should be read for
more complete information concerning dissenters' rights. Banking Circular 259
describes the specific requirements of the appraisal process conducted by the
Office of the Comptroller of the Currency discussed below and includes examples
of appraisal results in various transactions. THE REQUIRED PROCEDURE SET FORTH
IN SECTION 215a(b), (c) AND (d) OF TITLE 12 OF THE UNITED STATES CODE MUST BE
FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST.
COMPARATIVE PER SHARE MARKET PRICE (page 141)
American River Holdings common stock is not listed on any exchange and
is quoted on the OTC Bulletin Board under the symbol "AMRB.OB." North Coast
Bank, N.A. common stock is not listed on any exchange and is quoted on the OTC
Bulletin Board under the symbol "NCTA.OB." On March 1, 2000, the last trading
date prior to the public announcement of the proposed merger, American River
Holdings common stock closed at $12.50 per share and North Coast Bank, N.A.
common stock closed at $9.50 per share, or a pro forma equivalent per share of
American River Holdings common stock (based on a conversion ratio of .9644) of
$12.06. On August 10, 2000, the latest practicable trading date prior to the
printing of this document, American River Holdings common stock closed at $13.38
per share and North Coast Bank, N.A. common stock closed at $11.38 per share, or
a pro forma equivalent per share of American River Holdings common stock (based
on a conversion ratio of .9644) of $12.90. Following the merger, no shares of
North Coast Bank, N.A. common stock will be outstanding and American River
Holdings will take the action necessary to apply for the listing of its common
stock for trading on the Nasdaq National Market.
COMPARATIVE DIVIDEND INFORMATION (page 142)
American River Holdings has paid cash dividends to its shareholders on
a semi-annual basis from 1992 through 1999. American River Holdings paid cash
dividends totaling $0.174 per share in 1997, $0.195 per share in 1998, and
$0.230 per share in 1999. A dividend in the amount of $0.125 was declared on
June 21, 2000, payable on July 26, 2000 to shareholders of record on July 12,
2000. It is the
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<PAGE>
intention of American River Holdings to pay cash dividends, subject to
regulatory restrictions and depending upon the level of earnings, management's
assessment of future capital needs and other factors considered by the American
River Holdings board of directors. North Coast Bank, N.A. has not paid cash
dividends in 1997, 1998 or 1999. North Coast Bank, N.A. does not intend to pay
cash dividends prior to the closing of the transactions contemplated by the
merger agreement.
COMPARISON OF SHAREHOLDER RIGHTS (page 143)
Your rights as a shareholder of North Coast Bank, N.A. are currently
governed by the National Bank Act, and the articles of association and bylaws of
North Coast Bank, N.A. If the merger is completed, your rights as an American
River Holdings shareholder will be governed by California law but will also be
determined by American River Holdings' articles of incorporation and bylaws,
which differ in some respects from North Coast Bank, N.A.'s articles of
association and bylaws.
REGULATORY APPROVALS (page 125)
The transactions contemplated by the merger agreement require the prior
approval of the Board of Governors of the Federal Reserve System under the
provisions of the Bank Holding Company Act of 1956, as amended, and the Office
of the Comptroller of the Currency under Section 18(c) of the Federal Deposit
Insurance Act, as amended (the "Bank Merger Act") and Section 215a of the
National Bank Act, as amended. American River Holdings has filed applications
for approval with both the Board of Governors and the Comptroller of the
Currency. The Board of Governors approved the application on July 11, 2000.
American River Holdings and North Coast Bank, N.A. management are not aware of
any reason why the application filed with the Comptroller of the Currency will
not also be approved, however, no assurance can be given that such approval will
be obtained.
CONDITIONS TO THE COMPLETION OF THE MERGER (page 117)
We will not complete the merger unless a number of conditions are
satisfied. These include:
o approval of the merger by both American River Holdings and North
Coast Bank, N.A. shareholders;
o receipt of all required governmental approvals;
o absence of any governmental proceeding that would prohibit the
merger;
o receipt of tax opinions to the effect that the merger will be
treated as a tax-free reorganization under the Internal Revenue
Code;
o absence of any orders suspending the effectiveness of the
registration statement filed by American River Holdings to register
the shares to be issued to North Coast Bank, N.A. shareholders and
receipt of all required state securities law approvals;
o receipt of a letter from American River Holdings' independent
accountants that no conditions exist that would preclude accounting
for the merger as a pooling-of-interests and receipt of a letter
from North Coast Bank, N.A.'s independent accountants to the effect
that no conditions exist that would preclude North Coast Bank, N.A.
from being a party to a business combination to be accounted for as
a pooling-of-interests; and
o receipt of a written fairness opinion dated as of the date of this
document from North Coast Bank, N.A.'s and American River Holdings'
financial advisors.
American River Holdings or North Coast Bank, N.A. could decide to
complete the merger even though one or more of these conditions has not been
met, except conditions required by law. It is not
7
<PAGE>
certain when or if the conditions to the merger will be satisfied or waived, or
if the merger will be completed.
TERMINATION OF THE MERGER AGREEMENT (page 121)
We can terminate the merger agreement at any time before the merger is
completed, even if the shareholders of North Coast Bank, N.A. or American River
Holdings have approved the merger agreement. The merger agreement can be
terminated either by our mutual agreement or by one of us upon the occurrence of
particular events.
Either North Coast Bank, N.A. or American River Holdings can terminate
the merger agreement if:
o the merger is not completed by September 30, 2000, unless this date
is extended as provided in the merger agreement;
o any governmental agency denies or refuses to grant a required
approval of the merger, unless we agree to appeal the denial or
refusal or we agree to file an amended application for the
governmental approval; or
o the shareholders of North Coast Bank, N.A. or American River
Holdings fail to approve the merger.
American River Holdings can terminate the merger agreement if:
o any of the conditions to American River Holdings' obligations under
the merger agreement are not satisfied or waived by September 30,
2000, unless this date is extended as provided in the merger
agreement;
o a material adverse change has occurred in the business, financial
condition, results of operations or assets of North Coast Bank,
N.A.;
o North Coast Bank, N.A. or any of its affiliates enters into an
agreement by which North Coast Bank, N.A. or its subsidiaries would
be acquired by another entity;
o North Coast Bank, N.A. breaches any covenant in the merger agreement
which materially impairs the benefit of the merger to American River
Holdings, unless North Coast Bank, N.A. cures the breach within 45
days after written notice from American River Holdings; or
o North Coast Bank, N.A. fails to deliver to American River Holdings
documents required for the merger.
North Coast Bank, N.A. can terminate the merger agreement if:
o any of the conditions to North Coast Bank, N.A.'s obligations under
the merger agreement are not satisfied or waived by September 30,
2000, unless this date is extended;
o a material adverse change has occurred in the business, financial
condition, results of operations or assets of American River
Holdings;
o American River Holdings solicits or accepts an offer from a third
party to acquire American River Holdings or American River Bank and
the offer does not require American River Holdings or the third
party to comply with the merger agreement;
o American River Holdings breaches any covenant in the merger
agreement which materially impairs the benefit of the merger to
North Coast Bank, N.A. unless American River Holdings cures the
breach within 45 days after receipt of written notice from North
Coast Bank, N.A.; or
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<PAGE>
o American River Holdings fails to deliver to North Coast Bank, N.A.
documents required for the merger.
TERMINATION FEES (page 123)
North Coast Bank, N.A. is required to pay American River Holdings the
amounts described below as liquidated damages if American River Holdings
terminates the merger agreement for any of the following reasons:
o $1 million dollars if North Coast Bank, N.A. or its affiliates
enters into an agreement by which North Coast Bank, N.A. would be
acquired by another entity;
o $500 thousand dollars if North Coast Bank, N.A. breaches any
covenant in the merger agreement which materially impairs the
benefit of the merger to American River Holdings, unless North Coast
Bank, N.A. cures the breach within 45 days after written notice from
American River Holdings; or
o $500 thousand dollars if North Coast Bank, N.A. willfully or
deliberately refuses to deliver to American River Holdings the
closing documents required by the merger agreement.
American River Holdings is required to pay North Coast Bank, N.A. the
amounts described below as liquidated damages if North Coast Bank, N.A.
terminates the merger agreement for any of the following reasons:
o $1 million dollars if American River Holdings solicits or accepts an
offer from a third party to acquire American River Holdings or
American River Bank and the offer does not require American River
Holdings or the third party to comply with the merger agreement;
o $500 thousand dollars if American River Holdings breaches any
covenant in the merger agreement which materially impairs the
benefit of the merger to North Coast Bank, N.A., unless American
River Holdings cures the breach within 45 days after written notice
from North Coast Bank, N.A.; or
o $500 thousand dollars if American River Holdings willfully or
deliberately refuses to deliver to North Coast Bank, N.A. the
closing documents required by the merger agreement.
FEES AND EXPENSES OF THE MERGER (page 123)
Other than in the situations described in "Termination Fees" above and
for expenses which we have agreed to share equally, whether or not the merger is
completed in accordance with the merger agreement, all costs and expenses
incurred in connection with the merger agreement and the transactions covered by
the merger agreement will be paid by the party incurring those expenses.
RECENT DEVELOPMENTS
(Unaudited information as of and for the three months ended June 30,
2000)
For the three months ended June 30, 2000, American River Holdings
recorded net income of $728,000 or the equivalent of $.39 per share on a diluted
basis. The return on average assets for the quarter was 1.46% and the return on
average equity for the quarter was 16.57%. These results included merger related
costs (net of taxes) of $105,000. As of June 30, 2000, total assets were
$208,805,000, total net loans were $131,515,000, total deposits were
$182,762,000 and shareholders' equity was $17,924,000.
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<PAGE>
American River Holdings' net interest margin for the three months ended
June 30, 2000 was 5.60%. For the three months ended June 30, 2000, the fully
taxable equivalent interest income was $4,003,000 and total interest expense was
$1,431,000. For the three months ended June 30, 2000, the provision for loan
losses was $123,000, other income was $498,000 and other expenses was
$1,725,000.
For the three months ended June 30, 2000, North Coast Bank, N.A.
recorded net income of $129,000 or the equivalent of $.27 per share on a diluted
basis. The return on average assets for the quarter was 1.08% and the return on
average equity for the quarter was 12.19%. These results included merger related
costs (net of taxes) of $34,000. As of June 30, 2000, total assets were
$52,586,000, total net loans were $42,395,000, total deposits were $47,077,000
and shareholders' equity was $4,348,000.
North Coast Bank, N.A.'s net interest margin for the three months ended
June 30, 2000 was 6.79%. For the three months ended June 30, 2000, the fully
taxable equivalent interest income was $1,117,000 and total interest expense was
$358,000. For the three months ended June 30, 2000, the provision for loan
losses was $22,000, other income was $118,000 and other expenses was $637,000.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA (pages 11-13)
The following tables present selected historical and pro forma combined
consolidated financial information for American River Holdings and North Coast
Bank, N.A. This information should be read in conjunction with the historical
consolidated financial statements of American River Holdings, the historical
financial statements of North Coast Bank, N.A., and the unaudited pro forma
combined consolidated financial information of the two entities and the notes to
such information, some of which are included elsewhere in this document.
The unaudited pro forma combined consolidated financial information
presents selected financial information based on the historical financial
statements of the parties, giving effect to the proposed merger under the
pooling of interests method of accounting and the assumptions and adjustments
described in the notes thereto. The unaudited pro forma combined consolidated
financial information does not indicate the results or financial position that
would have occurred if the merger had been in effect for the periods or on the
dates indicated or that may occur in the future.
We expect to incur merger and other non-recurring expenses as a result
of combining our companies. We also anticipate that the merger will provide the
combined company with financial benefits such as reduced operating expenses and
the opportunity to earn additional revenue. However, none of these anticipated
expenses or benefits has been factored into the pro forma combined income
statement information. For that reason, the pro forma combined information,
while helpful in illustrating the financial attributes of the combined company
under one set of assumptions, does not attempt to predict or suggest future
results.
See "American River Holdings and Subsidiaries Financial Statements"
commencing on page 181, and "North Coast Bank, N.A. Financial Statements"
commencing on page 237.
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<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
As of and for the:
Three Months
Ended March 31, Years Ended December 31,
---------------------- -------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2000 1999 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 2,449 $ 2,263 $ 9,299 $ 8,726 $ 7,802 $ 7,351 $ 7,195
Provision for loan or lease losses 105 94 407 360 535 490 420
Other income 455 304 1,520 1,303 998 968 1,272
Other expenses 1,525 1,380 5,743 5,600 4,986 5,134 5,249
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 1,274 1,093 4,669 4,069 3,279 2,695 2,798
Income taxes 480 420 1,768 1,564 1,278 1,034 1,153
--------- --------- --------- --------- --------- --------- ---------
Net income $ 794 $ 673 $ 2,901 $ 2,505 $ 2,001 $ 1,661 $ 1,645
========= ========= ========= ========= ========= ========= =========
PER SHARE DATA: (1)
Earnings per share - basic $ 0.44 $ 0.37 $ 1.59 $ 1.37 $ 1.09 $ 0.90 $ 0.89
Earnings per share - diluted 0.42 0.35 1.50 1.24 0.99 0.87 0.89
Cash dividends per share -- -- 0.230 0.195 0.174 0.158 0.156
Book value per share 9.70 8.64 9.26 8.46 7.75 6.95 6.21
Tangible book value per share 9.62 8.53 9.17 8.35 7.61 6.78 6.02
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $ 197,329 $ 174,856 $ 201,362 $ 177,824 $ 163,855 $ 136,326 $ 134,496
Loans and leases, net 118,485 113,788 117,308 112,329 100,373 89,369 90,078
Deposits 176,329 155,800 180,996 158,951 146,566 122,065 122,233
Shareholders' equity 17,400 15,847 16,613 15,376 14,215 12,839 11,455
Average balance sheet amounts:
Assets $ 198,467 $ 174,668 $ 181,722 $ 166,608 $ 150,142 $ 135,915 $ 124,251
Loans and leases 119,738 116,399 113,853 107,539 94,109 90,776 87,635
Earning assets 183,777 161,827 167,649 154,642 139,191 126,133 115,167
Deposits 177,733 158,155 162,486 148,726 135,612 122,912 112,482
Shareholders' equity 16,813 15,605 16,002 14,796 13,576 12,136 10,647
SELECTED RATIOS: (2)
Return on average equity 18.99% 17.49% 18.13% 16.93% 14.74% 13.69% 15.45%
Return on average tangible equity 19.18% 17.72% 18.34% 17.20% 15.05% 14.05% 15.98%
Return on average assets 1.61% 1.56% 1.60% 1.50% 1.33% 1.22% 1.32%
Dividend payout ratio -- -- 15% 16% 18% 18% 17%
Efficiency ratio (noninterest
expense to net interest income
and non interest income) 52.51% 3.76% 53.08% 55.84% 56.66% 61.71% 61.99%
Efficiency ratio excluding the
amortization of intangibles and
goodwill 52.16% 53.37% 52.72% 55.43% 56.19% 61.22% 61.51%
Average equity to average assets 8.47% 8.93% 8.81% 8.88% 9.04% 8.93% 8.57%
Leveraged capital ratio 8.83% 8.92% 9.20% 8.90% 9.20% 9.30% 8.90%
Nonperforming loans and leases
to total loans and leases 0.05% 0.17% 0.03% 0.10% 0.37% 1.32% 0.54%
Nonperforming assets to total
assets 0.03% 0.37% 0.01% 0.38% 0.72% 1.30% 0.48%
Net chargeoffs to average loans
and leases 0.02% 0.01% 0.08% 0.16% 0.56% 0.81% 0.52%
Allowance for loan or lease
losses to total loans and leases 1.44% 1.26% 1.41% 1.20% 1.16% 1.29% 1.55%
Allowance for loan or lease
losses to nonperforming loans
and leases 2845.9% 725.5% 5596.7% 1238.2% 313.1% 97.7% 288.6%
</TABLE>
(1) Adjusted for 5% stock dividends in 1997, 1998 and 1999, and 3 for 2 stock
split in 1999
(2) Selected ratios for the three months ended March 31, 2000 and 1999 have been
annualized.
11
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<TABLE>
<CAPTION>
NORTH COAST BANK, N.A.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
As of and for the:
Three Months
Ended March 31, Years Ended December 31,
---------------------- -------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2000 1999 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 703 $ 534 $ 2,455 $ 2,017 $ 1,780 $ 1,754 $ 1,684
Provision for loan or lease losses 28 30 175 149 70 71 82
Other income 86 58 267 204 270 229 276
Other expenses 599 503 2,167 1,617 1,634 1,595 1,669
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 162 59 380 455 346 317 209
Income taxes 66 22 153 109 -- -- 1
--------- --------- --------- --------- --------- --------- ---------
Net income $ 96 $ 37 $ 227 $ 346 $ 346 $ 317 $ 208
========= ========= ========= ========= ========= ========= =========
PER SHARE DATA: (1)
Earnings per share - basic $ .20 $ .08 $ .48 $ .73 $ .73 $ .67 $ .44
Earnings per share - diluted .19 .08 .46 .70 .72 .67 .44
Cash dividends per share
Book value per share 8.67 8.10 8.46 8.03 7.31 6.56 5.94
Tangible book value per share 8.67 8.10 8.46 8.03 7.31 6.56 5.94
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $ 49,545 $ 41,546 $ 47,178 $ 42,177 $ 33,322 $ 29,850 $ 31,464
Loans and leases, net 39,648 30,635 39,736 30,803 21,587 19,452 19,643
Deposits 44,345 37,625 42,081 38,153 29,763 26,605 27,780
Shareholders' equity 4,094 3,825 3,998 3,792 3,449 3,097 2,804
Average balance sheet amounts:
Assets $ 48,105 $ 41,074 $ 43,238 $ 35,350 $ 29,525 $ 29,453 $ 28,396
Loans and leases 40,241 31,122 34,062 25,472 20,657 19,520 19,438
Earning assets 44,423 37,737 39,656 32,429 26,913 26,957 25,992
Deposits 42,880 36,874 38,694 31,562 26,182 25,893 25,186
Shareholders' equity 4,083 3,858 3,914 3,638 3,225 2,937 2,669
SELECTED RATIOS: (2)
Return on average equity 9.46% 3.89% 5.80% 9.51% 10.73% 10.79% 7.79%
Return on average tangible equity 9.46% 3.89% 5.80% 9.51% 10.73% 10.79% 7.79%
Return on average assets .80% .37% .53% .98% 1.17% 1.08% .73%
Dividend payout ratio -- -- -- -- -- -- --
Efficiency ratio (noninterest
expense to net interest income
and non interest income) 75.92% 84.97% 79.61% 72.81% 79.71% 80.43% 85.15%
Efficiency ratio excluding the
amortization of intangibles and
goodwill 75.92% 84.97% 79.61% 72.81% 79.71% 80.43% 85.15%
Average equity to average assets 8.49% 9.39% 9.05% 10.29% 10.92% 9.97% 9.40%
Leveraged capital ratio 8.54% 9.31% 9.30% 9.80% 11.20% 10.10% 9.76%
Nonperforming loans and leases
to total loans and leases 0% .03% 0% .02% .45% .15% 1.33%
Nonperforming assets to total
assets 0% .02% 0% .02% .29% .10% .85%
Net chargeoffs (recoveries) to
average loans and leases (.23%) 0% .36% .67% .31% .69% .15%
Allowance for loan or lease
losses to total loans and leases 1.08% 1.16% .95% 1.06% 1.60% 1.75% 2.03%
Allowance for loan or lease
losses to nonperforming loans
and leases (3) -- 3610% -- 4728.6% 359.2% 1193.1% 153.2%
</TABLE>
(1) Adjusted for 5 for 4 stock split in 1999.
(2) Selected ratios for the three months ended March 31, 2000 and 1999 have been
annualized.
(3) There were no non-accrual loans or loans past due 90 days or more at March
31, 2000 and December 31, 1999.
12
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND NORTH COAST BANK, N.A.
SELECTED UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
As of and for the:
Three Months
Ended March 31, Years Ended December 31,
---------------------- -------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2000 1999 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 3,152 $ 2,797 $ 11,754 $ 10,743 $ 9,582 $ 9,105 $ 8,879
Provision for loan or lease losses 133 124 582 509 605 561 502
Other income 541 362 1,787 1,507 1,268 1,197 1,548
Other expenses 2,124 1,883 7,910 7,217 6,620 6,729 6,918
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes 1,436 1,152 5,049 4,524 3,627 3,012 3,007
Income taxes 546 442 1,921 1,673 1,278 1,034 1,154
--------- --------- --------- --------- --------- --------- ---------
Net income $ 890 $ 710 $ 3,128 $ 2,851 $ 2,347 $ 1,978 $ 1,853
========= ========= ========= ========= ========= ========= =========
PER SHARE DATA: (1)
Earnings per share - basic $ 0.40 $ 0.31 $ 1.37 $ 1.25 $ 1.02 $ 0.86 $ 0.80
Earnings per share - diluted 0.38 0.29 1.30 1.14 0.95 0.84 0.80
Cash dividends per share 0.00 0.00 0.230 0.195 0.174 0.158 0.156
Book value per share 9.56 8.59 9.17 8.44 7.71 6.92 6.20
Tangible book value per share 9.49 8.50 9.09 8.35 7.60 6.79 6.05
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $ 246,874 $ 216,402 $ 248,540 $ 220,001 $ 197,177 $ 166,176 $ 165,960
Loans and leases, net 158,133 144,423 157,044 143,132 121,960 108,821 109,721
Deposits 220,674 193,425 223,077 197,104 176,329 148,670 150,013
Shareholders' equity 21,494 19,672 20,611 19,168 17,664 15,936 14,259
Average balance sheet amounts:
Assets $ 246,572 $ 215,742 $ 224,960 $ 201,958 $ 179,667 $ 165,368 $ 152,647
Loans and leases 159,979 147,521 147,915 133,011 114,766 110,296 107,073
Earning assets 228,200 199,564 207,305 187,071 166,104 153,090 141,159
Deposits 220,613 195,029 201,180 180,288 161,794 148,805 137,668
Shareholders' equity 20,896 19,463 19,916 18,434 16,801 15,073 13,316
SELECTED RATIOS: (2)
Return on average equity 17.13% 14.79% 15.71% 15.47% 13.97% 13.12% 13.92%
Return on average tangible equity 17.26% 14.95% 15.85% 15.66% 14.20% 13.40% 14.30%
Return on average assets 1.45% 1.33% 1.39% 1.41% 1.31% 1.20% 1.21%
Dividend payout ratio -- -- 18% 17% 18% 19% 19%
Efficiency ratio (noninterest
expense to net interest income
and non interest income) 57.51% 59.61% 58.42% 58.91% 61.01% 65.32% 66.35%
Efficiency ratio excluding the
amortization of intangibles and
goodwill 57.24% 59.29% 58.12% 58.59% 60.65% 64.93% 65.96%
Average equity to average assets 8.47% 9.02% 8.85% 9.13% 9.35% 9.11% 8.72%
Leveraged capital ratio 8.71% 9.13% 9.17% 9.51% 9.85% 9.66% 9.37%
Nonperforming loans and leases
to total loans and leases 0.04% 0.14% 0.02% 0.08% 0.38% 1.11% 0.68%
Nonperforming assets to total
assets 0.02% 0.31% 0.01% 0.31% 0.65% 1.09% 0.55%
Net chargeoffs to average loans
and leases -0.01% 0.00% 0.14% 0.26% 0.52% 0.79% 0.46%
Provision of allowance for loan
losses to average loans
outstanding 0.08% 0.08% 0.39% 0.38% 0.53% 0.51% 0.47%
Allowance for loan or lease
losses to total loans and leases 1.35% 1.24% 1.30% 1.17% 1.24% 1.37% 1.64%
Allowance for loan or lease
losses to nonperforming loans
and leases 3557.4% 862.9% 6873.3% 1447.0% 322.6% 123.7% 240.9%
</TABLE>
(1) Adjusted for American River Holdings 5% stock dividends in 1997, 1998 and
1999, and 3 for 2 stock split in 1999, and North Coast Bank, N.A. 5 for 4
stock split in 1999.
(2) Selected ratios for the three months ended March 31, 2000 and 1999 have been
annualized.
13
<PAGE>
HISTORICAL AND PRO FORMA PER SHARE DATA
FOR AMERICAN RIVER HOLDINGS AND NORTH COAST BANK, N.A
We have summarized below the per share information for our respective
companies on a historical, pro forma combined and equivalent basis.
We have calculated the pro forma combined per share data for net income
using the weighted average number of shares of American River Holdings common
stock outstanding for the periods presented, increased by the weighted average
number of shares of North Coast Bank, N.A. common stock outstanding for the
periods presented multiplied by the conversion ratio of .9644 of a share of
American River Holdings common stock for each share of North Coast Bank, N.A.
common stock, as if these shares were outstanding for each period presented. The
pro forma combined per share data for dividends declared represents the
historical dividends for American River Holdings common stock. The pro forma
combined book value per share has been calculated using shares of outstanding
American River Holdings common stock increased by the shares of outstanding
North Coast Bank, N.A. common stock multiplied by the conversion ratio of .9644
of a share of American River Holdings common stock for each share of North Coast
Bank, N.A. common stock as if these shares were outstanding as of the dates
presented.
The equivalent pro forma North Coast Bank, N.A. share information has
been calculated by multiplying the pro forma combined per share information by
the conversion ratio of .9644.
ARH NCB
Common Stock Common Stock
--------------------- ----------------------
Pro forma Pro forma
Historical Combined Historical Equivalent
---------- --------- ---------- ----------
Book value per share:
March 31, 2000 $ 9.70 $ 9.56 $ 8.67 $ 9.22
December 31, 1999 9.26 9.17 8.46 8.84
Tangible book value per share:
March 31, 2000 $ 9.62 $ 9.49 $ 8.67 $ 9.15
December 31, 1999 9.17 9.09 8.46 8.77
Dividends declared:
Three months ended March 31, 2000 $ -- $ -- $ -- $ --
Year ended December 31, 1999 .230 .230 -- .222
Year ended December 31, 1998 .195 .195 -- .188
Year ended December 31, 1997 .174 .174 -- .168
Earnings per share:
Basic:
Three months ended March 31, 2000 $ .44 $ .40 $ .20 $ .39
Year ended December 31, 1999 1.59 1.37 .48 1.32
Year ended December 31, 1998 1.37 1.25 .73 1.21
Year ended December 31, 1997 1.09 1.02 .73 .98
Diluted:
Three months ended March 31, 2000 $ .42 $ .38 $ .19 $ .37
Year ended December 31, 1999 1.50 1.30 .46 1.25
Year ended December 31, 1998 1.24 1.14 .70 1.10
Year ended December 31, 1997 0.99 .95 .72 .92
14
<PAGE>
RISK FACTORS
In deciding whether to vote in favor of the merger, shareholders of
North Coast Bank, N.A. and American River Holdings should consider the following
factors, in addition to the other matters set forth in this document.
CUSTOMERS OF NORTH COAST BANK, N.A. MAY NOT BE RETAINED
American River Holdings anticipates that, after the effective time of
the merger, a significant percentage of North Coast Bank, N.A.'s existing
customers will be retained. There are no assurances, however, that North Coast
Bank, N.A. customers will not move their banking relationships to other
financial institutions and that a greater than anticipated number of North Coast
Bank, N.A. customers will not be retained after the merger.
AMERICAN RIVER HOLDINGS MAY NOT BE ABLE TO REALIZE ANTICIPATED OPERATING COST
SAVINGS
While American River Holdings expects to achieve operating cost savings
through the elimination of duplicative corporate and administrative expenses
through centralization of management and operations functions and economies of
scale, there can be no assurance that American River Holdings will be able to
realize those cost savings.
THE PRICE OF AMERICAN RIVER HOLDINGS COMMON STOCK MAY DECLINE
The market price of American River Holdings common stock after the
merger takes place may vary from the price at the date of this document and at
the date of the meetings. Variations in the market price of American River
Holdings common stock may result from changes in the business, operations or
prospects of American River Holdings, North Coast Bank, N.A. or the combined
company, market assessments of the likelihood that the merger will be
consummated and the timing of the merger, regulatory considerations, general
market and economic conditions and other factors. We urge you to obtain current
market quotations for American River Holdings common stock. Changes in the
market price of American River Holdings common stock or North Coast Bank, N.A.
common stock will not change or otherwise affect the conversion ratio, which is
fixed at .9644.
ADDITIONAL SHARES OF AMERICAN RIVER HOLDINGS COMMON STOCK COULD BE ISSUED WHICH
COULD RESULT IN A DECLINE IN THE MARKET PRICE OF THE STOCK
Sales of substantial amounts of American River Holdings common stock in
the public market following the merger could adversely affect the market price
of American River Holdings common stock. There are no restrictions in the merger
agreement preventing American River Holdings from issuing additional shares of
American River Holdings common stock after the merger.
Future sales of authorized shares of American River Holdings common
stock and exercise of outstanding stock options to acquire shares of its common
stock, including substitute options issued in connection with the merger, could
have a dilutive effect on the market for American River Holdings common stock
and could adversely affect the market price.
There can be no assurance given as to the market value of American
River Holdings common stock after the merger based on future acquisitions, if
any, or other factors, including but not limited to, general economic conditions
or fluctuating interest rates.
15
<PAGE>
DETERIORATION OF THE REAL ESTATE MARKET COULD HAVE AN ADVERSE EFFECT UPON
PERFORMANCE
At March 31, 2000, approximately $84,330,000 or 70% and approximately
$20,831,000 or 52% of American River Bank's and North Coast Bank, N.A.'s loan
portfolios, respectively, constituted real estate loans primarily secured by the
underlying real estate. The ability of American River Bank and North Coast Bank,
N.A. to continue to originate real estate secured loans may be impaired by
adverse changes in local and regional economic conditions in the real estate
market, increasing interest rates, or by acts of nature, including earthquakes
and flooding. These events could have a material adverse impact on the value of
the collateral resulting in increases in loan losses, the allowance for loan
losses and other real estate, which could adversely impact the results of
operations and financial performance of American River Bank and North Coast
Bank, N.A.
ENVIRONMENTAL LIABILITY ASSOCIATED WITH COMMERCIAL AND REAL ESTATE LENDING COULD
RESULT IN LOSSES
In the course of business, American River Bank and North Coast Bank,
N.A. may in the future acquire, through foreclosure, properties securing
commercial and real estate loans they have originated or purchased which are in
default. There is a risk that hazardous substances could be discovered on these
properties. This could result in substantial expense incurred by American River
Bank or North Coast Bank, N.A. to remove the hazardous substances where a prior
owner, operator or other party is not otherwise responsible for the costs of
removal. The cost of removal could substantially exceed the value of the
affected properties and without remedies against another responsible party, or
an available market to sell the affected properties, losses could arise which
could have a material adverse effect on the business, financial condition and
results of operations of American River Bank and North Coast Bank, N.A.
16
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this document and in the documents attached to this
document are or may be forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those expressed in the
statements, depending on a variety of factors. You should carefully review all
information, including the financial statements and the notes to the financial
statements, included in this document and attached to this document.
Forward-looking statements regarding each of American River Holdings
and North Coast Bank, N.A. and the combined company following the merger,
include statements relating to:
o the financial condition, results of operations and business of
American River Holdings following completion of the merger;
o cost savings, enhanced revenues and accretion to reported earnings
that are expected to be realized from the merger; and
o the restructuring charges expected to be incurred in connection with
the merger.
These forward-looking statements involve risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by the forward-looking statements include, among others, the
following possibilities:
o expected cost savings from the merger cannot be fully realized or
realized within the expected time frame;
o revenues following the merger are lower than expected or deposit
withdrawals, operating costs or customer loss and business
disruption following the merger are greater than expected;
o competitive pressures among depository and other financial services
companies increase significantly;
o costs or difficulties related to the integration of the businesses
of American River Holdings and North Coast Bank, N.A. are greater
than expected;
o changes in the interest rate environment reduce interest margins,
cause an increase in the prepayment rate on mortgages and other
loans or reduce the demand for new loans;
o general economic or business conditions, either internationally,
nationally or in the State of California, are less favorable than
expected, resulting in, among other things, a deterioration in
credit quality or a reduced demand for credit;
o legislation or regulatory requirements or changes adversely affect
the businesses in which the combined company would be engaged;
o technology-related changes, including "Year 2000" data systems
compliance issues, may be harder to make or more expensive than
expected;
o changes in the securities market; and
17
<PAGE>
o timing of completion of the merger is delayed, due to regulatory
requirements or other factors which may delay, restrict or prohibit
new operations.
With respect to estimated cost savings, American River Holdings has
made assumptions regarding, among other things, the amount of general and
administrative expense consolidation, costs relating to converting North Coast
Bank, N.A. operations and data processing to American River Holdings systems,
the size of anticipated reductions in fixed labor costs, the amount of severance
expenses, the extent of the charges that may be necessary to align the
companies' respective accounting reserve policies and the costs related to the
merger. The realization of the expected cost savings are subject to the risk
that the foregoing assumptions are inaccurate.
Management of American River Holdings believes these forward-looking
statements are reasonable; however, undue reliance should not be placed on the
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. The future results and shareholder
values of American River Holdings following completion of the merger may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond American River
Holdings' and North Coast Bank, N.A.'s ability to control or predict.
18
<PAGE>
THE MEETINGS
DATES, TIMES AND PLACES
American River Holdings. American River Holdings' annual meeting will
be held at 1545 River Park Drive, Suite 107, Sacramento, California at 5:30
p.m., local time, on September 21, 2000.
North Coast Bank, N.A. North Coast Bank, N.A.'s special meeting will be
held at 50 Santa Rosa Avenue, Santa Rosa, California at 6:00 p.m., local time,
on September 21, 2000.
MATTERS TO BE CONSIDERED AT THE MEETINGS
American River Holdings. At American River Holdings' annual meeting,
holders of American River Holdings common stock are being asked to approve the
following:
o the merger agreement, including the merger and issuance of American
River Holdings common stock to North Coast Bank, N.A.'s shareholders
as provided under the terms of the merger agreement;
o the American River Holdings 2000 Stock Option Plan;
o amendments to the articles of incorporation and bylaws of American
River Holdings to provide for the classification of the board of
directors and to eliminate cumulative voting in the election of
directors;
o to elect management's nominees as directors of American River
Holdings; and
o to ratify the appointment of Perry-Smith LLP as independent
accountants for the year 2000.
North Coast Bank, N.A. At North Coast Bank, N.A.'s special meeting,
holders of North Coast Bank, N.A. common stock are being asked to approve the
merger agreement and the merger. In the event that the merger is not
consummated, it is the intention of North Coast Bank, N.A. to hold its annual
meeting of shareholders prior to December 31, 2000. If the merger is
consummated, no annual meeting of North Coast Bank, N.A. shareholders will be
held following the effective time of the merger.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
American River Holdings. Only holders of record of American River
Holdings common stock at the close of business on July 25, 2000, the record date
for American River Holdings' annual meeting, are entitled to receive notice of
and to vote at American River Holdings' annual meeting. On the record date,
approximately 1,793,274 shares of American River Holdings common stock were
issued and outstanding and held by approximately 850 holders of record. A
majority of the shares of American River Holdings common stock issued and
outstanding and entitled to vote on the record date must be represented in
person or by proxy at American River Holdings' annual meeting in order for a
quorum to be present for purposes of transacting business at American River
Holdings' annual meeting. In the event that a quorum is not present at American
River Holdings' annual meeting, it is expected that the annual meeting will be
adjourned or postponed to solicit additional proxies.
North Coast Bank, N.A. Only holders of record of North Coast Bank, N.A.
common stock at the close of business on July 25, 2000, the record date for
North Coast Bank, N.A.'s special meeting, are entitled to receive notice of and
to vote at North Coast Bank, N.A.'s special meeting. On the record
19
<PAGE>
date, approximately 489,604 shares of North Coast Bank, N.A. common stock
were issued and outstanding and held by approximately 475 holders of record. A
majority of the shares of North Coast Bank, N.A. common stock issued and
outstanding and entitled to vote on the record date must be represented in
person or by proxy at North Coast Bank, N.A.'s special meeting in order for a
quorum to be present for purposes of transacting business at North Coast Bank,
N.A.'s special meeting. In the event that a quorum is not present at North Coast
Bank, N.A.'s special meeting, it is expected that the special meeting will be
adjourned or postponed to solicit additional proxies.
NUMBER OF VOTES; CUMULATIVE VOTING
American River Holdings. Holders of record of American River Holdings
common stock on the record date are each entitled to one vote per share on each
matter to be considered at American River Holdings' annual meeting, except that
in the election of directors, such holders may cumulate votes as described
below.
You may cumulate votes in the election of directors by multiplying the
number of shares you own by the number of directors to be elected. You may then
cast all of your votes for one or more of the persons nominated for election as
a director of American River Holdings; provided that you may not be entitled to
cumulate votes for a candidate whose name has not been placed in nomination
prior to the voting and unless you have given notice at the meeting prior to the
voting of your intention to cumulate votes. If any shareholder has given notice
of intention to cumulate votes, all shareholders may cumulate their votes for
candidates who have been nominated for election as directors of American River
Holdings. Prior to voting, an opportunity will be given for shareholders or
their proxies at the meeting to announce their intention to cumulate their
votes. The proxyholders, under the terms of the proxy, are given discretionary
authority to cumulate votes on shares of American River Holdings common stock
for which they hold a valid proxy.
North Coast Bank, N.A. Holders of record of North Coast Bank, N.A.
common stock on the record date are each entitled to one vote per share on each
matter to be considered at North Coast Bank, N.A.'s special meeting. You will
not be entitled to cumulate votes as discussed above since you will not vote to
elect directors at the special meeting.
VOTES REQUIRED
American River Holdings. Approval of the proposals to be considered by
shareholders of American River Holdings requires the following affirmative
votes:
o a majority of the shares of American River Holdings common stock
outstanding on the record date to approve the merger agreement, the
merger and the issuance of the shares of American River Holdings
common stock to North Coast Bank, N.A.'s shareholders (Proposal No.
1);
o a majority of the shares of American River Holdings common stock
present in person or represented by proxy and entitled to vote at
the annual meeting, provided that the number of affirmative votes
equals at least a majority of the shares constituting the required
quorum to approve the American River Holdings 2000 Stock Option Plan
(Proposal No. 2);
o a majority of the shares of American River Holdings common stock
outstanding on the record date to approve the amendments to the
American River Holdings articles of incorporation and bylaws to
provide for the classification of the board of directors and to
eliminate cumulative voting in the election of directors (Proposal
Nos. 3 and 4);
20
<PAGE>
o nominees receiving the highest number of affirmative votes entitled
to vote at the meeting will be elected as directors (Proposal No.
5); and
o a majority of the shares of American River Holdings common stock
voting in person or by proxy at the annual meeting to ratify the
appointment of Perry-Smith LLP as independent accountants (Proposal
No. 6).
North Coast Bank, N.A. The approval of the merger agreement and the
merger requires the affirmative vote of the holders of record of at least
two-thirds of the shares of North Coast Bank, N.A. common stock outstanding on
the record date for North Coast Bank, N.A.'s special meeting.
VOTING OF PROXIES
Submitting Proxies. American River Holdings and North Coast Bank, N.A.
shareholders may vote their shares in person by attending their respective
meeting or vote their shares by proxy by completing the enclosed proxy card,
signing and dating it and mailing it in the enclosed postage pre-paid envelope.
If a written proxy card is signed by a shareholder and returned without
instructions, the shares represented by the proxy will be voted "FOR" the
proposals presented at American River Holdings' annual meeting or "FOR" the
proposal presented at North Coast Bank, N.A.'s special meeting, as applicable.
American River Holdings and North Coast Bank, N.A. shareholders whose shares are
held in "street name" (i.e., in the name of a broker, bank or other record
holder) must either direct the record holder of their shares as to how to vote
their shares or obtain a proxy from the record holder to vote at their
respective meeting. Your broker will not vote your shares for you unless you
provide instructions to your broker on how to vote. It is important that you
follow the directions provided by your broker regarding how to instruct your
broker to vote your shares. Your failure to instruct your broker on how to vote
your shares will have the same effect as a vote against any proposal, including
the merger agreement.
Revoking Proxies. American River Holdings and North Coast Bank, N.A.
shareholders of record may revoke their proxies at any time before the time
their proxies are voted at American River Holdings' annual meeting or North
Coast Bank, N.A.'s special meeting, respectively. Proxies may be revoked by
written notice, including by telegram or telecopy, to the Corporate Secretary of
American River Holdings or North Coast Bank, N.A., as applicable, by a
later-dated proxy signed and returned by mail or by attending American River
Holdings' annual meeting or North Coast Bank, N.A.'s special meeting, as
applicable, and voting in person. Attendance at American River Holdings' annual
meeting or North Coast Bank, N.A.'s special meeting will not in and of itself
constitute a revocation of a proxy. The shareholder must inform the Secretary at
the applicable meeting, prior to the vote, that he or she wants to revoke his or
her proxy and vote in person. Any written notice of a revocation of a proxy must
be sent so as to be received before the taking of the vote at the applicable
meeting as follows:
<TABLE>
<CAPTION>
For American River Holdings Shareholders, to: For North Coast Bank, N.A. Shareholders, to:
<S> <C>
American River Holdings North Coast Bank, N.A.
1545 River Park Drive, Suite 107 50 Santa Rosa Avenue
Sacramento, California 95815 Santa Rosa, California 95404
Attention: David T. Taber, President Attention: Kathy A. Pinkard, President
and Chief Executive Officer and Chief Executive Officer
</TABLE>
Abstentions and Broker Non-Votes. The presence, in person or by
properly executed proxy, of the holders of a majority of the outstanding shares
is necessary to constitute a quorum at each of American River Holdings' annual
meeting and North Coast Bank, N.A.'s special meeting. Abstentions and broker
non-votes will be counted solely for the purpose of determining whether a quorum
is present. Under the applicable rules of the National Association of Securities
Dealers, Inc., brokers or members who hold shares in street name for customers
who are the beneficial owners of the shares are prohibited from giving
21
<PAGE>
a proxy to vote those shares with respect to the approval of the transactions
contemplated by the merger agreement including the merger in the absence of
specific instructions from the customers. We refer to these as "broker
non-votes". Abstentions and broker non-votes will not be counted as a vote "FOR"
or "AGAINST" any proposal at either the American River Holdings annual meeting
or the North Coast Bank, N.A. special meeting, but will have the same effect as
a vote "AGAINST" any proposal. The effect of abstentions and broker non-votes on
the establishment of dissenters' rights of American River Holdings and North
Coast Bank, N.A. shareholders differs due to the different requirements under
California law applicable to American River Holdings compared to the federal law
requirements applicable to North Coast Bank, N.A. See "Dissenters' Rights"
commencing on page 129.
Other Matters. If any other matters are properly presented for
consideration at American River Holdings' annual meeting, in the case of the
American River Holdings shareholders, or at North Coast Bank, N.A.'s special
meeting, in the case of the North Coast Bank, N.A. shareholders, the persons
named in the enclosed form of proxy will have discretion to vote or not vote on
those matters in accordance with their best judgment, unless authorization to
use that discretion is withheld. If a proposal to adjourn American River
Holdings' annual meeting or North Coast Bank, N.A.'s special meeting is properly
presented, however, the persons named in the enclosed form of proxy will not
have discretion to vote in favor of the adjournment proposal any shares which
have been voted against the proposal(s) to be presented at the respective
meetings. Neither American River Holdings nor North Coast Bank, N.A. is aware of
any matters expected to be presented at their respective meeting other than as
described in their respective notice of meetings.
Solicitation of Proxies. The cost of solicitation of proxies will be
paid by American River Holdings and North Coast Bank, N.A., as applicable. In
addition to solicitation by mail, the directors, officers and employees of
American River Holdings and North Coast Bank, N.A. may also solicit proxies from
shareholders by telephone, facsimile, telegram or in person. Arrangements will
also be made with brokerage houses and other custodians, nominees and
fiduciaries to send the proxy materials to beneficial owners; and American River
Holdings or North Coast Bank, N.A., as the case may be, will, upon request,
reimburse those brokerage houses and custodians for their reasonable expenses in
so doing. North Coast Bank, N.A. has retained Chase Mellon Shareholder Services,
San Francisco, California, to aid in the solicitation of proxies and to verify
records related to the solicitations. Chase Mellon Shareholder Services will
receive $4,500 as compensation for its services and up to $2,000 as
reimbursement for its related out-of-pocket expenses.
Shareholders who submit proxy cards should not send in any stock
certificates with their proxy cards. Instructions for the surrender of
certificates representing shares of North Coast Bank, N.A. common stock will be
mailed by American River Holdings to former North Coast Bank, N.A. shareholders
shortly after the merger is completed. See "Exchange of North Coast Bank, N.A.
Stock Certificates" on page 109.
Recommendation of the American River Holdings Board of Directors and
North Coast Bank, N.A. Board of Directors. Each of the American River Holdings
board of directors and North Coast Bank, N.A. board of directors has unanimously
approved the merger and unanimously recommends that their respective
shareholders vote "FOR" the merger agreement and the merger at their respective
meetings. The American River Holdings board of directors also unanimously
recommends that their shareholders vote "FOR" the proposals to approve the
American River Holdings 2000 Stock Option Plan, the amendments to the American
River Holdings articles of incorporation and bylaws to provide for the
classification of the board of directors and to eliminate cumulative voting in
the election of directors, election of management's nominees as directors of
American River Holdings, and to ratify the appointment of Perry-Smith LLP as
independent accountants for the year 2000, at American River Holdings' annual
meeting.
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<PAGE>
EFFECT OF NON-APPROVAL OF PROPOSALS
Proposal Nos. 1 and 2. The merger cannot be consummated unless votes
required for approval of Proposal No. 1 are obtained from shareholders of
American River Holdings and North Coast Bank, N.A. at the their respective
meetings. In addition, the merger agreement requires American River Holdings to
issue substitute stock options to holders of North Coast Bank, N.A. stock
options as of or as soon as practicable following the effective time of the
merger. There are insufficient shares of American River Holdings common stock
currently reserved for issuance upon exercise of stock options under the
American River Holdings 1995 Stock Option Plan to effect the issuance of the
substitute stock options. Proposal No. 2 to approve the American River Holdings
2000 Stock Option Plan must be approved by American River Holdings shareholders
in order for American River Holdings to issue the substitute stock options.
Unless Proposal No. 1 and Proposal No. 2 are both approved and
conditions to the merger are satisfied, the merger will not be consummated
unless the parties agree to waive conditions to the extent permitted by the
merger agreement or amend the merger agreement.
Proposal Nos. 3 and 4. If Proposal Nos. 1 and 2 are approved, but
either or both of Proposal No. 3 to classify the American River Holdings board
of directors and Proposal No. 4 to eliminate cumulative voting, are not
approved, then the merger will nonetheless be consummated, subject to
satisfaction of the conditions to the merger.
Proposal Nos. 5 and 6. Consummation of the merger is not contingent
upon the voting results for election of directors and ratification of the
appointment of Perry-Smith LLP as independent accountants for the year 2000 as
described in Proposal Nos. 5 and 6, respectively.
See "Votes Required" on page 20.
23
<PAGE>
INFORMATION ABOUT AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
GENERAL DEVELOPMENT OF BUSINESS
American River Holdings is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. American River Holdings was
incorporated under the laws of the State of California in 1995. As a bank
holding company, American River Holdings is authorized to engage in the
activities permitted under the Bank Holding Company Act of 1956, as amended, and
regulations thereunder. Its principal office is located at 1545 River Park
Drive, Suite 107, Sacramento, California 95815 and its telephone number is (916)
565-6100.
American River Holdings owns 100% of the issued and outstanding common
shares of American River Bank. American River Bank was incorporated and
commenced business in Fair Oaks, California, in 1983 and thereafter moved its
headquarters office to Sacramento, California in 1985. American River Bank
accepts checking and savings deposits, offers money market deposit accounts and
certificates of deposit, makes secured and unsecured commercial, secured real
estate, and other installment and term loans and offers other customary banking
services.
At March 31, 2000, American River Holdings had total assets of $197
million, total net loans of $118 million, deposits of $176 million and
shareholders' equity of $17 million. American River Holdings and its bank
subsidiary, American River Bank, compete with approximately 38 other banking or
savings institutions in Sacramento County and 22 in Placer County. At March 31,
2000, American River Bank's market share of Federal Deposit Insurance
Corporation-insured deposits in the service areas of Sacramento County and
Placer County was approximately 1.15% and 1.60%, respectively, (based upon the
most recent information made available by the Federal Deposit Insurance
Corporation through June 30, 1999). See "Competitive Data" on page 88.
American River Bank owns 100% of two inactive companies, ARBCO and
American River Mortgage. ARBCO was formed in 1984 to conduct real estate
development and has been inactive since 1995. American River Mortgage has been
inactive since its formation in 1994. American River Bank operates four banking
offices in Placer and Sacramento Counties including the head office at 1545
River Park Drive, Suite 107, Sacramento, and branch offices at 9750 Business
Park Drive, Sacramento, 10123 Fair Oaks Boulevard, Fair Oaks and 2240 Douglas
Boulevard, Roseville. American River Bank's deposits are insured by the Federal
Deposit Insurance Corporation up to applicable legal limits. American River Bank
does not offer trust services or international banking services and does not
plan to do so in the near future.
American River Holdings also owns 100% of First Source Capital formed
in July 1999 to conduct lease financing for most types of business assets, from
computer software to heavy earth-moving equipment. Specific leasing programs are
tailored for vendors of equipment in order to increase their sales. First Source
Capital acts as a lease broker and receives a fee for each lease recorded on the
books of the party acting as the funding source. Various funding sources are
utilized in connection with multiple leasing programs made available by First
Source Capital.
Other than holding the shares of American River Bank and First Source
Capital, American River Holdings conducts no significant activities. However, it
is authorized, with the prior approval of the Board of Governors of the Federal
Reserve System (the "Board of Governors"), American River Holdings' principal
regulator, to engage in a variety of activities which are deemed closely related
to the business of banking. See "Supervision and Regulation" on page 83.
24
<PAGE>
As of December 31, 1999, American River Bank had total deposits of
$180,996,000. Of this total, $47,994,000 represented noninterest-bearing demand
deposits, $68,419,000 represented interest-bearing demand deposits, and
$64,583,000 represented interest-bearing savings and time deposits. At March 31,
2000, total deposits were $176,329,000. Of this total $45,311,000 represented
noninterest-bearing demand deposits, $63,778,000 represented interest-bearing
demand deposits, and $66,920,000 represented interest-bearing savings and time
deposits.
American River Bank's deposits are not received from a single depositor
or group of affiliated depositors, the loss of any one of which would have a
materially adverse effect on the business of American River Bank. A material
portion of American River Bank's deposits are not concentrated within a single
industry or group of related industries.
As of March 31, 2000 and December 31, 1999, American River Bank held
$6,000,000 in certificates of deposit for the State of California. In connection
with these deposits American River Bank is generally required to pledge
securities to secure such deposits, except for the first $100,000, which are
insured by the Federal Deposit Insurance Corporation.
The principal sources of American River Bank's revenues are: (i)
interest and fees on loans; (ii) interest on investments (principally government
securities); and (iii) interest on Federal funds sold (funds loaned on a
short-term basis to other banks). For the fiscal year ended December 31, 1999,
these sources comprised 78%, 20%, and 2%, respectively, of American River Bank's
total interest income. At March 31, 2000 these items amounted to 74%, 25% and
1%, respectively.
American River Bank competes with approximately 186 and 70 other
banking or savings institutions in Sacramento County and Placer County,
respectively. American River Bank's market share of Federal Deposit Insurance
Corporation insured deposits in the service areas of Sacramento County and
Placer County was approximately 1.2% and 1.6%, respectively (based upon the most
recent information made available by the Federal Deposit Insurance Corporation
through June 30, 1999). See "Competitive Data" on page 88.
At March 31, 2000, American River Holdings and its subsidiaries
employed 69 persons on a full-time basis. American River Holdings believes its
employee relations are good.
PROPERTIES
American River Holdings and its subsidiaries lease their respective
premises and do not own any real property. American River Bank's head office is
located at 1545 River Park Drive, Suite 107, Sacramento, California, in a
modern, five floor building which has offstreet parking for its clients.
American River Bank leases premises in the building from Spieker Properties,
L.P., a California limited partnership. The lease term is ten years and expires
on March 31, 2010. The premises consist of 8,375 square feet on the ground floor
and 506 square feet on the second floor. The current monthly rent is $14,688.75.
The monthly rent will increase to $16,634.00 upon the completion of tenant
improvements by the Landlord not later than September 1, 2000, and increases
annually during the term of the lease to $19,961.00 during the last month of the
lease term.
American River Bank leases premises at 9750 Business Park Drive,
Sacramento, California. The office space is leased from Bradshaw Plaza Group,
which is owned in part by Charles D. Fite, a director of American River
Holdings. The lease term is seven years and expires on November 30, 2006. The
premises consist of 4,590 square feet on the ground floor. The current monthly
rent is $7,100.
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<PAGE>
American River Bank leases premises at 10123 Fair Oaks Boulevard, Fair
Oaks, California. The office space is leased from Marjorie Taylor, a director of
American River Holdings. The lease term is 12 years and expires on March 1,
2009. The premises consist of 2,380 square feet on the ground floor and the
current monthly rent is $1,653.
American River Bank leases premises at 2240 Douglas Boulevard,
Roseville, California. The office space is leased from Sandalwood Land Company.
The lease term is 10 years and expires on December 18, 2006. The premises
consist of 3,790 square feet on the ground floor and the current monthly rent is
$6,898.
American River Holdings leases premises (used by First Source Capital)
at 1540 River Park Drive, Suite 108, Sacramento California. The office space is
leased from Union Bank of California, Trustees for Agnes M. and William S. Bourn
Trusts. The one year lease term expired on June 30, 2000 and is continuing on a
month to month basis pending negotiation of a new lease on substantially similar
terms. The premises consist of 381 square feet on the ground floor and the
current monthly rent is $533.
The premises located at 1545 River Park Drive, 9750 Business Park Drive
and 2240 Douglas Boulevard contain options to extend for five years. Included in
the above are two facilities leased from directors of American River Holdings at
terms and conditions which management believes are consistent with the
commercial lease market.
The foregoing summary descriptions of leased premises are qualified in
their entirety by reference to the lease agreements listed as exhibits to the
registration statement of which this document is a part. See "American River
Holdings and Subsidiaries Consolidated Financial Statements--Note 10,
Commitments and Contingencies" on page 221, for a description of the annual
minimum lease commitments under the above leases.
LEGAL PROCEEDINGS
There are no material legal proceedings adverse to American River
Holdings and its subsidiaries to which any director, officer, affiliate of
American River Holdings, or 5% shareholder of American River Holdings or its
subsidiaries, or any associate of any such director, officer, affiliate or 5%
shareholder of American River Holdings or its subsidiaries are a party, and none
of the above persons has a material interest adverse to American River Holdings
or its subsidiaries.
From time to time, American River Holdings and/or its subsidiaries is a
party to claims and legal proceedings arising in the ordinary course of
business. American River Holdings' management is not aware of any material
pending legal proceedings to which either it or its subsidiaries may be a party
or has recently been a party, which will have a material adverse effect on the
financial condition or results of operations of American River Holdings or its
subsidiaries, taken as a whole.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF AMERICAN RIVER HOLDINGS
The following is American River Holdings management's discussion and
analysis of the significant changes in income and expense accounts for the years
ended December 31, 1999, 1998 and 1997 and the three months ended March 31, 2000
and 1999.
INTRODUCTION
The discussion below is designed to provide a better understanding of
significant trends related to American River Holdings' financial condition,
results of operations, liquidity, capital resources and interest rate
sensitivity. It should be read in conjunction with the American River Holdings'
audited financial statements and unaudited interim financial statements and
notes thereto and the other financial information appearing elsewhere in this
document.
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans, securities, federal funds sold and
investments in time deposits) over the interest paid on deposits and borrowed
funds. Net interest margin is net interest income expressed as a percentage of
average earning assets.
American River Holdings' net interest margin was 5.64% in 1997, 5.69%
in 1998, and 5.61% in 1999. The net interest margin for the three months ended
March 31, 1999 was 5.73% and for the three months ended March 31, 2000 was
5.44%.
The fully taxable equivalent interest income component increased from
$12,076,000 in 1997 to $13,265,000 in 1998, and to $13,693,000 in 1999,
representing a 9.8% increase in 1998 over 1997 and a 3.2% increase in 1999 over
1998. Total interest income increased from $3,304,000 for the three months ended
March 31, 1999, to $3,804,000 for the three months ended March 31, 2000,
representing a 15.1% increase. The total interest income increase in 1998 was
primarily the result of a 12% growth in the loan portfolio resulting from a
concentrated effort on business lending and the effects of a strong construction
market. The interest income increase in 1999 was primarily the result of an
increase in average outstanding loan balances of $6,314,000, which reflected a
5.9% increase over 1998 balances. This increase contributed an additional
$615,000 to interest income and was offset in part by an average 48 basis point
decrease in loan yields that caused a reduction of $544,000 in interest income.
Competitive pressures and three 25 basis point decreases in the prime rate late
in 1998 contributed to the lower yields in 1999. The securities portfolio
average balances grew $5,823,000 or 15.8%, which added $352,000 to interest
income. The average yield received on securities was down just 1 basis point and
caused a reduction of $8,000 to interest income. Federal funds sold and
investments in time deposits combined added an additional $13,000 in interest
income.
Total interest expense increased from $4,214,000 in 1997 to $4,461,000
in 1998 and decreased to $4,280,000 in 1999, representing a 5.9% increase in
1998 over 1997 and a 4.1% decrease in 1999 as compared to 1998. The increase in
interest expense in 1998 over 1997 was primarily the result from a 7.4% increase
in interest bearing deposits. The average balances of interest bearing
liabilities increased $8,746,000 (8.6%). Average other borrowings were up
$2,904,000 as American River Holdings advanced $2,300,000 on a borrowing line
with the Federal Home Loan Bank. Lower rates paid on NOW, MMDA, savings and time
deposits helped offset the higher expense by $225,000. The decrease in interest
expense
27
<PAGE>
in 1999 as compared to 1998 was primarily the result of an overall decrease in
market rates starting in late 1998 and continuing through the middle of 1999.
The average rate on time deposits decreased 51 basis points representing a
$252,000 reduction in interest expense. The decrease in interest expense was
offset in part by an increase in average time deposit balances of $4,549,000
(10.14%). The total interest expense increased from $1,019,000 for the three
months ended March 31, 1999, to $1,317,000 for the three months ended March 31,
2000, representing a 29.2% increase. The increase in interest expense in the
first quarter of 2000 over the first quarter of 1999 was primarily the result of
a 16.8% increase in average interest bearing deposits and an increase in
interest rates. The average interest rate on deposits increased 35 basis from
the first quarter of 1999 to the first quarter of 2000. This increase in rates
added $110,000 in expense, while the increase in deposit balances added another
$188,000 in interest expense.
Table One, Analysis of Net Interest Margin on Earning Assets, and Table
Two, 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 American River Bank's interest income and expenses. Table One 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 Two presents an analysis of volume and rate change on net
interest income and expense.
28
<PAGE>
<TABLE>
<CAPTION>
TABLE ONE: ANALYSIS OF NET INTEREST MARGIN ON EARNING ASSETS
--------------------------------------------------------------------------------
Three Months Ended March 31, 2000 1999
----------------------------------- -----------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Loans (1) $ 119,738 $ 2,804 9.42% $ 116,399 $ 2,649 9.23%
Taxable investment
securities 45,822 711 6.24% 31,282 453 5.87%
Tax-exempt investment
securities (2) 8,903 145 6.55% 5,280 82 6.30%
Corporate stock 983 20 8.18% 766 16 8.47%
Federal funds sold 2,724 38 5.61% 2,768 32 4.69%
Investments in time deposits 5,607 86 6.17% 5,332 72 5.48%
--------- --------- --------- ---------
Total earning assets 183,777 3,804 8.33% 161,827 3,304 8.28%
--------- ---------
Cash & due from banks 11,412 10,978
Other assets 3,278 1,952
--------- ---------
$ 198,467 $ 174,757
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
NOW & MMDA $ 65,809 445 2.72% $ 58,440 342 2.37%
Savings 8,612 48 2.24% 7,435 41 2.24%
Time deposits 57,718 786 5.48% 47,207 602 5.17%
Other borrowings 2,493 38 6.13% 2,215 34 6.23%
--------- --------- --------- ---------
Total interest bearing
liabilities 134,632 1,317 3.93% 115,297 1,019 3.58%
--------- ---------
Demand deposits 45,594 42,858
Other liabilities 1,428 997
--------- ---------
Total liabilities 181,654 159,152
Shareholders' equity 16,813 15,605
--------- ---------
$ 198,467 $ 174,757
========= =========
Net interest income &
margin (3) $ 2,487 5.44% $ 2,285 5.73%
========= ========= ========= =========
</TABLE>
(1) Loan interest includes loan fees of $53,000 and $68,000 during the three
months ending March 31, 2000 and March 31, 1999, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield calculated based on actual days in quarter (91 for March 31,
2000 and 90 for March 31, 1999) and annualized to actual days in year (366
for 2000 and 365 for 1999).
29
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
-------------------------------- -------------------------------- ---------------------------------
(Taxable Equivalent Basis)
(In thousands, except Avg Avg Avg Avg Avg Avg
percentages) Balance Interest Yield Balance Interest Yield Balance Interest Yield
--------- --------- -------- --------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Loans (1) $ 113,853 $ 10,543 9.26% $ 107,539 $ 10,472 9.74% $ 94,109 $ 9,352 9.94%
Taxable investment
securities 35,167 2,066 5.87% 31,717 1,867 5.89% 31,340 1,872 5.97%
Tax-exempt investment
securities (2) 6,811 432 6.34% 4,239 272 6.42% 2,937 195 6.64%
Corporate stock 765 63 8.24% 964 78 8.05% 876 76 8.68%
Federal funds sold 5,958 299 5.02% 5,371 283 5.27% 5,470 300 5.48%
Investments in time
deposits 5,095 290 5.69% 4,812 293 6.09% 4,549 281 6.18%
--------- --------- --------- --------- --------- ---------
Total earning assets 167,649 13,693 8.17% 154,642 13,265 8.58% 139,281 12,076 8.67%
--------- --------- ---------
Cash & due from banks 11,460 9,799 8,834
Other assets 2,693 2,263 2,144
--------- --------- ---------
$ 181,802 $ 166,704 $ 150,259
========= ========= =========
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
NOW & MMDA $ 59,491 1,420 2.39% $ 56,488 1,604 2.84% $ 55,793 1,727 3.10%
Savings 8,240 186 2.26% 7,349 182 2.48% 6,546 164 2.51%
Time deposits 49,391 2,537 5.14% 44,843 2,532 5.65% 39,689 2,310 5.82%
Other borrowings 2,264 137 6.05% 2,317 143 6.17% 223 13 5.83%
--------- --------- --------- --------- --------- ---------
Total interest bearing
liabilities 119,386 4,280 3.59% 110,997 4,461 4.02% 102,251 4,214 4.12%
--------- --------- ---------
Demand deposits 45,364 40,046 33,584
Other liabilities 1,050 865 848
--------- --------- ---------
Total liabilities 165,800 151,908 136,683
Shareholders'
equity 16,002 14,796 13,576
--------- --------- ---------
$ 181,802 $ 166,704 $ 150,259
========= ========= =========
Net interest income &
margin (3) $ 9,413 5.61% $ 8,804 5.69% $ 7,862 5.64%
========= ===== ========= ===== ========= =====
</TABLE>
(1) Loan interest includes loan fees of $287,000, $290,000 and $240,000 in 1999,
1998 and 1997, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
30
<PAGE>
TABLE TWO: ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND
EXPENSES
--------------------------------------------------------------------------------
(In thousands) Three Months Ended March 31, 2000 over 1999
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------ -------- ----------
Net loans (1)(2) $ 76 $ 79 $ 155
Taxable investment securities 211 47 258
Tax exempt investment securities (3) 56 7 63
Corporate stock 5 (1) 4
Federal funds sold (1) 7 6
Investment in time deposits 4 10 14
------ ------ ------
Total 351 149 500
------ ------ ------
Interest-bearing liabilities:
Demand deposits 43 60 103
Savings deposits 7 0 7
Time deposits 134 50 184
Other borrowings 4 -- 4
------ ------ ------
Total 188 110 298
------ ------ ------
Interest differential $ 163 $ 39 $ 202
====== ====== ======
--------------------------------------------------------------------------------
(In thousands) Year Ended December 31, 1999 over 1998
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------ -------- ----------
Net loans (1)(2) $ 615 $ (544) $ 71
Taxable investment securities 203 (4) 199
Tax exempt investment securities (3) 165 (5) 160
Corporate stock (16) 1 (15)
Federal funds sold 31 (15) 16
Investment in time deposits 17 (20) (3)
------ ------ ------
Total 1,015 (587) 428
------ ------ ------
Interest-bearing liabilities:
Demand deposits 85 (269) (184)
Savings deposits 22 (18) 4
Time deposits 257 (252) 5
Other borrowings (3) (3) (6)
------ ------ ------
Total 361 (542) (181)
------ ------ ------
Interest differential $ 654 $ (45) $ 609
====== ====== ======
--------------------------------------------------------------------------------
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<PAGE>
(In thousands) Year Ended December 31, 1998 over 1997
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------ -------- ----------
Net loans (1)(2) $1,335 $ (215) $1,120
Taxable investment securities 22 (27) (5)
Tax exempt investment securities (3) 86 (9) 77
Corporate stock 8 (6) 2
Federal funds sold & other (5) (12) (17)
Investment in time deposits 16 (4) 12
------ ------ ------
Total 1,462 (273) 1,189
------ ------ ------
Interest-bearing liabilities:
Demand deposits 22 (145) (123)
Savings deposits 20 (2) 18
Time deposits 300 (78) 222
Other borrowings 122 8 130
------ ------ ------
Total 464 (217) 247
------ ------ ------
Interest differential $ 998 $ (56) $ 942
====== ====== ======
(1) The average balance of non-accruing loans is immaterial as a percentage of
total loans and, as such, has been included in net loans.
(2) Loan fees of $53,000 and $68,000 during the three months ended March 31,
2000 and 1999, respectively, and $287,000, $290,000 and $240,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, have been
included in the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(4) The rate/volume variance has been included in the rate variance.
PROVISION FOR LOAN LOSSES
American River Bank provided $105,000 for loan losses for the three
months ended March 31, 2000 as compared to $94,000 for the three months ended
March 31, 1999. Net loan charge-offs for the three months ended March 31, 2000
were $7,000 as compared to less than $4,000 for the three months ended March 31,
1999. In 1999, American River Bank made provisions for loan losses of $407,000
and net loan charge-offs were $90,000 or .08% of average loans outstanding. In
1998, net loan charge-offs totaled $172,000 or .16% of average loans
outstanding. During 1998 and 1997, American River Bank made provisions for loan
losses of $360,000 and $535,000, respectively. The higher loan loss provision in
1997 was a direct result of higher than average loan charge-offs. Net loan
charge-offs in 1997 were $530,000 or .56% of average loans outstanding.
SERVICE CHARGES AND FEES AND OTHER INCOME
Noninterest income was up $151,000 (49.7%) to $455,000 for the three
months ended March 31, 2000 as compared to $304,000 for the three months ended
March 31, 1999. The increase in the noninterest income from March 31, 1999 to
March 31, 2000 can be attributed to an increase in accounts receivable servicing
(up $60,000 or 206.9%) and revenue of $37,000 from First Source Capital, which
did not exist during the first quarter of 1999. For the year ended December 31,
1999, noninterest income was up $222,000 (17.02%) to $1,526,000. Increases were
in accounts receivable servicing (up $170,000 or 168.63%) and the state
servicing contract (up $58,000 or 89.23%). These increases were offset by a
decrease of $121,000 (47.64%) in loan origination fees from American River
Bank's residential lending division. American River Bank's residential lending
division acts as a broker between American River Bank's customers and the loan
wholesalers. American River Bank receives an origination fee for loans
32
<PAGE>
closed. The increase in accounts receivable servicing was a result of four new
clients and increasing average accounts receivable balances outstanding from
$652,000 in 1998 to $1,505,000 (130.8%) in 1999. The increase in fees from the
state servicing contract was the result of additional loans serviced for the
State of California. The residential lending division experienced a decrease in
loan volume as a direct result of an increase in mortgage rates, which caused
the number of refinances to decrease.
Noninterest income was up $305,000 (30.6%) from 1997 to $1,303,000 in
1998. Increases were in the accounts receivable servicing (up $89,000 or
684.6%), the state servicing contract (up $65,000) and the residential lending
division (up $86,000 or 51.24%). The increase in the accounts receivable
servicing resulted from an increase in average balances outstanding from $64,000
in 1997 to $652,000 (up 901.8%) in 1998 due to adding new clients. The increase
in income from the state servicing contract was the result of 1998 being the
first full year of servicing loans for the State of California. Low mortgage
rates contributed to the increase in origination fees in the residential lending
division in 1998 as compared to 1997.
SALARIES AND BENEFITS
Salaries and benefits were $935,000 (up $93,000 or 11.0%) for the three
months ended March 31, 2000 as compared to $842,000 for the three months ended
March 31, 1999; $28,000 of the increase related to salaries in the newly formed
First Source Capital. For the year ended December 31, 1999, salaries and
benefits totaled $3,493,000, (up $186,000 or 5.6%) from 1998. Base salaries
increased $105,000, consisting of $63,000 (2.6%) due to normal merit increases
and $42,000 (1.7%) due to the opening of First Source Capital in July 1999.
Incentive compensation increased $97,000 (21.0%) as American River Bank moved
closer to the goal of providing small cost of living increases and higher
incentive compensation based on American River Holdings' results of operation
performance. Benefit costs increased commensurate with the salaries. At the end
of 1999, the full time equivalent staff was 69 versus 67 at the end of 1998,
with the addition of two new employees at First Source Capital.
Salary and benefits expenses increased $417,000 (14.4%) to $3,310,000
in 1998 from the level in 1997. Components of salaries and benefits that
increased significantly included base salary and wages of $68,000 (2.8%) and
incentive compensation of $281,000 (99%). The increase in incentive compensation
expense consisted of gross-up plan payments (up $75,000), executive incentive
compensation (up $88,000) and staff incentive compensation (up $118,000). The
increase in the gross-up plan is a result of 1998 being the first full year of
the plan. The executive incentive compensation increased in direct correlation
to the increase in American River Holdings' return on equity. The staff
incentive compensation increase was in part due to the increased earnings and
the gradual phase-in of American River Bank's plan to provide small cost of
living increases and higher incentive compensation based on American River
Holdings' performance. At December 31, 1998 and 1997, the full time equivalent
staff was 67.
See "Board Compensation Committee Report on Executive Compensation" on
page 171 and "Executive Compensation" on page 173, for more information
regarding compensation of executive officers.
OCCUPANCY, FURNITURE AND EQUIPMENT
Occupancy and fixed assets expense was $170,000 (up $10,000 or 6.3%)
for the three months ended March 31, 2000 as compared to $160,000 for the three
months ended March 31, 1999. For the year ended December 31, 1999, occupancy and
fixed assets expense was down $21,000 (3.0%) from 1998. Annual rent adjustments
under the lease agreements, as well as the opening of the First Source Capital
location, increased occupancy expense by $27,000 (8.7%). These increases were
offset by the fact that
33
<PAGE>
certain fixed assets at American River Holdings' headquarters were fully
depreciated in 1998. Fixed asset depreciation expense was $42,000 in 1999
compared to $58,000 in 1998, representing a 27.6% decrease.
Occupancy and fixed asset expenses were $698,000 in 1998. This was a
decrease of $42,000 from 1997, primarily due to the fact that American River
Bank's mainframe computer was fully depreciated in 1997.
OTHER EXPENSES
Other expenses were $420,000 (up $42,000 or 11.1%) for the three months
ended March 31, 2000 as compared to $378,000 for the three months ended March
31, 1999. For the year ended December 31, 1999, other expenses decreased $22,000
(-1.4%). Normal price increases and growth in American River Holdings'
operations that accounted for slight increases in the other expense items were
offset by a decrease in other real estate (ORE) expense of $76,000 (49.7%). This
decrease was a result of decreasing the ORE portfolio. The average balance in
ORE for 1999 was $224,000 compared to $807,000 for 1998. The amount of ORE held
at December 31, 1999 was zero. The overhead efficiency ratio for 1999 was 52.7%
as compared to 55.4% in 1998.
Other expenses increased $239,000 (17.7%) to $1,592,000 in 1998. ORE
expense was up $97,000 (173.2%) due to a larger ORE portfolio. Average balance
in ORE for 1998 was $807,000 compared to $688,000 for 1997. American River Bank
charged-off $104,000 of the ORE balances in 1998 for ORE properties acquired in
1997. Director expenses were up $79,000 (64.8%) in 1997 due to the
implementation of the gross-up plan. The gross-up plan expense for 1997 was
$20,000 compared to $102,000 in 1998. The overhead efficiency ratio for 1997 was
56.4%.
PROVISION FOR TAXES
The effective tax rate on income was 37.7 % for the three months ended
March 31, 2000 as compared to 38.4% for the three months ended March 31, 1999.
The effective tax rate on income was 37.9%, 38.4% and 39.0% in 1999, 1998 and
1997, respectively. The effective tax rate has decreased slightly each of the
last three years as a result of an increase in investments made in tax qualified
municipal bonds. The effective tax rate was greater than the federal statutory
tax rate due to state tax expense (net of federal tax effect) of $290,000,
$230,000 and $227,000 in these years. Tax-exempt income of $330,000, $209,000
and $150,000 from investment securities in these years helped to reduce the
effective tax rate.
BALANCE SHEET ANALYSIS
American River Holdings' total assets were $197,329,000 at March 31,
2000 as compared to $174,856,000 at March 31, 1999, representing an increase of
12.9%. The average balances of total assets at March 31, 2000 was $ 198,467,000
which represent an increase of $23,799,000 or 13.6% over the $174,668,000 at
March 31, 1999. Total assets at December 31, 1999 were $201,362,000 compared to
$177,824,000 at December 31, 1998, representing an increase of 13.2%. The
average balances of total assets of $181,722,000 in 1999 represent an increase
of $15,114,000 or 9.1% over the $166,608,000 in 1998.
LOANS
American River Bank concentrates its lending activities in four
principal areas: 1) commercial loans; 2) real estate-mortgage; 3) real estate
construction loans (both commercial and personal); and 4) consumer loans. Real
estate-mortgage loans are generally secured by improved commercial property,
with original maturities of 5-10 years. At December 31, 1999, these four
categories accounted for
34
<PAGE>
approximately 25%, 53%, 18%, and 4%, respectively, of American River Bank's loan
portfolio. This mix was relatively unchanged compared to 24%, 54%, 18%, and 4%
at December 31, 1998. Continuing strong economic activity in American River
Bank's market area, combined with ongoing marketing efforts, offset by normal
loan paydowns and payoffs, resulted in net increases in loan balances for all
loan categories in 1999 over 1998. The deferred loan fees have been decreasing
over the same period as a competitive market has reduced loan origination fees.
Table Three below summarizes the composition of the loan portfolio for the three
months ended March 31, 2000 and the past five years as of December 31.
TABLE THREE: LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
March 31, December 31,
------------------ ------------------------------------------------
(In thousands) 2000 1999 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 31,840 $ 25,816 $ 30,265 $ 27,615 $ 24,354 $ 26,849 $ 26,702
Real estate:
Mortgage 71,243 61,824 62,867 61,034 61,375 59,000 57,862
Construction 13,087 22,920 21,307 20,768 10,552 2,894 5,175
Consumer 4,411 5,011 4,859 4,644 5,665 2,202 2,238
Deferred loan fees (360) (333) (311) (370) (399) (407) (482)
----------------------------------------------------------------------------------------
Total loans 120,221 115,238 118,987 113,691 101,547 90,538 91,495
Allowance for
credit losses (1,736) (1,450) (1,679) (1,362) (1,174) (1,169) (1,417)
----------------------------------------------------------------------------------------
Total net loans $118,485 $113,788 $117,308 $112,329 $100,373 $ 89,369 $ 90,078
========================================================================================
</TABLE>
The majority of American River Bank's loans are direct loans made to
individuals and local businesses. American River Bank relies substantially on
local promotional activity, personal contacts by bank officers, directors and
employees to compete with other financial institutions. American River Bank
makes loans to borrowers whose applications include a sound purpose, and a
viable primary repayment source generally backed 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 offered by
American River Bank such as personal lines of credit and loans to finance
purchases of autos, boats, recreational vehicles, mobile homes and various other
consumer items. Construction loans are generally composed of commitments to
customers within American River Bank's service area for construction of both
commercial properties and custom and semi-custom single family residences. Other
real estate loans consist primarily of loans secured by first trust deeds on
commercial and residential properties typically with maturities from 3 to 10
years and original loan to value ratios generally from 70% to 80%. In general,
except in the case of loans with SBA guarantees, American River Bank does not
make long-term mortgage loans; however, American River Bank has a residential
lending division to assist customers in securing most forms of longer term
single-family mortgage financing.
Average net loans during the three months ended March 31, 2000 were
$119,738,000 which represents a 2.9% increase over the average of $116,399,000
during the three months ended March 31, 1999. Average loans in 1999 were
$113,853,000 representing an increase of $6,314,000 or 5.9% over 1998. Loan
growth in 1999 resulted from a favorable economy in American River Bank's market
area and new borrowers were developed through American River Bank's marketing
efforts and credit extensions were expanded to existing borrowers. Average loans
in 1998 were $107,539,000 representing an increase of $13,430,000 or 14.3% over
1997.
35
<PAGE>
RISK ELEMENTS
American River Holdings 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, American River Holdings contracts with an outside loan review
consultant to periodically review the existing loan portfolio. Management
believes its ability to identify and assess risk and return characteristics of
American River Holdings' loan portfolio is critical for profitability and
growth. Management strives to continue its emphasis on credit quality in the
loan approval process, active credit administration and regular monitoring. With
this in mind, management has designed and implemented a comprehensive loan
review and grading system that functions to continually assess the credit risk
inherent in the loan portfolio.
Ultimately, credit quality may be influenced by underlying trends in
economic and business cycles. American River Holdings' 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 Holdings has significant extensions of credit and commitments to
extend credit which are secured by real estate. The ultimate recovery of these
loans is generally dependent on the successful operation, sale or refinancing of
the real estate. American River Holdings 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, absorption and sale rates; real estate values and rates of
return; operating expenses; inflation; and sufficiency of collateral independent
of the real estate including, in limited instances, personal guarantees.
In extending credit and commitments to borrowers, American River
Holdings 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. American River Holdings'
requirement for collateral and/or guarantees is determined on a case-by-case
basis in connection with management's evaluation of the credit-worthiness of the
borrower. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, income-producing properties, residences and other
real property. American River Holdings secures its collateral by perfecting its
interest in business assets, obtaining deeds of trust, or outright possession
among other means.
Management believes that its lending policies and underwriting
standards will tend to minimize losses in an economic downturn, however, there
is no assurance that losses will not occur under such circumstances. American
River Bank loan policies and underwriting standards include, but are not limited
to, the following: (1) maintaining a thorough understanding of American River
Bank'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
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
American River Bank's lending officers.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
Management generally places loans on nonaccrual status when they become
90 days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when, in the opinion of management, collection
appears unlikely. Table Four below sets forth nonaccrual loans and loans past
due 90 days or more for March 31, 2000 and the past five years as of December
31.
36
<PAGE>
TABLE FOUR: NON-PERFORMING LOANS
--------------------------------------------------------------------------------
March 31, December 31,
-------- ------------------------------------------
(In thousands) 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
Past due 90 days or more
and still accruing:
Commercial $ 52 $ -- $ -- $ 87 $ 18 $ --
Real estate -- -- -- -- -- 265
Consumer and other -- -- -- -- -- --
--------------------------------------------------------------------------------
Nonaccrual:
Commercial 9 30 110 281 712 85
Real estate -- -- -- -- 466 141
Consumer and other -- -- -- 7 -- --
--------------------------------------------------------------------------------
Total non-performing loans $ 61 $ 30 $ 110 $ 375 $1,196 $ 491
================================================================================
Interest due but excluded from interest income on nonaccrual loans was
not considered material during the three months ended March 31, 2000, and 1999,
and the year ended December 31, 1999; for December 31, 1998 and 1997, these
amounts were $77,000 and $64,000, respectively. In 1999, 1998 and 1997 interest
income recognized from payments received on nonaccrual loans was $45,000, $8,000
and $7,000, respectively. During the three months ended March 31, 2000, interest
recognized from payments received on nonaccrual loans was less than $1,000.
The recorded investments in loans that were considered to be impaired
totaled $61,000, $30,000 and $110,000 at March 31, 2000 and December 31, 1999
and 1998, respectively. The related allowance for loan losses for these loans at
March 31, 2000 and December 31, 1999 and 1998 was $9,000, $12,000 and $47,000,
respectively. Management believes that the reserve allocations are adequate for
the inherent risk of those loans. The average recorded investment in impaired
loans for the years ended December 31, 1999, 1998 and 1997 was $279,000,
$254,000 and $548,000, respectively. The average recorded investment in impaired
loans for the three months ended March 31, 2000 was $20,000.
The recorded investments in troubled debt restructurings as of March
31, 2000 was $542,000 and $677,000, $692,000, $640,000, $515,000 and $0 for the
years ending December 31, 1999, 1998, 1997, 1996 and 1995, respectively. There
were no loan concentrations in excess of 10% of total loans not otherwise
disclosed as a category of loans as of March 31, 2000 or December 31, 1999.
Management is not aware of any potential problem loans, which were accruing and
current at March 31, 2000 or December 31, 1999, where serious doubt exists as to
the ability of the borrower to comply with the present repayment terms.
ALLOWANCE FOR LOAN LOSSES ACTIVITY
The provision for loan losses is based upon management's evaluation of
the adequacy of the existing allowance for loans outstanding and loan
commitments. This allowance is increased by provisions charged to expense and
recoveries, and is reduced by loan charge-offs. Management determines an
appropriate provision based upon the interaction of three primary factors: (1)
loan portfolio growth, (2) a comprehensive grading and review formula for total
loans outstanding, and (3) estimated inherent credit risk in the portfolio.
Management reserves 2% of credit exposures graded "Special Mention",
15% of credits classified "Substandard" and 50% of credits classified
"Doubtful". These reserve factors may be adjusted for significant commercial and
real estate loans which are individually evaluated by management for specific
risk of loss. The amounts allocated for "Special Mention", "Substandard" and
"Doubtful" represent
37
<PAGE>
$292,000 at March 31, 2000 and $320,000 at December 31, 1999. In addition,
reserve factors ranging from 0.375% to 3.00% are assigned to currently
performing loans. These factors are assigned based on management's assessment of
the following for each identified loan type: (1) inherent credit risk, (2)
historical losses and, (3) where the Company has not experienced losses,
historical losses experienced by peer banks. The amounts allocated to interest
credit risk, historical losses and where the Company has not experienced losses,
historical losses experienced by peer banks, were $634,000, $144,000 and
$666,000, respectively, as of March 31, 2000 and $694,000, $123,000 and
$542,000, respectively, at December 31, 1999. Management also computes specific
and expected loss reserves for loan commitments to provide for risks of loss
inherent in the loan extension process. Finally, a residual component is
maintained to cover uncertainties that could affect management's estimate of
probable losses. This residual component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used to estimate losses in
specifically graded loans and expected losses in the performing portfolio.
The Bank's Loan Committee reviews the adequacy of the allowance for
loan losses at least quarterly to include consideration of the relative risks in
the portfolio and current economic conditions. The allowance is adjusted based
on that review if, in management's judgment, changes are warranted.
The allowance for credit losses totaled $1,736,000 or 1.44% of total
loans at March 31, 2000, $1,679,000 or 1.41% of total loans at December 31,
1999, $1,362,000 or 1.20% at December 31, 1998, and $1,174,000 or 1.16% at
December 31, 1997. During the first quarter of 2000, $41,000 was transferred out
of the allowance for loan loss account into a separate valuation reserve for the
accounts receivable servicing receivables. In 1996 and 1997, American River
Bank's credit losses were concentrated in a number of commercial loans to
general contractors and subcontractors. Because the Bank continued, and
continues, to lend to these higher risk business segments, larger reserve
factors were established in 1998 for these types of loans. These increases were
considered prudent given the greater credit losses experienced in loans to the
contracting trades. Growth in other types of commercial loans with higher
assigned risk factors also occurred during the past two years. The continued
lending in the commercial loans to general contractors and subcontractors and
the increase in other types of commercial loans with higher assigned risk
factors resulted in a significant portion of the twenty-one basis point increase
in the ratio of the allowance for loan losses to total loans from 1998 to 1999.
Although actual loan losses declined in 1998 and 1999, management believes that
the inherent credit risk in these segments of the loan portfolio warrants the
growth in the allowance for loan losses during that same period.
It is the policy of management to maintain the allowance for loan
losses at a level adequate for known and inherent risks in the loan portfolio.
Based on information currently available to analyze inherent credit risk,
including economic factors, overall credit quality, historical delinquencies and
a history of actual charge-offs, management believes that the provision for
credit losses and the allowance are prudent and adequate. American River Bank
generally makes monthly allocations to the allowance for loan losses. The
budgeted allocations are based on estimates of loss risk and loan growth.
Adjustments may be made based on differences from estimated loan growth, the
types of loans constituting this growth, changes in risk ratings within the
portfolio, and general economic conditions. However, no prediction of the
ultimate level of loans charged off in future years can be made with any
certainty.
38
<PAGE>
Table Five below summarizes, for the periods indicated, the activity in
the allowance for loan losses.
<TABLE>
<CAPTION>
TABLE FIVE: ALLOWANCE FOR LOAN LOSSES
-----------------------------------------------------------------------------------------------------------
Three Months
(In thousands, except for Ended
percentages) March 31, Year Ended December 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Average loans outstanding $119,738 $116,399 $114,489 $108,664 $ 95,210 $ 92,086 $ 89,095
-----------------------------------------------------------------------------------------------------------
Allowance for possible
loan losses at
beginning of period $ 1,679 $ 1,362 $ 1,362 $ 1,174 $ 1,169 $ 1,417 $ 1,457
Loans charged off:
Commercial 7 4 100 295 433 679 338
Real estate -- -- -- 22 70 56 104
Installment -- -- -- 7 47 19 18
-----------------------------------------------------------------------------------------------------------
Total 7 4 100 324 550 754 460
-----------------------------------------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial -- -- 10 152 20 14 --
Real estate -- -- -- -- -- -- --
Consumer -- -- -- -- -- 2 --
-----------------------------------------------------------------------------------------------------------
Total -- -- 10 152 20 16 --
-----------------------------------------------------------------------------------------------------------
Net loans charged off 7 4 90 172 530 738 460
Amount transferred for accounts
receivable servicing
valuation reserve (41) -- -- -- -- -- --
Additions to allowance
charged to operating expenses 105 94 407 360 535 490 420
-----------------------------------------------------------------------------------------------------------
Allowance for possible loan
losses at end of period $ 1,736 $ 1,452 $ 1,679 $ 1,362 $ 1,174 $ 1,169 $ 1,417
-----------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to
average loans outstanding .02% .01% .08% .16% .56% .81% .52%
Provision of allowance for
possible loan losses to
average loans outstanding .35% .33% .36% .33% .57% .54% .48%
Allowance for possible loan
losses to loans net of
deferred fees at end of
period 1.44% 1.26% 1.41% 1.20% 1.16% 1.29% 1.55%
</TABLE>
As part of its loan review process, management has allocated the
overall allowance based on specific identified problem loans and historical loss
data. Table Six below summarizes the allocation of the allowance for loan losses
at March 31, 2000, and at December 31, 1999 and 1998.
39
<PAGE>
<TABLE>
<CAPTION>
TABLE SIX: ALLOWANCE FOR LOAN LOSSES BY LOAN CATEGORY
---------------------------------------------------------------------------------------------------
(In thousands,
except percentages) March 31, 2000 December 31, 1999 December 31, 1998
---------------------------------------------------------------------------------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 459 26.5% $ 494 25.4% $ 382 24.3%
Real estate 1,177 69.8% 1,118 70.6% 921 71.6%
Consumer 100 3.7% 67 4.0% 59 4.1%
---------------------------------------------------------------------------------------------------
Total allocated $ 1,736 100.0% $ 1,679 100.0% $ 1,362 100.0%
---------------------------------------------------------------------------------------------------
</TABLE>
Table Seven below summarizes the allocation of the allowance for
accounts receivable servicing receivable (ARSR) losses at March 31, 2000. Prior
to January 1, 2000, a separate ARSR allowance was not deemed to be material.
During the period ending March 31, 2000, management determined that the balances
in the ARSR had reached a level that they were considered material and it was
management's intent to continue adding to the ARSR balances, therefore, an
allowance was established.
<TABLE>
<CAPTION>
TABLE SEVEN: ALLOWANCE FOR ACCOUNTS RECEIVABLE SERVICING RECEIVABLE (ARSR) LOSSES
--------------------------------------------------------------------------------
Three Months Ended
(In thousands except for percentages) March 31, 2000
--------------------------------------------------------------------------------
<S> <C>
Average ARSR outstanding $ 2,207
--------------------------------------------------------------------------------
Allowance for possible ARSR losses at beginning of period $ --
ARSR charged off: --
--------------------------------------------------------------------------------
Total --
--------------------------------------------------------------------------------
Recoveries of ARSR previously charged off --
--------------------------------------------------------------------------------
Total --
--------------------------------------------------------------------------------
Net ARSR charged off --
Amount transferred from loan loss reserve 41
Additions to allowance charged to operating expenses --
--------------------------------------------------------------------------------
Allowance for possible ARSR losses at end of period $ 41
--------------------------------------------------------------------------------
</TABLE>
Ratio of net charge-offs to average ARSR outstanding --
Provision of allowance for possible ARSR losses to --
average ARSR outstanding
Allowance for possible ARSR losses to ARSR at end of period 1.80%
OTHER REAL ESTATE
At March 31, 2000 and at December 31, 1999, American River Holdings did
not have any ORE properties. At March 31, 1999, American River Holdings'
portfolio included two ORE properties valued at $454,000. At December 31, 1998,
American River Holdings held three ORE properties valued at $561,000.
40
<PAGE>
DEPOSITS
At March 31, 2000, total deposits were $176,329,000 representing an
increase of $20,529,000 (13.2%) over the March 31, 1999, balance of
$155,800,000. During 1999, deposits increased $22,045,000 (13.9%) to a total of
$180,996,000 at year-end. State of California certificates of deposit accounted
for $6,000,000 of the deposit growth. The remainder of the increase in total
deposits is attributable to internal growth in noninterest-bearing demand,
interest-bearing demand, savings and time deposit categories. Deposits at
December 31, 1998, totaled $158,951,000 and were up $12,385,000 (8.5%) over the
1997 year-end balances of $146,566,000.
CAPITAL RESOURCES
The current and projected capital position of American River Holdings
and the impact of capital plans and long-term strategies is reviewed regularly
by management. American River Holdings' capital position represents the level of
capital available to support continued operations and expansion.
In May of 1997, the board of directors of American River Holdings
authorized a stock repurchase plan. American River Holdings acquired 77,000
shares of its common stock in the open market during 1999, 60,000 in 1998 and
25,000 in 1997. These repurchases were made periodically in the open market with
the intention to lessen the dilutive impact of issuing new shares in connection
with stock option plans and in conjunction with annual distributions of a five
percent common stock dividend.
American River Holdings and American River Bank are subject to
regulations issued by the Board of Governors of the Federal Reserve Bank and the
FDIC, which require maintenance of certain levels of capital. At March 31, 2000,
shareholders' equity was $17,400,000 representing an increase of $787,000 or
4.7% from $16,613,000 at December 31, 1999. In 1999, shareholders' equity
increased $1.2 million or 8.1% from 1998 and increased $1.2 million or 8.2% from
1997. The ratio of total risk-based capital to risk adjusted assets was 13.5% at
March 31, 2000 compared to 12.8% at December 31, 1999, and 12.4% at December 31,
1998. Tier 1 risk-based capital to risk-adjusted assets was 12.3% at March 31,
2000, 11.6% at December 31, 1999, and 11.3% at December 31, 1998.
Table Eight below lists the American River Holdings' actual capital
ratios at March 31, 2000, December 31, 1999 and December 31, 1998 as well as the
minimum capital ratios for capital adequacy.
TABLE EIGHT: CAPITAL RATIOS
--------------------------------------------------------------------------------
Capital to Risk- At March 31, At December 31, Minimum Regulatory
Adjusted Assets 2000 1999 1998 Capital Requirements
--------------------------------------------------------------------------------
Leverage ratio 8.8% 9.2% 8.9% 4.00%
Tier 1 Risk-Based Capital 12.3% 11.6% 11.3% 4.00%
Total Risk-Based Capital 13.5% 12.8% 12.4% 8.00%
The risk-based capital ratios increased in 1999 primarily due to
earnings and the exercise of stock options less reductions resulting from the
share repurchase program. Capital ratios are reviewed on a regular basis to
ensure that capital exceeds the prescribed regulatory minimums and is adequate
to meet future needs. All ratios are in excess of the regulatory definition of
"well capitalized."
See "Supervision and Regulation" on page 83 and "American River
Holdings and Subsidiaries Financial Statements--Note 10, Shareholders' Equity"
on page 195 and "Note 11, Shareholders' Equity" on pages 227 and 228, for a
discussion of regulatory
41
<PAGE>
capital requirements. Management believes that American River Holdings' capital
is adequate to support current operations and anticipated growth, cash dividends
and future capital requirements of American River Holdings and its subsidiaries.
MARKET RISK MANAGEMENT
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. American River Bank'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 American River Bank is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing American River Bank to undue interest rate risk. The Board of
Directors has overall responsibility for the interest rate risk management
policies. American River Bank has an Asset and Liability Management Committee
(ALCO) which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. American River Bank 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, American River Bank is able to estimate the potential impact of
changing interest rates on earnings. A balance sheet forecast is prepared
quarterly using inputs of actual loans, securities and interest bearing
liabilities (i.e. deposits/borrowings) positions as the beginning base. The
forecast balance sheet is processed against seven interest rate scenarios. The
scenarios include a 300, 200 and 100 basis point rising rate forecast, a flat
rate forecast and a 300, 200 and 100 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. American River Bank's 2000 net interest income, as forecast below, was
modeled utilizing a forecast balance sheet projected from year-end 1999
balances.
42
<PAGE>
Table Nine below summarizes the effect on net interest income (NII) of
a +/-300, +/-200 and +/-100 basis point change in interest rates as measured
against a constant rate (no change) scenario. There were no material changes or
trends reflected at March 31, 2000 compared to December 31, 1999.
TABLE NINE: INTEREST RATE RISK SIMULATION OF NET INTEREST
AS OF DECEMBER 31, 1999
-----------------------------------------------------------------------------
% Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
---------------- ----------------
Variation from a constant rate scenario
+300bp 6.0 % $ 561
+200bp 3.8 % $ 354
+100bp 1.9 % $ 175
-100bp (0.8)% $ (79)
-200bp (1.7)% $(159)
-300bp (2.5)% $(236)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
American River Bank also uses a second simulation scenario that rate
shocks the balance sheet also using a gradual change in rates of +/-300, +/-200
and +/-100 basis points over a twelve month horizon. This scenario provides
estimates of the future market value of equity (MVE). MVE measures the impact on
equity due to the changes in the market values of assets and liabilities as a
result of a change in interest rates. American River Bank measures the
volatility of these benchmarks using a twelve month time horizon. Using the
December 31, 1999 balance sheet as the base for the simulation, Table Ten below
summarizes the effect on American River Bank's market value of equity with
shifts of a +/-100, +/-200 and +/-300 basis point change in interest rates.
There were no material changes or trends reflected at March 31, 2000 compared to
December 31, 1999.
TABLE TEN: MARKET VALUE OF EQUITY AS OF DECEMBER 31, 1999
-----------------------------------------------------------------------------
% Change in MVE $ Change in MVE
12 Month Horizon 12 Month Horizon
---------------- ----------------
Variation from a constant rate scenario
+300bp (11.62)% $ (2,662)
+200bp ( 7.68)% $ (1,760)
+100bp ( 3.81)% $ ( 872)
-100bp 3.74 % $ 857
-200bp 7.42 % $ 1,699
-300bp 11.03 % $ 2,525
These results indicate that the balance sheet is asset sensitive since
earnings increase when interest rates rise. The magnitude of the NII change is
within American River Bank's policy guidelines. The asset liability management
policy limits aggregate market risk, as measured in this fashion, to an
acceptable level within the context of risk-return trade-offs.
Gap analysis provides another measure of interest rate risk. American
River Bank is becoming less reliant on gap analysis and in the future will not
actively use gap analysis in managing interest rate risk. It
43
<PAGE>
is presented here for comparative purposes. Interest rate sensitivity is a
function of the repricing characteristics of the portfolio of assets and
liabilities. These repricing characteristics are the time frames within which
the interest-bearing assets and liabilities are subject to change in interest
rates either at replacement, repricing or maturity. Interest rate sensitivity
management focuses on the maturity of assets and liabilities and their repricing
during periods of changes in market interest rates. Interest rate sensitivity is
measured as the difference between the volumes of assets and liabilities in the
current portfolio that are subject to repricing at various time horizons. The
differences are known as interest sensitivity gaps.
A positive cumulative gap may be equated to an asset sensitive
position. An asset sensitive position in a rising interest rate environment will
cause a bank's interest rate margin to expand. This results as floating or
variable rate loans reprice more rapidly than fixed rate certificates of deposit
that reprice as they mature over time. Conversely, a declining interest rate
environment will cause the opposite effect. A negative cumulative gap may be
equated to a liability sensitive position. A liability sensitive position in a
rising interest rate environment will cause a bank's interest rate margin to
contract, while a declining interest rate environment will have the opposite
effect.
As reflected in Table Eleven below, at December 31, 1999, the
cumulative gap through the one-year time horizon indicates a liability sensitive
position. Somewhere between one and five years, American River Bank moves into
an asset sensitive position. This interest rate sensitivity table categorizes
interest-bearing transaction deposits and savings deposits, also known as
non-maturing deposits, as repricing according to the following assumptions
table.
ASSUMPTIONS: The following assumptions were used in the gap analysis
with regards to non-maturing deposits.
----------------------------------------------------------------------
Non-Maturing Deposit Repricing Assumptions
0-3 4-6 7-12 1-2 3-5
Immediate Months Months Months Years Years
DDA-Interest 25% 25% 20% 15% 10% 5%
MMA 25% 25% 20% 15% 15% 0%
Savings 25% 25% 20% 10% 10% 10%
----------------------------------------------------------------------
Table Eleven below indicates that American River Bank is liability
sensitive through the one-year time horizon, however, the non-maturing deposit
liabilities, which have the characteristics of immediate repricing, have not
repriced immediately during past interest rate cycles, nor do they actually
reprice according to management's assumptions. The assumptions are merely
management's estimate based on past interest rate cycles. Consequently, American
River Bank's net interest income varies as though American River Bank is asset
sensitive (i.e. as interest rates rise, net interest income increases and vice
versa). This phenomenon is validated by the modeling as presented in Tables Nine
and Ten above.
44
<PAGE>
<TABLE>
<CAPTION>
TABLE ELEVEN: INTEREST RATE SENSITIVITY
March 31, 2000
------------------------------------------------------------------------------------------------------
Assets and Liabilities Over three
which Mature or Reprice: Next day months and Over one
and within within and within Over
(In thousands) Immediately three months one year five years five years Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 1,150 $ -- $ -- $ -- $ -- $ 1,150
Investment securities -- 5,291 16,101 28,408 9,428 59,228
Loans, excluding
nonaccrual loans
and overdrafts 44,016 20,285 20,133 33,500 2,647 120,581
------------------------------------------------------------------------------------------------------
Total $ 45,166 $ 25,576 $ 36,234 $ 61,908 $ 12,075 $ 180,959
======================================================================================================
Interest bearing
liabilities:
Interest bearing
demand $ 15,958 $ 15,958 $ 22,340 $ 9,542 $ -- $ 63,798
Savings 2,099 2,099 2,519 1,679 -- 8,396
Time certificates 10,144 24,441 20,057 4,182 -- 58,824
Other borrowings -- 9 28 175 1,903 2,115
------------------------------------------------------------------------------------------------------
Total $ 28,201 $ 42,507 $ 44,944 $ 15,608 $ 1,903 $ 133,133
======================================================================================================
Interest rate
sensitivity gap $ 16,965 $ (16,931) $ (8,710) $ 46,330 $ 10,172 $ 47,826
Cumulative interest
rate sensitivity gap $ 16,965 $ (34) $ (8,676) $ 37,654 $ 47,826
------------------------------------------------------------------------------------------------------
December 31, 1999
------------------------------------------------------------------------------------------------------
Assets and Liabilities Over three
which Mature or Reprice: Next day months and Over one
and within within and within Over
(In thousands) Immediately three months one year five years five years Total
------------------------------------------------------------------------------------------------------
Interest earning assets:
Federal funds sold $ 7,125 $ -- $ -- $ -- $ -- $ 7,125
Investment securities -- 13,637 11,744 28,860 8,853 63,094
Loans, excluding
nonaccrual loans
and overdrafts 40,814 20,732 18,982 36,022 2,748 119,172
------------------------------------------------------------------------------------------------------
Total $ 47,939 $ 34,117 $ 30,726 $ 64,882 $ 11,601 $ 189,265
======================================================================================================
Interest bearing
liabilities:
Interest bearing
demand $ 17,126 $ 17,126 $ 23,976 $ 10,191 $ -- $ 68,419
Savings 2,127 2,127 2,552 1,700 -- 8,506
Time certificates 10,286 23,542 18,420 3,797 32 56,077
Other borrowings -- 9 28 175 1,913 2,125
------------------------------------------------------------------------------------------------------
Total $ 29,539 $ 42,804 $ 44,976 $ 15,863 $ 1,945 $ 135,127
======================================================================================================
Interest rate
sensitivity gap $ 18,400 $ (8,561) $ (14,250) $ 49,019 $ 9,656 $ 54,264
Cumulative interest
rate sensitivity gap $ 18,400 $ 9,839 $ (4,411) $ 44,608 $ 54,264
</TABLE>
45
<PAGE>
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 American River Holdings and American River Bank
through its effect on market rates of interest, which affects American River
Bank'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 American River Holdings and
its subsidiaries during the periods ending March 31, 2000 and December 31, 1999,
1998, and 1997.
LIQUIDITY
Liquidity management refers to American River Holdings' 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 American River Holdings' liquidity position. Federal funds lines,
short-term investments and securities, and loan repayments contribute to
liquidity, along with deposit increases, while loan funding and deposit
withdrawals decrease liquidity. American River Bank 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 March 31,
2000 and December 31, 1999, were approximately $41,218,000 and $1,455,000, and
$42,540,000 and $2,311,000, respectively. Such loans relate primarily to
revolving lines of credit and other commercial loans, and to real estate
construction loans.
American River Holdings' sources of liquidity consist of overnight
funds sold to correspondent banks, unpledged marketable investments and loans
held for sale. On March 31, 2000, consolidated liquid assets totaled $28.5
million or 14.4% compared to $37.6 million or 18.7% of total assets and $27.1
million or 15.3% of total consolidated assets on December 31, 1999 and December
31, 1998, respectively. In addition to liquid assets, American River Bank
maintains short term lines of credit with correspondent banks. At March 31, 2000
and December 31, 1999, American River Bank had $11,000,000 available under these
credit lines. Additionally, American River Bank is a member of the Federal Home
Loan Bank. At March 31, 2000 and December 31, 1999, American River Bank could
have arranged for up to $4,464,000 and $4,624,000, respectively, in secured
borrowings from the FHLB. American River Bank also has informal agreements with
various other banks to purchase participations in loans, if necessary. American
River Holdings 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.
American River Bank can sell any of its unpledged securities held in the
Available for Sale category to meet liquidity needs. Due to the rising interest
rate environment throughout the last half of 1999, much of the investment
portfolio has experienced price declines, which has resulted in unrealized
losses. These unrealized losses limit American River Bank's ability to sell
these securities without realizing those losses. However, these securities are
available to pledge as collateral for borrowings if the need should arise.
American River Bank has established a master repurchase agreement with a
correspondent bank to enable such transactions. American River Bank can also
pledge securities to borrow from the Federal Reserve Bank and the FHLB.
46
<PAGE>
The maturity distribution of certificates of deposit in denominations
of $100,000 or more is set forth in Table Twelve below for the periods
presented. These deposits are generally more rate sensitive than other deposits
and, therefore, are more likely to be withdrawn to obtain higher yields
elsewhere if available.
TABLE TWELVE: CERTIFICATES OF DEPOSIT IN DENOMINATIONS OF $100,000 OR MORE
---------------------------------------------------------------------------
Three Months Ended Year Ended
(In thousands) 3/31/00 12/31/99
---------------------------------------------------------------------------
Three months or less $ 17,603 $ 17,352
Over three months through six months 8,651 8,138
Over six months through twelve months 5,193 3,903
Over twelve months 6,438 6,110
---------------------------------------------------------------------------
Total $ 37,885 $ 35,503
===========================================================================
Loan demand also affects American River Bank's liquidity position.
Table Thirteen below presents the maturities of loans for the period indicated.
TABLE THIRTEEN: LOAN MATURITIES
--------------------------------------------------------------------------------
March 31, 2000
--------------------------------------------------------------------------------
One year One year through Over
(In thousands) or less five years five years Total
--------------------------------------------------------------------------------
Commercial $14,971 $ 9,475 $ 7,394 $ 31,840
Real estate -
construction 9,618 3,469 -- 13,087
Real estate -
mortgage 3,991 22,882 44,370 71,243
Consumer 1,284 1,926 1,201 4,411
--------------------------------------------------------------------------------
Total $29,864 $37,752 $52,965 $120,581
================================================================================
Loans shown above with maturities greater than one year include
$74,307,000 of floating interest rate loans and $16,410,000 of fixed rate loans.
December 31, 1999
--------------------------------------------------------------------------------
One year One year through Over
(In thousands) or less five years five years Total
--------------------------------------------------------------------------------
Commercial $12,141 $11,540 $ 6,584 $ 30,265
Real estate -
construction 9,774 11,533 -- 21,307
Real estate -
mortgage 5,019 25,969 31,879 62,867
Consumer 1,320 2,337 1,202 4,859
--------------------------------------------------------------------------------
Total $28,254 $51,379 $39,665 $119,298
================================================================================
Loans shown above with maturities greater than one year include
$75,138,000 of floating interest rate loans and $15,906,000 of fixed rate loans.
The maturity distribution and yields of the investment portfolios are
presented in Table Fourteen below. The yields on tax exempt obligations have
been computed on a tax equivalent basis.
47
<PAGE>
<TABLE>
<CAPTION>
TABLE FOURTEEN: SECURITIES MATURITIES AND WEIGHTED AVERAGE YIELDS
MARCH 31, 2000 AND DECEMBER 31, 1999 AND 1998
----------------------------------------------------------------------------------------
(Taxable Equivalent Basis) Weighted
Amortized Unrealized Unrealized Market Average
(In thousands) Cost Gain Losses Value Yield
----------------------------------------------------------------------------------------
March 31, 2000
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury and agency securities
<S> <C> <C> <C> <C> <C>
Maturing within 1 year $ 5,981 $ 1 $ (10) $ 5,972 6.188%
Maturing after 1 year but
within 5 years 13,147 (209) 12,938 6.264%
State & political subdivisions
Maturing within 1 year 200 200 6.100%
Maturing after 1 year but
within 5 years 1,295 (41) 1,254 6.705%
Maturing after 5 years but
within 10 Years 450 (27) 423 6.337%
Maturing after 10 years 6,853 32 (217) 6,668 7.634%
Other
Maturing within 1 year 4,890 4,890 6.180%
Maturing after 5 years but
within 10 years 482 (12) 470 8.382%
Maturing after 10 years 486 14 (1) 499 10.125%
Non maturing 650 10 660 5.590%
-------------------------------------------------------------------------------
Total investment securities $ 34,434 $ 57 $ (517) $ 33,974 6.596%
===============================================================================
December 31, 1999
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury and agency securities
Maturing within 1 year $ 6,481 $ 4 $ (6) $ 6,479 6.173%
Maturing after 1 year but
within 5 years 11,356 (138) 11,218 6.104%
State & political subdivisions
Maturing after 1 year but
within 5 years 1,156 (27) 1,129 6.426%
Maturing after 5 years but
within 10 Years 450 (26) 424 6.333%
Maturing after 10 years 6,856 15 (295) 6,576 7.855%
Other
Maturing within 1 year 9,908 9,908 6.168%
Maturing after 5 years but
within 10 years 252 (17) 235 8.652%
Maturing after 10 years 486 25 511 10.135%
Non maturing 573 15 588 5.580%
-------------------------------------------------------------------------------
Total investment securities $ 37,518 $ 59 $ (509) $ 37,068 6.520%
===============================================================================
December 31, 1998
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury and agency securities
Maturing within 1 year $ 6,111 $ 33 $ 6,144 6.161%
Maturing after 1 year but
within 5 years 6,049 107 6,156 6.177%
State & political subdivisions
Maturing within 1 year 200 200 6.070%
Maturing after 10 years 2,744 92 $ (4) 2,832 7.412%
Other
Maturing within 1 year 7,952 7,952 5.555%
Maturing after 5 years but
within 10 years 252 17 269 8.652%
Maturing after 10 years 486 38 524 10.117%
Non maturing 539 9 (2) 546 5.620%
-------------------------------------------------------------------------------
Total investment securities $ 24,333 $ 296 $ (6) $ 24,623 6.212%
===============================================================================
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
(Taxable Equivalent Basis) Weighted
Amortized Unrealized Unrealized Market Average
(In thousands) Cost Gain Losses Value Yield
----------------------------------------------------------------------------------------
March 31, 2000
HELD-TO-MATURITY SECURITIES:
U.S. Treasury and agency securities
<S> <C> <C> <C> <C> <C>
Maturing within 1 year $ 1,999 -- $ (7) $ 1,992 6.004%
Maturing after 1 year but
within 5 years 502 502 6.807%
State & political subdivisions
Maturing within 1 year 116 $ 1 117 8.250%
Maturing after 1 year but
within 5 years 1,880 8 (9) 1,879 7.054%
Maturing after 5 years but
within 10 Years 23 23 15.840%
Government guaranteed mortgage
backed securities 11,462 1 (187) 11,276 6.417%
Other
Maturing within 1 year 1,311 (15) 1,296 5.513%
Maturing after 1 year but
within 5 years 2,330 (34) 2,296 6.535%
-------------------------------------------------------------------------------
Total investment securities $ 19,623 $ 10 $ (252) $ 19,381 6.422%
===============================================================================
December 31, 1999
HELD-TO-MATURITY SECURITIES:
U.S. Treasury and agency securities
Maturing within 1 year $ 1,505 -- $ (3) $ 1,502 5.862%
Maturing after 1 year but
within 5 years 1,498 $ 3 (4) 1,497 6.397%
State & political subdivisions
Maturing within 1 year 116 2 118 8.250%
Maturing after 1 year but
within 5 years 2,041 14 (7) 2,048 6.979%
Maturing after 5 years but
within 10 Years 31 31 15.840%
Government guaranteed mortgage
backed securities 11,891 -- (155) 11,736 6.421%
Other
Maturing within 1 year 753 (3) 750 5.703%
Maturing after 1 year but
within 5 years 2,664 (42) 2,622 6.054%
-------------------------------------------------------------------------------
Total investment securities $ 20,499 $ 19 $ (214) $ 20,304 6.384%
===============================================================================
December 31, 1998
HELD-TO-MATURITY SECURITIES:
U.S. Treasury and agency securities
Maturing within 1 year $ 1,503 $ 9 -- $ 1,512 6.366%
Maturing after 1 year but
within 5 years 3,012 63 3,075 6.128%
State & political subdivision
Maturing within 1 year
Maturing after 1 year but
within 5 years 1,971 72 $ (1) 2,042 6.901%
Maturing after 5 years but
within 10 Years 238 6 244 8.259%
Government guaranteed mortgage
backed securities 6,534 8 (45) 6,497 6.421%
Other
Maturing within 1 year 1,837 6 1,843 5.876%
Maturing after 1 year but
within 5 years 1,082 2 1,084 5.733%
-------------------------------------------------------------------------------
Total investment securities $ 16,177 $ 166 $ (46) $ 16,297 6.339%
===============================================================================
</TABLE>
49
<PAGE>
The principal cash requirements of American River Holdings are for
expenses incurred in the support of administration and operations. For
nonbanking functions, American River Holdings is dependent upon the payment of
cash dividends by American River Bank to service its commitments.
American River Holdings expects that the cash dividends paid by American River
Bank to American River Holdings will be sufficient to meet this payment
schedule.
OFF-BALANCE SHEET ITEMS
American River Bank has certain ongoing commitments under operating
leases. These commitments do not significantly impact operating results. See
"American River Holdings and Subsidiaries Financial Statements--Note 10,
Commitments and Contingencies" on page 221.
As of March 31, 2000 and December 31, 1999, commitments to extend
credit and letters of credit were the only financial instruments with
off-balance sheet risk. American River Bank has not entered into any contracts
for financial derivative instruments such as futures, swaps, options or similar
instruments. Loan commitments and letters of credit were $42,673,000,
$44,851,000 and $36,921,000 at March 31, 2000, December 31, 1999 and December
31, 1998, respectively. As a percentage of net loans these off-balance sheet
items represent 36.0%, 38.2% and 32.9%, respectively.
DISCLOSURE OF FAIR VALUE
The Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards Number 107, Disclosures about Fair Value of Financial
Statements, requires the disclosure of fair value of most financial instruments,
whether recognized or not recognized in the financial statements. The intent of
presenting the fair values of financial instruments is to depict the market's
assessment of the present value of net future cash flows discounted to reflect
both current interest rates and the market's assessment of the risk that the
cash flows will not occur.
In determining fair values, American River Holdings used the carrying
amount for cash and cash equivalents, accounts receivable, servicing receivable,
accrued interest receivable and accrued interest payable as all of these
instruments are short term in nature. Securities are reflected at quoted market
values. Loans and deposits have a long term time horizon which required more
complex calculations for fair value determination. Loans are grouped into
homogeneous categories and broken down between fixed and variable rate
instruments. Loans with a variable rate, which reprice immediately, are valued
at carrying value. The fair value of fixed rate instruments is estimated by
discounting the future cash flows using current rates. Credit risk and repricing
risk factors are included in the current rates. Fair value for nonaccrual loans
is reported at carrying value and is included in the net loan total. Since the
allowance for loan losses exceeds any potential adjustment for nonaccrual
valuation, no further valuation adjustment has been made.
Demand deposits, savings and certain money market accounts are short
term in nature so the carrying value equals the fair value. For certificates of
deposit, the fair value is estimated by discounting the future cash payments
using the rates currently offered for deposits of similar remaining maturities.
At year-end 1999, the fair values calculated on American River Bank's
financial instruments are 0.1% below the carrying values versus .03% above the
carrying values at year-end 1998. The change in the calculated fair value
percentage relates to the loan and investment categories and is the result of
changes in interest rates in 1999. There were no material changes or trends
reflected at March 31, 2000 compared to December 31, 1999. See "American River
Holdings and Subsidiaries Financial Statements--Note 16, Disclosures About Fair
Value of Financial Instruments" on page 231.
50
<PAGE>
YEAR 2000
During 1998 and 1999, management of American River Holdings focused the
appropriate resources to address the potential problems that could arise
regarding the Year 2000 (Y2K) century date change. American River Holdings'
mission critical systems were evaluated, modified as required and contingency
plans were put into place should the systems have experienced any failures. The
century date change passed without any operational difficulties. There are
certain dates within the year 2000 that have been identified as critical
processing dates. The first was January 31, the end of the first month of the
year, the second was February 29, leap year day, and the third was March 31, the
end of the first quarter. American River Holdings did not experience any
processing problems on those dates. Upcoming dates during the year are October
10, the first date to require an 8-digit field (10/10/2000), and December 31,
the end of the year. Those dates were tested as part of the Y2K project.
American River Holdings does not anticipate having any processing problems on
those dates, however, failure by third parties adequately to remediate Y2K
issues could have an impact upon American River Holdings, which is impossible to
quantify. Nevertheless, American River Holdings currently expects that its Y2K
compliance efforts will be successful without material adverse effects on its
business.
ACCOUNTING PRONOUNCEMENTS
The Financial Standards Accounting Board has proposed the elimination
of "pooling of interests" accounting by December 31, 2000. The result of this
accounting change will be that all mergers consummated after December 31, 2000
will be accounted for as "purchase" transactions, resulting in the amortization
of goodwill in any merger where the purchase price exceeds the asset value of
the acquired company. The goodwill amortization will reduce future reported
income of the merged companies. Additionally, in bank mergers, the goodwill in a
purchase accounting transaction will not be included in the calculation of
regulatory capital requirements. The effect of the elimination of "pooling of
interests" accounting is uncertain, however, it could result in lower merger
premiums for sellers with the possibility of fewer transactions occurring after
December 31, 2000.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activity, which was
subsequently amended on June 15, 2000. The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that entities recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Management does not
believe that the adoption of SFAS 133 will have a significant impact on its
financial position and results of operations when implemented.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There has been no change in the independent accountants engaged to
audit the financial statements of American River Holdings and its subsidiaries
during the last two fiscal years ended December 31, 1999. There have been no
disagreements with such independent accountants during the last two fiscal years
ended December 31, 1999, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
51
<PAGE>
INFORMATION ABOUT NORTH COAST BANK, N.A.
GENERAL DEVELOPMENT OF BUSINESS
North Coast Bank, N.A., formerly Windsor Oaks National Bank, is a
national banking association, organized in 1990 with its administrative
headquarters in Santa Rosa, California. North Coast Bank, N.A. is locally owned
and presently operates three full service banking offices within its primary
service area of Sonoma County, in the cities of Healdsburg, Santa Rosa and
Windsor. North Coast Bank, N.A. also services Napa, Marin and Mendocino Counties
through loan relationships in these areas. North Coast Bank, N.A.'s primary
business is servicing the business or commercial banking needs of small to
mid-sized businesses within Sonoma County. North Coast Bank, N.A.'s marketing
strategy emphasizes local ownership and a local decision process.
North Coast Bank, N.A. is chartered under the laws of the United States
and is governed by the National Bank Act, and is a member of the Federal Reserve
System. The deposits of North Coast Bank, N.A. are insured by the Federal
Deposit Insurance Corporation up to the applicable legal limits. North Coast
Bank, N.A. is subject to regulation, supervision and regular examination by the
Office of the Comptroller of the Currency. The regulations of the Federal
Deposit Insurance Corporation, Board of Governors of the Federal Reserve System,
and the Office of the Comptroller of the Currency govern many aspects of North
Coast Bank, N.A.'s business and activities, including investments, loans,
borrowings, branching, mergers and acquisitions, reporting and numerous other
areas. North Coast Bank, N.A. is also subject to applicable provisions of
California law to the extent those provisions are not in conflict with or
preempted by federal banking law. See "Supervision and Regulation" on page 83.
North Coast Bank, N.A. offers a broad range of services to individuals
and businesses in its primary service area with an emphasis upon efficiency and
personalized attention. North Coast Bank, N.A. provides a full line of business
financial products with specialized services such as courier, appointment
banking, and business internet banking. North Coast Bank, N.A. offers personal
and business checking and savings accounts, including individual
interest-bearing negotiable orders of withdrawal ("NOW"), money market accounts
and/or accounts combining checking and savings accounts with automatic transfer
capabilities, IRA accounts, time certificates of deposit and direct deposit of
social security, pension and payroll checks and computer cash management with
access through the internet. North Coast Bank, N.A. also makes available
commercial, standby letters of credit, construction, accounts receivable,
inventory, automobile, home improvement, residential real estate, commercial
real estate, single family mortgage, Small Business Administration, office
equipment, leasehold improvement and installment loans as well as overdraft
protection lines of credit. In addition, North Coast Bank, N.A. sells travelers
checks and cashiers checks, offers automated teller machine (ATM) services tied
in with major statewide and national networks and offers other customary
commercial banking services.
Most of North Coast Bank, N.A.'s deposits are obtained from commercial
businesses, professionals and individuals. As of March 31, 2000 North Coast Bank
had a total of 1,712 accounts consisting of demand deposit, NOW and money market
accounts with an average balance of approximately $11,762; 740 savings accounts
with an average balance of approximately $4,646; time certificates of $100,000
or more with an average balance of $115,600; and other time deposits with an
average balance of approximately $26,425. On occasion, North Coast Bank, N.A.
has obtained deposits through deposit brokers for which North Coast Bank, N.A.
pays a broker fee. As of March 31, 2000, North Coast Bank, N.A. has 12 of such
deposits totaling $1,141,000. There is no concentration of deposits or any
customer with 5% or more of North Coast Bank, N.A.'s deposits.
At March 31, 2000, North Coast Bank, N.A. had total assets of
$49,545,000, total net loans of $39,648,000, deposits of $44,345,000 and
shareholders' equity of $4,094,000. North Coast Bank, N.A.
52
<PAGE>
competes with approximately 19 other banking or savings institutions in its
service areas. North Coast Bank, N.A.'s market share of Federal Deposit
Insurance Corporation insured deposits in the service area of Sonoma County was
approximately .63% (based upon the most recent information made available by the
Federal Deposit Insurance Corporation through June 30, 1999). See "Competitive
Data" on page 88.
At March 31, 2000, North Coast Bank, N.A. employed 25 persons on a
full-time basis. North Coast Bank, N.A. believes its employee relations are
good.
PROPERTIES
North Coast Bank, N.A. leases premises at 8733 Lakewood Drive, Windsor,
California. The office space is leased from Hotel St. Paul Partnership. The
lease term is 10 years and expires on February 1, 2003. The premises consist of
approximately 5,760 square feet on the first and second floors and the current
monthly rent is $7,760.
North Coast Bank, N.A. owns premises at 412 Center Street, Healdsburg,
California. The premises were purchased June 1, 1993. The purchase price for the
land and building was $343,849. The building is 2,620 square feet sitting on
10,835 square feet of land.
North Coast Bank, N.A. leases premises at 50 Santa Rosa Avenue, Santa
Rosa, California. The office space is leased from Rosario LLC. The lease term is
10 years and expires on October 31, 2008. The premises consist of 7,072 square
feet on the ground floor and the current monthly rent is $8,840.
LEGAL PROCEEDINGS
There are no material legal proceedings adverse to North Coast Bank,
N.A. which any director, officer, affiliate of North Coast Bank, N.A., or 5%
shareholder of North Coast Bank, N.A. or its subsidiaries, or any associate of
any such director, officer, affiliate or 5% shareholder of North Coast Bank,
N.A. or its subsidiaries are a party, and none of the above persons has a
material interest adverse to North Coast Bank, N.A.
From time to time, North Coast Bank, N.A. is a party to claims and
legal proceedings arising in the ordinary course of business. North Coast Bank,
N.A.'s management is not aware of any material pending legal proceedings to
which either it or its subsidiaries may be a party or has recently been a party,
which will have a material adverse effect on the financial condition or results
of operations of North Coast Bank, N.A.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF NORTH COAST BANK, N.A.
The following is North Coast Bank, N.A. management's discussion and
analysis of the significant changes in income and expense accounts for the years
ended December 31, 1999, 1998 and 1997 and the three months ended March 31, 2000
and 1999.
INTRODUCTION
The discussion below is designed to provide a better understanding of
significant trends related to North Coast Bank, N.A.'s financial condition,
results of operations, liquidity, capital resources and interest rate
sensitivity. It should be read in conjunction with the North Coast Bank, N.A.'s
audited financial statements and unaudited interim financial statements and
notes thereto and the other financial information appearing elsewhere in this
document.
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans, securities, federal funds sold and
investments in time deposits) over the interest paid on deposits and borrowed
funds. Net interest margin is net interest income expressed as a percentage of
average earning assets.
North Coast Bank, N.A.'s net interest margin was 6.61% in 1997, 6.23%
in 1998, and 6.20% in 1999. The net interest margin for the three months ended
March 31, 1999 was 5.76% and for the three months ended March 31, 2000 was
6.41%.
The fully taxable equivalent interest income component increased from
$2,533,000 in 1997 to $2,993,000 in 1998, and to $3,653,000 in 1999,
representing an 18.2% increase in 1998 over 1997 and a 22.1% increase in 1999
over 1998. Total interest income increased from $827,000 for the three months
ended March 31, 1999, to $1,062,000 for the three months ended March 31, 2000,
representing a 28.4% increase. The total interest income increase in 1998 was
primarily the result of a 23.1% growth in the loan portfolio resulting from a
concentrated effort on business lending and the effects of a strong construction
market. The interest income increase in 1999 was primarily the result of an
increase in average outstanding loan balances of $8,674,000 for 1999, which
reflected a 33.6% increase over 1998 balances. This increase contributed an
additional $876,000 to interest income and was offset in part by an average 30
basis point decrease in loan yields that caused a reduction of $103,000 in
interest income. Competitive pressures and three 25 basis point decreases in the
prime rate late in 1998 contributed to the lower yields. The securities
portfolio average balances decreased by $1,413,000 or 54.6% from 1998 to 1999
and the average weighted yield received on securities was down 32 basis points
due to rate decreases and the calling and payoffs of higher yielding
investments.
Total interest expense increased from $753,000 in 1997 to $973,000 in
1998 and to $1,195,000 in 1999, representing a 29.2% increase in 1998 over 1997
and a 22.8% increase in 1999 over 1998. The increase in interest expense in 1998
over 1997 was the result of a 26.2% increase in average interest bearing
deposits along with a minor 9 basis point increase in the weighted average
yield. The increase in interest expense in 1999 over 1998 primarily resulted
from a 28.4% increase in average interest bearing deposits offset by a 17 basis
point reduction in the average weighted yield. The total interest expense
increased from $291,000 for the three months ended March 31, 1999, to $354,000
for the three months ended March 31, 2000, representing a 21.6% increase.
54
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Table One, Analysis of Net Interest Margin on Earning Assets, and Table
Two, 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 North Coast Bank, N.A.'s interest income and expenses. Table One 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 Two presents an analysis of volume and rate change on net
interest income and expense.
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<PAGE>
<TABLE>
<CAPTION>
TABLE ONE: ANALYSIS OF NET INTEREST MARGIN ON EARNING ASSETS
-------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2000 1999
----------------------------------- -----------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Loans (1) $ 40,756 $ 1,003 9.90% $ 31,550 $ 754 9.69%
Taxable investment securities 1,181 20 6.81% 826 13 6.38%
Tax-exempt investment
securities (2) 173 3 6.97% 173 3 7.03%
Corporate stock 290 4 5.55% 210 3 5.79%
Federal funds sold 1,379 21 6.12% 4,208 48 4.63%
Investments in time deposits 644 11 6.87% 770 6 3.16%
--------- -------- -------- ------
Total earning assets 44,423 1,062 9.62% 37,737 827 8.89%
-------- ------
Cash & due from banks 2,769 2,447
Other assets 913 890
--------- --------
$ 48,105 $ 41,074
========= ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
NOW & MMDA $ 14,199 111 3.14% $ 11,372 88 3.14%
Savings 4,352 27 2.50% 4,570 29 2.57%
Time deposits 15,645 201 5.17% 14,113 174 5.00%
Other borrowings 1,034 15 5.83% -- -- --%
--------- -------- -------- ------
Total interest bearing
liabilities 35,230 354 4.04% 30,055 291 3.93%
-------- ------
Demand deposits 8,684 6,819
Other liabilities 108 342
--------- --------
Total liabilities 44,022 37,216
Shareholders' equity 4,083 3,858
--------- --------
$ 48,105 $ 41,074
========= ========
Net interest income & margin (3) $ 708 6.41% $ 536 5.76%
======== ===== ====== =====
</TABLE>
(1) Loan interest includes loan fees of $25,000 and $21,000 during the three
months ending March 31, 2000 and March 31, 1999, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield calculated based on actual days in quarter (91 for March 31,
2000 and 90 for March 31, 1999) and annualized for actual days in year (366
for 2000 and 365 for 1999).
56
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
-------------------------------- -------------------------------- ---------------------------------
(Taxable Equivalent Basis)
(In thousands, except Avg Avg Avg Avg Avg Avg
percentages) Balance Interest Yield Balance Interest Yield Balance Interest Yield
--------- --------- -------- --------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Loans (1) $ 34,516 $ 3,383 9.80% $ 25,842 $ 2,610 10.10% $ 20,990 $ 2,162 10.30%
Taxable investment
securities 755 46 6.09% 2,248 146 6.49% 3,862 256 6.63%
Tax-exempt investment
securities (2) 173 12 6.86% 137 9 6.49% -- -- --%
Corporate stock 247 14 5.67% 203 12 5.91% 184 12 6.52%
Federal funds sold 3,065 152 4.96% 3,621 192 5.30% 1,821 98 5.38%
Investments in time
deposits 900 46 5.11% 378 24 6.35% 56 5 8.93%
--------- -------- -------- ------- -------- --------
Total earning assets 39,656 3,653 9.21% 32,429 2,993 9.23% 26,913 2,533 9.41%
-------- ------- --------
Cash & due from banks 2,629 2,158 1,865
Other assets 953 763 747
--------- -------- --------
$ 43,238 $ 35,350 $ 29,525
========= ======== ========
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
NOW & MMDA $ 12,557 381 3.03% $ 7,678 210 2.74% $ 5,443 138 2.54%
Savings 4,814 121 2.51% 5,139 134 2.61% 4,701 122 2.60%
Time deposits 13,769 671 4.87% 11,731 629 5.36% 9,309 493 5.30%
Other borrowings 380 22 5.79% -- -- --% -- -- --%
--------- -------- -------- ------- -------- --------
Total interest bearing
liabilities 31,520 1,195 3.79% 24,548 973 3.96% 19,453 753 3.87%
-------- ------- --------
Demand deposits 7,554 7,014 6,729
Other liabilities 250 150 118
--------- -------- --------
Total liabilities 39,324 31,712 26,300
Shareholders' equity 3,914 3,638 3,225
--------- -------- --------
$ 43,238 $ 35,350 $ 29,525
========= ======== ========
Net interest income &
margin (3) $ 2,458 6.20% $ 2,020 6.23% $ 1,780 6.61%
======== ===== ======= ====== ======== ======
</TABLE>
(1) Loans interest includes loan fees of $104,000, $55,000 and $28,000 in 1999,
1998 and 1997, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
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<PAGE>
TABLE TWO: ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND
EXPENSES
--------------------------------------------------------------------------------
(In thousands) Three Months Ended March 31, 2000 over 1999
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------ -------- ----------
Net loans (1)(2) $ 220 $ 29 $ 249
Taxable investment securities 6 1 7
Tax exempt investment securities (3)
Corporate stock 1 1
Federal funds sold (32) 5 (27)
Investment in time deposits (1) 6 5
----- ----- -----
Total 194 41 235
----- ----- -----
Interest-bearing liabilities:
Demand deposits 22 1 23
Savings deposits (1) (1) (2)
Time deposits 19 8 27
Other borrowings 0 15 15
----- ----- -----
Total 40 23 63
----- ----- -----
Interest differential $ 154 $ 18 $ 172
===== ===== =====
--------------------------------------------------------------------------------
(In thousands) Year Ended December 31, 1999 over 1998
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------ -------- ----------
Net loans (1)(2) $ 876 $(103) $ 773
Taxable investment securities (97) (3) (100)
Tax exempt investment securities (3) 2 1 3
Corporate stock 3 (1) 2
Federal funds sold (29) (11) (40)
Investment in time deposits 33 (11) 22
----- ----- -----
Total 788 (128) 660
----- ----- -----
Interest-bearing liabilities:
Demand deposits 133 38 171
Savings deposits (8) (5) (13)
Time deposits 109 (67) 42
Other borrowings -- 22 22
----- ----- -----
Total 234 (12) 222
----- ----- -----
Interest differential $ 554 $(116) $ 438
===== ===== =====
--------------------------------------------------------------------------------
58
<PAGE>
--------------------------------------------------------------------------------
(In thousands) Year Ended December 31, 1998 over 1997
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
------ -------- ----------
Net loans (1)(2) $ 500 $ (52) $ 448
Taxable investment securities (107) (3) (110)
Tax exempt investment securities (3) -- 9 9
Corporate stock 1 (1) --
Federal funds sold & other 97 (3) 94
Investment in time deposits 29 (10) 19
----- ----- -----
Total 520 (60) 460
----- ----- -----
Interest-bearing liabilities:
Demand deposits 57 15 72
Savings deposits 11 1 12
Time deposits 128 8 136
Other borrowings -- -- --
----- ----- -----
Total 196 24 220
----- ----- -----
Interest differential $ 324 $ (84) $ 240
===== ===== =====
--------------------------------------------------------------------------------
(1) The average balance of non-accruing loans is immaterial as a percentage of
total loans and, as such, has been included in net loans.
(2) Loan fees of $25,000 and $21,000 during the three months ended March 31,
2000 and 1999, respectively, and $104,000, $55,000 and $28,000 for the years
ended December 31, 1999, 1998 and 1997, respectively, have been included in
the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the three months ending March 31,
2000 and the years ended 1999, 1998 and 1997.
(4) The rate/volume variance has been included in the rate variance.
PROVISION FOR LOAN LOSSES
North Coast Bank, N.A. provided $28,000 for loan losses for the three
months ended March 31, 2000 as compared to $30,000 for the three months ended
March 31, 1999. North Coast Bank, N.A. experienced net loan recovery of $23,000
for the three months ended March 31, 2000 and had no charge-offs or recoveries
in the same period during 1999. In 1999, North Coast Bank, N.A. made provisions
for loan losses of $175,000 and net charge-offs were $122,000 or .36% of average
loans outstanding. In 1998, net loans charged-off totaled $170,000 or .67% of
average loans outstanding. During 1998 and 1997, North Coast Bank, N.A. made
provisions for loan losses of $149,000 and $70,000, respectively.
SERVICE CHARGES AND FEES AND OTHER INCOME
Noninterest income was up 28,000 or 47.5% to $86,000 for the three
months ended March 31, 2000 as compared to $58,000 for the three months ended
March 31, 1999. For the year ended December 31, 1999, noninterest income was up
$63,000 or 30.9% to $267,000 from December 31, 1998. Increases were primarily in
merchant credit cards due to an increased portfolio (up $48,000 or 89.1%), ATM
foreign transactions (up $15,000 or 119.4%), and increased service charge income
due to deposit growth.
For 1998, noninterest income was down $66,000 or 24.4% from 1997
results to $204,000. This was a result of an extraordinary gain on sale of SBA
loans in 1997 amounting to $83,000 offset by an increase of $13,000 in SBA
servicing fees for 1998.
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SALARIES AND BENEFITS
Salaries and benefits were up $23,000 or 10.0% to $252,000 for the
three months ended March 31, 2000 as compared to $229,000 for the three months
ended March 31, 1999. For the year ended December 31, 1999, salaries and
benefits totaled $870,000, up $158,000 or 22.2% from 1998. Base salaries
increased due to the addition of a CFO salary for a full year in 1999 versus 3
months in 1998, additional staffing due to the opening of the Santa Rosa Branch
in February 1999, and normal merit increases. Benefit costs increased
commensurate with the salaries. At the end of 1999, the full time equivalent
staff was 24 versus 20 at the end of 1998.
Salary and benefits expenses decreased $64,000 or 8.2% to $712,000 in
1998 from 1997. The major factor contributing to this decrease was the
unoccupied CFO position for 9 months in 1998. At December 31, 1997, the full
time equivalent staff was 19.
OCCUPANCY, FURNITURE AND EQUIPMENT
Occupancy and fixed assets expense increased $19,000 or 19.6% to
$117,000 for the three months ended March 31, 2000 as compared to $98,000 for
the three months ended March 31, 1999. For the year ended December 31, 1999,
occupancy and fixed assets expense was up $178,000 or 59.2% from 1998. This was
a result of opening the Santa Rosa Branch in February 1999 which added lease
payments of $97,000, common area maintenance charges of $22,000, leasehold
improvement amortization of $9,000, $7,500 in janitorial and utilities, and
$35,000 in additional fixed asset depreciation, insurance, maintenance and
support. Premises and fixed asset related expenses were $301,000 in 1998
compared to $299,000 in 1997.
OTHER EXPENSES
Other expenses increased $55,000 or 31.2% to $231,000 for the three
months ended March 31, 2000 as compared to $176,000 for the three months ended
March 31, 1999. For the year ended December 31, 1999, other expenses increased
$214,000 or 35.4% from 1998 totals. The opening of the Santa Rosa Branch in
February 1999 contributed to this increase with marketing and business
development expenses up $48,000 or 83% and $20,000 or 44.3% in supplies. Other
factors contributing to this increase include merchant credit card expenses up
$66,000 or 88.9% to due a doubling of the merchant portfolio, data and item
processing expense up $21,000 or 16.8% as a result of growth, and loan expense
up $18,000 or 94% due to increased loan volume and loan collection expenses.
Other normal price increases and growth in North Coast Bank, N.A.'s operations
also contributed to the increase in other expenses.
Other expenses increased $45,000 or 8.0% to $604,000 in 1998 over 1997.
Marketing and business development expense was up $29,000 or 70.5% due to media
advertising campaigns and merchant credit card expenses were up $17,000 or 30.3%
due to merchant portfolio growth.
PROVISION FOR TAXES
The effective tax rate on income was 40.7% for the three months ended
March 31, 2000 as compared to 37.1% for the three months ended March 31, 1999.
The effective tax rate on income was 40.3% and 24.0% at December 31, 1999 and
1998, respectively. Due to the existence of operating loss carry-forwards, tax
expense for 1998 was limited to the last five months of the year and no taxes
were expensed against income in 1997. The carryforward expired in 1998.
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BALANCE SHEET ANALYSIS
North Coast Bank, N.A.'s total assets were $49,545,000 at March 31,
2000 as compared to $41,546,000 at March 31, 1999, representing an increase of
19.3%. The average balances of total assets at March 31, 2000 was $48,105,000
which represent an increase of $7,031,000 or 17.1% over $41,074,000 at March 31,
1999. Total assets at December 31, 1999 were $47,178,000 compared to $42,177,000
at December 31, 1998, representing an increase of 11.9%. The average balances of
total assets of $43,238,000 in 1999 represent an increase of $7,888,000 or 22.3%
over $35,350,000 in 1998.
LOANS
North Coast Bank, N.A.'s lending activities are focused primarily
towards making direct loans to local businesses and business owners. The various
short and medium-termed lines of credit and commercial loans are for such
purposes as operating capital, account receivable and inventory financing,
business and professional start-ups, equipment purchases and interim
construction financing. Table Three summarizes the composition of the loan
portfolio at March 31, 2000 and for the past five calendar year ends starting
with December 31, 1995:
TABLE THREE: LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
March 31, December 31,
------------------- ---------------------------------------------------------
(In thousands) 2000 1999 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 11,687 $ 8,526 $ 11,883 $ 9,301 $ 6,316 $ 6,556 $ 5,376
Real estate:
Mortgage 17,094 15,849 15,510 15,542 11,027 10,070 10,723
Construction 3,738 1,210 4,477 1,587 1,977 1,271 1,931
Agriculture 6,588 4,208 7,200 3,416 1,221 -- --
Consumer 1,076 1,277 1,158 1,374 1,393 1,878 2,102
Deferred loan fees (101) (74) (109) (86) 5 23 (80)
----------------------------------------------------------------------------------------------------------
Total loans 40,082 30,996 40,119 31,134 21,939 19,798 20,052
Allowance for
credit losses (434) (361) (383) (331) (352) (346) (409)
----------------------------------------------------------------------------------------------------------
Total net loans $ 39,648 $ 30,635 $ 39,736 $ 30,803 $ 21,587 $ 19,452 $ 19,643
----------------------------------------------------------------------------------------------------------
</TABLE>
The success of North Coast Bank, N.A.'s lending program relies
substantially on personal contacts by its bank officers, directors and
employees, in order to compete with other local financial institutions. Local
promotional activities are also utilized in order to generate new business
opportunities. North Coast Bank, N.A. provides loans to borrowers who
demonstrate sound business practice and good financial acumen. Each approved
loan is made based on a specific purpose coupled with viable primary and
secondary sources of repayment.
Commercial loan products include: credit lines to support business
operations; term loans for working capital, expansion, or equipment purchases;
letters of credit to facilitate domestic and foreign trade; and business credit
cards for company purchases or travel expenses. Real estate loans include: land
purchase or bridge loans; interim construction loans to build new commercial or
residential projects; term loans to facilitate the purchase or refinance of
office, industrial, warehouse and single family and multi-family residential
properties; agricultural development loans to plant vineyards. Interim
construction loans are typically made to owner-users of the property, but are
occasionally granted to a well-qualified borrower for "resale" purposes. Term
real estate loans are typically made to either investors or owner-users of a
property with maturities usually ranging between five to ten years and original
loan to values not exceeding 75% for commercial or 80% for residential
properties. In general, the Bank does not make long term
61
<PAGE>
mortgage loans unless they are made through a government guaranteed loan program
such as the Small Business Administration, the Farm Services Agency or the USDA
Business and Industry program. Consumer loans available to our borrowers include
auto loans, home equity loans and lines of credit, credit cards and personal
loans.
Average net loans (net of deferred fees and allowance for loan loss)
during the three months ended March 31, 2000 were $40,241,000 which represents a
29.3% increase over the average of $31,122,000 during the three months ended
March 31, 1999. Average net loans in 1999 were $34,062,000 representing an
increase of $8,590,000 or 33.7% over 1998. The favorable economic conditions and
lower interest rates provided the impetus for continuing loan growth. Average
net loans in 1998 were $25,472,000 representing an increase of $4,815,000 or
23.3% over 1997.
RISK ELEMENTS
North Coast Bank, N.A. assesses and manages credit risk on an ongoing
basis through a credit culture that emphasizes excellent credit quality,
extensive internal monitoring and established lending policies. Additionally,
North Coast Bank, N.A. contracts with an outside loan review consultant to
periodically grade new loans and to review the existing loan portfolio.
Management believes its ability to identify and assess risk and return
characteristics of North Coast Bank, N.A.'s loan portfolio is critical for
profitability and growth. Management strives to continue its emphasis on credit
quality in the loan approval process through active credit administration and
regular monitoring. With this in mind, management has designed and implemented a
comprehensive loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio.
The overall credit quality of North Coast Bank, N.A.'s loan portfolio
may be influenced by underlying trends in both economic and business cycles.
North Coast Bank, N.A.'s business is focused into all of Sonoma County. Special
emphasis is placed within the three communities that the Bank has offices, i.e.,
Santa Rosa, Windsor, and Healdsburg. The economy of Sonoma County is diversified
with professional services, manufacturing, agriculture and real estate
investment and construction. North Coast Bank, N.A. has significant extensions
of credit and commitments secured by real estate. The ultimate recovery of these
loans is generally dependent on the successful operation, sale or refinancing of
the real estate. North Coast Bank, N.A. monitors the effects of current and
expected market conditions and other factors related to its ability to collect
on its real estate collateral. When approving a real estate related loan, Bank
management considers the following items: appraised values; absorption and sale
rates; leases and operating expenses; and, rates of return.
In extending credit and commitments to borrowers, North Coast Bank,
N.A. 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. North Coast Bank, N.A.'s requirement for
collateral and/or guarantees is determined on a case-by-case basis in connection
with management's evaluation of the credit-worthiness of the borrower.
Collateral held varies but may include accounts receivable, inventory,
commercial real estate, equipment, income-producing properties, single family
residences and other assets. North Coast Bank, N.A. secures its collateral by
perfecting its interest in business assets, obtaining deeds of trust, or
outright possession through other means.
North Coast Bank, N.A.'s management believes that its lending policies
and underwriting standards will tend to minimize losses in an economic downturn,
however, there is no assurance that losses will not occur under such
circumstances. North Coast Bank, N.A.'s lending policies and underwriting
standards include, but are not limited to: a) maintaining a thorough
understanding of North Coast Bank, N.A.'s service area and originating a
significant majority of its loans within that area; b) maintaining a thorough
understanding of a borrowers' management abilities, their capacity and
willingness to repay a
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<PAGE>
loan, and their expertise within their field of endeavor; c) making real estate
loan approvals not only based on market demand for a project, but also on the
borrowers' capacity to support the project financially in the event it does
perform to expectations; and d) maintaining conforming and prudent loan to value
and loan to cost ratios based on independent outside appraisals and ongoing
inspection and analysis by North Coast Bank, N.A.'s lending officers.
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
Management generally places loans on non-accrual status when the loan
becomes 90 days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when in the opinion of management, collection
appears unlikely. Table Four sets forth non-accrual loans and loans past due 90
days or more at March 31, 2000 and for the past five calendar year ends starting
with December 31, 1995:
<TABLE>
<CAPTION>
TABLE FOUR: NON-PERFORMING LOANS
---------------------------------------------------------------------------------------
March 31, December 31,
--------- --------------------------------------
(In thousands) 2000 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------
Past due 90 days or more and
still accruing
<S> <C> <C> <C> <C> <C> <C>
Commercial $ -- $ -- $ -- $ -- $ -- $ --
Real estate -- -- -- -- -- --
Consumer and other -- -- 7 -- -- --
---------------------------------------------------------------------------------------
Non-accrual:
Commercial $ -- $ -- $ -- $ -- $ -- $ --
Real estate -- -- -- 98 -- 267
Consumer and other -- -- -- -- 29 --
---------------------------------------------------------------------------------------
Total non-performing loans $ -- $ -- $ 7 $ 98 $ 29 $267
---------------------------------------------------------------------------------------
</TABLE>
At March 31, 2000 and for the years ended December 31, 1999, 1998 and
1997, the Bank had no significant impaired loans or loans placed on non-accrual
status.
There were also no troubled debt restructures or loan concentrations in
excess of 10% of total outstanding loans, not otherwise disclosed as a category
of loans as of March 31, 2000 and December 31, 1999. Management is not aware of
any potential problem loans beyond those reported as of March 31, 2000 and
December 31, 1999.
ALLOWANCE FOR LOAN LOSSES ACTIVITY
The provision for credit losses is based upon management's evaluation
of the adequacy of the existing allowance for loans outstanding. This allowance
is increased by provisions charged to expense and recoveries, and is reduced by
loan charge-off. Management determines an appropriate provision based upon the
interaction of three primary factors: (1) loan portfolio growth, (2) a
comprehensive grading and review formula for total loans outstanding, and (3)
projected potential credit losses.
The allowance for credit losses totaled $434,000 or 1.08% of total
loans at March 31, 2000 compared to $383,000 or .95% at December 31, 1999,
$331,000 or 1.06% at December 31, 1998, and $352,000 or 1.60% at December 31,
1997. It is the policy of management to maintain the allowance for credit losses
at a level adequate for known and future risks inherent in the loan portfolio.
Based on information currently available to analyze credit loss potential,
including economic factors, overall credit quality, historical delinquency and a
history of actual charge-off, management believes that the credit loss
63
<PAGE>
provision and allowance is prudent and adequate. However, no prediction of the
ultimate level of loans charged off in future years can be made with any
certainty.
Table Five below summarizes, for the periods indicated, the activity in
the allowance for loan losses.
<TABLE>
<CAPTION>
TABLE FIVE: ALLOWANCE FOR LOAN LOSSES
---------------------------------------------------------------------------------------------------------------------
(In thousands, except for Three Months
percentages) Ended March 31, Year Ended December 31,
--------------- ---------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Average loans outstanding $ 40,241 $ 31,122 $34,062 $25,472 $20,657 $19,520 $19,438
---------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses
at beginning of period $ 383 $ 331 $ 331 $ 352 $ 346 $ 409 $ 357
Loans charged off:
Commercial -- -- 128 183 53 9 7
Real estate -- -- -- -- 16 65 --
Installment -- -- 3 -- 2 61 22
---------------------------------------------------------------------------------------------------------------------
Total -- -- 131 183 71 135 29
---------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial 23 -- 5 13 5 1 --
Real estate -- -- -- -- -- -- --
Consumer -- -- 3 -- 2 1 --
---------------------------------------------------------------------------------------------------------------------
Total 23 -- 8 13 7 2 --
---------------------------------------------------------------------------------------------------------------------
Net loans (recovered) charged off (23) -- 123 170 64 133 29
Additions to allowance charged
to operating expenses 28 30 175 149 70 70 81
---------------------------------------------------------------------------------------------------------------------
Allowance for possible loans
losses at end of period $ 434 $ 361 $ 383 $ 331 $ 352 $ 346 $ 409
---------------------------------------------------------------------------------------------------------------------
Ratio of net (recoveries)
charge-offs to average loans
outstanding (1) (.23)% -- .36% .67% .31% .68% .15%
Provision of allowance for possible
loan losses to average loans
outstanding .28% .39% .51% .58% .34% .36% .42%
Allowance for possible loan losses to
loans net of deferred fees at end of
period 1.08% 1.16% .95% 1.06% 1.60 1.75% 2.03%
</TABLE>
(1) There were no charge-offs during the three months ended March 31, 1999.
As part of its loan review process, North Coast Bank, N.A.'s management
has allocated the overall allowance based on specific identified problem loans
and historical loss data. Table Six summarizes the allocation of the allowance
for loan losses at March 31, 2000, December 31, 1999 and 1998.
64
<PAGE>
<TABLE>
<CAPTION>
TABLE SIX: ALLOWANCE FOR LOAN LOSSES BY LOAN CATEGORY
---------------------------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999 December 31, 1998
-------------------------- -------------------------- -------------------------
Percent of loans Percent of loans Percent of loans
(In thousands, in each category in each category in each category
except percentages) Amount to total loans Amount to total loans Amount to total loans
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 179 46.0% $ 168 48.1% $ 134 42.2%
Real estate 234 51.9% 194 49.7% 170 54.9%
Consumer 21 2.1% 21 2.2% 27 2.9%
---------------------------------------------------------------------------------------------------------------
Total $ 434 100.0% $ 383 100.0% $ 331 100.0%
---------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER REAL ESTATE
North Coast Bank, N.A. did not have any Other Real Estate ("ORE")
properties as of March 31, 2000, December 31, 1999, or December 31, 1998.
DEPOSITS
At March 31, 2000, total deposits were $44,345,000 representing an
increase of $6,720,000 or 17.9% over the March 31, 1999 balance of $37,625,000.
During 1999, deposits increased $3,928,000 or 10.3% to total $42,081,000 at
year-end. The increase in total deposits is attributable to internal growth in
noninterest-bearing demand and interest-bearing demand categories. Deposits at
December 31, 1998 totaled $38,153,000 and were up $8,390,000 or 28.2% over the
1997 year-end balances of $29,763,000.
CAPITAL RESOURCES
The current and projected capital position of North Coast Bank, N.A.
and the impact of capital plans and long-term strategies is reviewed regularly
by management. North Coast Bank, N.A.'s capital position represents the level of
capital available to support continued operations.
North Coast Bank, N.A. is subject to regulations by the Office of the
Comptroller of the Currency, the Federal Reserve and the Federal Deposit
Insurance Corporation which require maintenance of certain levels of capital. At
March 31, 2000, shareholders' equity was $4,094,000 representing an increase of
$96,000 or 2.4% from $3,998,000 at December 31, 1999. Shareholders' equity
increased $206,000 or 5.4% from December 31, 1998. The ratio of total risk-based
capital to risk adjusted assets was 11.4% as of March 31, 2000 compared to 11%
at December 31, 1999, and 13% at December 31, 1998. Tier 1 risk-based capital to
risk-adjusted assets was 10.3% at March 31, 2000, 10% at December 31, 1999, and
12% at December 31, 1998.
Table Seven below lists North Coast Bank, N.A.'s actual capital ratios
at March 31, 2000, December 31, 1999, and December 31, 1998, as well as the
minimum capital ratios for capital adequacy.
<TABLE>
<CAPTION>
TABLE SEVEN: CAPITAL RATIOS
---------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At March 31, At December 31, Minimum Regulatory
2000 1999 1998 Capital Requirements
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio 8.5% 9.3% 9.8% 4.00%
Tier 1 Risk-Based Capital 10.3% 10.0% 12.0% 4.00%
Total Risk-Based Capital 11.4% 11.0% 13.0% 8.00%
</TABLE>
65
<PAGE>
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
All ratios are in excess of the regulatory definition of "well capitalized."
See "Supervision and Regulation" on page 83 and "North Coast Bank, N.A.
Financial Statements--Note 7, Shareholders' Equity" on page 249 and "Note 9,
Shareholders' Equity" on page 278 for a discussion of regulatory capital
requirements. Management believes that North Coast Bank, N.A.'s capital is
adequate to support current operations and anticipated growth of North Coast
Bank, N.A.
MARKET RISK MANAGEMENT
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. North Coast Bank, N.A.'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 North Coast Bank, N.A. is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing North Coast Bank, N.A. to undue interest rate risk. The Board
of Directors has overall responsibility for the interest rate risk management
policies. North Coast Bank, N.A. has an Asset and Liability Management Committee
(ALCO) which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. North Coast Bank, N.A. 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, North Coast Bank, N.A. is able to estimate the potential impact of
changing interest rates on earnings. A balance sheet forecast is prepared
monthly using inputs of actual loans, securities and interest bearing
liabilities (i.e. deposits/borrowings) positions as the beginning base. The
forecast balance sheet is processed against seven interest rate scenarios. The
scenarios include a 300, 200 and 100 basis point rising rate forecast, a flat
rate forecast and a 300, 200 and 100 basis point falling rate forecast which
take place within a one year time frame. The net interest income is measured
during the first year of the rate changes and in the year following the rate
changes. North Coast Bank, N.A.'s 2000 net interest income, as forecast below,
was modeled utilizing a forecast balance sheet projected from year-end 1999
balances.
Table Eight below summarizes the effect on net interest income of a
+/-300, +/-200 and +/-100 basis point change in interest rates as measured
against a constant rate (no change) scenario.
66
<PAGE>
TABLE EIGHT: INTEREST RATE RISK SIMULATION OF NET INTEREST INCOME
--------------------------------------------------------------------------------
As of March 31, 2000 Estimated Impact on 2000 Net Interest
Income
-------------------------------------
(in thousands)
Variation from a constant rate scenario
+300bp $(129)
+200bp $( 86)
+100bp $( 43)
-100bp $ 43
-200bp $ 86
-300bp $ 129
--------------------------------------------------------------------------------
As of December 31, 1999 Estimated Impact on 2000 Net Interest
Income
-------------------------------------
(in thousands)
Variation from a constant rate scenario
+300bp $( 99)
+200bp $( 66)
+100bp $( 33)
-100bp $ 33
-200bp $ 66
-300bp $ 99
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk. North Coast Bank, N.A. does not use a second
simulation scenario based on a balance sheet rate shock as used by American
River Bank.
Gap analysis provides another measure of interest rate risk. It is
presented here for comparative purposes. Interest rate sensitivity is a function
of the repricing characteristics of the portfolio of assets and liabilities.
These repricing characteristics are the time frames within which the
interest-bearing assets and liabilities are subject to change in interest rates
either at replacement, repricing or maturity. Interest rate sensitivity
management focuses on the maturity of assets and liabilities and their repricing
during periods of changes in market interest rates. Interest rate sensitivity is
measured as the difference between the volumes of assets and liabilities in the
current portfolio that are subject to repricing at various time horizons. The
differences are known as interest sensitivity gaps.
A positive cumulative gap may be equated to an asset sensitive
position. An asset sensitive position in a rising interest rate environment will
cause a bank's interest rate margin to expand. This results as floating or
variable rate loans reprice more rapidly than fixed rate certificates of deposit
that reprice as they mature over time. Conversely, a declining interest rate
environment will cause the opposite effect. A negative cumulative gap may be
equated to a liability sensitive position. A liability sensitive position in a
rising interest rate environment will cause a bank's interest rate margin to
contract, while a declining interest rate environment will have the opposite
effect.
As reflected in Table Nine below, at March 31, 2000 and December 31,
1999, the cumulative gap indicates a liability sensitive position at the one
year mark. This interest rate sensitivity table categorizes interest-bearing
transaction deposits and savings deposits, also known as non-maturing deposits,
as repricing according to the following assumptions table.
67
<PAGE>
ASSUMPTIONS: The following assumptions were used in the gap analysis
with regards to non-maturing deposits.
--------------------------------------------------------------
Non-Maturing Deposit Repricing Assumptions
0-30 31-90 91-180 181-365
Days Days Days Days
DDA-Interest 25% 25% 25% 25%
MMA 25% 25% 25% 25%
Savings 25% 25% 25% 25%
--------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE NINE: INTEREST RATE SENSITIVITY
MARCH 31, 2000
------------------------------------------------------------------------------------------------------
Assets and Liabilities
which Mature or Reprice: Over one
and within Over
(In thousands) 0-30 Days 31-90 Days 91-365 Days five years five years Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 3,150 $ -- $ -- $ -- $ -- $ 3,150
Interest bearing bank
balances 141 -- 297 600 -- 1,038
Investment securities 2 5 150 1,024 164 1,345
Loans, excluding
nonaccrual loans
and overdrafts 15,881 5,016 6,440 9,478 3,368 40,183
------------------------------------------------------------------------------------------------------
Total $ 19,174 $ 5,021 $ 6,887 $ 11,102 $ 3,532 $ 45,716
======================================================================================================
Interest bearing
liabilities:
Interest bearing demand $ 3,717 $ 3,717 $ 7,435 $ -- $ -- $ 14,869
Savings 1,138 1,138 2,275 -- -- 4,551
Time certificates 3,132 2,859 8,820 1,016 -- 15,827
Other borrowings 1,000 1,000
------------------------------------------------------------------------------------------------------
Total $ 8,987 $ 7,714 $ 18,530 $ 1,016 $ -- $ 36,247
======================================================================================================
Interest rate
sensitivity gap $ 10,187 $ (2,693) $ (11,643) $ 10,086 $ 3,532 $ 9,469
Cumulative interest
rate sensitivity gap $ 10,187 $ 7,494 $ (4,149) $ 5,937 $ 9,469
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------------------------------------------------------
Assets and Liabilities
which Mature or Reprice: Over one
and within Over
(In thousands) 0-30 Days 31-90 Days 91-365 Days five years five years Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 3,150 $ -- $ -- $ -- $ -- $ 3,150
Interest bearing bank
balances 298 198 297 793
Investment securities 5 11 46 1,105 192 1,359
Loans, excluding
nonaccrual loans
and overdrafts 13,282 5,731 8,160 9,073 3,982 40,228
------------------------------------------------------------------------------------------------------
Total $ 14,585 $ 5,742 $ 8,404 $ 10,475 $ 4,174 $ 43,380
======================================================================================================
Interest bearing
liabilities:
Interest bearing demand $ 3,370 $ 3,370 $ 6,740 $ -- $ -- $ 13,480
Savings 1,058 1,058 2,116 -- -- 4,232
Time certificates 2,072 3,360 8,247 541 -- 14,220
Other borrowings 1,000 1,000
------------------------------------------------------------------------------------------------------
Total $ 7,500 $ 7,788 $ 17,103 $ 541 $ -- $ 32,932
======================================================================================================
Interest rate
sensitivity gap $ 7,085 $ (2,046) $ (8,699) $ 9,934 $ 4,174 $ 10,448
Cumulative interest
rate sensitivity gap $ 7,085 $ 5,039 $ (3,660) $ 6,274 $ 10,448
</TABLE>
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 North Coast Bank, N.A. through its effect on market
rates of interest, which affects North Coast Bank, N.A.'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 North Coast Bank, N.A. during the periods ended March
31, 2000 and December 31, 1999, 1998, and 1997.
LIQUIDITY
Liquidity management refers to North Coast Bank, N.A.'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 North Coast Bank, N.A.'s liquidity position. Deposit increases,
Federal funds lines, short-term investments and securities, and loan repayments
contribute to liquidity, while loan funding and deposit withdrawals decrease
liquidity. North Coast Bank, N.A. 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 March 31, 2000, were
approximately $9,635,000 and $50,000, respectively and approximately
69
<PAGE>
$9,154,000 and $150,000, respectively at December 31, 1999. Such loans relate
primarily to revolving lines of credit and other commercial loans, and to real
estate construction loans.
North Coast Bank, N.A.'s sources of liquidity consist of overnight
funds sold to correspondent banks, unpledged marketable investments, loans
available for sale, correspondent fed funds lines and cash. On March 31, 2000,
liquid assets totaled $8,658,000 or 17.5% of total assets as compared to
$6,237,000 or 13.2% of total assets at December 31, 1999 and $11,391,000 or
27.0% of total assets on December 31, 1998. Included in the sources of liquidity
is a total of $2,000,000 in unsecured Federal funds lines of credit with two
correspondent banks. In addition, at March 31, 2000, North Coast Bank, N.A. had
a line of credit available with the Federal Home Loan Bank totaling $1,000,000
which is secured by pledged mortgage loans. An advance totaling $1,000,000 was
outstanding from the Federal Home Loan Bank at March 31, 2000 bearing an
interest rate of 5.9% and a maturity date of April 12, 2000. The Federal Home
Loan Bank line of credit available at December 31, 1999, stood at $1,400,000
with the same above mentioned $1,000,000 advance outstanding. There were no
short-term borrowings outstanding at December 31, 1998. North Coast Bank, N.A.
also has informal agreements with various other banks to purchase participations
in loans, if necessary. North Coast Bank, N.A. 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.
The maturity distribution of certificates of deposit in denominations
of $100,000 or more is set forth in Table Ten below. These deposits are
generally more rate sensitive than other deposits and, therefore, are more
likely to be withdrawn to obtain higher yields elsewhere if available.
TABLE TEN: CERTIFICATES OF DEPOSIT IN DENOMINATIONS OF $100,000 OR MORE
----------------------------------------------------------------------------
Three Months Ended Year Ended
(In thousands) 3/31/00 12/31/99
----------------------------------------------------------------------------
Three months or less $ 3,041 $ 2,037
Over three months through six months 2,062 1,895
Over six months through twelve months 1,533 1,681
Over twelve months 453 --
----------------------------------------------------------------------------
Total $ 7,089 $ 5,613
============================================================================
Loan demand also affects North Coast Bank, N.A.'s liquidity position.
Table Eleven below presents the maturities of loans for the period indicated.
70
<PAGE>
TABLE ELEVEN: LOAN MATURITIES
-----------------------------------------------------------------------------
March 31, 2000
-----------------------------------------------------------------------------
One year
One year through Over
(In thousands) or less five years five years Total
-----------------------------------------------------------------------------
Commercial $ 6,218 $ 3,980 $ 1,489 $ 11,687
Real estate -
Construction 2,632 168 938 3,738
Real estate -
Mortgage 1,991 4,155 10,947 17,093
Agriculture 349 2,426 3,814 6,589
Consumer 546 403 127 1,076
-----------------------------------------------------------------------------
Total $ 11,736 $ 11,132 $ 17,315 $ 40,183
=============================================================================
Loans shown above with maturities greater than one year include
$21,100,000 of floating interest rate loans and $7,347,000 of fixed rate loans.
-----------------------------------------------------------------------------
December 31, 1999
-----------------------------------------------------------------------------
One year
One year through Over
(In thousands) or less five years five years Total
-----------------------------------------------------------------------------
Commercial $ 6,468 $ 4,043 $ 1,372 $ 11,883
Real estate -
Construction 2,924 744 809 4,477
Real estate -
Mortgage 1,606 3,629 10,275 15,510
Agriculture 398 2,283 4,519 7,200
Consumer 588 440 130 1,158
-----------------------------------------------------------------------------
Total $ 11,984 $ 11,139 $ 17,105 $ 40,228
=============================================================================
Loans shown above with maturities greater than one year include
$19,890,000 of floating interest rate loans and $8,354,000 of fixed rate loans.
71
<PAGE>
The maturity distribution and yields of the investment portfolios are
presented in Table Twelve below. The yields on tax exempt obligations have been
computed on a tax equivalent basis.
<TABLE>
<CAPTION>
TABLE TWELVE: SECURITIES MATURITIES AND WEIGHTED AVERAGE YIELDS
MARCH 31, 2000 AND DECEMBER 31, 1999 AND 1998
-----------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis) Weighted
Amortized Unrealized Unrealized Market Average
(In thousands) Cost Gain Losses Value Yield
-----------------------------------------------------------------------------------------------------
March 31, 2000
AVAILABLE-FOR-SALE SECURITIES:
<S> <C> <C> <C> <C> <C>
U.S. Treasury and agency securities
maturing after 1 year but within 5
Years $ 983 $ -- $ (12) $ 971 6.54%
State & political subdivisions
maturing after 10 years 173 (9) 164 7.03%
Government guaranteed mortgage backed
securities 213 (3) 210 6.30%
Other
Non-maturing 352 352 1.19%
----------------------------------------------------------------------------------------
Total investment securities $ 1,721 $ -- $ (24) $ 1,697 5.45%
========================================================================================
December 31, 1999
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury and agency securities
maturing after 1 year but within 5 $ 982 $ -- $ (9) $ 973 6.54%
years
State & political subdivisions
maturing after 10 years 173 (12) 161 6.86%
Government guaranteed mortgage
backed securities 228 -- (3) 225 6.26%
Other
Non-maturing 349 -- -- 349 1.18%
----------------------------------------------------------------------------------------
Total investment securities $ 1,732 $ -- $ (24) $ 1,708 5.45%
========================================================================================
December 31, 1998
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury and agency securities
maturing within 1 year $ 450 $ 1 $ -- $ 451 6.32%
State & political subdivisions
maturing after 10 years 173 4 -- 177 6.86%
Government guaranteed mortgage
backed securities 530 3 (1) 532 6.09%
Other
Non-maturing 269 -- -- 269 1.01%
----------------------------------------------------------------------------------------
Total investment securities $ 1,422 $ 8 $ (1) $ 1,429 5.32%
========================================================================================
</TABLE>
72
<PAGE>
OFF-BALANCE SHEET ITEMS
North Coast Bank, N.A. has certain ongoing commitments under operating
leases. See "North Coast Bank, N.A. Financial Statements--Note 7,
Commitments and Contingencies" on page 271.
As of March 31, 2000 and December 31, 1999, commitments to extend
credit and letters of credit were the only financial instruments with
off-balance sheet risk. North Coast Bank, N.A. has not entered into any
contracts for financial derivative instruments such as futures, swaps, options
or similar instruments. Loan commitments and letters of credit were 9,685,000,
9,304,000 and 5,109,000 at March 31, 2000, December 31, 1999 and December 31,
1998, respectively. As a percentage of net loans these off-balance sheet items
represent 24.4%, 23.4% and 16.6%, respectively.
DISCLOSURE OF FAIR VALUE
The Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards Number 107, Disclosures about Fair Value of Financial
Statements, requires the disclosure of fair value of most financial instruments,
whether recognized or not recognized in the financial statements. The intent of
presenting the fair values of financial instruments is to depict the market's
assessment of the present value of net future cash flows discounted to reflect
both current interest rates and the market's assessment of the risk that the
cash flows will not occur.
At year-end 1999, the fair values calculated on North Coast Bank,
N.A.'s assets are 0.9% below the carrying values versus .08% above the carrying
values at year-end 1998. There were no material changes or trends reflected at
March 31, 2000 compared to December 31, 1999. See "North Coast Bank, N.A.
Financial Statements--Note 14, Disclosures About Fair Value of Financial
Instruments" on page 281.
YEAR 2000
During 1998 and 1999, management of North Coast Bank, N.A. focused the
appropriate resources to address the potential problems that could arise
regarding the Year 2000 (Y2K) century date change. North Coast Bank, N.A.'s
mission critical systems were evaluated, modified as required and contingency
plans were put into place should the systems have experienced any failures. The
century date change passed without any operational difficulties. There are
certain dates within the year 2000 that have been identified as critical
processing dates. North Coast Bank, N.A. has not experienced any processing
problems with the first three critical dates of 2000; January 31 (end of the
first month of the year), February 29 (leap year day), and March 31 (end of the
first quarter). Upcoming dates during the year are October 10 (first date to
require and 8-digit field, i.e. 10/10/2000) and December 31 (end of the year).
These dates were tested as part of the Y2K project and North Coast Bank, N.A.
does not anticipate any processing problems. North Coast Bank, N.A. currently
expects that its Y2K compliance efforts will be successful without material
adverse effects on its business.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
In 1999, North Coast Bank, N.A. changed independent accountants from
Richardson & Company to Perry-Smith LLP. Accordingly, Perry-Smith LLP audited
North Coast Bank, N.A.'s financial statements as of and for the year ended
December 31, 1999. Richardson & Company audited North Coast Bank, N.A.'s
financial statements as of and for the years ended December 31, 1998 and 1997,
which financial statements did not contain an adverse opinion or a disclaimer of
opinion or qualification or modification as to uncertainty, audit scope, or
accounting principle. Richardson & Company did not resign or decline to stand
for re-election. The change in accountants from Richardson & Company to
Perry-Smith LLP
73
<PAGE>
resulted from the annual review of audit services by the audit committee and
evaluation of proposals for audit services for the year ended December 31, 1999.
The audit committee recommended and the board of directors approved the
appointment of Perry-Smith LLP following review of the proposals. There were no
disagreements with Richardson & Company on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
during the two most recent fiscal years or any subsequent interim period
preceding the change in accountants.
74
<PAGE>
NORTH COAST BANK, N.A. MANAGEMENT AND CERTAIN SECURITY HOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At the close of business on the record date, directors and executive
officers of North Coast Bank, N.A. and their affiliates beneficially owned and
were entitled to vote approximately 276,652 shares of North Coast Bank, N.A.
common stock, which represented approximately 42.8% of the shares of North Coast
Bank, N.A. common stock outstanding on that date. Each of those directors and
executive officers has agreed to vote, or cause to be voted, the North Coast
Bank, N.A. common stock owned by him or her "FOR" approval of the merger
agreement and the merger at North Coast Bank, N.A.'s special meeting. See
"Interests of American River Holdings and North Coast Bank, N.A. Officers and
Directors in the Merger" on page 110.
As of the record date, no individual known to North Coast Bank, N.A.
owned more than five percent (5%) of the outstanding shares of its common stock
except as described in the table below and the directors and executive officers
of North Coast Bank, N.A. beneficially owned shares of North Coast Bank, N.A.
common stock as described in the following table. Unless otherwise indicated in
the table or the notes to the table, (i) each director and executive officer
listed below possesses sole voting power and sole investment power; (ii) all of
the shares shown in the following table are owned both of record and
beneficially; (iii) the address for beneficial owners, all of whom are incumbent
directors and executive officers of North Coast Bank, N.A., is the address of
North Coast Bank, N.A., 50 Santa Rosa Avenue, Santa Rosa, California 95404; and
(iv) North Coast Bank, N.A. $4.00 par value common stock is the only class of
shares outstanding.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership (1) Percent of Class (2)
--------------------- ------------------------ --------------------
Leo J. Becnel 22,593(3) 4.5%
M. Edgar Deas 31,330(4)(14) 6.2%
Debbie K. Fakalata 2,925(5) *
Michael P. Merrill 30,750(6) 6.1%
Kathy A. Pinkard 19,843(7) 3.9%
William A. Robotham 35,124(8) 6.9%
Herbert C. Steiner 31,250(9) 6.2%
Larry L. Wasem 38,150(10) 7.5%
David A. Wattell 2,500(11) *
Philip A. Wright 32,887(12) 6.5%
Robert A. Young 29,300(13)(14) 5.8%
All directors and executive 276,652(15) 42.8%
officers as a group (11) persons
----------------------
(1) Except as otherwise noted, may include shares held by or with the person's
spouse (except where legally separated) and minor children; shares held by
any other relative of the person who has the
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same home; shares held by a family trust as to which the person is a
beneficiary and trustee with sole voting and investment power (or shared
with a spouse); or shares held in an individual retirement account or
pension plan of which the person is the sole beneficiary, and as to which
shares the person has pass-through voting rights and investment power.
(2) Includes stock options outstanding to purchase common stock exercisable
based upon accelerated vesting in connection with the merger under the
North Coast Bank, N.A. 1990 Stock Option Plan. The shares "beneficially
owned" are determined under Securities and Exchange Commission Rules, and
do not necessarily indicate ownership for any other purpose. In general,
beneficial ownership includes shares over which a person has sole or shared
voting or investment power and shares which the person has the right to
acquire within 60 days. An * indicates less than one percent.
(3) Includes 16,875 shares which Mr. Becnel has the right to acquire upon the
exercise of stock options.
(4) Includes 18,750 shares which Mr. Deas has the right to acquire upon the
exercise of stock options.
(5) Includes 2,500 shares which Ms. Fakalata has the right to acquire upon the
exercise of stock options.
(6) Includes 15,625 shares which Mr. Merrill has the right to acquire upon the
exercise of stock options.
(7) Includes 19,290 shares which Ms. Pinkard has the right to acquire upon the
exercise of stock options.
(8) Includes 16,875 shares which Mr. Robotham has the right to acquire upon the
exercise of stock options.
(9) Includes 16,875 shares which Mr. Steiner has the right to acquire upon the
exercise of stock options.
(10) Includes 18,750 shares which Mr. Wasem has the right to acquire upon the
exercise of stock options.
(11) Includes 2,500 shares which Mr. Wattell has the right to acquire upon the
exercise of stock options.
(12) Includes 16,875 shares which Mr. Wright has the right to acquire upon the
exercise of stock options.
(13) Includes 12,125 shares which Mr. Young has the right to acquire upon the
exercise of stock options.
(14) Includes 1,500 shares for Mr. Deas and 1,500 shares for Mr. Young
representing a total of 3,000 shares as to which they have shared voting
and investment power with other investors in an investment club.
(15) Includes 157,040 stock options outstanding to purchase common stock
exercisable based upon accelerated vesting in connection with the merger
under the North Coast Bank, N.A. 1990 Stock Option Plan.
BACKGROUND AND BUSINESS EXPERIENCE OF MANAGEMENT
The following table sets forth certain information as of the record
date July 25, 2000 with respect to incumbent directors, as well as all executive
officers, including their respective ages, positions with North Coast Bank,
N.A., and a brief account of the business experience for a minimum of five years
of each director and executive officer listed below.
Other than the merger, North Coast Bank, N.A. knows of no arrangements,
including any pledge by any person of securities of North Coast Bank, N.A., the
operation of which may, at a subsequent date, result in a change in control of
North Coast Bank, N.A. There are no arrangements or understandings by which any
of the executive officers or directors of North Coast Bank, N.A. were selected.
There is no family relationship between any of the directors or executive
officers.
NAME AGE POSITION
Leo J. Becnel 63 Director and Corporate Secretary of North Coast
Bank, N.A. since 1990. Optometry practitioner in
Windsor.
M. Edgar Deas 64 Director (Chairman) of North Coast Bank, N.A.
since 1990. President and Chief Executive Officer
of E&M Electric in Healdsburg.
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<PAGE>
NAME AGE POSITION
Debbie K. Fakalata 41 Senior Vice President and Chief Financial Officer
of North Coast Bank, N.A. since 1998. Formerly,
Vice President and Chief Financial Officer of
Stockmans Bank in Elk Grove since April, 1991, and
Operations Manager of California Livestock
Production Credit Association since 1980. Ms.
Fakalata resigned effective July 7, 2000.
Michael P. Merrill 58 Director (Vice-Chairman) of North Coast Bank, N.A.
since 1990. Attorney-at-Law and senior partner of
Merrill, Arnone & Jones in Santa Rosa.
Kathy A. Pinkard 47 Director, President and Chief Executive Officer of
North Coast Bank, N.A. since 1998. Formerly,
Executive Vice President and Chief Operating
Officer, and Senior Vice President and Chief
Financial Officer, of North Coast Bank, N.A.,
since September 1, 1997 and February 6, 1996,
respectively. Senior Vice President and Chief
Financial Officer of Gold Country National Bank in
Marysville since May, 1993. Vice President/Cashier
of Stockmans Bank in Elk Grove since 1990.
William A. Robotham 58 Director of North Coast Bank, N.A. since 1990.
Executive partner of Pisenti & Brinker, Certified
Public Accountants, in Santa Rosa.
Herbert C. Steiner 62 Director of North Coast Bank, NA. since 1990.
Pharmacist and owner of the Prescription Center
Pharmacy in Healdsburg.
Larry L. Wasem 46 Director of North Coast Bank, N.A. since 1990.
Real estate developer and partner of the Airport
Business Center in Santa Rosa since 1985.
David A. Wattell 54 Senior Vice President and Chief Credit Officer of
North Coast Bank, N.A. since 1997. Formerly,
Senior Vice President and Senior Credit Officer of
National Bank of the Redwoods in Santa Rosa since
November, 1991. President and Chief Executive
Officer of Codding Bank in Rohnert Park since
September, 1988.
Philip A. Wright 53 Director of North Coast Bank, N.A. since 1990.
Owner of Wright Realty, a real estate and
development business in Windsor.
Robert A. Young 81 Director of North Coast Bank, N.A. since 1990.
President of Robert Young Vineyards, Inc. in
Geyserville.
None of the directors of North Coast Bank, N.A. is a director of any other
company with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, or subject to the requirements of
Section 15(d) of such Act or any company registered as an investment company
under the Investment Company Act of 1940, whose common stock is registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
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<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established the following standing
committees, with membership as noted:
The board of directors has not established nominating or compensation
committees. The full board of directors performs the functions of nominating and
compensation committees with responsibility for considering appropriate
candidates for election as directors and for determining appropriate
compensation for management, respectively.
The Investment/Audit Committee is composed of William A. Robotham
(Chairman), Philip Wright (Vice-Chairman), Herbert C. Steiner, Larry L. Wasem,
and Robert A. Young. The functions of the Audit Committee are to recommend the
appointment of and to oversee a firm of independent public accountants who audit
the books and records of North Coast Bank, N.A. for the fiscal year for which
they are appointed, to approve each professional service rendered by such
accountants and to evaluate the possible effect of each such service on the
independence of North Coat Bank, N.A.'s accountants. The function of the
Investment Committee is to oversee the investments of North Coast Bank, N.A. to
ensure that North Coast Bank, N.A. maintains suitable investments while being
sufficiently liquid to meet demands for funds for withdrawals and loans, and to
use best efforts to obtain a reasonable return on those investments. The
Investment/Audit Committee met twelve (12) times during 1999.
The Loan Committee is composed of Larry L. Wasem (Chairman), Michael P.
Merrill (Vice- Chairman), Philip A. Wright and Leo J. Becnel. The functions of
the Loan Committee are to set the lending limits for North Coast Bank, N.A.'s
officers, to monitor compliance with North Coast Bank, N.A.'s loan policy and
CRA requirements, to meet regularly to review North Coast Bank, N.A.'s overall
position and to review and act upon all loans in excess of the lending limits of
North Coast Bank's officers. The Loan Committee met thirty (30) times during
1999.
Mario Edgar Deas (Chairman of the board of directors) is an ex-officio
member of each committee and has attended substantially all of each committee's
meetings.
During 1999, North Coast Bank, N.A.'s board of directors held fifty
four (54) meetings. All directors attended at least 75% of the aggregate of the
total number of meetings of the board of directors and the number of meetings of
the committees on which they served, except director Robotham who attended 71%
of these meetings.
COMPENSATION OF DIRECTORS
No fees were paid to non-employee directors during 1999. The
non-employee directors of North Coast Bank, N.A. participate in the North Coast
Bank, N.A. 1990 Stock Option Plan. During 1999, each non-employee director was
granted options to purchase 5,000 shares of North Coast Bank, N.A. common stock
at a price of $8.75 per share. The options have a term of 10 years and vested at
the rate of 1,000 immediately and the remainder in installments of 1,000 over
each of the next four years.
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<PAGE>
EXECUTIVE COMPENSATION
Set forth below is the summary compensation paid during the three years
ended December 31, 1999 to Kathy A. Pinkard, Debbie K. Fakalata, and David A.
Wattell, the only executive officers of North Coast Bank, N.A.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Principal Position ($) (1) ($) (2) Compensation Stock Underlying Payouts Compensation
($) (3) Award(s) ($) Options/SARs ($) ($) (5)
(#) (4)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kathy A. Pinkard, 1999 $ 95,000 $ 10,000 $ 3,240 -- 7,500 $ -- $ 1,425
President and Chief
Executive Officer 1998 95,000 -- 3,505 -- -- -- --
1997 68,667 3,500 3,505 -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
Debbie K. Fakalata, 1999 75,000 1,500 2,280 -- 2,500 -- --
Senior Vice President and
Chief Financial Officer 1998 18,750 -- 523 -- -- -- --
(6)
1997 -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
David A. Wattell, 1999 80,000 8,500 3,820 -- 2,500 -- 2,300
Senior Vice President and
Chief Credit Officer 1998 75,000 2,000 3,487 -- -- -- --
1997 18,634 -- -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers under the 401(k) Plan.
(2) Amounts indicated as incentive bonus payments are listed in the year paid.
(3) No executive officer received perquisites or other personal benefits in
excess of the lesser of $50,000 or 10% of each such officer's total annual
salary and bonus during 1999, 1998 and 1997.
(4) Amounts shown represent the number of shares granted. North Coast Bank,
N.A. has a 1990 Stock Option Plan (the "1990 Plan") pursuant to which
options can be granted to directors and key, full-time salaried, officers
and employees of North Coast Bank, N.A. Options granted under the 1990 Plan
were either incentive options or nonstatutory options. Options granted
under the 1990 Plan became exercisable in accordance with a vesting
schedule established at the time of grant. Vesting can not extend beyond
ten years from the date of grant. Upon a change in control of North Coast
Bank, N.A., all outstanding options under the 1990 Plan will become fully
vested and exercisable. Options granted under the 1990 Plan are adjusted to
protect against dilution in the event of certain changes in North Coast
Bank, N.A.'s capitalization, including stock splits and stock dividends.
All options granted to the named executive officers have an exercise price
equal to the fair market value of North Coast Bank, N.A. common stock on
the date of grant. There were 2,500 incentive stock options granted to each
of Ms. Pinkard, Ms. Fakalata and Mr. Wattell during 1999. Ms. Pinkard was
also granted 5,000 nonstatutory stock options during 1999 for service as a
director.
(5) Amounts shown for each named executive officer include 401(k) matching
contributions.
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<PAGE>
(6) Ms. Fakalata resigned effective July 7, 2000.
The following table sets forth certain information concerning the
granting of options under the 1990 Stock Option Plan during the year ended
December 31, 1999.
<TABLE>
<CAPTION>
Option/SAR Grants In Last Fiscal Year
-------------------------------------------------------------------------------------------------
Individual Grants
-------------------------------------------------------------------------------------------------
Number of Percentage of
Securities Underlying Total Options/SARs
Option/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) (1) Fiscal Year ($/Sh) (2) Date
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kathy Pinkard 2,500 33.33% $ 8.75 12/16/09
5,000 -- (3) $ 8.75 12/16/09
-------------------------------------------------------------------------------------------------
Debbie K. Fakalata 2,500 33.33% $ 8.75 12/16/09
-------------------------------------------------------------------------------------------------
David A. Wattell 2,500 33.33% $ 8.75 12/16/09
-------------------------------------------------------------------------------------------------
</TABLE>
(1) Options granted under the 1990 Plan were either incentive options or
nonstatutory options. Options granted under the 1990 Plan became
exercisable in accordance with a vesting schedule established at the time
of grant. Vesting can't extend beyond ten years from the date of grant.
Upon a change in control of North Coast Bank, N.A., all outstanding options
under the 1990 Plan will become fully vested and exercisable. Options
granted under the 1990 Plan are adjusted to protect against dilution in the
event of certain changes in North Coast Bank, N.A.'s capitalization,
including stock splits and stock dividends. All options granted to the
named executive officers are incentive stock options and have an exercise
price equal to the fair market value of North Coast Bank, N.A. common stock
on the date of grant.
(2) The exercise price was determined based upon the closing price of North
Coast Bank, N.A.'s common stock on the grant date.
(3) Ms. Pinkard was granted 5,000 nonstatutory stock options for service as a
director.
The following table sets forth the number of shares of common stock
acquired by each of the named executive officers upon the exercise of stock
options during fiscal 1999, the net value realized upon exercise, the number of
shares of common stock represented by outstanding stock options held by each of
the named executive officers as of December 31, 1999, the value of such options
based on the closing price of North Coast Bank, N.A. common stock, and certain
information concerning unexercised options under the 1990 Stock Option Plan.
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<PAGE>
---------------------------------------------------------------------------
Aggregated Option/SAR Exercises In Last Fiscal Year And
FY-End Option/SAR Values
---------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs Options/SARs
at Fiscal Year- at Fiscal Year-
Shares Value End (#) End ($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e) (1)
---------------------------------------------------------------------------
Kathy A. -- -- 6,540 / 12,750 9,576 / 7,875
Pinkard
---------------------------------------------------------------------------
Debbie K. -- -- -- / 2,500 -- / --
Fakalata
---------------------------------------------------------------------------
David A. -- -- -- / 2,500 -- / --
Wattell
---------------------------------------------------------------------------
(1) The aggregate value has been determined based upon the closing price for
North Coast Bank, N.A.'s common stock at year-end, minus the exercise
price.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
On December 16, 1999, North Coast Bank, N.A. entered into an employment
agreement with Kathy A. Pinkard. The agreement is for a term of three (3) years
and will be automatically extended each year after its initial term, unless
either party gives written notice to the contrary ninety (90) days prior the
renewal date, and provides for a base salary of $104,500, to be reviewed
annually. The agreement also provides for a performance bonus ranging from 0% to
50% of Ms. Pinkard's base salary based upon mutually agreed upon goals. The
board of directors has sole discretion as to the goals of the bonus program. Ms.
Pinkard is also entitled to participate in any retirement or employee benefits
that the board of directors may adopt for its employees; is entitled to four (4)
weeks' vacation; and will be reimbursed for mileage associated with business and
reasonable expenses for attending annual and periodic meetings of trade
associations. If, during the term of the agreement, Ms. Pinkard is terminated
after a change of control of North Coast Bank, N.A. for any reason other than
cause, she will receive her base salary through the last day of the calendar
month of the termination. If the termination occurs within three (3) years after
the change of control, she will also receive payment in an amount equal to two
(2) times her then current base salary. As defined in the agreement, "control"
refers to the acquisition of 25% or more of the voting securities of North Coast
Bank, N.A. Accordingly, the merger would be considered a change of control under
the terms of the agreement.
On December 16, 1999, North Coast Bank, N.A. also entered into change
of control employment agreements with each of Debbie K. Fakalata and David A.
Wattell. The agreements are for a term of three (3) years and will be
automatically extended each year after the initial term, unless either party
gives written notice to the contrary ninety (90) days prior the renewal date.
If, during the term of the agreements, Ms. Fakalata or Mr. Wattell is terminated
after a change of control of North Coast Bank, N.A. for any reason other than
cause, he or she, as the case may be, shall receive his or her base salary
through the last day of the calendar month of the termination. If such
termination occurs within one hundred eighty (180) days after the change of
control, he or she will also receive payment in an amount equal to one (1) times
his or her then current base salary. As defined in the agreements, "control"
refers to the
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acquisition of 25% or more of the voting securities of North Coast Bank, N.A.
Accordingly, the merger would be considered a change of control under the terms
of the agreements.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
North Coast Bank, N.A. does not currently have a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended,
nor is it required to file reports with the Securities and Exchange Commission
under Section 13 of the Securities Exchange Act of 1934. Consequently, North
Coast Bank, N.A. directors, executive officers and ten percent or more
shareholders of North Coast Bank, N.A. equity securities are not required to
file reports of initial ownership and changes in ownership of its equity
securities with the Securities and Exchange Commission under Section 16(a) of
the Securities Exchange Act of 1934.
In connection with the merger, American River Holdings will register
its common stock under Section 12 of the Securities Exchange Act and thereafter
will be required to file reports under Section 13 of the Securities Exchange Act
with the Securities and Exchange Commission. Following the effective time of the
merger, Kathy A. Pinkard and the two North Coast Bank, N.A. directors who are
appointed to the American River Holdings board of directors, and ten percent or
more shareholders of North Coast Bank, N.A. equity securities, will be required
to file ownership reports with the Securities and Exchange Commission under
Section 16(a) of the Securities Exchange Act of 1934.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
There have been no transactions, or series of similar transactions,
during 1999, or any currently proposed transaction, or series of similar
transactions, to which North Coast Bank, N.A. and its subsidiaries was or is to
be a party, in which the amount involved exceeded or will exceed $60,000 and in
which any director or executive officer of North Coast Bank, N.A., any
shareholder owning of record or beneficially 5% or more of North Coast Bank,
N.A.'s common stock, or any member of the immediate family of any of the
foregoing persons, had, or will have, a direct or indirect material interest.
CERTAIN BUSINESS RELATIONSHIPS
There were no business relationships during 1999 of the type requiring
disclosure under Item 404(b) of Regulation S-K.
INDEBTEDNESS OF MANAGEMENT
North Coast Bank, N.A., through its subsidiaries, has had, and expects
in the future to have banking transactions in the ordinary course of its
business with many of North Coast Bank, N.A. directors and officers and their
associates, including transactions with corporations of which such persons are
directors, officers or controlling shareholders, on substantially the same terms
(including interest rates and collateral) as those prevailing for comparable
transactions with others. Management believes that in 1999 such transactions
comprising loans did not involve more than the normal risk of collectibility or
present other unfavorable features. Loans to executive officers of North Coast
Bank, N.A. are subject to limitations as to amount and purposes prescribed in
part by the Federal Reserve Act, as amended, and the regulations of the Office
of the Comptroller of the Currency.
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SUPERVISION AND REGULATION
GENERAL
American River Holdings and Subsidiaries. The common stock of American
River Holdings is subject to the registration requirements of the Securities Act
of 1933, as amended, and the qualification requirements of the California
Corporate Securities Law of 1968, as amended. American River Bank's common
stock, however, is exempt from those requirements. American River Holdings is
not currently subject to the periodic reporting requirements of Section 13 of
the Securities Exchange Act of 1934, as amended, which include, but are not
limited to, annual, quarterly and other current reports with the Securities and
Exchange Commission. American River Holdings intends to register its securities
under Section 12(g) of the Securities Exchange Act of 1934, as amended,
following filing of this document with the Securities and Exchange Commission.
Thereafter, American River Holdings will be subject to the periodic reporting
requirements of Section 13 of the Securities Exchange Act of 1934, as amended.
American River Bank is licensed by the California Commissioner of
Financial Institutions, its deposits are insured by the Federal Deposit
Insurance Corporation, and it has chosen not to become a member of the Federal
Reserve System. Consequently, American River Bank is subject to the supervision
of, and is regularly examined by, the California Commissioner of Financial
Institutions and the Federal Deposit Insurance Corporation. The supervision and
regulation includes comprehensive reviews of all major aspects of American River
Bank's business and condition, including its capital ratios, allowance for
possible loan losses and other factors. However, no inference should be drawn
that such authorities have approved any such factors. American River Holdings
and American River Bank are required to file reports with the Board of Governors
of the Federal Reserve System (the "Board of Governors"), the California
Commissioner of Financial Institutions, and the Federal Deposit Insurance
Corporation and provide the additional information that the Board of Governors,
California Commissioner of Financial Institutions, and Federal Deposit Insurance
Corporation may require. American River Bank's deposits are insured by the
Federal Deposit Insurance Corporation up to the applicable legal limits.
First Source Capital is a California corporation which conducts a lease
brokerage business as a permissible non-banking activity under the Federal
Reserve Act. First Source Capital is subject to regulatory supervision by the
Board of Governors and the California Commissioner of Corporations.
American River Holdings is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company
Act"), and is registered as such with, and subject to the supervision of, the
Board of Governors. American River Holdings is required to obtain the approval
of the Board of Governors before it may acquire all or substantially all of the
assets of any bank, or ownership or control of the voting shares of any bank if,
after giving effect to such acquisition of shares, American River Holdings would
own or control more than 5% of the voting shares of such bank. The Bank Holding
Company Act prohibits American River Holdings from acquiring any voting shares
of, or interest in, all or substantially all of the assets of, a bank located
outside the State of California unless such an acquisition is specifically
authorized by the laws of the state in which such bank is located. Any such
interstate acquisition is also subject to the provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994.
American River Holdings, and any subsidiaries, which it may acquire or
organize, are deemed to be "affiliates" of American River Bank within the
meaning of that term as defined in the Federal Reserve Act. This means, for
example, that there are limitations (a) on loans by American River Bank to
affiliates, and (b) on investments by American River Bank in affiliates' stock
as collateral for loans to any
83
<PAGE>
borrower. American River Holdings and its subsidiaries are also subject to
certain restrictions with respect to engaging in the underwriting, public sale
and distribution of securities.
In addition, regulations of the Board of Governors under the Federal
Reserve Act require that reserves be maintained by American River Bank in
conjunction with any liability of American River Holdings under any obligation
(promissory note, acknowledgement of advance, banker's acceptance or similar
obligation) with a weighted average maturity of less than seven (7) years to the
extent that the proceeds of such obligations are used for the purpose of
supplying funds to American River Bank for use in its banking business, or to
maintain the availability of such funds.
North Coast Bank, N.A. As a national bank licensed under the national
banking laws of the United States, North Coast Bank, N.A. is regularly examined
by the Office of the Comptroller of the Currency and is subject to the
supervision of the Federal Deposit Insurance Corporation, Board of Governors,
and the Office of the Comptroller of the Currency. The supervision and
regulation includes comprehensive reviews of all major aspects of North Coast
Bank, N.A.'s business and condition, including its capital ratios, allowance for
possible loan losses and other factors. However, no inference should be drawn
that such authorities have approved any such factors. North Coast Bank, N.A. is
required to file reports with the Office of the Comptroller of the Currency and
the Federal Deposit Insurance Corporation. North Coast Bank, N.A.'s deposits are
insured by the Federal Deposit Insurance Corporation up to the applicable legal
limits.
CAPITAL STANDARDS
The Board of Governors, the Federal Deposit Insurance Corporation, and
the Office of the Comptroller of the Currency have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies and
banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, American River Holdings, American
River Bank, and North Coast Bank, N.A. are required to maintain capital equal to
at least 8.0% of its assets and commitments to extend credit, weighted by risk,
of which at least 4.0% must consist primarily of common equity (including
retained earnings) and the remainder may consist of subordinated debt,
cumulative preferred stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of those loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of those loans.
Under the risk-based capital guidelines, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which has an assigned risk weight. Capital ratios are
calculated by dividing the institution's qualifying capital by its period-end
risk-weighted assets. The guidelines establish two categories of qualifying
capital: Tier 1 capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which includes,
among other items, limited life(and in case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses. Tier 2 capital may also include up to 45% of the
pretax net unrealized gains on certain available-for-sale equity securities
having readily determinable fair values (i.e. the excess, if any, of fair market
value over the book value or historical cost of the investment security). The
federal regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are
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not prudently valued. Unrealized gains and losses on other types of assets, such
as bank premises and available-for-sale debt securities, are not included in
Tier 2 capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale equity
securities will continue to be deducted from Tier 1 capital as a cushion against
risk. Each institution is required to maintain a minimum risk-based capital
ratio (including Tier 1 and Tier 2 capital) of 8%, of which at least half must
be Tier 1 capital.
A leverage capital standard was adopted as a supplement to the
risk-weighted capital guidelines. Under the leverage capital standard, an
institution is required to maintain a minimum ratio of Tier 1 capital to the sum
of its quarterly average total assets and quarterly average reserve for loan
losses, less intangibles not included in Tier 1 capital. Period-end assets may
be used in place of quarterly average total assets on a case-by-case basis. The
Board of Governors and the Federal Deposit Insurance Corporation have also
adopted a minimum leverage ratio for bank holding companies as a supplement to
the risk-weighted capital guidelines. The leverage ratio establishes a minimum
Tier 1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank
holding companies or those that have implemented the risk-based capital market
risk measure. All other bank holding companies must maintain a minimum Tier 1
leverage ratio of 4% with higher leverage capital ratios required for bank
holding companies that have significant financial and/or operational weakness, a
high risk profile, or are undergoing or anticipating rapid growth.
At March 31, 2000, American River Holdings, American River Bank and
North Coast Bank, N.A. were in compliance with the risk-weighted capital and
leverage ratios. See "Capital Resources" on pages ___ and ___.
PROMPT CORRECTIVE ACTION
The Board of Governors, Federal Deposit Insurance Corporation, and
Office of the Comptroller of the Currency have adopted regulations implementing
a system of prompt corrective action pursuant to Section 38 of the Federal
Deposit Insurance Act and Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five
capital categories with the following characteristics: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet
the definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than 8%, a
Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less
than 4%; (4) "Significantly undercapitalized" - consisting of institutions with
a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain
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mandatory and discretionary supervisory actions. Mandatory supervisory actions
include (1) increased monitoring and review by the appropriate federal banking
agency; (2) implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without prior
regulatory approval and regulators must prohibit a critically undercapitalized
institution from taking certain other actions without prior approval, including
(1) entering into any material transaction other than in the usual course of
business, including investment expansion, acquisition, sale of assets or other
similar actions; (2) extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply with any law,
regulation or order; (4) making any material change in accounting methods; (5)
engaging in certain affiliate transactions; (6) paying excessive compensation or
bonuses; and (7) paying interest on new or renewed liabilities at rates which
would increase the weighted average costs of funds beyond prevailing rates in
the institution's normal market areas.
ADDITIONAL REGULATIONS
Under the FDICIA, the federal financial institution agencies have
adopted regulations which require institutions to establish and maintain
comprehensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and reporting
requirements. The FDICIA further generally prohibits an insured state bank from
engaging as a principal in any activity that is impermissible for a national
bank, absent Federal Deposit Insurance Corporation determination that the
activity would not pose a significant risk to the Bank Insurance Fund, and that
American River Bank is, and will continue to be, within applicable capital
standards.
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The Federal Financial Institution Examination Counsel ("FFIEC") on
December 13, 1996, approved an updated Uniform Financial Institutions Rating
System ("UFIRS"). In addition to the five components traditionally included in
the so-called "CAMEL" rating system which has been used by bank examiners for a
number of years to classify and evaluate the soundness of financial institutions
(including capital adequacy, asset quality, management, earnings and liquidity),
UFIRS includes for all bank regulatory examinations conducted on or after
January 1, 1997, a new rating for a sixth category identified as sensitivity to
market risk. Ratings in this category are intended to reflect the degree to
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
revised rating system is identified as the "CAMELS" system.
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital adequacy
in conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings. American
River Bank and North Coast Bank, N.A. each have current ratings of
"satisfactory" for CRA compliance.
LIMITATIONS ON DIVIDENDS
American River Holdings' ability to pay cash dividends is subject to
restrictions set forth in the California General Corporation Law. Funds for
payment of any cash dividends by American River Holdings would be obtained from
its investments as well as dividends and/or management fees from American River
Bank. The payment of cash dividends and/or management fees by American River
Bank is subject to restrictions set forth in the California Financial Code, as
well as restrictions established by the Federal Deposit Insurance Corporation.
North Coast Bank, N.A.'s ability to pay cash dividends is subject to
restrictions imposed under the National Bank Act and regulations promulgated by
the Office of the Comptroller of the Currency. See "Dividends and Dividend
Policy" on page 142 for further information regarding the payment of cash
dividends by American River Holdings, American River Bank, and North Coast Bank,
N.A.
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COMPETITION
COMPETITIVE DATA
American River Bank. At June 30, 1999, based on the most recent "Data
Book Summary of Deposits in Federal Deposit Insurance Corporation Insured
Commercial and Savings Banks" report at that date, the competing commercial and
savings banks had 139 offices in the cities of Fair Oaks, Roseville and
Sacramento, California, where American River Bank has its 4 offices.
Additionally, American River Bank competes with thrifts and, to a lesser extent,
credit unions, finance companies and other financial service providers for
deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which American River Bank is not authorized nor prepared to
offer currently. American River Bank has made arrangements with its
correspondent banks and with others to provide some of these services for its
customers. For borrowers requiring loans in excess of American River Bank's
legal lending limits, American River Bank has offered, and intends to offer in
the future, such loans on a participating basis with its correspondent banks and
with other independent banks, retaining the portion of such loans which is
within its lending limits. As of March 31, 2000, American River Bank's aggregate
legal lending limits to a single borrower and such borrower's related parties
were $2,825,000 on an unsecured basis and $4,708,000 on a fully secured basis
based on regulatory capital of $18,833,000.
American River Bank's business is concentrated in its service area,
which primarily encompasses Sacramento County and South Western Placer County.
The economy of American River Bank's service area is dependent upon government,
manufacturing, tourism, retail sales, population growth and smaller service
oriented businesses.
Based upon the most recent "Data Book Summary of Deposits in Federal
Deposit Insurance Corporation Insured Commercial and Savings Banks" report dated
June 30, 1999, there were 186 operating commercial and savings bank offices in
Sacramento County with total deposits of $10,491,810,000. This was an increase
of $356,658,000 over the June 30, 1998 balances. American River Bank held a
total of $120,623,000 in deposits, representing approximately 1.2% of total
commercial and savings banks deposits in Sacramento County as of June 30, 1999.
Based upon the most recent "Data Book Summary of Deposits in Federal
Deposit Insurance Corporation Insured Commercial and Savings Banks" report dated
June 30, 1999, there were 70 operating commercial and savings bank offices in
Placer County with total deposits of $2,188,633,000. This was an increase of
$138,464,000 over the June 30, 1998 balances. American River Bank held a total
of $35,038,000 in deposits, representing approximately 1.6% of total commercial
and savings banks deposits in Placer County as of June 30, 1999.
In 1996, pursuant to Congressional mandate, the Federal Deposit
Insurance Corporation reduced bank deposit insurance assessment rates to a range
from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. Based upon
the risk-based assessment rate schedule, American River Bank's current capital
ratios and levels of deposits, American River Bank anticipates no change in the
assessment rate applicable to it during 2000 from that in 1999.
North Coast Bank, N.A. At June 30, 1999, based on the most recent "Data
Book Summary of Deposits in Federal Deposit Insurance Corporation Insured
Commercial and Savings Banks" report at that date, the competing commercial and
savings banks had 51 offices in the cities of Healdsburg, Santa
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Rosa and Windsor, California, where North Coast Bank, N.A. has its 3 offices.
Additionally, North Coast Bank, N.A. competes with thrifts and, to a lesser
extent, credit unions, finance companies and other financial service providers
for deposit and loan customers.
North Coast Bank, N.A. has also made arrangements with its
correspondent banks and with others to provide some of the services for its
customers, such as trust services, international banking, discount brokerage and
insurance services, which North Coast Bank, N.A. is not authorized nor prepared
to offer currently. For borrowers requiring loans in excess of North Coast Bank
N.A.'s legal lending limits, North Coast Bank has offered, and intends to offer
in the future, such loans on a participating basis with its correspondent banks
and with other independent banks, retaining the portion of such loans which is
within its lending limits. As of March 31, 2000, North Coast Bank N.A.'s
aggregate legal lending limits to a single borrower and such borrower's related
parties were $680,000 based on regulatory capital of $4,536,000.
North Coast Banks, N.A.'s business is concentrated in its service area,
which primarily encompasses Sonoma County. The economy of North Coast Bank,
N.A.'s service area is dependent upon agriculture, tourism, retail sales,
population growth and smaller service oriented businesses.
Based upon the most recent "Data Book Summary of Deposits in Federal
Deposit Insurance Corporation Insured Commercial and Savings Banks" report dated
June 30, 1999, there were 19 operating commercial and savings bank offices in
Sonoma County with total deposits of $5,895,987,000. This was an increase of
$305,000,000 over the June 30, 1998 balances. North Coast Bank, N.A. held a
total of $37,133,000 in deposits, representing approximately .63% of total
commercial and savings banks deposits in Sonoma County as of June 30, 1999.
Based upon the risk-based assessment rate schedule implemented by the
Federal Deposit Insurance Corporation in 1996, North Coast Bank, N.A.'s current
capital ratios and levels of deposits, North Coast Bank, N.A. anticipates no
change in the assessment rate applicable to it during 2000 from that in 1999.
GENERAL COMPETITIVE FACTORS
In order to compete with the major financial institutions in their
primary service areas, community banks such as American River Bank and North
Coast Bank, N.A. use to the fullest extent possible the flexibility which is
accorded by their independent status. This includes an emphasis on specialized
services, local promotional activity, and personal contacts by their respective
officers, directors and employees. They also seek to provide special services
and programs for individuals in their primary service area who are employed in
the agricultural, professional and business fields, such as loans for equipment,
furniture, tools of the trade or expansion of practices or businesses. In the
event there are customers whose loan demands exceed their respective lending
limits, they seek to arrange for such loans on a participation basis with other
financial institutions. They also assist those customers requiring services not
offered by either bank to obtain such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by a bank to obtain their
deposits and other borrowings and the interest rate received by a bank on loans
extended to customers and on securities held in a bank's portfolio comprise the
major portion of a bank's earnings.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits.
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Commercial banks also compete for loans with savings and loan associations,
credit unions, consumer finance companies, mortgage companies and other lending
institutions.
The interest rate differentials of a bank, and therefore their
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on American River Bank and North
Coast Bank, N.A. are not predictable.
IMPACT OF LEGISLATIVE AND REGULATORY PROPOSALS
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank which has been in existence for at least five years.
The federal financial institution agencies, especially the Office of
the Comptroller of the Currency and the Board of Governors, have taken steps to
increase the types of activities in which national banks and bank holding
companies can engage, and to make it easier to engage in such activities. The
Office of the Comptroller of the Currency has issued regulations permitting
national banks to engage in a wider range of activities through subsidiaries.
"Eligible institutions" (those national banks that are well capitalized, have a
high overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through operating
subsidiaries subject to an expedited application process. In addition, a
national bank may apply to the Office of the Comptroller of the Currency to
engage in an activity through a subsidiary in which American River Bank itself
may not engage.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act"), which is potentially the most significant
banking legislation in many years. The Act eliminates most of the remaining
depression-era "firewalls" between banks, securities firms and insurance
companies which was established by The Banking Act of 1933, also known as the
Glass-Steagall Act ("Glass-Steagall). Glass-Steagall sought to insulate banks as
depository institutions from the perceived risks of securities dealing and
underwriting, and related activities. The Act repeals Section 20 of
Glass-Steagall which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can now
acquire securities firms or create them as subsidiaries, and securities firms
can now acquire banks or start banking activities through a financial holding
company. The Act includes provisions which permit national banks to conduct
financial activities through a subsidiary that are permissible for a national
bank to engage in directly, as well as certain activities authorized by statute,
or that are financial in nature or incental to financial activities to the same
extent as permitted to a "financial holding company" or its affiliates. This
liberalization of United States banking and financial services regulation
applies both to domestic institutions and foreign institutions conducting
business in the United States. Consequently, the common ownership of banks,
securities firms and insurance firms is now possible, as is the conduct of
commercial banking, merchant banking,
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investment management, securities underwriting and insurance within a single
financial institution using a "financial holding company" structure authorized
by the Act.
Prior to the Act, significant restrictions existed on the affiliation
of banks with securities firms and on the direct conduct by banks of securities
dealing and underwriting and related securities activities. Banks were also
(with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The Act removes these restrictions and substantially
eliminates the prohibitions under the Bank Holding Company Act on affiliations
between banks and insurance companies. Bank holding companies which qualify as
financial holding companies can now insure, guarantee, or indemnify against
loss, harm, damage, illness, disability, or death; issue annuities; and act as a
principal, agent, or broker regarding such insurance services.
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the Act, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that federal financial
institution and securities regulatory agencies prescribe regulations to
implement the policy that financial institutions must respect the privacy of
their customers and protect the security and confidentiality of customers'
non-public personal information. Implementing regulations have recently been
issued for comment by all of the federal financial institution regulatory
agencies and the Securities and Exchange Commission. These regulations will
require, in general, that financial institutions (1) may not disclose non-public
personal information of customers to non-affiliated third parties without notice
to their customers, who must have opportunity to direct that such information
not be disclosed; (2) may not disclose customer account numbers except to
consumer reporting agencies; and (3) must give prior disclosure of their privacy
policies before establishing new customer relationships.
Neither American River Holdings and American River Bank nor North Coast
Bank, N.A. have determined whether or when they may seek to acquire and exercise
new powers or activities under the Act, and the extent to which competition will
change among financial institutions affected by the Act has not yet become
clear.
Certain legislative and regulatory proposals that could affect American
River Holdings, American River Bank, North Coast Bank, N.A., and the banking
business in general are periodically introduced before the United States
Congress, the California State Legislature and Federal and state government
agencies. It is not known to what extent, if any, legislative proposals will be
enacted and what effect such legislation would have on the structure, regulation
and competitive relationships of financial institutions. It is likely, however,
that such legislation could subject American River Holdings, American River Bank
and North Coast Bank, N.A. to increased regulation, disclosure and reporting
requirements, competition, and costs of doing business.
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In addition to legislative changes, the various Federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such regulations may have on American River Holdings,
American River Bank, and North Coast Bank, N.A.
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PROPOSAL NO. 1
TO APPROVE THE MERGER AGREEMENT AND MERGER
BACKGROUND OF THE MERGER AGREEMENT AND MERGER
The following is a brief description of the events that resulted in the
execution of the merger agreement dated as of March 1, 2000, among American
River Holdings, ARH Interim National Bank and North Coast Bank, N.A.
American River Holdings. On November 17, 1999, the executive committee
of the American River Holdings board of directors met to discuss a proposal to
acquire North Coast Bank, N.A. as an additional banking subsidiary. Later that
day, the board of directors reviewed the proposal to acquire North Coast Bank,
N.A. and authorized the executive committee to communicate interest in such a
proposal to North Coast Bank, N.A. David T. Taber, President and Chief Executive
Officer of American River Holdings contacted Kathy A. Pinkard, President and
Chief Executive Officer of North Coast Bank, N.A. on November 18, 1999 to
discuss interest in the proposed transaction. She advised him that the matter
would be brought to the attention of the board of directors of North Coast Bank,
N.A. during its strategic planning meeting on December 1, 1999. On December 2,
1999, Ms. Pinkard asked Mr. Taber to provide further information regarding the
proposal to Chairman of the Board, Mr. M. Edgar Deas. Mr. Taber contacted
Chairman Deas and after a preliminary discussion it was determined that a
meeting among members of the respective executive committees of American River
Holdings and North Coast Bank, N.A. should be held to further discuss the
proposed transaction. On December 9, 1999, a meeting was held among members of
both executive committees.
The executive committee of American River Holdings met on December 10,
1999 to review the conversion ratio alternatives prepared by Mr. Taber and Chief
Financial Officer, Mitchell A. Derenzo. The alternatives included financial
projections received from North Coast Bank, N.A., which estimated net income
between $389,000 and $521,000 for the year 2000, and between $612,000 and
$674,000 for the year 2001. After review of the financial projections and
historical balance sheets and income statements, asset liability reports and
competitive data, the executive committee determined that an appropriate net
income projection for North Coast Bank, N.A. was approximately $475,000 for the
year 2000 and approximately $674,000 for the year 2001. These financial
projections did not include estimated cost savings determined by the executive
committee to be approximately $250,000 or 10% of North Coast Bank, N.A.'s
overhead costs. These projections and information reviewed by the executive
committee were provided to American River Holdings financial advisor, Hoefer &
Arnett Incorporated.
On December 14, 1999, the executive committee of American River
Holdings met to further review the conversion ratio and structure of the
proposed transaction. During this meeting, the executive committee authorized
Mr. Taber to negotiate a floating exchange ratio not to exceed .9284 of a share
of American River Holdings common stock for each outstanding share of North
Coast Bank, N.A. common stock. The executive committee also authorized Mr. Taber
to deliver additional information and a written expression of interest in
connection with the proposed transaction, which he delivered the next day to Ms.
Pinkard.
American River Holdings received a letter from North Coast Bank, N.A.
on December 20, 1999 requesting more time to evaluate matters pertaining to the
proposed transaction prior to responding to American River Holdings' expression
of interest. On January 6, 2000, American River Holdings received a letter from
North Coast Bank, N.A. proposing changes to various factors for such proposed
transaction, including a floating conversion ratio based on a minimum of .97 and
a maximum of 1.07 of a share of American River Holdings common stock. On January
7, 2000, the executive committee of American River Holdings reviewed the
floating conversion ratio proposal received from North Coast Bank, N.A. and
determined that a fixed conversion ratio was preferable due to the uncertainty
of a floating ratio, particularly in view of the volatility of community bank
stock performance. After review of the impact of outstanding North Coast Bank,
N.A. stock options upon the conversion ratio, the executive committee authorized
Mr. Taber to prepare and deliver a revised expression of interest in response to
the letter from North Coast Bank, N.A. received on January 6, 2000. Mr. Taber
delivered to Ms. Pinkard a revised
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expression of interest in which American River Holdings proposed a fixed
conversion ratio of .9644 of a share of American River Holdings common stock for
each outstanding share of North Coast Bank, N.A. common stock. On January 10,
2000, Ms. Pinkard delivered to Mr. Taber a letter accepting the terms outlined
in American River Holdings' expression of interest dated January 7, 2000.
On January 10, 2000, American River Holdings and North Coast Bank, N.A.
entered into a confidentiality agreement to facilitate exchange of confidential
information and due diligence reviews of their respective businesses.
Thereafter, from January 10 through January 19, American River Holdings
conducted its due diligence reviews.
On January 19, 2000, American River Holdings' board of directors
reviewed the letter from North Coast Bank, N.A. received on January 10, 2000,
and various other factors including certain financial due diligence matters
pertaining to the on-site review of North Coast Bank, N.A. The board of
directors authorized the executive committee to proceed to negotiate with
representatives of North Coast Bank, N.A. On February 2, 2000, the executive
committee of American River Holdings reviewed a draft merger agreement. On
February 16, 2000, the board of directors of American River Holdings reviewed a
revised draft of the merger agreement. On February 18, 2000, the executive
committee of American River Holdings reviewed a further revised draft of the
merger agreement and discussed various issues raised in negotiations between
representatives for American River Holdings and North Coast Bank, N.A. On
February 29, 2000, the boards of directors of American River Holdings, American
River Bank and First Source Capital met in a special joint meeting to review the
merger agreement and related documents. Following review of such documents and
the results of due diligence, the respective boards of directors authorized and
approved the execution of the merger agreement and the issuance of a joint press
release announcing the signing of the merger agreement.
North Coast Bank, N.A. On November 18, 1999, Kathy Pinkard, President
and CEO of North Coast Bank was contacted by David T. Taber, President and Chief
Executive Officer of American River Holdings to discuss the possibility of
interest in a strategic alliance with American River Holdings. Ms. Pinkard
advised Mr. Taber that the proposal would be brought to the attention of the
North Coast Bank board of directors at a strategic planning meeting scheduled
for December 1, 1999. During the regularly scheduled strategic planning meeting,
it was determined that NCB was interested in pursuing the matter further and Ms.
Pinkard was instructed by the board to contact Mr. Taber with instructions for
Mr. Taber to contact Mr. Edgar Deas, NCB Chairman of the Board. After contact
with Mr. Deas, it was decided that the members of both executive committees
should meet for further discussion on the proposed transaction. A meeting of the
executive committees was held on December 9, 1999 at American River Bank's board
room in Sacramento. On December 15, 1999, Mr. Taber delivered to Ms. Pinkard
additional information and a written expression of interest in connection with
the proposed merger. On December 16, 1999, at a regularly scheduled board of
directors meeting, the proposal was reviewed by the board of directors. At this
meeting, Ms. Pinkard was instructed to deliver a letter to Mr. Taber asking for
an extension to the December 24, 1999 deadline for response stating that the
board of directors had scheduled another strategic planning session for January
6 at which time North Coast Bank, N.A. would respond to the proposal. On January
6, 2000, North Coast Bank, N.A. responded to Mr. Taber with specific changes to
the original proposal. On January 7, 2000, Ms. Pinkard received a revised
expression of interest from American River Holdings. After a special meeting
held by the board of directors, Ms. Pinkard was instructed to deliver a letter
confirming the terms outlined in the January 7, 2000 American River Holdings
expression of interest. On January 10, 2000, North Coast Bank, N.A. signed a
confidentiality agreement with American River Holdings to begin the exchange of
information and respective due diligence examinations.
On January 27, 2000, the board of directors of North Coast Bank, N.A.
reviewed the written report discussing the due diligence review performed by Ms.
Pinkard and Mr. Wattell during the week of
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January 24, 2000. On February 17, 2000, the board of directors reviewed a draft
merger agreement with revisions associated with issues raised during the
negotiation process with American River Holdings. On February 24, 2000, the
board of directors met to verify that all concerns with the agreement had been
addressed and were satisfactory and the merger agreement was tentatively
approved by the board of directors. On March 1, 2000, a special board of
directors meeting was held to hear the presentation of the fairness opinion by
Seapower Carpenter Capital, Inc., dba Carpenter and Company, concerning the
proposed transaction. After review and discussion of the fairness opinion with
Carpenter and Company, and final review of the merger agreement, the merger
agreement was approved by the board of directors. Ms. Pinkard was authorized to
execute the merger agreement and issue a joint press release announcing the
signing of the merger agreement.
On March 1, 2000, American River Holdings and North Coast Bank, N.A.
executed the merger agreement. Prior to the opening of the OTC Bulletin Board on
March 2, 2000, the parties issued a joint press release publicly announcing the
merger.
Annex A to the document contains a copy of the merger agreement which
is incorporated here by this reference.
See "--Reasons for the Merger Agreement and Merger; Recommendations of
the Boards of Directors" below, "Opinion of American River Holdings Financial
Advisor" on page 98 and "Opinion of North Coast Bank, N.A.'s Financial Advisor"
on page 102.
REASONS FOR THE MERGER AGREEMENT AND MERGER; RECOMMENDATIONS OF THE BOARDS OF
DIRECTORS
American River Holdings. The strategy of the board of directors of
American River Holdings for enhancing long-term value for American River
Holdings shareholders recognizes that further consolidation will occur in the
banking and financial services industry in the United States and that American
River Holdings must be in a position to take advantage of this change. Under
this strategy, management of American River Holdings, at the direction of the
board of directors of American River Holdings, continually explores and
evaluates acquisition opportunities, such as the acquisition of North Coast
Bank, N.A. as a continuing subsidiary of American River Holdings, through the
merger of North Coast Bank, N.A. into ARH Interim National Bank.
In reaching the conclusion that the merger of North Coast Bank, N.A.
into ARH Interim National Bank is fair to and in the best interests of the
shareholders of American River Holdings, the board of directors of American
River Holdings considered numerous factors, including:
o the board of directors' familiarity with and review of North Coast
Bank, N.A.'s business, results of operations, prospects and
financial condition and the willingness of the board of directors of
North Coast Bank, N.A. to consider a merger with ARH Interim
National Bank;
o the opinion of Hoefer & Arnett Incorporated that the terms of the
merger are fair, from a financial point of view, to American River
Holdings shareholders;
o economic conditions and prospects for the markets in which American
River Holdings and North Coast Bank, N.A. operate, and competitive
pressures in the financial services industry in general and the
banking industry in particular;
o the enhancement of American River Holdings' competitiveness and its
ability to serve its customers, depositors, creditors, other
constituents and the communities in which it operates as a result of
the merger;
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o information concerning the business, results of operations, asset
quality and financial condition of American River Holdings and North
Coast Bank, N.A. on a stand-alone and combined basis, and the future
growth prospects of American River Holdings and North Coast Bank,
N.A. following the merger. In this regard, the board of directors of
American River Holdings gave consideration to the results of the
initial review conducted by American River Holdings' management with
respect to North Coast Bank, N.A.'s business and operations,
including, in particular, its asset quality and related conditions
in the merger agreement. That review included an assessment of the
opportunities to achieve increased market penetration in its
existing market and to expand into North Coast Bank, N.A.'s market
area in California;
o the revenue enhancements, cost savings and operational synergies
which the management of American River Holdings believes may be
achieved as a result of the merger through the elimination of
duplicative efforts;
o an assessment that, in the current economic environment, expansion
through acquisition of another financial institution is most
economically advantageous to American River Holdings' shareholders
when compared to other alternatives such as de novo branch openings
or branch acquisitions;
o the geographic and business fit of American River Holdings and North
Coast Bank, N.A. and the complementary nature of their respective
businesses, including the compatibility of their existing branch
structures;
o information with respect to historical trading ranges and multiples
for American River Holdings common stock and North Coast Bank, N.A.
common stock, and possible trading ranges and multiples for each on
a stand-alone basis and for the two companies on a combined basis
and the evaluation by the board of directors of American River
Holdings of the financial terms of the merger and their effect on
the shareholders of American River Holdings and the belief of the
American River Holdings board of directors that those terms are fair
to American River Holdings and its shareholders;
o the expectation that for federal income tax purposes the merger will
constitute a tax-free reorganization to American River Holdings and
its subsidiaries;
o the expectation that the merger will be accounted for under the
pooling of interests method of accounting;
o the terms and conditions of the merger agreement and the related
agreements;
o the likelihood of the merger being approved by the appropriate
regulatory authorities; and
o the structure of the merger and the resulting corporate entities.
The board of directors of American River Holdings did not assign any
relative or specific weights to the factors considered and individual directors
may have assigned different weights to the above factors.
The board of directors of American River Holdings unanimously
recommends that the merger agreement, the related agreements, the transactions
contemplated by the merger agreement, including the merger and the issuance of
American River Holdings common stock in connection with the merger, and
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the proposals to approve the American River Holdings 2000 Stock Option Plan, the
amendments to the American River Holdings articles of incorporation and bylaws
to provide for the classification of the board of directors and to eliminate
cumulative voting in the election of directors, election of management's
nominees as directors of American River Holdings, and to ratify the appointment
of Perry-Smith LLP as independent accountants for the year 2000, at American
River Holdings' annual meeting, be approved by the American River Holdings
shareholders.
North Coast Bank, N.A. The board of directors of North Coast Bank, N.A.
believes that the merger is fair to and in the best interest of the shareholders
of North Coast Bank, N.A. In reaching their conclusion to approve the merger,
the board of directors of North Coast bank, N.A. considered numerous factors,
including:
o the terms, conditions, covenants, and representations contained in
the merger agreement, including the number and value of the shares
of American River holdings to be issued in exchange for the
outstanding shares of North Coast Bank, N.A. common stock;
o the historical and recent trading prices for North Coast Bank, N.A.
stock and of American River Holdings' stock;
o the fact that American River Holdings' stock, when combined with
North Coast Bank, N.A.'s stock, will have greater market
capitalization and liquidity compared to North Coast Bank, N.A.'s
current stock liquidity;
o the belief that the merger will greatly enhance the long-term
prospects for stock value;
o the tax-free nature of the merger;
o the condition that the merger be accounted for as a pooling-of
interests;
o the impact of the Financial Standards Accounting Board draft by
which so-called "pooling-of -interests" accounting will be
eliminated by December 31, 2000, including the adverse effects on
bank regulatory capital, premiums for the seller, and the likelihood
that an alternative transaction could be completed that would be
eligible for "pooling-of interests" accounting treatment;
o the financial condition, results of operations and business risks of
North Coast Bank, N.A. on both an historical and prospective basis;
o the significant expansion of the geographic base of the combined
companies as a result of the merger, creating a greater market for
the products and services of North Coast Bank, N.A.;
o the greater flexibility to North Coast Bank, N.A. in meeting the
credit needs of its customers that the merger will provide;
o current industry, economic and market conditions;
o the financial condition, financial performance, business operations,
capital levels, asset quality, loan portfolio composition, and
prospects of American River Holdings on an historical and
prospective basis;
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o presentations by North Coast Bank N.A.'s financial advisors,
Seapower Carpenter Capital Inc., dba Carpenter and Company;
o review of the results of financial and business due diligence
completed by officers of North Coast Bank, N.A.;
o the geographic areas and market conditions where American River
Holdings conducts business compared to those where North Coast Bank,
N.A. conducts business, and the effect of economies in those markets
on American River Holdings' performance;
o the opinion of Carpenter and Company that the consideration to
be received by North Coast Bank, N.A. shareholders in the merger is
fair to North Coast Bank, N.A. shareholders from a financial point
of view;
o the fact that the articles of association of North Coast Bank, N.A.
require that the merger be approved by sixty-six and two-thirds
percent (66-2/3%) of the bank's outstanding shares; and
o the impact of the merger on the North Coast Bank, N.A.'s depositors,
customers, and employees and on the communities in which North Coast
Bank, N.A. operates.
The North Coast Bank, N.A. board of directors did not assign any
relative or specific value to any of the factors.
The board of directors of North Coast Bank, N.A. unanimously recommends
that the merger agreement, the related agreements and the transactions
contemplated by those agreements, including the merger of North Coast Bank, N.A.
into ARH Interim National Bank, be approved by the North Coast Bank, N.A.
shareholders.
OPINION OF AMERICAN RIVER HOLDINGS' FINANCIAL ADVISOR
General. On February 4, 2000, American River Holdings engaged Hoefer &
Arnett Incorporated to act as its financial advisor in connection with the
merger. Hoefer & Arnett agreed to assist American River Holdings in analyzing a
transaction with North Coast Bank, NA. American River Holdings selected Hoefer &
Arnett because Hoefer & Arnett is a nationally recognized investment-banking
firm with substantial experience in transactions similar to the merger and is
familiar with American River Holdings and its business. As part of its
investment banking business, Hoefer & Arnett is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions.
As part of its engagement, representatives of Hoefer & Arnett
participated telephonically at the meeting of the American River Holdings board
of directors held on February 29, 2000 during which the board considered and
approved the merger agreement. At the February 29, 2000 meeting, Hoefer & Arnett
rendered an oral opinion (subsequently confirmed in writing) that, as of that
date, the conversion ratio was fair to American River Holdings and its
shareholders from a financial point of view. That opinion was reconfirmed in
writing as of August 17, 2000.
The full text of Hoefer & Arnett's updated written opinion is attached
as Annex B to this document and is incorporated here by reference. American
River Holdings shareholders are urged to read the opinion in its entirety for a
description of the procedures followed, assumptions made, matters considered,
and qualifications and limitations on the review undertaken by Hoefer & Arnett.
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Hoefer & Arnett's opinion is directed to the American River Holdings
board of directors and addresses only the fairness from a financial point of
view of the conversion ratio. It does not address the underlying business
decision to proceed with the merger and does not constitute a recommendation to
American River Holdings shareholders as to how they should vote at the American
River Holdings annual meeting with respect to the merger or any matter related
thereto.
In rendering its opinion, Hoefer & Arnett:
(a) reviewed, among other things, (i) the merger agreement; (ii) annual
reports to shareholders of American River Holdings and North Coast Bank, N.A.,
(iii) FFIEC consolidated reports of American River Holdings and North Coast
Bank, N.A.; and (iv) certain internal financial analyses and forecasts prepared
by management of American River Holdings and North Coast Bank, N.A;
(b) held discussions with members of senior management of American
River Holdings and North Coast Bank, N.A. regarding (i) past and current
business operations; (ii) regulatory relationships; (iii) financial condition;
and (iv) future prospects of the respective companies;
(c) compared certain financial and stock market information for
American River Holdings and North Coast Bank, N.A. with similar information for
certain other companies with publicly traded securities;
(d) reviewed the financial terms of certain recent business
combinations in the banking industry; and
(e) performed other studies and analyses that it considered
appropriate.
In rendering its opinion, Hoefer & Arnett relied, without independent
verification, on the accuracy and completeness of the material furnished to it
by American River Holdings and North Coast Bank, N.A. and the material otherwise
made available to it, including information from published sources. With respect
to the financial information, Hoefer & Arnett assumed (with American River
Holdings' consent) that they had been reasonably prepared reflecting the best
currently available estimates and judgment of American River Holdings
management. In addition, Hoefer & Arnett did not make or obtain any independent
appraisals or evaluations of the assets or liabilities, and potential and/or
contingent liabilities of American River Holdings or North Coast Bank, N.A.
Hoefer & Arnett further relied on the assurances of American River Holdings and
North Coast Bank, N.A. management that they are not aware of any facts that
would make such information inaccurate or misleading. Hoefer & Arnett's opinion
is necessarily based on the market, economic and other relevant considerations
as they existed and could be evaluated on the date thereof.
Analysis of the Merger Consideration. Hoefer & Arnett calculated the
multiple which the merger consideration represents based on the conversion ratio
as set forth in the merger agreement of each share of North Coast Bank, N.A.
common stock being exchanged for 0.9644 of a share of American River Holdings
common stock and the closing price of American River Holdings common stock as of
February 25, 2000. Based on the $12.50 closing price of American River Holdings
common stock on February 25, 2000, the merger consideration represented a per
share value of $12.06 for each share of North Coast Bank, N.A. common stock. The
multiples were calculated based on North Coast Bank, N.A.'s December 31, 1999
book value per share of $8.47 and its last twelve month earnings per share of
$0.44. The price to book value was 1.42 times and the price to last twelve month
earnings per share was 27.4 times.
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Analysis of Comparable Acquisition Transactions. In rendering its
opinion, Hoefer & Arnett analyzed certain comparable merger and acquisition
transactions of both pending and completed bank deals, comparing the acquisition
price relative to book value, tangible book value, last twelve month earnings,
and assets. The analysis included a comparison of the low and median of the
above ratios for completed and pending acquisitions from California transactions
from January 1, 1998 to February 25, 2000 with announced transaction values less
than $100.0 million and return on average assets between 0.5% and 1.5%.
The information in the following table summarizes the material
information analyzed by Hoefer & Arnett with respect to the merger. The summary
is not a complete description of the analysis performed by Hoefer & Arnett and
should not be construed independently of the other information considered by
Hoefer & Arnett in rendering its opinion. Selecting portions of Hoefer &
Arnett's analysis or isolating certain aspects of the comparable transactions
without considering all analysis and factors, could create an incomplete or
potentially misleading view of the evaluation process.
<TABLE>
<CAPTION>
Multiple of Price to Factors
Comparable Comparable Comparable American River
Group Group Group Holdings/north Coast
Factor Considered (1) Low Median High Bank, NA Merger (2)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trailing Twelve Months 10.6x 21.2x 44.2x 27.4x
Earnings
Book Value 1.1x 2.3x 5.0x 1.4x
Tangible Book Value 1.3x 2.3x 5.0x 1.4x
Assets 9.8% 21.1% 44.4% 13.6%
</TABLE>
(1) Financial data as of December 31, 1999.
(2) Based on a conversion ratio of 0.9644 and American River Holdings price of
$12.50 as of February 25, 2000.
Contribution Analysis. Hoefer & Arnett reviewed the relative
contribution of each American River Holdings and North Coast Bank, N.A. to
certain pro forma balance sheet and income statement items of the combined
entity. The contribution analysis showed:
North Coast Bank, N.A. Contribution To:
Combined Shareholders' Equity 19.6%
Combined 1999 Estimated Net Income without Cost Savings 12.4%
Combined Total Assets 19.0%
North Coast Bank, N.A. Estimated Pro Forma Ownership 20.1%
Hoefer & Arnett compared the relative contribution of the balance sheet
and income statement items with the estimated pro forma ownership for North
Coast Bank, N.A. shareholders based on a conversion ratio of 0.9644.
Discounted Dividends Analysis. Using a discounted dividends analysis,
Hoefer & Arnett estimated the future stream of dividends that North Coast Bank,
N.A. could produce over the next five years, under various circumstances,
assuming North Coast Bank, N.A. performed in accordance with the earnings
forecasts of North Coast Bank, N.A.'s management. Hoefer & Arnett then estimated
the terminal values for North Coast Bank, N.A. common stock at the end of the
period by applying multiples ranging from 9.0 times to 11.0 times earnings
projected in year five. The dividend streams and terminal values were then
discounted to present values using different discount rates (ranging from 12.5%
to
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15.0%) chosen to reflect different assumptions regarding the required rates of
return to holders or prospective buyers of North Coast Bank, N.A. common stock.
This discounted dividends analysis indicated reference ranges of between $12.17
and $15.59 per share for North Coast Bank, N.A. common stock. These values
compare to the merger consideration of $12.06 based on a conversion ratio of
0.9644 and American River Holdings closing price of $12.50 as of February 25,
2000.
The summary set forth above describes the material analyses prepared by
Hoefer & Arnett in connection with the rendering of its opinion. The preparation
of a fairness opinion is not necessarily susceptible to partial analysis or
summary description. Hoefer & Arnett believes that its analysis and the above
summary above must be considered as a whole and that selecting portions of its
analysis, or selecting part of the summary above, without considering all
factors and analyses, would create an incomplete view of the process underlying
the analysis set forth in Hoefer & Arnett's presentation and opinion. The ranges
of valuations resulting from any particular analysis described above should not
be taken to be Hoefer & Arnett's view of the actual value of American River
Holdings or North Coast Bank, N.A. The fact that any specific analysis has been
referred to in the summary above is not meant to indicate that such analysis was
given greater weight that any other analysis.
In preparing its analysis, Hoefer & Arnett made numerous assumptions
with respect to industry performance, business and economic conditions, and
other matters, many of which are beyond the control of Hoefer & Arnett and
American River Holdings. The analyses performed by Hoefer & Arnett are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses and do not
purport to be appraisals or reflect the prices at which a business may be sold
or the prices at which any securities may trade at the present time or at any
time in the future. In addition, as described above, Hoefer & Arnett's opinion,
along with its presentation to the American River Holdings board of directors,
was just one of the many factors taken into consideration by the American River
Holdings board of directors in approving the agreement.
In connection with its opinion dated as of August 17, 2000, Hoefer &
Arnett performed procedures to update, as necessary, certain of the analyses
described above. Hoefer & Arnett reviewed the assumptions on which the analyses
described above were based and the factors considered in connection therewith.
Hoefer & Arnett did not perform any analysis in addition to those described
above in updating its February 29, 2000 written opinion.
The American River Holdings board of directors has retained Hoefer &
Arnett as an independent contractor to act as financial advisor to American
River Holdings regarding the merger. As part of its investment banking business,
Hoefer & Arnett is continually engaged in the valuation of banking businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes. Hoefer & Arnett has experience in, and knowledge of, the
valuation of banking enterprises. In the ordinary course of its business as a
broker-dealer, Hoefer & Arnett may, from time to time, purchase securities from,
and sell securities to, American River Holdings and North Coast Bank, N.A. As a
market maker in securities, Hoefer & Arnett may from time to time have a long or
short position in, and buy or sell, debt or equity securities of American River
Holdings and North Coast Bank, N.A. for Hoefer & Arnett's own account and for
the accounts of its customers.
Pursuant to its engagement letter with American River Holdings, Hoefer
& Arnett will receive a fee of $20,000. As of the date of this document, Hoefer
& Arnett has received $15,000 of such fee. The remainder is due upon mailing of
the document. American River Holdings has also agreed to indemnify Hoefer &
Arnett against certain liabilities, including liabilities under the federal
securities laws, and to reimburse Hoefer & Arnett for certain out-of-pocket
expenses.
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The full text of Hoefer & Arnett Incorporated's opinion, dated August
17, 2000, is attached as Annex B and is incorporated here by this reference.
American River Holdings shareholders are urged to read the opinion in its
entirety.
OPINION OF NORTH COAST BANK, N.A.'S FINANCIAL ADVISOR
General. Pursuant to an engagement letter dated January 26, 2000, North
Coast Bank, N.A. engaged Seapower Carpenter Capital, Inc., dba Carpenter and
Company to provide financial advisory services and a fairness opinion with
respect to the North Coast Bank, N.A./American River Holdings merger. Carpenter
and Company is an investment banking firm specializing in California financial
institutions, and, as part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
merger transactions and other types of acquisitions, underwritings, private
placements and valuations for corporate and other purposes. North Coast Bank,
N.A. selected Carpenter and Company to render the opinion on the basis of its
experience and expertise in transactions similar to the merger and its
reputation in the banking and investment communities. No limitations were
imposed by North Coast Bank, N.A. on Carpenter and Company with respect to the
investigations made or procedures followed in rendering its opinion.
At a meeting of the North Coast Bank, N.A. board of directors on March
1, 2000, Carpenter and Company delivered its oral opinion that, as of the date
of the opinion and subject to the limitations and assumptions set forth in the
opinion, the merger consideration pursuant to the merger agreement was fair to
North Coast Bank, N.A. shareholders from a financial point of view. Carpenter
and Company's oral opinion was subsequently confirmed in writing as of such date
and reconfirmed in writing as of August 17, 2000.
The full text of Carpenter and Company's written opinion to the North
Coast Bank, N.A. board of directors, which sets forth the assumptions made,
matters considered, and limitations of the review, by Carpenter and Company, is
attached hereto and is incorporated herein by reference. The following summary
of Carpenter and Company's opinion is qualified in its entirety by reference to
the full text of the opinion, which should be read carefully and in its
entirety. In furnishing such opinion, Carpenter and Company does not admit that
it is an expert with respect to the registration statement of which this proxy
statement/prospectus is part within the meaning of the term "experts" as used in
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder. Carpenter and Company does not admit that its opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act. Carpenter and Company's opinion is directed to the North Coast
Bank, N.A. board of directors, covers only the fairness of the merger
consideration to be received by holders of North Coast Bank, N.A. common stock
from a financial point of view as of the date of the opinion, and does not
constitute a recommendation to any holder of North Coast Bank, N.A. common stock
as to how such shareholder should vote.
In connection with its opinion, Carpenter and Company, among other
things: (i) reviewed certain publicly available financial and other data with
respect to North Coast Bank, N.A. and American River Holdings, including the
consolidated financial statements for recent years through December 31, 1999,
and certain other relevant financial and operating data relating to these
companies made available to Carpenter and Company from published sources and
from the internal records and projections of North Coast Bank, N.A.; (ii)
reviewed the merger agreement; (iii) reviewed certain information concerning the
trading of, and the trading market for, North Coast Bank, N.A. common stock and
American River Holdings common stock; (iv) compared North Coast Bank, N.A. and
American River Holdings from a financial point of view with certain other
companies in the banking industry which Carpenter and Company deemed to be
relevant; (v) considered the financial terms, to the extent publicly available,
of
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selected recent business combinations of companies in the banking industry which
Carpenter and Company deemed to be comparable, in whole or in part, to the
merger; (vi) reviewed and discussed with representatives of the management of
North Coast Bank, N.A. certain information of a business and financial nature
regarding North Coast Bank, N.A. and American River Holdings, furnished to
Carpenter and Company by them; (vii) made inquiries regarding and discussed the
merger and the merger agreement and other matters related thereto with North
Coast Bank, N.A.'s counsel; and (vii) performed such other analyses and
examinations as Carpenter and Company deemed appropriate.
In connection with its review, Carpenter and Company did not assume any
obligation independently to verify the foregoing information and relied on such
information being accurate and complete in all material respects. Carpenter and
Company also assumed that there were no material changes in the assets,
financial condition, results of operations, business or prospects of all
companies involved in the merger since the respective dates of their last
financial statements made available to it. Carpenter and Company relied on
advice of counsel to North Coast Bank, N.A. as to all legal matters with respect
to North Coast Bank, N.A., the merger and the merger agreement. North Coast
Bank, N.A. acknowledged that Carpenter and Company did not discuss with North
Coast Bank, N.A.'s independent accountants any financial reporting matters with
respect to North Coast Bank, N.A., the merger or the merger agreement. North
Coast Bank, N.A. informed Carpenter and Company, and Carpenter and Company
assumed that the merger would be accounted for as a pooling of interests under
generally accepted accounting principles. Carpenter and Company assumed that the
merger would be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act, the Securities Exchange Act of
1934, as amended, and all other applicable federal and state statutes, rules and
regulations. Carpenter and Company assumed that the allowance for loan losses
for each of North Coast Bank, N.A. and American River Holdings are in the
aggregate adequate to cover such losses. In addition, Carpenter and Company did
not assume responsibility for reviewing any individual credit files, or making
an independent evaluation, appraisal or physical inspection of any of the assets
or liabilities (contingent or otherwise) of the companies involved in the
merger, nor was Carpenter and Company furnished with any such appraisals.
Finally, Carpenter and Company's opinion was based on economic, monetary and
market and other conditions as in effect on, and the information made available
to Carpenter and Company as of, the date of the opinion. Accordingly, although
subsequent developments may affect Carpenter and Company's opinion, it has not
assumed any obligation to update, revise or reaffirm such opinion.
Set forth below is a summary of Carpenter and Company's analysis in
connection with its opinion that is complete in all material respects.
Review of American River Holdings and North Coast Bank, N.A. Carpenter
and Company, analyzed North Coast Bank, N.A. and American River Holdings as
reported by the companies in their respective financial reports and regulatory
filings, and by combining them on a pro-forma basis. Specifically, Carpenter and
Company reviewed total loans, total assets, total deposits, total shareholders'
equity, net income, and net yield on earning assets. The following tables
summarizes these values for each company at or for the period ending December
31, 1999 and on a pro-forma basis:
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NCB ARH Pro-Forma
--- --- ---------
(Dollars in millions)
Total loans $40.1 $121.6 $161.7
Total assets 47.3 201.3 248.5
Total deposits 42.1 181.0 223.1
Total shareholders' equity 4.0 16.6 20.6
Total net income .2 2.9 3.1
Net yield on earning assets 6.2% 5.7% 5.8%
Trading Activity and Prices. The common stock of both North Coast Bank,
N.A. and American River Holdings are quoted on the over-the-counter bulletin
board. However, neither is publicly traded in any significant volume. In its
analyses Carpenter and Company, derived a valuation for North Coast Bank, N.A.
of $13.26 per share by applying the exchange ratio of .9644 to an average
trading price for American River Holdings of $13.75 (the average closing price
for American River Holdings during the previous four weeks.).
Analysis of Selected Merger Transactions. Using publicly available
information, Carpenter and Company reviewed the consideration paid in recently
announced transactions whereby certain banks and bank holding companies of
various sizes were acquired. Specifically, Carpenter and Company reviewed 18
transactions involving acquisitions of banks based in California, announced
since April 1, 1998, with total assets less than $125 million, consisting of the
following (acquirer/target):
o Bank of the Sierra/Sierra National Bank
o Rancho Santa Fe National Bank/First Community Bank of the Desert
o Civic BanCorp/East County Bank NA
o First Banks Inc./Lippo Bank
o VIB Corp./Kings River Bancorp
o Valencia Bank & Trust/First Valley National Bank
o Humboldt Bancorp/Global Bancorp
o City Holding Company/Frontier Bancorp
o Belvedere Capital Partners Inc./Cerritos Valley Bancorp
o East West Bancorp Inc./First Central Bank NA
o Washington Mutual Inc./Industrial Bank
o First Coastal Bancshares/American Independent Bank NA
o Belvedere Capital Partners Inc./ The Bank of Orange County
o Belvedere Capital Partners Inc./Downey Bancorp
o Western Sierra Bancorp/Roseville 1st Community Bancorp
o Western Sierra Bancorp/Lake Community Bank
o First Banks Inc./Republic Bank
o Summit Bank Corporation/California Security Bank
For each bank acquired or to be acquired in such transactions,
Carpenter and Company analyzed data illustrating, among other things purchase
price to book value and to tangible book value, purchase price to last 12
months' earnings, purchase price as a percentage of assets and the ratio of the
premium (i.e., purchase price in excess of tangible book value) to core
deposits.
No other company or transaction used in the above analysis as a
comparison is identical to North Coast Bank, N.A. or the North Coast Bank,
N.A./American River Holdings merger. Accordingly, an analysis of the results of
the foregoing is not mathematical. Rather, it involves complex considerations
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and judgments concerning differences in financial and operating characteristics
of the companies and other factors that could affect the public trading value
and the announced acquisition prices of the companies to which North Coast Bank,
N.A. and the merger are being compared.
Carpenter and Company derived the value for each share of North Coast
Bank, N.A. common stock of $13.26 by applying the exchange ratio of .9644 times
the average trading value of American River Holdings of $13.75 per share. Based
upon this valuation, the following table compares the relative valuation ratios
(average and median) for California bank acquisitions to the valuation ratios
for North Coast Bank, N.A. in the North Coast Bank, N.A./American River Holdings
merger:
Comparable Transactions
---------------------------
Average Median NCB
------- ------ ---
Price to book value 2.09x 2.01x 1.69x
Price to tangible book value 2.10x 2.03x 1.69x
Price to last twelve months earnings 24.09x 27.90x 29.83x
Price as a percentage of assets 17.64% 17.25% 14.32%
Premium to core deposits 12.11% 11.34% 7.71%
Four of these ratios derived from comparable transactions are higher
than the ratios found in the merger; one ratio, the price to earnings ratio, is
higher than the comparable transactions. Given the high importance of the price
to earnings ratio in most analyses of stock value, these relative ratios support
the conclusion that the merger is fairly priced. Further, Carpenter and Company
also reviewed the S&P 500 Bank Index and noted that trading prices for banks had
declined by over 30% since the middle of 1999. The decline in trading prices for
banks suggests declining valuations of banks in stock based transactions in the
current merger and acquisition environment as compared to those in recent
periods. Taking into account the recent decline in trading valuations of bank
stocks, this comparison indicates that the valuation attributed to North Coast
Bank, N.A. in the North Coast Bank, N.A./American River Holdings merger is
generally consistent or better than the value that would be suggested by the
other bank mergers reviewed.
Earnings Accretion Analysis. Carpenter and Company analyzed the
historical earnings of each North Coast Bank, N.A. and American River Holdings
comparing the earnings per share for North Coast Bank, N.A. shareholders on a
stand-alone basis and on a combined pro forma basis without assuming any cost
savings to be derived through this combination. Additionally, Carpenter and
Company performed this same analysis utilizing management budgets for 2000
assuming both no cost savings and cost savings equal to 20% of North Coast Bank,
N.A.'s noninterest expense. The following table summarizes the stand-alone and
pro forma earnings per share and the dollar and percent accretion to North Coast
Bank, N.A. shareholders in each scenario:
Earnings Accretion
------------------
NCB Pro Forma Amount Percent
--- --------- ------ -------
Historical 1999 $0.44 $1.29 $0.84 189%
2000 Budget $0.76 $1.66 $0.90 118%
2000 Budget with cost savings $0.76 $1.77 $1.01 133%
This analysis suggests that there is greater potential value for North
Coast Bank, N.A. shareholders in completing the merger than in remaining
independent.
Pro-Forma Merger and Contribution Analysis. Carpenter and Company
analyzed the contribution of each of North Coast Bank, N.A. and American River
Holdings to, among other things,
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total assets, total deposit liabilities, total equity, last twelve months' net
income of the pro forma combined companies. For purposes of this analysis,
Carpenter and Company used the balance sheets and income statements for the
period ending December 31, 1999.
Based upon the exchange ratio of .9644, taking into account outstanding
options for both companies, the fully diluted ownership of the North Coast Bank,
N.A. shareholders in the combined company would be approximately 21.8%. The
following table details the percentage contribution of North Coast Bank, N.A. to
the combined company:
NCB Contribution
----------------------------------------------
Total assets 19.0%
Total deposit liabilities 19.0%
Total shareholders' equity 19.4%
Last twelve months' net income 20.4%
This analysis suggests that the ownership interest of North Coast Bank,
N.A. shareholders in American River Holdings after the merger is consistent with
or greater than what would be indicated by North Coast Bank, N.A.'s share of
assets, deposit liabilities, equity and earnings.
Regression Analysis. Carpenter and Company undertook an analysis to
determine the price to earnings and price to book multiple at which North Coast
Bank, N.A. might actively trade on a stand-alone basis. A regression analysis of
publicly available data on comparable banks and bank holding companies indicated
a correlation between return on equity and price to last twelve months' earnings
and price to book value. This analysis utilized trading prices of the comparable
banks and bank holding companies as of February 25, 2000. Based on North Coast
Bank, N.A.'s last twelve months ended December 31, 1999 return on equity of
5.86%, this analysis yielded a price to last twelve months' earnings ratio at
which North Coast Bank, N.A. might trade of 21.3x and an implied value of $9.47
per share for North Coast Bank, N.A. Based on North Coast Bank, N.A.'s December
31, 1999 fully diluted book value of $7.83, this analysis yielded a price to
book ratio at which North Coast Bank, N.A. might trade of 1.19x and an implied
value of $9.32 per share for North Coast Bank, N.A.. Because the imputed value
of $13.26 per North Coast Bank, N.A. share substantially exceeds this value
range, the regression analyses support that the consideration being received by
North Coast Bank, N.A. shareholders is fair.
Discounted Value Analysis. Carpenter and Company estimated the present
value (current share price) based on estimated earnings that (a) North Coast
Bank, N.A. could produce on a stand-alone basis through fiscal year 2004 without
giving effect to, among other things, potential cost savings that could be
realized in a sale to an in-market acquiror, and (b) that American River
Holdings and North Coast Bank, N.A. combined could produce. Carpenter and
Company utilized North Coast Bank, N.A. and American River Holdings management
projections for the years 2000 through 2004. The range of estimated future
prices was calculated by applying market multiples ranging from 14.0x to 22.0x
to the projected 2004 cash earnings of North Coast Bank, N.A. alone and of the
combined companies. The estimated future share prices were then discounted to
present values using discount rates ranging from 12% to 20%. This analysis
indicated an implied per share price range for North Coast Bank, N.A. on a
stand-alone basis of approximately $5.71 to $12.66. The corresponding range for
the combined companies, including estimated consolidation savings provided by
North Coast Bank, N.A. and American River Holdings management, is $14.68 to
$32.57 in North Coast Bank, N.A. equivalent shares. These analyses do not
purport to be indicative of actual values or expected values of North Coast
Bank, N.A. common stock or of American River Holdings common stock.
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Because the value range for the combined companies is higher than the
range for North Coast Bank, N.A. on a stand-alone basis, the discounted value
analyses suggest that there is greater potential value for North Coast Bank,
N.A. shareholders in completing the merger than in remaining independent.
The summary set forth above does not purport to be a complete
description of the presentation by Carpenter and Company to the North Coast
Bank, N.A. board of directors. The preparation of a fairness opinion is not
necessarily susceptible to partial analysis or summary description. Carpenter
and Company believes that its analyses and the summary set forth above must be
considered as a whole and that selecting a portion of its analyses and factors,
without considering all analyses and factors, would create an incomplete view of
the process underlying the analyses set forth in its presentation to the North
Coast Bank, N.A. board of directors. The ranges of valuations resulting from any
particular analysis described above should not be taken to be Carpenter and
Company's view of the actual value of North Coast Bank, N.A. or the combined
companies.
In performing its analyses, Carpenter and Company made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of North
Coast Bank, N.A. or American River Holdings. Material among those assumptions
were that of a reasonably stable economic and interest rate environment and no
significant changes in the regulatory and statutory regime governing the
businesses of both American River Holdings and North Coast Bank, N.A. sufficient
to materially impact their results. The analyses performed by Carpenter and
Company are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Such analyses were prepared solely as part of Carpenter and
Company's analysis of the fairness of the consideration to be received by the
holders of North Coast Bank, N.A. common stock in the merger and were provided
to the North Coast Bank, N.A. board of directors in connection with the delivery
of Carpenter and Company's opinion. The analyses do not purport to be appraisals
or to reflect the prices at which a company might actually be sold or the prices
at which any securities may trade at the present time or any time in the future.
The forecasts utilized by Carpenter and Company in certain of its analyses are
based on numerous variables and assumptions, which are inherently unpredictable
and must be considered not certain of occurrence as projected. Accordingly,
actual results could vary significantly from those contemplated in such
forecasts.
In the ordinary course of our business, we represent acquirers and
sellers of financial institutions, and Carpenter and Company has performed other
financial advisory services for North Coast Bank, N.A. in the past. Under the
terms of the engagement letter, North Coast Bank, N.A. paid Carpenter and
Company a fee of $20,000 for the fairness opinion. North Coast Bank, N.A. has
also agreed to reimburse Carpenter and Company for its reasonable out-of-pocket
expenses. North Coast Bank, N.A. has agreed to indemnify Carpenter and Company,
its affiliates, and their respective partners, directors, officers, agents,
consultants, employees and controlling persons against certain liabilities
including liabilities under federal securities laws.
The full text of Carpenter and Company's written opinion, dated
August 17, 2000, is attached as Annex C to this document and is
incorporated here by this reference.
North Coast Bank, N.A. shareholders are urged to read the opinion in
its entirety for a description of the procedures followed, assumptions made,
matters considered, and qualifications and limitations on the review undertaken
by Seapower Carpenter Capital, Inc., dba Carpenter and Company.
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EFFECTIVE DATE AND TIME OF THE MERGER
The merger agreement provides that the merger will be effective on the
date and at the time selected by the parties after the merger has been certified
by the Office of the Comptroller of the Currency, an executed copy of the bank
merger agreement has been filed with and accepted by the Office of the
Comptroller of the Currency, all government approvals have been received and
satisfied and all other conditions to the merger have been satisfied. The date
and time on which the merger is effective as specified in the merger agreement
is referred to in this document as the effective date and effective time,
respectively. Although the parties have not adopted any formal timetable, it is
presently anticipated that the merger will be consummated on or before September
30, 2000, assuming all of the conditions set forth in the merger agreement are
satisfied or waived.
PURCHASE PRICE
Each share of North Coast Bank, N.A. common stock issued and
outstanding prior to the effective time of the merger, other than shares as to
which dissenters' rights have been perfected, will be converted into the right
to receive a number of American River Holdings shares of common stock, plus cash
in lieu of fractional shares, according to a fixed conversion ratio of .9644 of
a share of American River Holdings common stock for each share of North Coast
Bank, N.A. common stock. The merger agreement does not contain any provisions to
adjust the conversion ratio.
FRACTIONAL SHARES
No fractional shares of American River Holdings common stock will be
issued to holders of shares of North Coast Bank, N.A. common stock. In lieu
thereof, each holder entitled to a fraction of a share of American River
Holdings common stock will receive, at the time of surrender of the certificate
or certificates representing the holder's shares of North Coast Bank, N.A.
common stock, an amount in cash equal to the average of the closing bid and
asked prices for a share of American River Holdings common stock quoted on the
OTC Bulletin Board for each of the twenty trading days ending on the third
business day immediately preceding the effective date, multiplied by the
fraction of a share of American River Holdings common stock to which such holder
otherwise would be entitled and rounded to the nearest penny. No holder will be
entitled to dividends, voting rights, interest on the value of, or any other
rights in respect of, a fractional share.
CONVERSION OF SHARES OF NORTH COAST BANK, N.A. COMMON STOCK
At the effective time, by virtue of the merger and without any action
on the part of the holders of North Coast Bank, N.A. common stock, each issued
and outstanding share of North Coast Bank, N.A. common stock (other than
dissenting and fractional shares) will be converted into the right to receive
.9644 of a share of American River Holdings common stock as discussed above. All
shares of North Coast Bank, N.A. common stock will no longer be outstanding and
will automatically be canceled and retired and will cease to exist, and each
certificate previously representing any North Coast Bank, N.A. shares will
thereafter represent the shares of American River Holdings common stock into
which such shares of North Coast Bank, N.A. common stock have been converted.
Certificates previously representing shares of North Coast Bank, N.A. common
stock will be exchanged for certificates representing whole shares of American
River Holdings common stock issued in consideration therefor upon the surrender
of those certificates. Cash will be paid in lieu of any fractional share of
American River Holdings common stock. From and after the effective date, the
holders of certificates formerly representing shares of North Coast Bank, N.A.
common stock will cease to have any rights with respect to those shares.
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EXCHANGE OF NORTH COAST BANK, N.A. STOCK CERTIFICATES
Prior to the effective date, American River Holdings has agreed to
appoint U.S. Stock Transfer Corporation, or its successor as exchange agent (the
"Exchange Agent") for the purpose of exchanging certificates representing shares
of American River Holdings common stock, and at and after the effective date,
American River Holdings will issue and deliver to the Exchange Agent
certificates representing the shares of American River Holdings common stock to
be delivered to holders of shares of North Coast Bank, N.A. common stock. As
soon as practicable after the effective date, each holder of shares of North
Coast Bank, N.A. common stock, other than a dissenting holder, upon surrender to
the exchange agent of one or more certificates for the shares of North Coast
Bank, N.A. common stock for cancellation, will be entitled to receive a
certificate representing the number of shares of American River Holdings common
stock into which the number of shares of North Coast Bank, N.A. common stock
will have been converted and a payment in cash with respect to fractional
shares, if any.
No dividends or other distributions of any kind which are declared
payable to shareholders of record of the shares of American River Holdings
common stock after the effective date will be paid to persons entitled to
receive the certificates for shares of American River Holdings common stock
until those persons surrender their certificates representing shares of North
Coast Bank, N.A. common stock. Upon surrender of certificates representing
shares of North Coast Bank, N.A. common stock, the holder thereof will be paid,
without interest, any dividends or other distributions with respect to the
shares of American River Holdings common stock as to which the record date and
payment date occurred on or after the effective date and on or before the date
of surrender.
If any certificate for shares of American River Holdings common stock
is to be issued in a name other than that in which the certificate for shares of
North Coast Bank, N.A. common stock surrendered in exchange therefor is
registered, it will be a condition of the exchange that the person requesting
the exchange will pay to the Exchange Agent any transfer costs or other expenses
(except taxes) required by reason of the issuance of certificates for the shares
of American River Holdings common stock in a name other than the registered
holder of the certificate surrendered.
All dividends or distributions, and any cash to be paid in lieu of
fractional shares, if held by the Exchange Agent for payment or delivery to the
holders of unsurrendered certificates representing shares of North Coast Bank,
N.A. common stock and unclaimed at the end of one year from the effective date,
will (together with any interest earned thereon) at that time be paid or
redelivered by the Exchange Agent to American River Holdings, and after that
time any holder of a certificate representing shares of North Coast Bank, N.A.
common stock who has not surrendered the certificate to the Exchange Agent will,
subject to applicable law, look as a general creditor only to American River
Holdings for payment or delivery of the shares of American River Holdings common
stock and dividends or distributions or cash, as the case may be.
TREATMENT OF STOCK OPTIONS
At the effective time of the merger, the obligations under the North
Coast Bank, N.A. 1990 Stock Option Plan will be assumed by American River
Holdings. At the effective time of the merger, options to purchase shares of
North Coast Bank, N.A. common stock issued under North Coast Bank, N.A.'s 1990
Stock Option Plan that are outstanding will be converted, without any action on
the part of the holders thereof, into substitute options to acquire the number
of shares of American River Holdings common stock the option holder would have
received in the merger if he or she had exercised all of his or her options
immediately prior to the effective date. The option exercise price will be
adjusted to equal the exercise price per share for the options immediately prior
to the merger divided by the conversion
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ratio. Except as noted above, each North Coast Bank, N.A. stock option will
otherwise continue on terms and conditions that are consistent with those that
were applicable on the effective date.
INTERESTS OF AMERICAN RIVER HOLDINGS AND NORTH COAST BANK, N.A. OFFICERS AND
DIRECTORS IN THE MERGER
American River Holdings. Directors and executive officers of American
River Holdings have interests in the merger in addition to their interest as
American River Holdings shareholders. The board of directors of American River
Holdings was aware of these interests and considered them, among other matters,
in approving the merger agreement. As of the record date, the directors and
executive officers of American River Holdings owned an aggregate of 662,517
shares of American River Holdings common stock (including 190,317 shares subject
to options exercisable within 60 days of the record date). See "Security
Ownership of Certain Beneficial Owners and Management on page 164.
Under the merger agreement, North Coast Bank, N.A. has agreed to
appoint two current directors of American River Holdings (David T. Taber and
Roger J. Taylor, D.D.S.) to the North Coast Bank, N.A. board of directors. Dr.
Taylor will be entitled to receive the directors' fees and benefits which North
Coast Bank, N.A. extends to its directors. Additionally, all of the current
American River Holdings and American River Bank directors will continue to serve
on the boards of directors of American River Holdings and American River Bank
and continue to receive the directors' fees, indemnification and other benefits
which American River Holdings and American River Bank extend to their directors.
It is also anticipated that the current executive officers of American River
Holdings and American River Bank will continue to serve in such capacities and
be entitled to receive executive compensation and other benefits provided for
executive officers.
North Coast Bank, N.A. North Coast Bank, N.A. directors and executive
officers have interests in the merger in addition to their interests as North
Coast Bank, N.A. shareholders. The North Coast Bank, N.A. board of directors was
aware of these interests and considered them, among other matters, in approving
the merger agreement. As of the record date, the directors and executive
officers of North Coast Bank, N.A. beneficially owned an aggregate of 276,652
shares of North Coast Bank, N.A. common stock (including 157,040 shares subject
to options exercisable based upon accelerated vesting in connection with the
merger under the North Coast Bank, N.A. 1990 Stock Option Plan). See "Security
Ownership of Certain Beneficial Owners and Management" on page 75.
Under the merger agreement, American River Holdings has agreed to
appoint two current directors of North Coast Bank, N.A., M. Edgar Deas and Larry
L. Wasem, to the American River Holdings board of directors who will be entitled
to receive the directors' fees and benefits which American River Holdings
extends to its directors. Additionally, all of the current North Coast Bank,
N.A. directors will continue to serve on the board of directors of North Coast
Bank, N.A. and two of American River Holdings' current directors, Roger J.
Taylor, D.D.S. and David T. Taber, will become members of the board of directors
of North Coast Bank, N.A. Dr. Taylor will be entitled to receive the directors'
fees and benefits which North Coast Bank, N.A. extends to its directors. After
the effective time of the merger, Kathy A. Pinkard will continue to serve as
President and Chief Executive Officer of North Coast Bank, N.A. She will also be
a member of the executive management committee of American River Holdings.
Kathy A. Pinkard is a party to an employment agreement dated December
16, 1999, and Debbie K. Fakalata and David A. Wattell are parties to change of
control employment agreements each dated December 16, 1999. These agreements
include provisions that provide severance benefits upon the occurrence of a
change of control of North Coast Bank, N.A. such as the merger. These agreements
provide that, upon termination following a change of control for reasons other
than cause, Ms. Pinkard,
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Ms. Fakalata and Mr. Wattell will each receive their respective base salary
through the last day of the calendar month of the termination. If the
termination occurs within three (3) years of the change of control in the case
of Ms. Pinkard and one hundred eighty (180) days in the case of Ms. Fakalata and
Mr. Wattell, additional payments will be received by each of them equal to two
(2) times the then current base salary in the case of Ms. Pinkard and one (1)
times the then current base salary in the case of Ms. Fakalata and Mr. Wattell.
Under these provisions, Ms. Pinkard, Ms. Fakalata, and Mr. Wattell would be
entitled to $209,000, $78,750 and $85,000, respectively.
In addition, stock options held by directors and officers become fully
vested as a result of the merger and the merger agreement provides North Coast
Bank, N.A. directors and officers with rights to indemnification by American
River Holdings. See "Indemnification of Directors and Executive Officers" on
page 144.
CONDUCT OF BUSINESS PENDING THE MERGER
Under the merger agreement, American River Holdings and North Coast
Bank, N.A. have each agreed that, during the period from the date of the merger
agreement to the effective time of the merger, it and each of its respective
subsidiaries will:
o carry on its business in the ordinary course conducted prior to the
execution of the merger agreement and in compliance with safe and
sound banking practices and applicable law;
o preserve its business and business organizations intact, and
preserve the goodwill of its customers and others having business
relations with it;
o maintain its in customary repair, working order and condition;
o comply with all applicable laws, regulations, decrees and regulatory
requirements; promptly forward to each party all communications
received from any regulatory agency that are not prohibited by the
regulatory agency from being disclosed; and inform each party of any
material restrictions imposed by any regulatory agency on its
business;
o use its best efforts to keep in force at not less than its present
limits all insurance policies (including deposit insurance of the
Federal Deposit Insurance Corporation) to the extent reasonably
practicable;
o use its reasonable best commercial efforts to keep available the
services of its present officers and employees;
o timely file all reports, tax returns and other documents required to
be filed with federal, state, local and other authorities;
o prior to foreclosure on any property concerning which it has
knowledge, or should have knowledge, that any hazardous material was
or is present, manufactured, recycled, reclaimed, released, stored,
treated, or disposed of at or from the property, conduct an
environmental audit and provide the results of the audit to and
consult with each party regarding the significance of the audit;
o not sell, lease, pledge, assign, encumber or otherwise dispose of
any of its assets except in the ordinary course of its business, for
adequate value, without recourse and consistent with its customary
practice;
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o not take any action with respect to its investments or risk
management arrangements which are inconsistent with the policies
established by its board of directors;
o not take any action to create, locate or terminate the operations of
any banking office or branch, or to form any new subsidiary or
affiliated entity;
o not settle or otherwise take any action to release or reduce any of
its rights with respect to any litigation involving a claim of more
than twenty-five thousand dollars ($25,000) in which it is a party;
o not amend its articles of incorporation or association or bylaws or
the articles of incorporation or bylaws of any subsidiary; make any
change in its authorized, issued or outstanding capital stock or any
other equity security; issue, grant, sell, pledge, assign or
otherwise encumber or dispose of, or purchase, redeem, retire or
otherwise acquire (other than in a fiduciary capacity), shares of or
securities convertible into, capital stock or other equity
securities of their respective companies, or enter into any
agreement, call or commitment of any character so to do; grant or
issue any stock option relating to or right to acquire shares of its
capital stock or other equity security; or agree to do any of the
foregoing, except as expressly provided in the merger agreement and
except for issuance of shares upon exercise of options granted under
the American River Holdings 1995 Stock Option Plan or the North
Coast Bank, N.A. 1990 Stock Option Plan and outstanding at the time
the merger agreement was executed;
o not declare, set aside or pay any dividend or other distribution in
respect of its common stock other than regular quarterly or
semi-annual cash dividends on its common stock in amounts
substantially equivalent to cash dividends paid in the two years
prior to the date of the merger agreement;
o not change lending, investment, liability management and other
material policies and procedures except as required by law or
regulation; and
o not change the methods of accounting for their businesses, except as
required by generally accepted accounting principles.
In addition, North Coast Bank, N.A. has agreed that it will:
o take all necessary action to terminate the North Coast Bank, N.A.
1990 Stock Option Plan at the effective time of the merger and to
allow the exercise or surrender (in exchange for substitute options)
of North Coast Bank, N.A. options outstanding thereunder;
o pending consummation of the merger, not make, approve, or grant to
any of its directors, officers, employees or agents with annual
salaries in excess of $75,000: (1) any increase in the compensation
payable or to become payable by it (including but not limited to
compensation through any profit sharing, pension, retirement,
severance, incentive or other employee benefit program or
arrangement); (2) any bonus payment or any agreement to make a bonus
payment; (3) any stock option, warrant or other right to acquire
capital stock (except as provided in the merger agreement); (4) any
employment or consulting agreement, unless American River Holdings
has given its prior written consent, and except for payments to
officers and employees of North Coast Bank, N.A. of regular salary
increases, consistent with past practices in connection with regular
salary reviews or bonuses consistent with past practices, as
disclosed to American River Holdings;
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o not cause, allow or suffer its officers or agents to commit to any
loan, loan renewal or amendment, loan participation or other
extension of credit, which does not comply in all material respects
with its credit policies in effect and as disclosed to American
River Holdings prior to the date of the merger agreement; All loan
participations, real estate construction or development loans and
loans to North Coast Bank, N.A. directors and officers regardless of
amount and all other extensions of credit over $650,000, except for
conforming FHLMC and FNMA loans, will be subject to American River
Holdings' prior written consent. The prior written consent of
American River Holdings will be deemed waived for any new
stand-alone extension of credit that is below $650,000 and where the
new stand-alone extension of credit is in compliance with North
Coast Bank, N.A. credit policy and either the approving officer has
the requisite lending authority or the loan(s) has (have) been
approved by the North Coast Bank, N.A. loan committee or equivalent
committee of the North Coast Bank, N.A. board of directors
performing that function;
o notify American River Holdings promptly in writing upon the
occurrence of: (1) the classification of any loan as "Non-Accrual,"
"Watch," "Other Assets Specially Mentioned," "Substandard,"
"Doubtful" or "Loss"; or (2) the filing or commencement of any legal
action or other proceeding or investigation against North Coast
Bank, N.A., its directors, officers or employees will provide to
American River Holdings on request reports on specified loans as
described in the merger agreement; and maintain adequate reserves
for loan losses;
o subject to specified exceptions, not incur or commit to any capital
expenditures for more than $25,000 in the aggregate; and
o until the effective time of the merger, subject to its fiduciary
duties to its shareholders, not effect a merger or other business
combination with a third party, and neither it or its officers,
directors, affiliates, agents or advisors, shall solicit or
encourage, directly or indirectly, any inquiries, discussions or
proposals, or enter into discussions or negotiations providing for
any business combination with a third party.
Additionally, American River Holdings has agreed that it will:
o amend the articles of association and bylaws of ARH Interim National
Bank, subject to obtaining requisite shareholder and governmental
approvals, to change the name of the resulting bank to "North Coast
Bank, National Association" and to provide for a board of directors
consisting of five to twenty-five members with the exact number of
directors set at eleven or another number agreed by the parties;
o take action to offer substitute stock options, exercisable for an
equivalent number of shares of American River Holdings common stock,
to all holders of North Coast Bank, N.A. stock options;
o take all necessary corporate action, including any required approval
of the shareholders of American River Holdings, to amend its 1995
Stock Option Plan or establish a new stock option plan and cause to
be filed and become effective under the Securities Act of 1933, as
amended, a registration statement with respect to the options to be
granted and shares to be issued thereunder to fulfill the
obligations to grant substitute options to holders of North Coast
Bank, N.A. options pursuant to the merger agreement;
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o take all necessary action to list American River Holdings common
stock for trading on the Nasdaq National Market, to be effective as
soon as practicable following the effective time of the merger;
o amend, subject to shareholder approval and listing of American River
Holdings common stock for trading on the Nasdaq National Market, its
articles of incorporation and bylaws to classify its board of
directors, and to appoint two of the existing directors of North
Coast Bank, N.A. to the classified American River Holdings board of
directors; if the proposal to classify the American River Holdings
board of directors is approved by its shareholders, then one
appointed director will be a class II director and the other
appointed director will be a class III director; and
o until the effective time of the merger, not solicit or accept a
takeover proposal from a third party unless the proposal is
expressly conditioned upon the performance by American River
Holdings or the successor in interest of American River Holdings of
its obligations under the merger agreement.
ADDITIONAL AGREEMENTS
Shareholders' Meetings. In the merger agreement, each of American River
Holdings and North Coast Bank, N.A. has agreed to call a meeting of its
shareholders to be held as promptly as practicable for the purpose of voting on
the merger. Each of American River Holdings and North Coast Bank, N.A. is
required through its board of directors to recommend to its shareholders
approval of the merger agreement unless its board of directors determines in
good faith, based upon the written advice of outside counsel, that making the
recommendation, or failing to withdraw, modify or amend any previously made
recommendation, would constitute a breach of fiduciary duty by its board of
directors under applicable law.
No Solicitations. Subject to the fiduciary duty of North Coast Bank,
N.A. board of directors, prior to the effective time of the merger, North Coast
Bank, N.A. has agreed not to enter into a transaction or series of transactions
with one or more third persons or groups providing for the acquisition of all or
a substantial part of North Coast Bank, N.A., whether by way of merger, exchange
of stock, sale of assets, or otherwise ("Business Combination") or directly or
indirectly. North Coast Bank, N.A. also agreed not to acquire or agree to
acquire any of its own capital stock or the capital stock or asset (except in a
fiduciary capacity or in the ordinary course of business) of any other entity,
or commence any proceedings for winding up and dissolution affecting either of
them, solicit or encourage any inquiries, discussions or proposals for any
Business Combination with any third party; or disclose, directly or indirectly,
any nonpublic information to any group concerning North Coast Bank, N.A.'s
business, properties, books or records or otherwise encourage any person, having
any actual or prospective role with respect to any Business Combination.
However, in the event the North Coast Bank, N.A. board of directors receives a
bona fide unsolicited offer for a Business Combination of North Coast Bank, N.A.
with another entity, and reasonably determines, upon advice of counsel, that as
a result of the offer, any duty to act or to refrain from doing any act under
the merger agreement is inconsistent with the continuing fiduciary duties of the
board to its shareholders, subject to the provisions of the merger agreement,
including payment of a termination fee to American River Holdings, a violation
of North Coast Bank, N.A.'s covenants will be excused and the violation will not
constitute the failure of any condition or a breach of the merger agreement. If
the merger is terminated because North Coast Bank, N.A. breaches the agreement
against entering into a Business Combination, North Coast Bank, N.A. is required
to pay to American River Holdings a termination fee. See "Termination Fees" on
page 123.
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Filings and Other Actions. In the merger agreement, American River
Holdings and North Coast Bank, N.A. have each agreed to use all reasonable
efforts:
o to take all actions necessary to comply promptly with all legal
requirements which may be imposed on each party or its subsidiaries
with respect to the transactions contemplated by the merger
agreement; and
o to obtain (and to cooperate with the other party to obtain) any
governmental or private consent, authorization, order, exemption or
approval which is required to be obtained or made by each party or
any of its subsidiaries in connection with the merger and the other
transactions contemplated by the merger agreement. In addition, each
of North Coast Bank, N.A. and American River Holdings has agreed to
use its best efforts to take all actions necessary and proper or
advisable to complete, as soon as practicable, the transactions
contemplated by the merger agreement.
Indemnification; Directors' And Officers' Insurance. Under the merger
agreement, from and after the effective date, American River Holdings will
indemnify and hold harmless each officer or director of North Coast Bank, N.A.
(determined as of the effective time of the merger) against all losses, claims,
damages, liabilities, costs, expenses or judgments or amounts that are paid in
the settlement of or in connection with any claim, action, suit, proceeding or
investigation based on or arising out of (1) the fact that the person is or was
a director or officer of North Coast Bank, N.A. and (2) the merger agreement or
the transactions contemplated by the merger agreement, in each case to the full
extent permitted by law.
Additionally, from and after the effective date, American River
Holdings will include in its director and officer insurance policy persons who
served as directors and officers of North Coast Bank, N.A. or obtain extended
coverage under North Coast Bank, N.A.'s director and officer insurance policy to
cover claims made for a period of three years after the effective date regarding
acts or omissions of North Coast Bank, N.A.'s directors or officers prior to the
effective date. However, American River Holdings will not be obligated to make
annual premium payments for the insurance to the extent the premiums exceed 150%
of the premiums paid by North Coast Bank, N.A. for the insurance, as previously
disclosed to American River Holdings. If the premiums for the insurance would at
any time exceed 150% of the premiums paid by North Coast Bank, N.A. for the
insurance, then American River Holdings will maintain policies of insurance
which, in American River Holdings' good faith determination, provide a maximum
coverage available at an annual premium equal to 150% of the premiums paid by
North Coast Bank, N.A. in respect of the insurance.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary mutual representations by each
of American River Holdings and North Coast Bank, N.A. relating to, among other
things:
o corporate organization, existence and power to enter into the merger
agreement and consummate the merger;
o capitalization;
o due authorization, execution, delivery, performance and
enforceability of the merger agreement;
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o required governmental and third party consents and approvals and
that neither the merger agreement nor the transactions contemplated
by the merger agreement violate either party's organizational
documents, applicable law and specified material agreements;
o financial statements;
o compensation of officers and employees;
o the accuracy of the information provided by each of American River
Holdings and North Coast Bank, N.A. for inclusion in this document;
o compliance with applicable laws and possession of requisite
governmental permits and licenses;
o filing of tax returns, payment of taxes and related matters;
o material contracts;
o employee benefit plans and agreements;
o title to properties;
o transactions with affiliates;
o the absence of material litigation;
o insurance;
o bank regulatory matters;
o the absence of material changes or events since December 31, 1999;
o the absence of undisclosed liabilities;
o brokers' and finders' fees;
o ownership of intellectual property;
o adequacy of loan reserves;
o compliance with the Community Reinvestment Act;
o Year 2000 readiness;
o validity and enforceability of all loans, other extensions of
credit, commitments or other interest-bearing assets and investments
of North Coast Bank, N.A.;
o absence of restrictions on ability to dispose of investments;
o absence of collective bargaining agreements;
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o validity and prudence of risk management instruments;
o accuracy of information in governmental filings to be made in
connection with the merger; and
o accuracy of representations and warranties as of the closing date.
The representations and warranties of American River Holdings and North
Coast Bank, N.A. terminate as of the effective time of the merger.
CONDITIONS TO THE COMPLETION OF THE MERGER
The merger will occur only if specified conditions are satisfied,
unless we agree to waive any condition that is not satisfied. It is not certain
when or if the conditions to the merger will be satisfied or waived, or if the
merger will be consummated.
Each party's obligation to complete the merger is subject to various
conditions which include the following, in addition to other customary closing
conditions:
o the merger agreement and the terms of the merger must be approved by
the affirmative vote or consent of shareholders holding at least a
majority of the outstanding shares of American River Holdings common
stock and at least two-thirds of the outstanding shares of North
Coast Bank, N.A. common stock;
o all necessary governmental filings must have been made and all
necessary governmental approvals must have been obtained and be in
effect. In addition, no governmental approval must require either of
us to divest or cease any of our present businesses or operations or
impose any other condition or requirement which we, in our
reasonable judgment, consider to be materially burdensome;
o no legal, administrative, arbitration, investigatory or other
proceeding by any governmental or regulatory authority which seeks
to restrain or prohibit the merger must have been commenced or be
threatened;
o the registration statement must have been declared effective and
must not be subject to a stop order of the SEC, and no proceedings
for that purpose must have been initiated or threatened by the SEC.
In addition, the shares of American River Holdings common stock
included in the registration statement must have received all
permits or approvals required under all applicable state securities
laws;
o each of us must have received a tax opinion from Perry-Smith LLP,
based on customary assumptions and exceptions and factual statements
and representations provided by the parties, substantially to the
effect that, under federal income tax law and California income and
franchise tax law:
o the merger will not result in any recognized gain or loss to
American River Holdings or North Coast Bank, N.A.;
o except for cash received in lieu of any fractional share, no gain
or loss will be recognized by holders of North Coast Bank, N.A.
common stock who receive shares of American
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River Holdings common stock in exchange for the shares of North
Coast Bank, N.A. common stock they hold;
o the holding period for the shares of American River Holdings
common stock issued in exchange for the shares of North Coast
Bank, N.A. common stock in the merger will include the holding
period of the shares of the North Coast Bank, N.A. common stock
for which they are exchanged, assuming that the shares of North
Coast Bank, N.A. common stock are capital assets in the hands of
the North Coast Bank, N.A. shareholder at the effective date of
the merger;
o the basis of the shares of American River Holdings common stock
received by the North Coast Bank, N.A. shareholders in the merger
will be the same as the basis of the shares of North Coast Bank,
N.A. common stock for which they are exchanged, less any basis
attributable to fractional shares for which cash is received;
o any North Coast Bank, N.A. shareholder who dissents to the merger
and receives cash for his or her shares of North Coast Bank, N.A.
common stock will be treated as having received a distribution in
redemption of his or her shares of North Coast Bank, N.A. common
stock, subject to the provisions and limitations of Section 302
of the Internal Revenue Code. Those North Coast Bank, N.A.
shareholders who receive solely cash, who immediately after the
merger hold no shares of American River Holdings common stock
directly or through the application of Section 318 of the
Internal Revenue Code, and thus whose interests are completely
terminated within the meaning of Section 302(b)(3) of the
Internal Revenue Code, will be treated as receiving a cash
distribution in full payment for the shares of North Coast Bank,
N.A. common stock as provided in Section 302(a) of the Internal
Revenue Code. Gain or loss will be recognized to such North Coast
Bank, N.A. shareholders measured by the difference between the
redemption price and the adjusted basis of the shares of North
Coast Bank, N.A. common stock. If the North Coast Bank, N.A.
shareholder holds such shares of North Coast Bank, N.A. common
stock as a capital asset, such gain or loss will be a capital
gain or loss;
o no gain or loss will be recognized by the holders of nonqualified
options to buy shares of North Coast Bank, N.A. common stock upon
the conversion of those options into nonqualified options to buy
shares of American River Holdings common stock under the same
terms and conditions as in effect immediately prior to the
merger; and
o the substitution of incentive stock options to acquire shares of
American River Holdings common stock for incentive stock options
to acquire shares of North Coast Bank, N.A. common stock will not
be a modification as defined in Section 424(h)(3) of the Internal
Revenue Code, and will not result in the recognition of income,
gain, or loss to the holders of the incentive stock options to
acquire shares of North Coast Bank, N.A. common stock. Such
options to acquire shares of American River Holdings common stock
will be incentive stock options as defined in Section 422(b) of
the Internal Revenue Code;
o American River Holdings must receive a letter from American River
Holdings' independent accountants that no conditions exist that
would preclude accounting for the merger as a pooling-of-interests
and North Coast Bank, N.A. must receive a letter from North Coast
Bank, N.A.'s independent accountants to the effect that no
conditions exist that would preclude North Coast Bank, N.A. from
being a party to a business combination to be
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accounted for as a pooling-of-interests. In addition, no
determination by any court, governmental or regulatory agency must
have been made that the merger fails or will fail to qualify for
pooling-of-interests accounting treatment;
o each party must have received an opinion from its financial advisor,
dated within three days prior to the date this document is mailed to
you, to the effect that the conversion ratio is fair, from a
financial point of view, to that party and its shareholders, and the
opinion must not have been withdrawn prior to the effective time of
the merger. Hoefer & Arnett Incorporated is the financial advisor to
American River Holdings and Seapower Carpenter Capital, Inc., dba
Carpenter and Company is the financial advisor to North Coast Bank,
N.A. and the parties have received their respective opinions;
o the representations and warranties that each of us have made in the
merger agreement must remain true and correct in all material
respects as of the closing date and effective time of the merger;
and each of us must have performed and complied, in all material
respects, with all of the agreements we made in the merger agreement
at or prior to the effective time of the merger;
o each party must have received a certificate signed by the other
party's president and chief financial officer to the effect that the
representations and warranties of each party set forth in the merger
agreement, subject to the disclosure schedules delivered by each
party to the other party on or prior to the closing date, are true
and correct in all material respects as of the closing date;
o holders of not more than nine percent (9%) of the outstanding shares
of North Coast Bank, N.A. common stock and American River Holdings
common stock will have perfected their dissenter's rights in the
manner required by the National Bank Act and the rules and
regulations of the Office of the Comptroller of the Currency, and
under Chapter 13 of the California General Corporation Law, as
applicable;
o each party must have received from the other party the certificates
and other closing documents that their counsel reasonably requires
in order to close the merger;
o we must have received signed affiliate agreements from each person
who, in our opinion, might be deemed to be an affiliate of North
Coast Bank, N.A. or American River Holdings under Rule 144 or Rule
145 of the Securities Act of 1933, as amended. The affiliate
agreements include provisions restricting specified actions by the
affiliates of American River Holdings and North Coast Bank, N.A.,
including the purchase, sale or other transfer of shares of American
River Holdings common stock or North Coast Bank, N.A. common stock
in a manner that could prevent the merger from qualifying for
pooling-of-interests accounting treatment; and
o our boards of directors and executive officers must have delivered
to us signed shareholder agreements, under which they agree to vote
their shares of American River Holdings common stock and North Coast
Bank, N.A. common stock, respectively, in favor of the merger, and
to recommend to shareholders that they also vote in favor of the
merger.
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The obligation of American River Holdings to consummate the merger is
subject to the following additional conditions:
o no material adverse change must have occurred since December 31,
1999, in the business, financial condition, results of operations or
assets of North Coast Bank, N.A., and North Coast Bank, N.A. must
not have become a party to or threatened with any litigation or
governmental proceeding that was not previously disclosed to
American River Holdings;
o American River Holdings must have received a legal opinion from
Lillick & Charles LLP, counsel to North Coast Bank, N.A., dated the
effective date and in form and substance reasonably acceptable to
American River Holdings and its counsel;
o American River Holdings must have received, on or before the
effective date of the registration statement, a comfort letter on
North Coast Bank, N.A. financial information as of March 31, 2000,
and for the three month period then ended from North Coast Bank,
N.A.'s independent public accountants, prepared in accordance with
Statement of Accounting Standards No. 71, Interim Financial
Information, and in form and substance satisfactory to American
River Holdings and its counsel;
o not later than five business days prior to the effective date, North
Coast Bank, N.A. will have furnished to American River Holdings a
copy of its most recently prepared unaudited month-end consolidated
financial statements for the month ended at least 10 business days
prior to the effective date;
o North Coast Bank, N.A. must have received, or American River
Holdings must be satisfied that North Coast Bank, N.A. will receive,
all consents from third parties as may be required to close the
merger, and the consents must remain in effect at the closing date;
and
o as of the determination date, the closing date and the effective
date, North Coast Bank, N.A. must have (a) total shareholders'
equity and leverage, tier 1 and total risk-based capital ratios,
respectively, in amounts required to comply with the
"well-capitalized" category of applicable federal banking
regulations, (b) total reserves for losses on outstanding loans in
compliance with the North Coast Bank, N.A. loan loss policy and
procedures and at a level which, in the reasonable determination of
American River Holdings, are adequate for regulatory purposes and
for purposes of generally accepted accounting principles, (c) total
shareholders' equity of $4,030,000, and (d) assets classified as
"Substandard", "Doubtful", and "Loss" shall not exceed 15% of total
shareholders' equity.
The obligation of North Coast Bank, N.A. to consummate the merger is
subject to the following additional conditions:
o no material adverse change must have occurred since December 31,
1999, in the business, financial condition, results of operations or
assets of American River Holdings and American River Bank, taken
together, and American River Holdings must not have become a party
to or threatened with any litigation or governmental proceeding
which, in North Coast Bank, N.A.'s reasonable judgment, could have a
material adverse effect on the business, financial condition,
results of operations or assets of American River Holdings and
American River Bank taken together;
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o North Coast Bank, N.A. must have received a legal opinion from
Coudert Brothers, counsel to American River Holdings, dated the
effective date of the merger and in form and substance reasonably
acceptable to North Coast Bank, N.A. and its counsel;
o North Coast Bank, N.A. must have received, on or before the
effective date of the registration statement, a comfort letter on
American River Holdings financial information as of March 31, 2000,
and for the three month period then ended from American River
Holdings' independent public accountants, prepared in accordance
with Statement of Accounting Standards No. 71, Interim Financial
Information, and in form and substance satisfactory to North Coast
Bank, N.A. and its counsel;
o not later than five business days prior to the effective date,
American River Holdings will have furnished to North Coast Bank,
N.A. a copy of its most recently prepared unaudited month-end
consolidated financial statements for the month ended at least 10
business days prior to the effective date of the merger; and
o American River Holdings must have received, or North Coast Bank,
N.A. must be satisfied that American River Holdings will receive,
all consents from third parties as may be required to close the
merger, and the consents must remain in effect at the closing date;
and
o as of the determination date, closing date and effective date,
American River Holdings must have (a) total shareholders' equity and
leverage, tier 1 and total risk-based capital ratios, respectively,
in amounts required to comply with the "well capitalized" category
of applicable federal banking regulations, (b) total reserves for
losses on outstanding loans in compliance with the American River
Holdings loan loss policy and procedures and at a level which, in
the reasonable determination of North Coast Bank, N.A., are adequate
for regulatory purposes and for purposes of generally accepted
accounting principles, and (c) total shareholders' equity of
$16,700,000.
TERMINATION OF THE MERGER AGREEMENT
We can agree at any time to terminate the merger agreement without
completing the merger, even if the shareholders of both American River Holdings
and North Coast Bank, N.A. have approved it. Also, the merger agreement can be
terminated either by our mutual agreement or by one of us if specified events
occur. If the merger agreement is terminated, the merger will not occur.
Either American River Holdings or North Coast Bank, N.A. can terminate
the merger agreement if any of the following events occurs:
o if the merger is not completed by September 30, 2000 or another date
that we approve; provided, however, that if the only conditions to
the closing that remain unsatisfied at September 30, 2000 (or other
date that we approve) are the receipt of any requisite governmental
approvals or the expiration of any legally required waiting periods,
then the closing will be automatically extended to November 30, 2000
or other date we approve;
o thirty days after any governmental agency denies or refuses to grant
an approval, consent or qualification that is required for the
merger, unless we agree, during the 30 day period, to appeal the
denial or refusal or we agree to file an amended application for the
governmental approval, consent or qualification; and
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o the shareholders of either American River Holdings or North Coast
Bank, N.A. fail to approve the merger agreement and related
transactions, including the merger, by the required vote.
American River Holdings can elect to terminate the merger agreement if
any of the following events occur:
o any of the conditions to American River Holdings' obligations to
complete the merger under the merger agreement have not been
satisfied or waived by September 30, 2000 (or other date that we may
approve);
o a material adverse change has occurred since December 31, 1999 in
the business, financial condition, results of operations or assets
of North Coast Bank, N.A.;
o North Coast Bank, N.A. or any of its affiliates enters into a
transaction or series of transactions with one or more third persons
providing for the acquisition of all or a substantial part of North
Coast Bank, N.A. or its subsidiaries, whether by way of merger,
exchange or stock, sale of assets, or otherwise;
o North Coast Bank, N.A. breaches or fails to satisfy any of its
agreements in the merger agreement which would materially impair the
benefits reasonably expected to be derived by American River
Holdings and American River Bank from the merger, unless the breach
or failure is waived by American River Holdings or cured by North
Coast Bank, N.A. within 45 days after American River Holdings gives
North Coast Bank, N.A. written notice of the breach or failure; and
o North Coast Bank, N.A. fails to deliver to American River Holdings
the shareholder agreements, affiliates agreements, officer's
certificate or opinion of North Coast Bank, N.A.'s legal counsel
which are required by the merger agreement or if those documents are
not in a form that is reasonably acceptable to American River
Holdings.
North Coast Bank, N.A. can elect to terminate the merger agreement if
any of the following events occur:
o any of the conditions to North Coast Bank, N.A.'s obligations to
complete the merger under the merger agreement have not been
satisfied or waived by September 30, 2000 (or other date that we may
approve);
o a material adverse change has occurred since December 31, 1999 in
the business, financial condition, results of operations or assets
of American River Holdings and its subsidiaries, taken as a whole;
o American River Holdings solicits or accepts any offer from any third
party providing for the acquisition of all or a substantial part of
American River Holdings or American River Bank, whether by way of
merger, exchange or stock, sale of assets, or otherwise, unless the
offer is expressly conditioned on the performance by American River
Holdings or its successor of American River Holdings' obligations
under the merger agreement;
o American River Holdings breaches or fails to satisfy any of its
agreements in the merger agreement which would materially impair the
benefits reasonably expected to be derived by North Coast Bank, N.A.
from the merger, unless the breach or failure is waived by North
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Coast Bank, N.A. or cured by American River Holdings within 45 days
after North Coast Bank, N.A. gives American River Holdings written
notice of the breach or failure; and
o American River Holdings fails to deliver to North Coast Bank, N.A.
the shareholder agreements, affiliates agreements, officer's
certificate or opinion of American River Holdings' legal counsel
which are required by the merger agreement or if those documents are
not in a form that is reasonably acceptable to North Coast Bank,
N.A.
Any termination must be made by written notice from the party seeking
termination to the other party. In the event the merger agreement is terminated,
it will become void and have no effect, except that the termination will not
affect the provisions regarding payment of expenses, confidentiality, payment of
any termination fees if applicable or any relevant general provisions of the
merger agreement. Also, if the merger agreement is terminated due to a party's
breach, the termination will not relieve the breaching party from its liability
and the non-breaching party will retain all of its legal rights and remedies
against the breaching party for its breach.
TERMINATION FEES
North Coast Bank, N.A. is required to pay American River Holdings the
amounts described below as liquidated damages if American River Holdings
terminates the merger agreement for any of the following reasons:
o $1 million dollars if North Coast Bank, N.A. or its affiliates enters into an
agreement by which North Coast Bank, N.A. or its subsidiaries would be
acquired by another entity;
o $500 thousand dollars if North Coast Bank, N.A. breaches any covenant in the
merger agreement which materially impairs the benefit of the merger to
American River Holdings, unless North Coast Bank, N.A. cures the breach
within 45 days after written notice from American River Holdings; or
o $500 thousand dollars if North Coast Bank, N.A. willfully or deliberately
refuses to deliver to American River Holdings closing documents required by
the merger agreement.
American River Holdings is required to pay North Coast Bank, N.A. the
amounts described below as liquidated damages if North Coast Bank, N.A.
terminates the merger agreement for any of the following reasons:
o $1 million dollars if American River Holdings solicits or accepts an offer
from a third party to acquire American River Holdings or American River Bank
and the offer does not require American River Holdings or the third party to
comply with the merger agreement;
o $500 thousand dollars if American River Holdings breaches any covenant in the
merger agreement which materially impairs the benefit of the merger to North
Coast Bank, N.A., unless American River Holdings cures the breach within 45
days after written notice from North Coast Bank, N.A.; or
o $500 thousand dollars if American River Holdings willfully or deliberately
refuses to deliver to North Coast Bank, N.A. closing documents required by
the merger agreement.
FEES AND EXPENSES OF THE MERGER
Other than in the situations described in "Termination Fees" above and
in the following paragraphs, whether or not the merger is completed in
accordance with the merger agreement, all costs
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and expenses incurred in connection with the merger agreement and the
transactions covered by the merger agreement will be paid by the party incurring
those expenses.
American River Holdings and North Coast Bank, N.A. will each bear the
costs of distributing this document and other proxy materials and information
relating to the merger agreement to its shareholders and of conducting a meeting
of its shareholders, but each party will pay one-half of the (1) printing costs,
(2) the fees and costs related to obtaining a tax opinion, (3) the fees and
costs related to obtaining a letter from their independent accountants regarding
pooling-of-interests accounting treatment, (4) all fees and costs payable under
state "blue sky" securities laws, (5) the fee required to be paid to the
Securities and Exchange Commission to register the shares of American River
Holdings common stock, (6) the fees and costs related to any amendments to the
American River Holdings 1995 Stock Option Plan or for the preparation of a new
American River Holdings stock option plan for the North Coast Bank, N.A.
optionees, and (7) the fees related to preparation and filing of applications to
governmental agencies for approval of the merger agreement and merger.
The fees and costs related to the listing of the shares of American
River Holdings common stock for trading on the Nasdaq National Market will be
paid by American River Holdings.
AMENDMENT
The merger agreement may be amended by the parties at any time before
or after approval of the merger agreement by the shareholders of American River
Holdings and North Coast Bank, N.A. However, after the approval by the
shareholders of American River Holdings and North Coast Bank, N.A., no amendment
will be made which by law requires further approval by those shareholders
without that further approval. The merger agreement may not be amended except by
an instrument in writing signed on behalf of each of the parties.
EXTENSION; WAIVER
At any time prior to the closing of the merger, the parties, by action
taken or authorized by their respective board of directors, may, to the extent
legally allowed, (1) extend the time for the performance of any of the
obligations or other acts of the other parties, (2) waive any inaccuracies in
the representations and warranties contained in the merger agreement or in any
document delivered under it, and (3) waive compliance with any of the agreements
or conditions contained in the merger agreement. To "waive" means to give up
rights.
Any agreement on the part of a party to the merger agreement to any
extension or waiver will be valid only if set forth in a written instrument
signed on behalf of the party.
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
Upon the consummation of the merger, the separate corporate existence
of North Coast Bank, N.A. will cease and North Coast Bank, N.A. will be merged
with and into ARH Interim National Bank. All rights, franchises and interests of
North Coast Bank, N.A. will be assumed by and vested in ARH Interim National
Bank and the resulting bank will continue as a subsidiary of American River
Holdings with the national bank charter number and name of North Coast Bank,
N.A. The directors and executive officers of North Coast Bank, N.A. prior to the
effective date will be the directors and executive officers of North Coast Bank,
N.A. following the merger, except that (a) two of the existing directors of
American River Holdings, David T. Taber and Dr. Roger J. Taylor, will become
directors of the resulting national banking association, (b) two North Coast
Bank, N.A. directors, M. Edgar Deas and Larry L. Wasem, will be added to the
board of directors of American River Holdings, and (c) Kathy A. Pinkard,
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President and Chief Executive Officer of North Coast Bank, N.A., will be
appointed to serve on the executive management committee of American River
Holdings.
REQUIRED REGULATORY APPROVALS
The merger must be approved by the Board of Governors of the Federal
Reserve System under the provisions of the Bank Holding Company Act of 1956, as
amended. American River Holdings has filed an application with the Board of
Governors for approval of the merger. The application addresses all of the
statutory and regulatory requirements of the Board of Governors. The Board of
Governors approved the application on July 11, 2000.
In conducting a review of any application for a merger, the Board of
Governors is required to consider the financial and managerial resources
(including the competence, experience and integrity of the officers, directors
and principal shareholders) and future prospects of the banks concerned and the
convenience and needs of the community to be served. The Bank Holding Company
Act also prohibits the Board of Governors from approving a merger if it would
result in a monopoly or be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of banking in any part of
the United States, or if its effect would be substantially to lessen competition
or to tend to create a monopoly, or if it would in any other manner result in a
restraint of trade, unless the Board of Governors finds that the anticompetitive
effects of the merger are clearly outweighed in the public interest by the
probable effect of the merger in meeting the convenience and needs of the
communities to be served. In addition, the Board of Governors has the authority
to deny an application if it concludes that the requirements of the Community
Reinvestment Act of 1977, as amended, are not satisfied.
A transaction approved by the Board of Governors may not be consummated
for at least 30 days (in some circumstances a 15-day waiting period is allowed)
after the approval. During that period, the Department of Justice may commence a
legal action challenging the transaction under federal antitrust laws. If the
Department of Justice does not commence a legal action during the 30-day period
(in some circumstances a 15-day waiting period is allowed), it may not
thereafter challenge the transaction except in an action commenced under the
antimonopoly provisions of Section 2 of the Sherman Antitrust Act.
The Bank Holding Company Act provides for the publication of notice and
the opportunity for administrative hearings relating to an application for
approval under the Act and authorizes the Board of Governors to permit
interested parties to intervene in the proceedings. If an interested party is
permitted to intervene, the intervention could substantially delay the
regulatory approval required for consummation of the merger.
The merger of North Coast Bank, N.A. and ARH Interim National Bank is
subject to the prior approval of the Office of the Comptroller of the Currency
under Section 18(c) of the Federal Deposit Insurance Act, as amended (the "Bank
Merger Act") and Section 215a of the National Bank Act, as amended. American
River Holdings has filed an application for approval of the merger with the
Office of the Comptroller of the Currency.
The application filed with the Office of the Comptroller of the
Currency includes an application for approval to organize an interim national
bank, named ARH Interim National Bank. Interim national banks are federally
chartered banks established to facilitate interim bank mergers and they do not
operate as banks in their own right. Nonetheless, they must comply with
chartering and organization requirements. The directors of American River
Holdings are the organizers of ARH Interim National Bank and they will serve as
its board of directors. Upon receipt of preliminary approval to organize, the
organizers of ARH Interim National Bank are required to file articles of
association with the Office of the Comptroller of the Currency and comply with
the other conditions stated in the preliminary approval. Once organized, ARH
Interim National Bank is expected to become a party to the merger agreement by
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entering into an addendum with American River Holdings and North Coast Bank,
N.A. With the approval of the Office of the Comptroller of the Currency, North
Coast Bank, N.A. is expected to merge into ARH Interim National Bank pursuant to
a bank merger agreement, as described in the merger agreement.
The Bank Merger Act requires the Office of the Comptroller of the
Currency, when approving a transaction like the merger, to take into
consideration the financial and managerial resources (including the competence,
experience and integrity of the officers, directors and principal shareholders)
and future prospects of the existing and proposed institutions and the
convenience and needs of the communities to be served. In considering financial
resources and future prospects, the Office of the Comptroller of the Currency
will, among other things, evaluate the adequacy of the capital levels of the
parties to a proposed transaction and of the resulting institutions.
The Bank Merger Act prohibits the Office of the Comptroller of the
Currency from approving a merger if it would result in a monopoly or be in
furtherance of any combination or conspiracy to monopolize or to attempt to
monopolize the business of banking in any part of the United States, or if its
effect in any section of the country would be substantially to lessen
competition or to tend to create a monopoly, or if it would in any other manner
result in a restraint of trade, unless the Office of the Comptroller of the
Currency finds that the anti-competitive effects of the merger are clearly
outweighed in the public interest by the probable effect of the transaction in
meeting the convenience and needs of the communities to be served. In addition,
under the Community Reinvestment Act, the Office of the Comptroller of the
Currency must take into account the record of performance of the existing
institutions in meeting the credit needs of the entire community, including low-
and moderate-income neighborhoods, served by those institutions.
The Office of the Comptroller of the Currency will furnish notice and a
copy of the application for approval of the merger to the Board of Governors,
the Federal Deposit Insurance Corporation and the United States Department of
Justice. These agencies have 30 days to submit their views and recommendations
to the Office of the Comptroller of the Currency. The Bank Merger Act also
provides for the publication of notice and public comment on applications filed
with the Office of the Comptroller of the Currency and authorizes the agency to
permit interested parties to intervene in the proceedings. If an interested
party is permitted to intervene, the intervention could delay the regulatory
approvals required for completion of the merger.
Under the merger agreement, prior to the merger, all governmental
approvals required for the merger will be in effect, and all conditions or
requirements prescribed by law or any governmental approval will be satisfied.
However, no governmental approval will be deemed to have been received if it
will require the divestiture or cessation of any of the present businesses or
operations conducted by the parties or imposes any condition or requirement
which, in the reasonable opinion of the board of directors of American River
Holdings is deemed to be materially burdensome.
The merger cannot proceed in the absence of the necessary regulatory
approvals. The respective managements of American River Holdings and North Coast
Bank, N.A. believe that the merger should be approved by the Office of the
Comptroller of the Currency and the merger should not be subject to challenge by
the Department of Justice under federal antitrust laws. However, no assurance
can be provided that the Office of the Comptroller of the Currency or the
Department of Justice will concur in this assessment or that, in connection with
the grant of any approval by the Board of Governors or the Office of the
Comptroller of the Currency, action taken, or statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the merger or transactions
contemplated thereby, will not contain conditions or requirements which are
materially burdensome as further described in the merger agreement. If any
materially burdensome condition or
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requirement is imposed in connection with a governmental approval, a condition
to American River Holdings' obligation to consummate the merger will be deemed
not to have occurred and American River Holdings will have the right to
terminate the merger agreement.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax consequences of the merger. The discussion does not address all
aspects of United States federal taxation that may be relevant to you, and it
may not be applicable to North Coast Bank, N.A. shareholders who, for United
States federal income tax purposes, are nonresident alien individuals, foreign
corporations, foreign partnerships, foreign trusts or foreign estates, or who
acquired their North Coast Bank, N.A. common stock by the exercise of North
Coast Bank, N.A. stock options or otherwise as compensation. YOU SHOULD CONSULT
YOUR OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE MERGER.
This discussion is based on the Internal Revenue Code of 1986, as
amended, regulations thereunder, current administrative rulings and practice,
and judicial precedent, all of which are subject to change. Any change, which
may or may not be retroactive, could alter the tax consequences to you as
discussed in this document. This discussion assumes that you hold your North
Coast Bank, N.A. common stock as a capital asset within the meaning of Section
1221 of the Internal Revenue Code.
American River Holdings' and North Coast Bank, N.A.'s obligation to
complete the merger is conditioned upon American River Holdings and North Coast
Bank, N.A. receiving an opinion of Perry-Smith LLP, based upon customary
assumptions, exceptions and representations made by American River Holdings and
North Coast Bank, N.A. The following is a summary of the opinion of Perry-Smith
LLP, dated August 10, 2000, to the effect that under federal income tax law and
California income and franchise tax law:
o the merger will not result in any recognized gain or loss to
American River Holdings or North Coast Bank, N.A.;
o except for any cash received in lieu of any fractional share, no
gain or loss will be recognized by the holders of North Coast Bank,
N.A. common stock who receive American River Holdings common stock
in exchange for the North Coast Bank, N.A. common stock which they
hold;
o the holding period of the American River Holdings common stock
exchanged for North Coast Bank, N.A. common stock will include the
holding period of the North Coast Bank, N.A. common stock for which
it is exchanged, assuming the shares of North Coast Bank, N.A.
common stock are capital assets in the hands of the holder thereof
at the effective date;
o the basis of the American River Holdings common stock received in
the exchange will be the same as the basis of the North Coast Bank,
N.A. common stock for which it was exchanged, less any basis
attributable to fractional shares for which cash is received; and
o a North Coast Bank, N.A. shareholder who dissents to the merger and
receives cash for his or her North Coast Bank, N.A. common stock
will be treated as having received a distribution in redemption of
his or her North Coast Bank, N.A. common stock, subject to the
provisions and limitations of Section 302 of the Internal Revenue
Code. Those North Coast Bank, N.A. shareholders who receive solely
cash, who immediately after the merger hold no shares of American
River Holdings common stock directly or through the application of
Section 318 of the Internal Revenue Code, and thus whose interests
are completely terminated within the
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meaning of Section 302(b)(3) of the Internal Revenue Code, will be
treated as receiving a cash distribution in full payment for the
shares of North Coast Bank, N.A. common stock as provided in Section
302(a) of the Internal Revenue Code. Gain or loss will be recognized
to such North Coast Bank, N.A. shareholders measured by the
difference between the redemption price and the adjusted basis of
the shares of North Coast Bank, N.A. common stock. If the North
Coast Bank, N.A. shareholder holds such shares of North Coast Bank,
N.A. common stock as a capital asset, such gain or loss will be a
capital gain or loss.
o No gain or loss will be recognized by the holders of nonqualified
options to buy shares of North Coast Bank, N.A. common stock upon
the conversion of those options into nonqualified options to buy
shares of American River Holdings common stock under the same terms
and conditions as in effect immediately prior to the merger.
o The substitution of incentive stock options to acquire shares of
American River Holdings common stock for incentive stock options to
acquire shares of North Coast Bank, N.A. common stock will not be a
modification as defined in Section 424(h)(3) of the Internal Revenue
Code, and will not result in the recognition of income, gain, or
loss to the holders of the incentive stock options to acquire shares
of North Coast Bank, N.A. common stock. Such options to acquire
shares of American River Holdings common stock will be incentive
stock options as defined in Section 422(b) of the Internal Revenue
Code.
Perry-Smith LLP has indicated that it expects to be able to deliver its
tax opinion. Opinions are not binding on the Internal Revenue Service or the
courts and no ruling has been or will be obtained from the Internal Revenue
Service in connection with the merger.
THE FOREGOING IS A GENERAL DISCUSSION OF THE MATERIAL UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. THE FOREGOING DISCUSSION DOES NOT
TAKE INTO ACCOUNT THE PARTICULAR FACTS AND CIRCUMSTANCES OF YOUR STATUS AND
ATTRIBUTES. AS A RESULT, THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT APPLY TO YOU. IN VIEW OF THE
INDIVIDUAL NATURE OF INCOME TAX CONSEQUENCES, YOU ARE URGED TO CONSULT YOUR OWN
TAX ADVISOR TO DETERMINE THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE MERGER,
INCLUDING THE APPLICATION AND EFFECT OF UNITED STATES FEDERAL, STATE, LOCAL AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL AND
OTHER TAX LAWS.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the merger is expected
to qualify as a pooling of interests of North Coast Bank, N.A. by American River
Holdings under generally accepted accounting principles. Under the pooling of
interests accounting method, American River Holdings will carry forward on its
books the assets and liabilities of North Coast Bank, N.A. at their historical
recorded values, subject to any adjustments required to conform the accounting
policies and financial statement classification of the two companies. Income of
the combined American River Holdings will include income of American River
Holdings and North Coast Bank, N.A. for the entire fiscal year in which the
combination occurs and the reported income, assets, liabilities and
shareholders' equity of the separate companies for previous periods will be
combined and restated as income, assets, liabilities and shareholders' equity of
American River Holdings. The unaudited pro forma combined financial information
contained in this document have been prepared using the pooling of interests
method of accounting to account for the merger. See "Selected Historical and Pro
Forma Financial Data" on page 10 and "Unaudited Pro Forma Condensed Combined
Financial Information" on page 133.
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TRADING MARKETS FOR STOCK
The American River Holdings common stock is not listed on any exchange
and is quoted on the OTC Bulletin Board under the symbol "AMRB.OB." American
River Holdings will take the action necessary to apply for the listing of shares
of American River Holdings common stock (including the shares to be issued in
the merger and the shares of American River Holdings common stock to be reserved
for issuance upon the exercise of existing North Coast Bank, N.A. stock options)
to be approved for trading on the Nasdaq National Market, subject to official
notice of issuance, on or as soon as practicable following the effective time of
the merger.
The North Coast Bank, N.A. common stock is not listed on any exchange
and is quoted on the OTC Bulletin Board under the symbol "NCTA.OB." If the
merger is consummated, American River Holdings will take action to cause the
North Coast Bank, N.A. shares to cease to be quoted on the OTC Bulletin Board
and public trading of the North Coast Bank, N.A. shares will cease.
RESALES OF AMERICAN RIVER HOLDINGS COMMON STOCK
The American River Holdings common stock issued in the merger will be
freely transferable under the Securities Act of 1933, as amended, except for
shares issued to any North Coast Bank, N.A. shareholder who may be deemed to be
an "affiliate" of American River Holdings or North Coast Bank, N.A. for purposes
of Rule 145 under the Securities Act of 1933, as amended. Each director and
executive officer of North Coast Bank, N.A. is deemed to be an affiliate. Each
North Coast Bank, N.A. director and each other person deemed to be an affiliate
has entered into an agreement with American River Holdings providing that the
person will not transfer any shares of American River Holdings common stock
received in the merger, except in compliance with the Securities Act of 1933, as
amended, and applicable rules thereunder.
DISSENTERS' RIGHTS
DISSENTERS' RIGHTS OF AMERICAN RIVER HOLDINGS SHAREHOLDERS
Dissenters' rights will be available to the shareholders of American
River Holdings in accordance with Chapter 13 of the California General
Corporation Law. THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 MUST BE FOLLOWED
EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST.
The information set forth below is a general summary of dissenters'
rights as they apply to American River Holdings shareholders and is qualified in
its entirety by reference to Chapter 13 which is attached to this document as
Annex D.
Fair Market Value of Shares. If the merger is consummated, shareholders
of American River Holdings who dissent from the merger by complying with the
procedures set forth in Chapter 13 would be entitled to receive an amount equal
to the fair market value of their shares as of March 1, 2000, the last business
day before the public announcement of the merger. The bid, asked and closing
prices for American River Holdings common stock quoted on the OTC Bulletin Board
on March 1, 2000 were $12.50, $13.50, and $12.50, respectively.
Voting Procedure. In order to be entitled to exercise dissenters'
rights, the shares of American River Holdings common stock which are outstanding
and are entitled to be voted at the annual meeting must not have been voted by
the holder of such shares "FOR" the merger. Thus, any American River Holdings
shareholder who wishes to dissent and executes and returns a proxy in the
accompanying form or votes at the annual meeting must not vote "FOR" the merger.
If the shareholder returns a proxy
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without voting instructions or with instructions to vote "FOR" the merger, or
votes in person or by proxy at the annual meeting "FOR" the merger, his or her
shares will be counted as votes in favor of the merger and the shareholder will
lose any dissenters' rights.
Written Demand. Furthermore, in order to preserve his or her
dissenters' rights, an American River Holdings shareholder must make a written
demand upon American River Holdings for the purchase of dissenting shares and
payment to the shareholder of their fair market value, specifying the number of
shares held of record by the shareholder and a statement of what the shareholder
claims to be the fair market value of those shares as of March 1, 2000. The
demand must be addressed to American River Holdings,1545 River Park Drive, Suite
107, Sacramento, California 95815; Attention: Corporate Secretary, and the
demand must be received by American River Holdings not later than 30 days after
the date on which the written notice of approval described below is sent to
shareholders who have not voted "FOR" approval of the merger. A vote "AGAINST"
the merger does not constitute the written demand.
Notice of Approval. If the merger is approved by the shareholders,
American River Holdings will have 10 days after the approval to send to those
shareholders who have not voted "FOR" approval of the merger, a written notice
of the approval accompanied by a copy of sections 1300 through 1304 of Chapter
13, a statement of the price determined by American River Holdings to represent
the fair market value of the dissenting shares as of March 1, 2000, and a brief
description of the procedure to be followed if a shareholder desires to exercise
dissenters' rights.
Surrender of Certificates. Within 30 days after the date on which the
notice of the approval of the merger is mailed, the dissenting shareholder must
surrender to American River Holdings, at the office designated in the notice of
approval, both the written demand and the certificates representing the
dissenting shares to be stamped or endorsed with a statement that they are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed. Any shares of American River Holdings
common stock that are transferred prior to their submission for endorsement lose
their status as dissenting shares.
Agreement on Price and Payment. If American River Holdings and the
dissenting shareholder agree that the surrendered shares are dissenting shares
and agree upon the price of the shares, the dissenting shareholder will be
entitled to the agreed price with interest thereon at the legal rate on
judgments from the date of the agreement. Payment of the fair market value of
the dissenting shares will be made within 30 days after the amount thereof has
been agreed upon or 30 days after any statutory or contractual conditions to the
merger have been satisfied, whichever is later, subject to the surrender of the
certificates therefor, unless provided otherwise by agreement.
Disagreement on Price and Court Determination. If American River
Holdings denies that the shares surrendered are dissenting shares, or American
River Holdings and the dissenting shareholder fail to agree upon a fair market
value of the shares of American River Holdings common stock, then the dissenting
shareholder of American River Holdings must, within six months after the notice
of approval is mailed, file a complaint at the Superior Court of the proper
county requesting the court to make the determinations or intervene in any
pending action brought by any other dissenting shareholder. If the complaint is
not filed or intervention in a pending action is not made within the specified
six-month period, the dissenters' rights are lost. If the fair market value of
the dissenting shares is at issue, the court will determine, or will appoint one
or more impartial appraisers to determine, the fair market value.
Withdrawal of Demand. A dissenting shareholder may not withdraw his or
her dissent or demand for payment unless American River Holdings consents to the
withdrawal.
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DISSENTERS' RIGHTS OF NORTH COAST BANK, N.A. SHAREHOLDERS
Dissenters' rights will be available to the shareholders of North Coast
Bank, N.A. in accordance with Section 215a(b), (c) and (d) of Title 12 of the
United States Code and Office of the Comptroller of the Currency Banking
Circular 259. Banking Circular 259 describes the specific requirements of the
appraisal process conducted by the Office of the Comptroller of the Currency
discussed below and includes examples of appraisal results in various
transactions. THE REQUIRED PROCEDURE SET FORTH IN SECTION 215A(B), (C) AND (D)
MUST BE FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST.
The information set forth below is a general summary of dissenters'
rights as they apply to North Coast Bank, N.A. shareholders and is qualified in
its entirety by reference to Section 215a(b),(c) and (d) and to Banking Circular
259 which are attached to this document as Annex E.
Value of Shares. If the merger is consummated, shareholders of North
Coast Bank, N.A. who dissent from the merger by complying with the procedures
set forth in Section 215a(b),(c) and (d) would be entitled to receive an amount
equal to the value of their shares based upon an appraisal in accordance with
the appraisal or reappraisal procedures described below.
Voting Procedure. In order to be entitled to exercise dissenters'
rights, a shareholder of North Coast Bank, N.A. must vote "AGAINST" the merger
or give notice in writing at or prior to the special meeting that the
shareholder dissents. Thus, any North Coast Bank, N.A. shareholder who executes
and returns a proxy in the accompanying form and wishes to dissent, must specify
that his or her shares are to be voted "AGAINST" the merger. If the shareholder
returns a proxy without voting instructions or with instructions to vote "FOR"
the merger, his or her shares will be counted as votes in favor of the merger
and the shareholder will lose any dissenters' rights. In addition, if the
shareholder abstains from voting or does not vote his or her shares, the
shareholder will lose his or her dissenters' rights.
Written Demand. Furthermore, in order to preserve his or her
dissenters' rights, a North Coast Bank, N.A. shareholder must make a written
demand upon North Coast Bank, N.A. for the purchase of dissenting shares and
payment to the shareholder of the fair market value. The written demand must be
made prior to thirty days after the date of consummation of the merger, and be
accompanied by the surrendered certificates representing the dissenting North
Coast Bank, N.A. shareholders' interest in North Coast Bank, N.A. common stock.
American River Holdings will mail notice of the date of consummation of the
merger immediately after consummation to all dissenting North Coast Bank, N.A.
shareholders, together with a letter of transmittal for their use in submitting
their North Coast Bank, N.A. stock certificates to American River Holdings for
payment. A vote "AGAINST" the merger does not constitute the required written
demand.
Appraisal Procedure. The value of the North Coast Bank, N.A. common
stock to be purchased by American River Holdings from dissenting North Coast
Bank, N.A. shareholders will be determined as of the effective date of the
merger, by an appraisal made by a committee of three persons, one selected by
the majority vote of the dissenting North Coast Bank, N.A. shareholders, one by
the directors of North Coast Bank, N.A. and one by the two so selected. The
valuation agreed upon by any two of the three appraisers will govern. The
appraisers will determine the value of any dissenting shares within ninety days
from the date of consummation of the merger. In the event that any one or more
appraiser is not selected or the appraisers fail to determine the value of the
dissenting shares within this ninety day time period, any party may request an
appraisal to be made by the Office of the Comptroller of the Currency, which
appraisal will be final and binding on all parties.
Reappraisal Procedure. If the valuation determined by the appraiser is
unsatisfactory to any dissenting North Coast Bank, N.A. shareholder, that
shareholder may appeal to the Office of the
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Comptroller of the Currency within five days after being notified of the
appraised value of the shares. In this event, the Office of the Comptroller of
the Currency will cause a reappraisal to be made and this reappraisal will be
final and binding as to the value of the shares of the appealing North Coast
Bank, N.A. shareholder. The expenses of the Office of the Comptroller of the
Currency incurred in making the appraisal or reappraisal, as the case may be,
will be paid by the resulting bank in the merger.
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UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Balance Sheet as
of March 31, 2000 combines the historical consolidated balance sheets of
American River Holdings and North Coast Bank, N.A. as if the merger had been
effective on March 31, 2000. The Unaudited Pro Forma Condensed Combined
Statements of Operations for the three months ended March 31, 2000 and 1999 and
for the years ended December 31, 1999, 1998 and 1997 present the combined
results of operations of American River Holdings and North Coast Bank, N.A. as
if the merger had been effective at the beginning of each period. The Unaudited
Pro Forma Condensed Combined Financial Information has been prepared from, and
should be read in conjunction with, the historical consolidated financial
statements and notes thereto of American River Holdings and North Coast Bank,
N.A.
The Unaudited Pro Forma Condensed Combined Financial Information and
accompanying notes reflect the application of the pooling of interests method of
accounting for the merger. Under this method of accounting, the recorded assets,
liabilities, shareholders' equity, income and expenses of American River
Holdings and North Coast Bank, N.A. are combined and reflected at their
historical amounts.
The pro forma combined figures shown in the Unaudited Pro Forma
Condensed Combined Financial Information are simply arithmetical combinations of
American River Holdings' and North Coast Bank, N.A.'s separate financial
results; you should not assume that American River Holdings and North Coast
Bank, N.A. would have achieved the pro forma combined results if they had
actually been combined during the periods presented.
THE COMBINED COMPANY EXPECTS TO ACHIEVE MERGER BENEFITS IN THE FORM OF
OPERATING COST SAVINGS AND REVENUE ENHANCEMENTS. THE PRO FORMA EARNINGS, WHICH
DO NOT REFLECT ANY DIRECT COSTS OR POTENTIAL SAVINGS WHICH ARE EXPECTED TO
RESULT FROM THE CONSOLIDATION OF THE OPERATIONS OF AMERICAN RIVER HOLDINGS AND
NORTH COAST BANK, N.A., ARE NOT INDICATIVE OF THE RESULTS OF FUTURE OPERATIONS.
NO ASSURANCES CAN BE GIVEN WITH RESPECT TO THE ULTIMATE LEVEL OF EXPENSE SAVINGS
OR REVENUE ENHANCEMENTS. FOR FURTHER EXPLANATION ABOUT THESE RISKS, READ THE
INFORMATION UNDER "RISK FACTORS" ON PAGE 15 AND "INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS" ON PAGE 17.
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<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND NORTH COAST BANK, N.A.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
ARH
and NCB
ARH NCB Combined
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 12,536 $ 2,862 $ 15,398
Federal funds sold 1,150 3,150 4,300
--------- --------- ---------
Total cash and cash equivalents 13,686 6,012 19,698
Interest bearing deposits in other financial 5,631 899 6,530
institutions
Securities:
Available for sale, at fair value 33,974 1,697 35,671
Held to maturity, at amortized cost 19,623 -- 19,623
Loans and leases, net of allowance for loan and
lease losses
and deferred fees 118,485 39,648 158,133
Premises and equipment, net of
accumulated depreciation and amortization 542 730 1,272
Accrued interest receivable 1,283 275 1,558
Intangibles 151 -- 151
Accounts receivable servicing receivables 2,280 -- 2,280
Other assets 1,674 284 1,958
--------- --------- ---------
TOTAL ASSETS $ 197,329 $ 49,545 $ 246,874
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 45,311 $ 9,098 $ 54,409
Interest-bearing deposits 131,018 35,247 166,265
--------- --------- ---------
Total deposits 176,329 44,345 220,674
Other borrowings 2,115 1,000 3,115
Accrued expenses and other liabilities 1,485 106 1,591
--------- --------- ---------
Total liabilities 179,929 45,451 225,380
SHAREHOLDERS' EQUITY:
Preferred stock -- -- --
Common stock 6,722 1,889 8,611
Additional paid in capital -- 1,827 1,827
Retained earnings 10,965 392 11,357
Accumulated other comprehensive loss, net of tax (287) (14) (301)
--------- --------- ---------
Total shareholders' equity 17,400 4,094 21,494
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 197,329 $ 49,545 $ 246,874
========= ========= =========
</TABLE>
134
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND NORTH COAST BANK, N.A.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ARH
and NCB
ARH NCB Adjustments Combined(1)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans including fees $ 2,804 $ 1,000 $ -- $ 3,804
Securities:
Taxable 711 19 -- 730
Exempt from federal taxes 111 2 -- 113
Dividends 16 4 -- 20
Investments in time deposits 86 11 -- 97
Federal funds sold 38 21 -- 59
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 3,766 1,057 -- 4,823
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 1,279 339 -- 1,618
Other borrowings 38 15 -- 53
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 1,317 354 -- 1,671
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,449 703 -- 3,152
PROVISION FOR LOAN LOSSES 105 28 -- 133
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,344 675 -- 3,019
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit
accounts 113 31 -- 144
Other fees and charges 337 55 -- 392
Gain on sale of available for
sale securities 5 -- -- 5
----------- ----------- ----------- -----------
TOTAL NONINTEREST INCOME 455 86 -- 541
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 935 252 -- 1,187
Occupancy 111 72 -- 183
Furniture and equipment expense 59 45 -- 104
Professional fees 66 42 -- 108
Advertising 36 26 -- 62
Supplies 22 14 -- 36
Outsourced item processing 68 51 -- 119
Telephone and postage 53 11 -- 64
Other 175 86 -- 261
----------- ----------- ----------- -----------
TOTAL NONINTEREST EXPENSE 1,525 599 -- 2,124
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 1,274 162 -- 1,436
Provision for income taxes 480 66 -- 546
----------- ----------- ----------- -----------
NET INCOME $ 794 $ 96 $ -- $ 890
=========== =========== =========== ===========
EARNINGS PER SHARE: (2)
Basic $ 0.44 $ 0.20 $ -- $ 0.40
=========== =========== =========== ===========
Diluted $ 0.42 $ 0.19 $ -- $ 0.38
=========== =========== =========== ===========
Weighted average common shares
outstanding-basic 1,793,274 472,354 (16,816) 2,248,812
=========== =========== =========== ===========
Weighted average common shares
and common share equivalents
outstanding-diluted 1,877,503 500,977 (17,835) 2,360,645
=========== =========== =========== ===========
</TABLE>
135
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
ARH
and NCB
ARH NCB Adjustments Combined
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans including fees $ 2,649 $ 753 $ -- $ 3,402
Securities:
Taxable 453 13 -- 466
Exempt from federal taxes 63 2 -- 65
Dividends 13 3 -- 16
Investments in time deposits 72 6 -- 78
Federal funds sold 32 48 -- 80
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 3,282 825 -- 4,107
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 985 291 -- 1,276
Other borrowings 34 -- -- 34
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,019 291 -- 1,310
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,263 534 -- 2,797
PROVISION FOR LOAN LOSSES 94 30 -- 124
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,169 504 -- 2,673
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit 114 23 -- 137
accounts
Other fees and charges 190 35 -- 225
Gain on sale of available for
sale securities -- -- -- --
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 304 58 -- 362
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 842 229 -- 1,071
Occupancy 101 54 -- 155
Furniture and equipment expense 59 44 -- 103
Professional fees 35 18 -- 53
Advertising 23 20 -- 43
Supplies 30 16 -- 46
Outsourced item processing 54 48 -- 102
Telephone and postage 50 11 -- 61
Other 186 63 -- 249
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSE 1,380 503 -- 1,883
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 1,093 59 -- 1,152
Provision for income taxes 420 22 -- 442
---------- ---------- ---------- ----------
NET INCOME $ 673 $ 37 $ -- $ 710
========== ========== ========== ==========
EARNINGS PER SHARE: (2)
Basic $ 0.37 $ .08 $ -- $ .31
========== ========== ========== ==========
Diluted $ 0.35 $ .08 $ -- $ .29
========== ========== ========== ==========
Weighted average common shares
outstanding-basic 1,832,036 472,354 (16,816) 2,287,574
========== ========== ========== ==========
Weighted average common shares
and common share equivalents
outstanding-diluted 1,946,703 491,088 (17,483) 2,420,308
========== ========== ========== ==========
</TABLE>
136
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ARH
and NCB
ARH NCB Adjustments Combined
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans including fees $ 10,543 $ 3,383 $ -- $ 13,926
Securities:
Taxable 2,066 46 -- 2,112
Exempt from federal taxes 330 9 -- 339
Dividends 51 14 -- 65
Investments in time deposits 290 46 -- 336
Federal funds sold 299 152 -- 451
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 13,579 3,650 -- 17,229
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 4,143 1,173 -- 5,316
Other borrowings 137 22 -- 159
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 4,280 1,195 -- 5,475
---------- ---------- ---------- ----------
NET INTEREST INCOME 9,299 2,455 -- 11,754
PROVISION FOR LOAN LOSSES 407 175 -- 582
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,892 2,280 -- 11,172
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit
accounts 438 99 -- 537
Other fees and charges 1,082 168 -- 1,250
Gain on sale of available for
sale securities -- -- -- --
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 1,520 267 -- 1,787
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 3,496 870 -- 4,366
Occupancy 420 279 -- 699
Furniture and equipment expense 257 200 -- 457
Professional fees 165 64 -- 229
Advertising 105 106 -- 211
Supplies 121 71 -- 192
Outsourced item processing 222 188 -- 410
Telephone and postage 198 51 -- 249
Other 759 338 -- 1,097
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSE 5,743 2,167 -- 7,910
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 4,669 380 -- 5,049
Provision for income taxes 1,768 153 -- 1,921
---------- ---------- ---------- ----------
NET INCOME $ 2,901 $ 227 $ -- $ 3,128
========== ========== ========== ==========
EARNINGS PER SHARE: (2)
Basic $ 1.59 $ 0.48 $ -- $ 1.37
========== ========== ========== ==========
Diluted $ 1.50 $ 0.46 $ -- $ 1.30
========== ========== ========== ==========
Weighted average common shares
outstanding - basic 1,820,013 472,354 (16,816) 2,275,551
========== ========== ========== ==========
Weighted average common shares
and common share equivalents
outstanding-diluted 1,932,813 489,672 (17,432) 2,405,053
========== ========== ========== ==========
</TABLE>
137
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ARH
and NCB
ARH NCB Adjustments Combined
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans including fees $ 10,472 $ 2,610 $ -- $ 13,082
Securities:
Taxable 1,867 146 -- 2,013
Exempt from federal taxes 209 6 -- 215
Dividends 63 12 -- 75
Investments in time deposits 293 24 -- 317
Federal funds sold 283 192 -- 475
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 13,187 2,990 -- 16,177
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 4,318 973 -- 5,291
Other borrowings 143 -- -- 143
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 4,461 973 -- 5,434
---------- ---------- ---------- ----------
NET INTEREST INCOME 8,726 2,017 -- 10,743
PROVISION FOR LOAN LOSSES 360 149 -- 509
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,366 1,868 -- 10,234
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 447 88 -- 535
Other fees and charges 856 116 -- 972
Gain on sale of available for sale
securities -- -- -- --
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 1,303 204 -- 1,507
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 3,310 712 -- 4,022
Occupancy 409 147 -- 556
Furniture and equipment expense 289 154 -- 443
Professional fees 158 77 -- 235
Advertising 91 58 -- 149
Supplies 118 45 -- 163
Outsourced item processing 213 188 -- 401
Telephone and postage 194 34 -- 228
Other 818 202 -- 1,020
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSE 5,600 1,617 -- 7,217
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 4,069 455 -- 4,524
Provision for income taxes 1,564 109 -- 1,673
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 2,505 $ 346 $ -- $ 2,851
========== ========== ========== ==========
EARNINGS PER SHARE: (2)
Basic $ 1.37 $ 0.73 $ -- $ 1.25
========== ========== ========== ==========
Diluted $ 1.24 $ 0.70 $ -- $ 1.14
========== ========== ========== ==========
Weighted average common shares
outstanding-basic 1,829,351 471,794 (16,796) 2,284,349
========== ========== ========== ==========
Weighted average common shares
and common share equivalents
outstanding-diluted 2,024,187 493,830 (17,580) 2,500,437
========== ========== ========== ==========
</TABLE>
138
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ARH
and NCB
ARH NCB Adjustments Combined
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans including fees $ 9,352 $ 2,162 $ -- $ 11,514
Securities:
Taxable 1,872 256 -- 2,128
Exempt from federal taxes 150 -- -- 150
Dividends 61 12 -- 73
Investments in time deposits 281 5 -- 286
Federal funds sold 300 98 -- 398
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 12,016 2,533 -- 14,549
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 4,201 753 -- 4,954
Other borrowings 13 -- -- 13
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 4,214 753 -- 4,967
---------- ---------- ---------- ----------
NET INTEREST INCOME 7,802 1,780 -- 9,582
PROVISION FOR LOAN LOSSES 535 70 -- 605
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,267 1,710 -- 8,977
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 424 104 -- 528
Other fees and charges 574 166 -- 740
Gain on sale of available for sale
securities -- -- -- --
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 998 270 -- 1,268
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 2,893 776 -- 3,669
Occupancy 405 142 -- 547
Furniture and equipment expense 335 157 -- 492
Professional fees 141 76 -- 217
Advertising 73 42 -- 115
Supplies 122 48 -- 170
Outsourced item processing 185 168 -- 353
Telephone and postage 184 39 -- 223
Other 648 186 -- 834
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSE 4,986 1,634 -- 6,620
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 3,279 346 -- 3,625
Provision for income taxes 1,278 -- -- 1,278
---------- ---------- ---------- ----------
NET INCOME $ 2,001 $ 346 $ -- $ 2,347
========== ========== ========== ==========
EARNINGS PER SHARE: (2)
Basic $ 1.09 $ 0.73 $ -- $ 1.02
========== ========== ========== ==========
Diluted $ 0.99 $ 0.72 $ -- $ .95
========== ========== ========== ==========
Average common shares
outstanding-basic 1,844,151 471,667 (16,791) 2,299,027
========== ========== ========== ==========
Average common shares and
common share equivalents
outstanding-diluted 2,016,475 481,845 (17,154) 2,481,166
========== ========== ========== ==========
</TABLE>
139
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Merger Costs
The following table reflects all nonrecurring American River
Holdings and North Coast Bank, N.A. incurred and estimated
merger-related costs. Merger costs incurred as of March 31, 2000
have been expensed on the unaudited pro forma condensed combined
statements of operations. These pretax amounts, which primarily
represent professional fees, total $9,000 for American River
Holdings and $20,000 for North Coast Bank, N.A. as of March 31,
2000.
The remaining anticipated pretax merger costs of $506,000 are not
included in the March 31, 2000 unaudited pro forma condensed
combined statements of operations. These anticipated pretax merger
costs will be charged to expense as incurred. These estimated merger
costs are summarized below. The financial advisory costs do not
include out-of-pocket expenses which may arise, but are not deemed
to be material in amount.
ARH NCB Total
---------- ---------- ----------
Financial advisory $ 20,000 $ 20,000 $ 40,000
Professional fees 250,000 200,000 450,000
Printing 20,000 20,000 40,000
Termination and
severance benefits -- -- --
Other 5,000 -- 5,000
---------- ---------- ----------
$ 295,000 $ 240,000 535,000
========== ========== ----------
Estimated tax benefit 219,000
----------
Total $ 316,000
==========
(2) Common Stock
American River Holdings and North Coast Bank, N.A. combined earnings
per share and average outstanding shares and common share
equivalents are calculated using the historical American River
Holdings weighted average shares plus the historical North Coast
Bank, N.A. weighted average shares adjusted by the conversion ratio
of .9644.
140
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
MARKET QUOTATIONS
The American River Holdings common stock is not listed on any exchange
and is quoted on the OTC Bulletin Board under the symbol "AMRB.OB." The North
Coast Bank, N.A. common stock is not listed on any exchange and is quoted on the
OTC Bulletin Board under the symbol "NCTA.OB." As of the record date, there were
approximately 850 holders of record of American River Holdings common stock and
approximately 475 holders of record of North Coast Bank, N.A. common stock.
The following table sets forth for American River Holdings common stock
and North Coast Bank, N.A. common stock the high and low bid or closing prices
and per share cash dividends declared for the quarters indicated, adjusted to
reflect stock splits and stock dividends.
<TABLE>
<CAPTION>
ARH NCB
-------------------------- ----------------------------
Common Stock Dividends Common Stock Dividends
High Low Declared High Low Declared
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
1997
First Quarter................ $ 9.50 $ 7.85 $ -- $ 7.00 $ 6.75 --
Second Quarter............... 11.06 9.21 .083 8.00 6.75 --
Third Quarter................ 13.25 10.80 -- 9.63 9.00 --
Fourth Quarter............... 17.08 13.61 .091 10.38 9.75 --
1998
First Quarter................ $17.23 $16.25 $ -- $ 11.00 $10.00 --
Second Quarter............... 20.56 16.33 .094 12.38 11.00 --
Third Quarter................ 18.75 16.33 -- 12.50 12.38 --
Fourth Quarter............... 17.14 14.60 .101 12.38 11.00 --
1999
First Quarter................ $17.38 $14.92 $ -- $ 11.38 $10.50 --
Second Quarter............... 16.98 15.24 .110 13.00 11.50 --
Third Quarter ............... 17.38 15.36 -- 10.00 8.50 --
Fourth Quarter .............. 16.88 14.13 .120 10.38 8.75 --
2000
First Quarter ............... $16.00 $11.00 $ -- $ 11.75 $ 9.38 --
Second Quarter (through
June 21, 2000)............... 15.00 10.50 .125 11.00 9.00 --
</TABLE>
At the close of business on March 1, 2000, the last trading day
immediately prior to the first public announcement of the merger, the bid, asked
and closing prices for American River Holdings common stock on the OTC Bulletin
Board were $12.50, $13.50, and $12.50, respectively.
At the close of business on March 1, 2000, the last trading day
immediately prior to the first public announcement of the merger, there were no
bid, asked or closing prices quoted for North Coast Bank, N.A. common stock on
the OTC Bulletin Board. February 29, 2000 was the last day prior to the first
public announcement of the merger when bid, asked and closing prices for shares
of North Coast Bank, N.A. common stock were quoted on the OTC Bulletin Board. On
that date, the bid, asked and closing prices for shares of North Coast Bank,
N.A. common stock were $9.38, $10.25, and $9.50, respectively.
141
<PAGE>
DIVIDENDS AND DIVIDEND POLICY
American River Holdings. American River Holdings' board of directors
considers the advisability and amount of proposed dividends each year. Future
dividends will be determined after consideration of American River Holdings'
earnings, financial condition, future capital funds, regulatory requirements and
other factors as the board of directors may deem relevant. American River
Holdings' primary source of funds for payment of dividends to its shareholders
will be receipt of dividends and management fees from American River Bank. The
payment of dividends by a bank is subject to various legal and regulatory
restrictions.
From 1992 through 1999, American River Holdings maintained a policy of
paying semi-annual dividends to its shareholders. American River Holdings has
declared and paid cash dividends on its outstanding shares of common stock
totaling $0.174 per share in 1997, $0.195 per share in 1998 and $0.230 per share
in 1999. A dividend in the amount of $0.125 was declared on June 21, 2000,
payable on July 26, 2000 to shareholders of record on July 12, 2000. It is the
intention of American River Holdings to pay cash dividends, subject to the
restrictions on the payment of cash dividends and depending upon the level of
earnings, management's assessment of future capital needs and other factors
considered by the American River Holdings board of directors.
Holders of American River Holdings common stock are entitled to receive
dividends as and when declared by the board of directors of American River
Holdings out of funds legally available therefor under the laws of the State of
California. The California General Corporation Law provides that a corporation
may make a distribution to its shareholders if the corporation's retained
earnings equal at least the amount of the proposed distribution. The California
General Corporation Law further provides that, in the event sufficient retained
earnings are not available for the proposed distribution, a corporation may
nevertheless make a distribution to its shareholders if, after giving effect to
the distribution, it meets two conditions, which generally stated are as
follows: (i) the corporation's assets must equal at least 125% of its
liabilities; and (ii) the corporation's current assets must equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's interest expense for those fiscal
years, then the corporation's current assets must equal at least 125% of its
current liabilities.
The Board of Governors of the Federal Reserve System generally
prohibits a bank holding company from declaring or paying a cash dividend which
would impose undue pressure on the capital of subsidiary banks or would be
funded only through borrowing or other arrangements that might adversely affect
a bank holding company's financial position. The Board of Governors' policy is
that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
Under the merger agreement, without the prior written consent of North
Coast Bank, N.A., American River Holdings is prohibited from declaring or paying
any dividends on or making other distributions in respect of any of its capital
stock, except regular quarterly or semi-annual cash dividends in an amount
substantially equivalent to cash dividends paid in the two years prior to the
date of the merger agreement.
North Coast Bank, N.A. North Coast Bank, N.A.'s shareholders are
entitled to receive dividends when and as declared by its board of directors,
out of funds legally available therefor, subject to the restrictions set forth
in the National Bank Act.
142
<PAGE>
The payment of cash dividends by North Coast Bank, N.A. may be subject
to the approval of the Office of the Comptroller of the Currency, as well as
restrictions established by federal banking law and the Federal Deposit
Insurance Corporation. Approval of the Office of the Comptroller of the Currency
is required if the total of all dividends declared by North Coast Bank, N.A.'s
board of directors in any calendar year will exceed North Coast Bank, N.A.'s net
profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus or to a fund for the
retirement of preferred stock. Additionally, the Federal Deposit Insurance
Corporation and/or Office of the Comptroller of the Currency, might, under some
circumstances, place restrictions on the ability of a bank to pay dividends
based upon peer group averages and the performance and maturity of that bank.
North Coast Bank, N.A. has not paid cash dividends in 1997, 1998 and
1999. North Coast Bank, N.A. does not intend to pay cash or stock dividends
prior to the closing of the transactions contemplated by the merger agreement.
Under the merger agreement, without the prior written consent of
American River Holdings, North Coast Bank, N.A. is prohibited from declaring or
paying any dividends on or making other distributions in respect of any of its
capital stock, except regular quarterly or semi-annual cash dividends in an
amount substantially equivalent to cash dividends paid in the two years prior to
the date of the merger agreement.
COMPARISON OF SHAREHOLDER RIGHTS
GENERAL
American River Holdings is incorporated under and subject to the
provisions of the California General Corporation Law. North Coast Bank, N.A. is
a national banking association, organized under and subject to the National Bank
Act.
Upon consummation of the merger, except for those persons, if any, who
perfect dissenters' rights under the National Bank Act, the shareholders of
North Coast Bank, N.A. will become shareholders of American River Holdings. See
"Dissenters' Rights" on page 129.
American River Holdings is a California corporation and, accordingly,
is governed by the California General Corporation Law and by its articles of
incorporation and bylaws. North Coast Bank, N.A. is chartered by the Office of
the Comptroller of the Currency and is governed by the National Bank Act, its
articles of association and bylaws, which differ in some material respects from
the American River Holdings articles and American River Holdings bylaws.
The following is a general comparison of similarities and material
differences between the rights of American River Holdings and North Coast Bank,
N.A. shareholders under their respective governing articles and bylaws. This
discussion is only a summary of selected provisions and is not a complete
description of the similarities and differences, and is qualified in its
entirety by reference to the California General Corporation Law, the National
Bank Act, the common law thereunder and the full text of the American River
Holdings articles, American River Holdings bylaws, North Coast Bank, N.A.
articles and North Coast Bank, N.A. bylaws.
ANTI-TAKEOVER MEASURES
The proposals to amend the articles and bylaws of American River
Holdings to provide for the classification of the board of directors and the
proposal to amend the articles and bylaws of American River Holdings to
eliminate cumulative voting in the election of directors, may deter efforts to
obtain control of American River Holdings on a basis which some shareholders
might deem favorable. Those
143
<PAGE>
provisions are designed to encourage any person attempting a change in control
of American River Holdings to enter into negotiations with the board of
directors of American River Holdings. See "Proposal No. 3" on page 157 and
"Proposal No. 4" on page 161.
QUORUM REQUIREMENTS
Both the American River Holdings bylaws and the North Coast Bank, N.A.
bylaws provide that the presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting of the shareholders will
constitute a quorum for the transaction of business.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Overview of California Law. Section 317 of the California General
Corporation Law expressly grants to each California corporation the power to
indemnify its directors, officers and agents against liabilities and expenses
incurred in the performance of their duties. Rights to indemnification beyond
those provided by Section 317 may be valid to the extent that the rights are
authorized in the corporation's articles of incorporation. Indemnification may
not be made, however, with respect to liability incurred in connection with any
of the following acts for which the liability of directors may not be limited
under the California General Corporation Law: (1) acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (2) acts or
omissions that a director believes to be contrary to the best interests of the
corporation or its shareholders or that involve the absence of good faith on the
part of the director; (3) any transaction from which a director derived a
personal benefit; (4) acts or omissions that show a reckless disregard for the
director's duty to the corporation or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the corporation
or its shareholders; (5) acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders; (6) acts or omissions arising out of interested
party transactions; or (7) acts in connection with illegal distributions, loans
or guarantees.
With respect to all proceedings other than shareholder derivative
actions, Section 317 permits a California corporation to indemnify any of its
directors, officers or other agents only if the person acted in good faith and
in a manner the person reasonably believed to be in the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of the person was unlawful. In the case of derivative
actions, a California corporation may indemnify any of its directors, officers
or agents only if the person acted in good faith and in a manner the person
believed to be in the best interests of the corporation and its shareholders.
Furthermore, in derivative actions, no indemnification is permitted (1) with
respect to any matter with respect to which the person to be indemnified has
been held liable to the corporation, unless the indemnification is approved by
the court; (2) of amounts paid in settling or otherwise disposing of a pending
action without court approval; or (3) of expenses incurred in defending a
pending action which is settled or otherwise disposed of without court approval.
To the extent that a director, officer or agent of a corporation has been
successful on the merits in defense of any proceeding for which indemnification
is permitted by Section 317, a corporation is obligated by Section 317 to
indemnify the person against expenses actually and reasonably incurred by him in
connection with the proceeding.
American River Holdings. The American River Holdings articles eliminate
the liability of its directors for monetary damages to the fullest extent
permissible under California law and authorize American River Holdings to
indemnify its directors, officers and agents through agreements with the
persons, bylaw provisions, vote of shareholders or disinterested directors, or
otherwise, in excess of the indemnification otherwise permitted by Section 317,
subject to applicable statutory prohibitions upon indemnification.
144
<PAGE>
The American River Holdings articles and bylaws obligate American River
Holdings to indemnify to the maximum extent permitted by California General
Corporation Law its directors, officers and other agents against liabilities and
expenses incurred in the performance of their duties, subject to the
prohibitions of the California General Corporation Law.
American River Holdings maintains directors' and officers' liability
insurance policies that indemnify its directors and officers against losses in
connection with claims made against them for specified wrongful acts.
The American River Holdings bylaws entitle the directors of American
River Holdings to be indemnified against liabilities and reasonable expenses
incurred in connection with any claims brought against them by reason of the
fact that they are or were directors. American River Holdings may pay expenses
incurred in defending the proceedings specified above in advance of their final
disposition, but such advance would be subject to receipt of an undertaking from
the directors to return any amounts advanced to the extent that it is ultimately
determined that they were not legally entitled to be indemnified by American
River Holdings in the proceeding. The directors may also bring suit against
American River Holdings to recover unpaid amounts claimed with respect to
indemnification and any expenses incurred in bringing an action. While it is a
defense to a suit that indemnification is prohibited by the California General
Corporation Law, the burden of proving a defense is on American River Holdings.
North Coast Bank, N.A. The North Coast Bank, N.A. articles are
substantially similar to the American River Holdings articles regarding
elimination of the liability of its directors for monetary damages to the
fullest extent permissible under California law and the power of indemnification
in excess of the indemnification otherwise permitted by Section 317, subject to
applicable statutory prohibitions upon indemnification and the restriction that
no indemnification is available for expenses, penalties, or other payments
incurred in an administrative proceeding or action instituted by an appropriate
bank regulatory agency, which proceeding or action results in a final order
assessing civil money penalties or requiring affirmative action by an individual
or individuals in the form of payments to North Coast Bank, N.A.
The North Coast Bank, N.A. bylaws do not include indemnification
provisions and they are exclusively covered in the North Coast Bank, N.A.
articles. North Coast Bank, N.A. also maintains directors' and officers'
liability insurance policies that indemnify its directors and officers against
losses in connection with claims made against them for specified wrongful acts.
North Coast Bank, N.A. has entered into indemnity agreements with its
directors which obligate North Coast Bank, N.A. to pay litigation expenses as
well as judgments, fines, penalties and settlements, incurred in connection with
any claims brought against them by reason of the fact that they are or were
directors. Directors are indemnified against expenses, judgments, fines,
penalties, settlements, and other amounts, actually and reasonably incurred in
defending or settling the proceeding. The director must have acted in good faith
and in a manner he or she reasonably believed to be in the best interests of
North Coast Bank, N.A.
North Coast Bank, N.A. will advance expenses prior to the final
disposition of a proceeding if the director agrees to repay advances to the
extent it is ultimately determined that the director was not entitled to
indemnification or, if required by law, if the director agrees to repay any
advances received above those to which it is ultimately determined the director
was entitled.
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If legal action is brought to enforce the agreement, the prevailing
party is entitled to recover attorneys' fees and court costs, in addition to any
other amounts to which the prevailing party may be entitled.
Under the merger agreement, from and after the effective date, American
River Holdings will indemnify and hold harmless each present or former officer
or director of North Coast Bank, N.A. (determined as of the effective time)
against all losses, claims, damages, liabilities, costs, expenses or judgments
or amounts that are paid in the settlement of or in connection with any claim,
action, suit, proceeding or investigation based on or arising out of (a) the
fact that the person is or was a director or officer of North Coast Bank, N.A.
and (b) the merger agreement or the transactions contemplated by the merger
agreement, in each case to the full extent permitted by law.
Additionally, from and after the effective date, American River
Holdings will include in its director and officer insurance policy persons who
served as directors and officers of North Coast Bank, N.A. or obtain extended
coverage under North Coast Bank, N.A.'s director and officer insurance policy to
cover claims made for a period of three years after the effective date of the
merger regarding acts or omissions of North Coast Bank, N.A.'s directors or
officers prior to the effective date of the merger. However, American River
Holdings will not be obligated to make annual premium payments for the insurance
to the extent the premiums exceed 150% of the premiums paid by North Coast Bank,
N.A. for the insurance, as previously disclosed to American River Holdings. If
the premiums for the insurance would at any time exceed 150% of the premiums
paid by North Coast Bank, N.A. for the insurance, then American River Holdings
will maintain policies of insurance which, in American River Holdings' good
faith determination, provide a maximum coverage available at an annual premium
equal to 150% of the premiums paid by North Coast Bank, N.A. in respect of the
insurance.
Overview of Federal Law. Federal law authorizes the Federal Deposit
Insurance Corporation to limit, by regulation or order, the payment of
indemnification by insured banks or bank holding companies to their directors
and officers. The Federal Deposit Insurance Corporation has enacted a regulation
that permits the payment of indemnification by banks and bank holding companies
to institution-affiliated directors, officers and other parties only if
specified requirements are satisfied. This regulation permits an institution to
make an indemnification payment to, or for the benefit of, a director, officer
or other party only if the institution's board of directors, in good faith,
certifies in writing that the individual has a substantial likelihood of
prevailing on the merits and that the payment of indemnification will not
adversely affect the institution's safety and soundness. An institution's board
of directors is obligated to cease making or authorizing indemnification
payments in the event that it believes, or reasonably should believe, that the
conditions discussed in the preceding sentence are no longer being met. In
addition, indemnification payments related to an administrative proceeding or
civil action instituted by an appropriate federal bank regulatory agency are
limited to the payment or reimbursement of reasonable legal or other
professional expenses. Finally, the director, officer or other party must agree
in writing to reimburse the institution for any indemnification payments
received should the proceeding result in a final order being instituted against
the individual assessing a civil money penalty, removing the individual from
office, or requiring the individual to cease and desist from specified
institutional activities.
SHAREHOLDER MEETINGS AND ACTION BY WRITTEN CONSENT
American River Holdings. The American River Holdings articles authorize
shareholder action by written consent only when first authorized by the board of
directors. Additionally, the American River Holdings bylaws permit a director to
be elected at any time to fill a vacancy on the board of
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directors that has not been filled by the directors by the written consent of
the holders of a majority of the outstanding shares entitled to vote for the
election of directors.
North Coast Bank, N.A. The North Coast Bank, N.A. articles do not
authorize shareholder action by written consent for purposes permitted to
California state chartered banks.
CUMULATIVE VOTING
Cumulative voting allows a shareholder to cast a number of votes equal
to the number of directors to be elected multiplied by the number of shares held
in the shareholder's name on the record date. American River Holdings
shareholders and North Coast Bank, N.A. shareholders are also entitled to
cumulative voting in the election of directors. If Proposal No. 4 to eliminate
cumulative voting is approved, the election of directors of American River
Holdings following the effective time of the merger will not permit the use of
cumulative voting by American River Holdings shareholders. See "Proposal No. 4"
on page 161.
AMENDMENT OF ARTICLES AND BYLAWS
American River Holdings. The American River Holdings articles and
bylaws may be amended or repealed by the affirmative vote or written consent of
a majority of the outstanding shares entitled to vote.
The American River Holdings bylaws may be amended or repealed by the
affirmative vote or written consent of a majority of the outstanding shares
entitled to vote, provided that any amendment which reduces (a) the number of
directors on a fixed-number board or (b) the minimum number of directors on a
variable-number board to a number less than five, cannot be adopted if the votes
cast or consents given opposing the action are equal to or more than 16 2/3% of
all outstanding shares entitled to vote.
Subject to the rights of shareholders to amend the bylaws, the American
River Holdings bylaws provide that the bylaws may be adopted, amended or
repealed by its board of directors, except that only the shareholders can adopt
a bylaw or amendment to the bylaws which (a) specifies or changes the number of
directors on a fixed number board, (b) specifies or changes the minimum or
maximum number of directors on a variable number board or (c) changes from a
fixed number board to a variable number board or vice versa.
North Coast Bank, N.A. Subject to the laws of the United States, North
Coast Bank, N.A.'s articles of association may be amended or repealed by the
affirmative vote of a majority of the outstanding shares unless the vote of a
greater amount of shares is required by law, and in that case with the vote of
the greater amount. North Coast Bank, N.A.'s bylaws may be amended, altered or
repealed, at any duly called meeting of the North Coast Bank, N.A. board of
directors by a majority vote of the total number of directors.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
American River Holdings. The American River Holdings bylaws provide
that vacancies occurring on their respective boards of directors may be filled
by a vote of a majority of the remaining directors, though less than a quorum,
or by a sole remaining director, except that a vacancy created by the removal of
a director may only be filled by the vote of a majority of the shares entitled
to vote represented at a duly held meeting or by unanimous written consent of
the outstanding shares entitled to vote. The American River Holdings bylaws also
provide that the shareholders may elect a director at any time to fill any
vacancy not filled by the directors, except that any election by written
consent, other than
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to fill a vacancy created by removal of a director, requires the consent of a
majority of the outstanding shares entitled to vote.
In addition, the California General Corporation Law provides that if,
after the filling of any vacancy by the directors, the directors then in office
who have been elected by the shareholders constitute less than a majority of the
directors then in office, (a) any holder or holders of an aggregate of 5% or
more of the total number of shares at the time outstanding having the right to
vote for the directors may call a special meeting of shareholders; or (b) the
California Superior Court of the proper county will, upon application of the
shareholder or shareholders, summarily order a special meeting of shareholders,
to be held to elect the entire board of directors.
North Coast Bank, N.A. Any vacancy on the North Coast Bank, N.A. board
of directors for any reason, including an increase in the number of directors,
may be filled by action of the board of directors, provided that an increase in
the number of directors may not be more than two directors between shareholder
meetings. Directors appointed by the North Coast Bank, N.A. board hold office
until their successors are elected and qualified.
CALL OF ANNUAL OR SPECIAL MEETING OF SHAREHOLDERS AND ACTION BY SHAREHOLDERS
WITHOUT A MEETING
American River Holdings. The American River Holdings bylaws provide
that a special meeting of the shareholders may be called at any time by the
board of directors, chairman of the board, president or one or more shareholders
holding shares in the aggregate entitled to cast not less than 10% of the votes
at that special meeting. Under the California General Corporation Law, unless
otherwise provided in the articles of incorporation, any action which may be
taken at any annual or special meeting may be taken without a meeting and
without prior notice, if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take the action
at a meeting at which all shares entitled to vote thereon were present and
voted. The American River Holdings articles provide that action without a
meeting can be taken if the board of directors of American River Holdings has by
resolution first approved any of the action without a meeting.
North Coast Bank, N.A. Any ten or more shareholders owning, in the
aggregate, not less than twenty percent of the outstanding shares of North Coast
Bank, N.A., may call a special meeting of the shareholders at any time. Other
than amending the articles, no provision is made in the North Coast Bank, N.A.
articles of association for the shareholders to take any action in the absence
of a duly called meeting.
CLASSIFIED BOARD PROVISIONS
American River Holdings. At present, neither the American River
Holdings articles nor the American River Bank bylaws provide for a classified
board. Assuming that Proposal No. 3 providing for classification of the American
River Holdings board of directors is approved by the shareholders of American
River Holdings and the common stock of American River Holdings is listed for
trading on the Nasdaq National Market, the American River Holdings articles will
be amended to provide that, in the event that the authorized number of directors
will be fixed at nine or more, the board of directors will be divided into three
classes: Class I, Class II and Class III, each consisting of a number of
directors equal to as nearly as practicable one-third the total number of
directors. Directors in Class I, Class II and Class III will initially serve for
a term expiring respectively at the 2001, 2002 and 2003 annual meeting of
shareholders. Thereafter, each director will serve for a term ending at the
third annual shareholders meeting following the annual meeting at which the
director was elected. In the event that the authorized number of directors will
be fixed with at least six but less than nine, the board of directors will be
divided
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into two classes, designated as Class I and Class II, each consisting of
one-half of the directors or as close an approximation as possible. At each
annual meeting, each of the successors to the directors of the class whose term
will have expired at such annual meeting will be elected for a term running
until the second annual meeting next succeeding his or her election and until
his or her successor will have been duly elected and qualified. The number of
directors is currently set between eight and 15. The use of a classified board
may have the effect of discouraging takeover attempts.
North Coast Bank, N.A. North Coast Bank, N.A.'s articles do not provide
for a classified board of directors.
DESCRIPTION OF AMERICAN RIVER HOLDINGS CAPITAL STOCK
The authorized capital stock of American River Holdings consists of
20,000,000 shares of American River Holdings common stock, without par value. As
of July 25, 2000, there were 1,793,274 shares of American River Holdings common
stock outstanding and an additional 336,182 shares of the authorized American
River Holdings common stock were available for future grant and reserved for
issuance to holders of outstanding stock options under American River Holdings'
1995 Stock Option Plan.
COMMON STOCK
Holders of American River Holdings common stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
shareholders, except that shareholders may cumulate their votes for the election
of directors. Shareholders are entitled to receive ratably dividends as may be
legally declared by American River Holdings' board of directors. There are legal
and regulatory restrictions on the ability of American River Holdings to declare
and pay dividends. See "Dividends and Dividend Policy" on page 142.
In the event of a liquidation, common shareholders are entitled to
share ratably in all assets remaining after payment of liabilities and
liquidation preference for securities with a priority over the American River
Holdings common stock. Shareholders of American River Holdings common stock have
no preemptive or conversion rights. American River Holdings common stock is not
subject to calls or assessments, except as required by Section 55 of the
National Bank Act. The transfer agent and registrar for American River Holdings
common stock is U.S. Stock Transfer Corporation.
DESCRIPTION OF NORTH COAST BANK, N.A. CAPITAL STOCK
The authorized capital stock of North Coast Bank, N.A. consists of
5,000,000 shares of common stock, par value $4.00 per share. As of July 25,
2000, there were 489,604 shares of common stock outstanding, and an additional
235,876 shares of the authorized North Coast Bank, N.A. common stock available
for future grant and reserved for issuance to holders of outstanding stock
options under the North Coast Bank, N.A. 1990 Stock Option Plan.
COMMON STOCK
Holders of North Coast Bank, N.A. common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
shareholders, except that shareholders may cumulate their votes for the election
of directors. Shareholders are entitled to receive ratably dividends as may be
legally declared by North Coast Bank, N.A.'s board of directors. There are legal
and regulatory restrictions on the ability of North Coast Bank, N.A. to declare
and pay dividends. See "Dividends and Dividend Policy" on page 142.
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In the event of a liquidation, common shareholders are entitled to
share ratably in all assets remaining after payment of liabilities and
liquidation preferences for securities with a priority over the North Coast
Bank, N.A. common stock. Shareholders of North Coast Bank, N.A. common stock
have no preemptive or conversion rights. North Coast Bank, N.A. common stock is
not subject to calls or assessments, except as required by Section 55 of the
National Bank Act. The transfer agent and registrar for North Coast Bank, N.A.
common stock is Chase Mellon Shareholder Services, San Francisco, California.
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PROPOSAL NO. 2
APPROVAL OF THE AMERICAN RIVER HOLDINGS
2000 STOCK OPTION PLAN
INTRODUCTION
Shareholders are being asked to vote on a proposal to approve the
American River Holdings 2000 Stock Option Plan (the "2000 Plan"), which was
approved and adopted by the board of directors on April 26, 2000, subject to
shareholder approval and consummation of the transactions described in the
merger agreement, including the merger, to be effective as of the effective time
of the merger or as soon thereafter as is practicable and following registration
of the shares to be issued upon exercise of stock options under the 2000 Plan
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
No stock option grants will be made under the 2000 Plan prior to the
effective time of the merger, however, the merger agreement requires American
River Holdings to issue substitute stock options to holders of North Coast Bank,
N.A. stock options as of or as soon as practicable following the effective time
of the merger. The proposal to approve the American River Holdings 2000 Stock
Option Plan must be approved in order for American River Holdings to issue the
substitute stock options. Consequently, unless the merger proposal and the 2000
Stock Option Plan proposal are both approved, the merger will not be consummated
unless the parties agree to amend the merger agreement. The following discussion
summarizes the principal features of the 2000 Plan. This description is
qualified in its entirety by reference to the full text of the 2000 Plan, a copy
of which is attached to this document as Annex F and is incorporated here by
reference.
SUMMARY OF 2000 PLAN
Purpose of the 2000 Plan. The purpose of the 2000 Plan is to offer
selected key employees, directors and consultants of American River Holdings and
its affiliates, which are collectively referred to in this Proposal No. 2 as the
"Company", an opportunity to acquire a proprietary interest in the success of
the Company, or to increase such interest, by purchasing shares of the Company's
common stock.
The stock options issued under the 2000 Plan, at the discretion of the
board of directors, may be either incentive stock options or nonstatutory stock
options; however, only employees of the Company are eligible to receive grants
of incentive stock options under the 2000 Plan.
Administration. The board of directors will have authority to
administer the 2000 Plan.
Shares Reserved. The Company has a 1995 Stock Option Plan. Upon
approval of the 2000 Plan, subject to consummation of the transactions described
in the merger agreement, including the merger, and in connection with
registration of the shares to be issued upon exercise of stock options under the
2000 Plan with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, the 1995 Plan will be terminated as to future grants. As of
July 25, 2000, stock options to acquire 270,128 shares of American River
Holdings common stock remained outstanding under the 1995 Plan. The aggregate
number of shares available for issuance pursuant to the exercise of stock
options to be granted under the 2000 Plan will be equal to thirty percent (30%)
of the Company's issued and outstanding shares immediately after the effective
time of the merger, not to exceed 679,634 shares, minus such number of shares,
not to exceed 270,128 shares, which are subject to stock options then
outstanding under the 1995 Plan. The following calculations demonstrate the
approximate number of the stock options to be reserved for issuance under the
2000 Plan immediately after the effective time of the merger as reduced by the
stock options outstanding under the 1995 Plan:
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Shares outstanding (2,265,448) x 30% = 679,634
Less shares reserved for outstanding stock options under 1995 Plan
(270,128) = 409,506
If the 2000 Plan is approved by the shareholders, subject to
consummation of the transactions described in the merger agreement, including
the merger, and registration of the shares to be issued upon exercise of stock
options under the 2000 Plan with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, a maximum of 168,929 shares for
substitute stock options will be allocated to holders of North Coast Bank, N.A.
stock options as soon as practicable following the effective time of the merger,
based on 175,165 shares of North Coast Bank, N.A. common stock reserved for
issuance in respect of stock options currently outstanding under the North Coast
Bank, N.A. 1990 Stock Option Plan multiplied by the conversion ratio of .9644.
Consequently, assuming the allocation of 168,929 shares for substitute stock
options, the maximum number of shares available for future grants of stock
options under the 2000 Plan would be 218,951. Should any stock options granted
under the 1995 or 2000 Plans expire or become unexercisable for any reason
without having been exercised in full, the shares subject to the portion of the
stock options not so exercised will be available for subsequent stock option
grants under the 2000 Plan. The following calculations demonstrate the effect of
the allocation of the substitute stock options under the 2000 Plan immediately
after the effective time of the merger, adjusted for the shares currently
reserved under the 1995 Plan:
Shares outstanding (2,265,448) x 30% = 679,634
Less shares reserved for outstanding stock options under 1995 Plan
(270,128) = 409,506
Less shares reserved for substitute stock options (168,929) = 240,577
Eligibility. Any individual who is an employee of the Company, any
member of the board of directors, and any independent contractor consultant who
performs services for the Company and who is not a member of the board of
directors will be eligible to participate in the 2000 Plan. As of the date of
this document, the persons eligible to receive grants under the 2000 Plan
include approximately 69 employees (including executive officers) of the Company
and seven non-employee directors.
Terms of Stock Options. Under the 2000 Plan, the board of directors
selects the individuals to whom stock options will be granted, the type of stock
option to be granted, the exercise price of each stock option, the number of
shares covered by the stock options and the other terms and conditions of each
stock option. Non-employee directors and consultants are eligible to receive
only nonstatutory stock option grants while eligible employees of the Company
are able to receive grants of nonstatutory or incentive stock options; provided,
however, that the aggregate fair market value (determined at the time the
incentive stock options are granted) of the stock with respect to which
incentive stock options are exercisable for the first time by the optionee
during any calendar year (under all incentive stock option plans of the Company)
may not exceed one hundred thousand dollars ($100,000). Should it be determined
that any incentive stock options granted exceed such dollar maximum, such
incentive stock options are considered to be nonstatutory stock options and not
to qualify for treatment as incentive stock options under Section 422 of the
Internal Revenue Code to the extent, but only to the extent, of the excess.
The vesting of any stock options granted under the 2000 Plan will be
determined by the board of directors in its sole discretion, provided however,
that (i) each stock option will vest in the manner and at the time as the board
of directors determines and the board of directors may accelerate the time of
exercise of any stock options, (ii) no stock options will vest at a rate less
than twenty percent per year during the five year period following the date of
grant, and (iii) in the event that an optionee's service as an employee,
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director or consultant of the Company terminates, the stock options will be
exercisable only to the extent they were vested as of the date of termination.
The exercise price of stock options granted under the 2000 Plan
ordinarily may not be less than one hundred percent (100%) of the fair market
value of the stock subject to the stock options on the date the stock options
are granted; provided, however, that the purchase price of the stock subject to
incentive stock options may not be less than one hundred ten percent (110%) for
incentive stock options where the optionee owns stock possessing more than ten
percent (10%) of the total combined voting power of the Company. For purposes of
establishing the exercise price and for all other valuation purposes under the
2000 Plan, the fair market value per share of common stock on any relevant date
will be the value as determined by the board of directors in reliance upon
prices reported or quoted upon any exchange or transaction reporting system on
which the common stock is listed or reported. If the common stock is not so
listed or quoted, fair market value may be determined in any manner which the
board of directors deems reasonable.
Payment for Shares. The exercise of incentive and nonstatutory stock
options under the 2000 Plan may generally be made by delivery of (i) the
required form of exercise notice or instructions together with payment of the
exercise price in cash, certified check, official bank check, or equivalent
means acceptable to the Company, or shares which have already been owned by the
optionee or his or her representative for more than six months, having an
aggregate fair market value on the date of surrender equal to the exercise
price, or (ii) the required form of an irrevocable direction to a securities
broker approved by the Company to sell shares and to deliver all or part of the
sales proceeds to the Company in payment of all or part of the exercise price
and any withholding taxes.
Adjustments Upon Changes In Shares. In the event of changes to the
shares of common stock of the Company including where the shares are changed
into or exchanged for a different number or kind of shares of stock or other
securities resulting from, among other matters, a reorganization, merger,
consolidation, recapitalization, reclassification, stock split, reverse stock
split, combination of shares, or otherwise, or where an increase in the number
of shares occurs resulting from a stock dividend, then appropriate adjustments
will be made in the number and kind of shares as to which outstanding stock
options, or unexercised portions of stock options, will be exercisable, in order
to maintain an optionee's proportionate interest in the Company as existed prior
to the occurrence of any of those changes to the Company's common stock. The
adjustment in outstanding stock options will be made without change in the total
price of the unexercised portion of the stock options, and with a corresponding
adjustment in the stock option price per share.
Expiration, Termination and Transfer of Stock Options. Under the 2000
Plan, no incentive stock options may extend more than ten years (or five years,
in the case incentive stock options granted to an employee who owns more than 10
percent of the combined voting power of all classes of stock of the Company)
from the date of grant; the terms of all stock options, including stock options
to directors, may otherwise be determined by the board of directors in its sole
discretion. In the event of termination of an optionee's employment, consulting
relationship or tenure on the board of directors, as applicable, due to death or
disability, stock options will generally expire twelve months after such
termination unless the stock options by their terms were scheduled to expire
earlier. If the optionee's employment or consulting relationship and in certain
circumstances, tenure on the board of directors, is terminated for "cause," the
stock option expires thirty days after the Company gives notice of such
termination. The term "cause" is defined to include embezzlement, fraud,
dishonesty, breach of fiduciary duty, the deliberate disregard of rules of the
Company which results in loss, damage or injury to the Company, the unauthorized
disclosure of any of the secrets or confidential information of the Company, the
inducement of any client or customer of the Company to break any contract with
the Company, or the inducement of any principal for whom the Company acts as
agent to terminate such agency relationship, the engagement in any conduct which
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constitutes unfair competition with the Company, or the removal of the optionee
from office by any court or bank regulatory agency. In the event that such a
termination occurs for a reason other than death, disability or for "cause", the
optionee will generally be required to exercise stock options within three
months of such termination to the extent that the stock options remain
exercisable. Generally, stock options will be transferable only by will or the
laws of descent and distribution or as may otherwise be permitted under Rule
16b-3 promulgated by the Securities and Exchange Commission or Section 422 of
the Internal Revenue Code, and shall be exercisable during the optionee's
lifetime only by the optionee, or in the event of disability, by the optionee's
qualified representative. The 2000 Plan provides for the termination of stock
options not exercised prior to dissolution or liquidation of the Company or upon
a reorganization, merger or consolidation in which the Company does not survive.
Termination and Amendment of the Plan. The board of directors may
amend, suspend or terminate the 2000 Plan at any time and for any reason. An
amendment of the 2000 Plan is subject to the approval of the shareholders of the
Company only to the extent required by applicable laws or regulations. Under
current federal and California regulations applicable to the 2000 Plan,
shareholder approval is only required to obtain the tax attributes of incentive
stock option treatment under Section 422 of the Internal Revenue Code.
Shareholder approval requirements previously imposed under Rule 16b-3 have been
eliminated by recent amendments to Rule 16b-3, resulting in increased board of
directors discretion to effect material amendments to the 2000 Plan. Such
material amendments may include, among other matters, (i) an increase in the
number of shares subject to the 2000 Plan, (ii) changes to the class of eligible
insiders, (iii) the repricing of stock options, or (iii) other material
increases in benefits under the 2000 Plan. Consequently, if shareholders approve
the 2000 Plan, no further shareholder approval will be required prior to
effecting material amendments to the 2000 Plan including the types of material
amendments discussed above and others deemed appropriate in the sole discretion
of the board of directors. If not previously terminated by the board of
directors, the 2000 Plan will terminate ten years from the date of adoption of
the 2000 Plan by the board of directors.
Dissolution, Liquidation, Sale or Merger. In the event of a proposed
(i) dissolution or liquidation of the Company; (ii) reorganization, merger, or
consolidation of the Company, with the result that (A) the Company is not the
surviving corporation, or (B) the Company becomes a subsidiary of another
corporation, which shall be deemed to have occurred if another corporation shall
own, directly or indirectly, eighty percent (80%) or more of the aggregate
voting power of all outstanding equity securities of the Company; or (iii) sale
of substantially all the assets of the Company to another corporation; or (iv)
sale of the equity securities of the Company representing eighty percent (80%)
or more of the aggregate voting power of all outstanding equity securities of
the Company to any person or entity, or any group of persons and/or entities
acting in concert, then in those events, the Company will deliver to each
optionee no less than thirty (30) days prior to each event, written notification
of the occurrence of the event and the optionee's right to exercise all stock
options granted under the 2000 Plan, whether or not vested under the 2000 Plan
or applicable stock option agreement, and all outstanding stock options granted
under the 2000 Plan will completely vest and become immediately exercisable
prior to the occurrence of the event. This right of exercise will be conditional
upon execution of a final plan of dissolution or liquidation, or a definitive
agreement of reorganization, merger or consolidation. Upon occurrence of the
event, all outstanding stock options and the 2000 Plan will terminate; provided,
however, that any outstanding stock options not exercised as of the occurrence
of the event will not terminate if a successor corporation assumes the
outstanding stock options or substitutes for the stock options, new stock
options covering shares of the successor corporation's stock with appropriate
adjustments as to the number, kind and prices of shares, and substantially on
the same terms as the outstanding stock options.
Federal Income Tax Consequences. The following discussion is only a
summary of the principal federal income tax consequences of the stock options
and rights to be granted under the 2000 Plan, and is based on existing federal
law, including administrative regulations and rulings, which is subject to
change,
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in some cases retroactively. State and local tax consequences may differ. This
discussion is also qualified by the particular circumstances of individual
optionees, which may substantially alter or modify the federal income tax
consequences discussed.
Incentive stock options and nonstatutory stock options are treated
differently for federal income tax purposes. Incentive stock options are
intended to comply with the requirements of Section 422 of the Internal Revenue
Code. Nonstatutory stock options need not comply with such requirements.
An optionee is not taxed on the grant or exercise of incentive stock
options. The difference between the exercise price and the fair market value of
the shares on the exercise date will, however, be a preference item for the
purposes of the alternative minimum tax. If an optionee holds the shares
acquired upon exercise of incentive stock options for at least two years
following grant and at least one year following exercise, the optionee's gain,
if any, upon a subsequent disposition of the shares is long-term capital gain.
The measure of the gain is the difference between the proceeds received on
disposition and the optionee's basis in the shares, which generally equals the
exercise price. If an optionee disposes of stock acquired by exercise of
incentive stock options before satisfying the one- and two-year holding periods,
the optionee will recognize both ordinary income and capital gain in the year of
disposition. The amount of ordinary income will be the lesser of (i) the amount
realized on disposition less the optionee's adjusted basis in the stock, which
is usually the exercise price or (ii) the difference between the fair market
value of the stock on the exercise date and the stock option price. The balance
of the consideration received on the disposition will be long-term capital gain
if the stock had been held for at least one year following exercise of the
incentive stock options. The Company will not be entitled to an income tax
deduction on the grant or exercise of an incentive stock option or on the
optionee's disposition of the shares after satisfying the holding period
requirement. If the holding periods are not satisfied, the Company will be
entitled to a deduction in the year the optionee disposes of the shares, in an
amount equal to the ordinary income recognized by the optionee.
An optionee is not taxed on the grant of a nonstatutory stock option.
Upon exercise, however, the optionee recognizes ordinary income equal to the
difference between the stock option price and the fair market value of the
shares on the date of exercise. The Company will be entitled to an income tax
deduction in the year of exercise in the amount recognized by the optionee as
ordinary income. Any gain on subsequent disposition of the shares is long-term
capital gain if the shares are held for at least one year following exercise.
The Company will not receive a deduction for this gain.
NEW PLAN BENEFITS
As of the date of this document, (i) no stock options have been granted
to eligible participants under the 2000 Plan, (ii) no substitute stock options
have been issued to holders of North Coast Bank, N.A. stock options, and (iii)
no stock options will be granted and no substitute stock options will be issued,
prior to the effective time of the merger. If the 2000 Plan is approved by
shareholders, future grants of stock options under the 2000 Plan, if any, will
be subject to the sole discretion of the board of directors. Any such stock
option grants would be made in compliance with the provisions of the 2000 Plan;
however, no amounts or benefits are currently determinable respecting future
grants. See the full text of the 2000 Plan, a copy of which is attached to this
document as Annex F for further information regarding the 2000 Plan.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of
American River Holdings common stock present in person or represented by proxy
and entitled to vote at the annual meeting is required to approve the 2000 Plan
provided that the number of affirmative votes equals at least a majority of the
shares constituting the required quorum.
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RECOMMENDATION OF MANAGEMENT
The board of directors believes that this proposal is in the best
interests of American River Holdings and its shareholders, and unanimously
recommends a vote "FOR" its approval.
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PROPOSAL NO. 3
APPROVAL OF AMENDMENTS TO THE AMERICAN RIVER HOLDINGS ARTICLES OF
INCORPORATION AND BYLAWS TO PROVIDE FOR THE CLASSIFICATION OF THE
BOARD OF DIRECTORS
APPOINTMENT OF NORTH COAST BANK, N.A. DIRECTORS
The terms of the merger agreement require that two of the existing
directors of North Coast Bank, N.A. will be appointed to the American River
Holdings board of directors promptly after the consummation of the merger.
Consequently, the American River Holdings board of directors will be increased
to eleven (11) after the effective time of the merger. The two directors to be
appointed are M. Edgar Deas and Larry L. Wasem. In addition, American River
Holdings agreed under the merger agreement to adopt amendments to the American
River Holdings articles of incorporation and bylaws to divide its board of
directors into three classes. If the amendments are approved by the American
River Holdings shareholders, and subject to American River Holdings common stock
being listed for trading on the Nasdaq National Market, one of the existing
directors of North Coast Bank, N.A. is to serve as a Class II director and
another director of North Coast Bank, N.A. is to serve as a Class III director,
as discussed below.
CLASSIFICATION OF DIRECTORS
The board of directors adopted amendments to the American River
Holdings articles of incorporation and bylaws which provide, subject to
shareholder approval and American River Holdings common stock being listed for
trading on the Nasdaq National Market, that the board of directors be divided
into three classes of directors, each consisting of a number of directors equal
as nearly as practicable to one-third the total number of directors, for so long
as the board consists of at least nine authorized directors and, in the event
that the total number of authorized directors on the board is at least six but
less than nine, for classification of the board of directors into two classes,
each consisting of a number of directors equal as nearly as practicable to
one-half the total number of directors. After initial implementation at the 2000
annual meeting of shareholders, each class of directors would be subject to
election every third year and would serve for a three-year term for so long as
the board remained classified into three classes, or would be subject to
election every second year and would serve for a two-year term in the event the
board were classified into two classes. Currently, all of American River
Holdings' directors are elected each year to serve a one-year term. The text of
the proposed amendments to the articles of incorporation and bylaws is set forth
in Annex G attached to this document.
ELECTION OF CLASSIFIED DIRECTORS
If the proposal is approved by the shareholders and subject to the
common stock of American River Holdings being listed for trading on the Nasdaq
Stock Market, the board of directors will, for purposes of initial
implementation, designate three classes of directors for election at the 2000
annual meeting. Class I will be elected initially for a one-year term expiring
at the 2001 annual meeting of shareholders; Class II will be elected initially
for a two-year term expiring at the 2002 annual meeting of shareholders; and
Class III will be elected for a three-year term expiring at the annual meeting
of shareholders to be held in the year 2003; and, in each case, until their
successors are duly elected and qualified. At each annual meeting after the 2000
annual meeting, only directors of the class whose term is expiring would be
voted upon, and upon election each director would serve a three-year term.
Commencing with the annual meeting of shareholders scheduled to occur in 2001,
directors elected to Class I would serve for a three-year term and until their
successors are duly elected and qualified, subject to any decrease in the total
number of authorized directors. Subsequently, in the years 2002 and 2003,
directors elected to Class II and Class III,
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respectively, would also be elected for a three-year term and until their
successors are duly elected and qualified.
CALIFORNIA CORPORATIONS CODE
Classification of the board of directors is permitted by Section 301.5
of the California Corporations Code. Under Section 301.5, a qualifying
California corporation, may divide its board of directors into two or three
classes, with one-half or one-third of the directors, respectively, elected at
each annual meeting (or as near to one-half or one-third as practicable). The
authorized number of directors must be not less than six in the case of a
two-class board and not less than nine in the case of a three-class board.
Classified boards of directors are permitted under the corporate law of a
majority of states, and American River Holdings believes that well over one-half
of Fortune 500 companies provide for classified boards.
AMENDMENT OF BYLAWS
If this proposal is adopted by the American River Holdings
shareholders, in order to make the bylaws consistent with the amendment to the
articles of incorporation described in this proposal, upon effectiveness of the
filing of the amendment to the articles of incorporation with the Secretary of
State of the State of California, Section 3.4 of Article III of the bylaws will
be amended to read as set forth in Annex G attached to this document.
EFFECTS OF CLASSIFICATION OF BOARD
Future Elections. If adopted, the classification of the board will
apply to every subsequent election of directors for so long as at least six
directors are authorized under the American River Holdings bylaws and the
classification provision is not amended. The American River Holdings bylaws
provide that the board of directors will consist of not less than nine and not
more than seventeen directors, with the exact number of directors currently set
at eleven. So long as the board continues to consist of at least nine authorized
directors, after initial implementation of the classified board, directors will
serve for a term of three years rather than one year, and one-third of the
directors (or as near to one-third as practicable) will be elected each year.
Board Increase or Decrease. In the event that the number of directors
increases, the increase will be apportioned by the board among the classes of
directors to make each class as nearly equal in number as possible. If the
number of authorized directors is decreased to at least six but less than nine,
the directors will be apportioned by the board among two classes, each
consisting of one-half of the directors or as close an approximation as
possible, directors will serve for a term of two years, and one-half the
directors (or as near to one-half as practicable) will be elected each year. In
any event, a decrease in the number of directors cannot shorten the term of any
incumbent director. Vacancies on the board created by any resignation, removal
or other reason, or by an increase in the size of the board, may be filled for
the remainder of the term by the vote of the majority of the directors remaining
in office or by the vote of holders of a majority of the outstanding shares of
the American River Holdings common stock.
Removal of Directors. Under California law, members of the board of
directors may be removed by the board of directors for cause (defined to be a
felony conviction or court declaration of unsound mind), by the shareholders
without cause or by court order for fraudulent or dishonest acts or gross abuse
of authority or discretion. In the case of a board of directors that is not
classified, no director may be removed by the shareholders if the votes cast
against the removal (or, if done by written consent, the votes eligible to be
cast by the non-consenting shareholders) would have been sufficient to elect the
director if voted cumulatively at an election at which the same total number of
votes were cast (or, if the action is taken by written consent, all shares
entitled to vote were voted) and the entire number of directors
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authorized at the time of the director's most recent election were then being
elected (the "relevant number of directors"). In the case of classified boards,
the relevant number of directors is (i) the number of directors elected at the
most recent annual meeting of shareholders or, if greater, (ii) the number of
directors sought to be removed. It should be noted that this removal provision
applies equally to corporations that permit cumulative voting and to those that
do not.
Anti-takeover Effects. Public companies are potentially subject to
attempts by various individuals and entities to acquire significant minority
positions in a company with the intent either of obtaining actual control of the
company by electing their own slate of directors, or of achieving some other
goal, such as the repurchase of their shares by the company at a premium. Public
companies also are potentially subject to inadequately priced or coercive bids
for control through majority share ownership. These prospective acquirors may be
in a position to elect a company's entire board of directors through a proxy
contest or otherwise, even though they do not own a majority of a company's
outstanding shares at the time. If this proposal is approved, a majority of
American River Holdings' directors could not be removed by those individuals,
entities or acquirors until two annual meetings of shareholders have occurred,
unless the removal was for cause and the requisite vote was obtained. By
providing this additional time to the board of directors and eliminating the
possibility of rapid removal of the board, the directors of American River
Holdings will have the necessary time to most effectively satisfy their
responsibility to the American River Holdings shareholders to evaluate any
proposal and to assess and develop alternatives without the pressure created by
the threat of imminent removal. In addition, this proposal, by providing that
directors will serve three-year terms rather than one-year terms, will enhance
continuity and stability in the composition of American River Holdings' board of
directors and in the policies formulated by the board. The board believes that
this, in turn, will permit it more effectively to represent the interests of all
shareholders, including responding to demands or actions by any shareholder or
group. Following adoption of the classified board structure, at any given time
at least one-third of the members of the board of directors will generally have
had prior experience as directors of American River Holdings. The board believes
that this will facilitate long-range planning, strategy and policy and will have
a positive impact on customer and employee loyalty. American River Holdings has
not historically had problems with either the continuity or stability of its
board of directors.
The classification of the board of directors will have the effect of
making it more difficult to replace incumbent directors. So long as the board is
classified into three classes, a minimum of three annual meetings of
shareholders would generally be required to replace the entire board, absent
intervening vacancies. While the proposal is not intended as a
takeover-resistive measure in response to a specific threat, it may discourage
the acquisition of large blocks of American River Holdings' shares by causing it
to take longer for a person or group of persons who acquire a block of shares to
effect a change in management.
If this proposal is approved and implemented, a shareholder or group of
shareholders seeking to replace a majority of the directors on the board will
generally need to influence the voting of at least a majority of the outstanding
shares at two consecutive annual meetings. In addition, American River Holdings
has other corporate attributes that may also have the effect of helping American
River Holdings to resist an unfriendly acquisition. These include existing
provisions in the American River Holdings articles of incorporation and bylaws
eliminating, subject to specified exceptions, the liability of directors for
monetary damages; provisions in the articles of incorporation and bylaws
providing for indemnification of directors and officers; provisions in the
bylaws requiring advance notice of nomination of a candidate for election to the
board of directors of American River Holdings when the nomination is made by a
person other than the nominating committee of the board; and, if approved by the
American River Holdings shareholders, the elimination of cumulative voting in
the election of directors as described in Proposal No. 4 and Annex H of this
document.
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This proposal is not in response to any attempt to acquire control of
American River Holdings. However, the board believes that adopting this proposal
is prudent, advantageous and in the best interests of shareholders because it
will give the board more time to fulfill its responsibilities to shareholders,
and it will provide greater assurance of continuity and stability in the
composition and policies of the board of directors. The board also believes the
advantages outweigh any disadvantage relating to discouraging potential
acquirors from attempting to obtain control of American River Holdings.
VOTE REQUIRED FOR APPROVAL
Approval of the proposed amendments to the articles of incorporation
and the bylaws requires the affirmative vote of the holders of a majority of the
outstanding shares of American River Holdings common stock. If this proposal is
not approved, it is the intention of American River Holdings and North Coast
Bank, N.A. that the American River Holdings board of directors will be increased
to eleven (11) members and the two existing directors of North Coast Bank, N.A.
(M. Edgar Deas and Larry L. Wasem) will be appointed to the American River
Holdings board of directors to serve along with the existing American River
Holdings directors, without classification as contemplated by this proposal.
RECOMMENDATION OF MANAGEMENT
The board of directors believes that the amendment of the articles of
incorporation and bylaws is in the best interests of American River Holdings and
its shareholders and that the advantages of the proposed amendments greatly
outweigh the possible disadvantages. Accordingly, the board of directors has
unanimously approved the proposed amendments and unanimously recommends that the
American River Holdings shareholders vote "FOR" their approval.
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PROPOSAL NO. 4
APPROVAL OF AMENDMENTS TO THE AMERICAN RIVER HOLDINGS ARTICLES OF
INCORPORATION AND BYLAWS TO ELIMINATE CUMULATIVE VOTING IN THE
ELECTION OF DIRECTORS
INTRODUCTION
Effective on January 1, 1990, the California General Corporation Law
was amended to permit California corporations with widely traded securities to
provide, with the approval of their shareholders, for majority rule voting in
electing directors in lieu of cumulative voting. California law specifically
allows a corporation with its common stock quoted on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market to eliminate
cumulative voting by an amendment to its bylaws or articles of incorporation.
Prior to such legislation, cumulative voting in electing directors was mandatory
for California corporations upon proper notice by any shareholder of the
corporation. By permitting shareholders of California corporations to provide
for majority rule voting in electing directors, the new law substantially
conforms California corporate law with the corporate laws of a majority of other
states (including Delaware, Illinois, Michigan, New Jersey, New York, Ohio,
Pennsylvania and Texas) which either provide that cumulative voting is optional
or make no provision for cumulative voting at all. Only a small majority of
states still require that shareholders be permitted to invoke cumulative voting.
American River Holdings intends to list its common stock for trading on the
Nasdaq National Market, such listing to be made effective as soon as practicable
following the effective time of the merger.
CUMULATIVE VOTING
Cumulative voting in the election of directors may currently be invoked
by any shareholder of American River Holdings who complies with statutory notice
requirements. Cumulative voting entitles shareholders to a number of votes per
share of common stock equal to the number of directors to be elected, and all
nominees are voted upon simultaneously. Holders of shares may cast all of their
votes for a single nominee or distribute them among two to more nominees.
As a consequence of cumulative voting, a shareholder with a relatively
small number of voting shares may be able to elect one or more directors. For
example, if a shareholder were to give the appropriate notice and properly
nominate a nominee, and nine directors were to be elected at an annual meeting,
a shareholder holding 10% of the voting shares could elect one director by
cumulating and casting his or her votes for one candidate. This is true even if
shareholders holding 90% of the voting shares are opposed to the election of
that candidate and cast their votes to elect nine other nominees.
Absent cumulative voting, a nominee cannot be elected without
relatively wide support, as shareholders are entitled to only one vote per share
with the nominee receiving the greatest number of votes being elected.
Consequently, the holder or holders of a majority of the shares entitled to vote
in an election of directors will be able to elect all directors of American
River Holdings, and holders of less than a majority of the shares may not be
able to elect any directors.
For reasons set forth below, the board believes that the articles of
incorporation should be amended to eliminate cumulative voting. The text of the
proposed amendment to the articles of incorporation is set forth in Annex H
attached to this document and is incorporated here by this reference.
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REASONS FOR THE AMENDMENT
The board believes that the elimination of cumulative voting is
advantageous to American River Holdings and its shareholders because each
director of a publicly held corporation has a duty to represent the interests of
all shareholders rather than any specific shareholder or group of shareholders.
The presence on the board of directors of one or more directors representing the
interests of a minority shareholder or group of shareholders could disrupt the
management of American River Holdings and prevent it from operating in the most
effective manner. Furthermore, the election of directors who view themselves as
representing a particular minority constituency could introduce an element of
discord on the board of directors, impair the ability of the directors to work
effectively and discourage qualified independent individuals from serving as
directors. Providing for majority rule voting in the election of directors by
eliminating cumulative voting will help ensure that each director acts in the
best interests of all shareholders.
This proposal to eliminate cumulative voting is not being made in
response to any effort by a minority shareholder or group of shareholders to
attain representation on the board of directors or acquire greater influence in
the management of the Corporation's business, nor is American River Holdings
aware of any such effort. Furthermore, this proposal is not being made in
response to any attempt to acquire control of American River Holdings, nor is
American River Holdings aware of any such attempt.
OTHER EFFECTS
Approval of the proposed amendment may render more difficult any
attempt by a holder or group of holders of a significant number of voting
shares, but less than a majority, to change or influence the management or
policies of American River Holdings. In addition, under certain circumstances,
the proposed amendment, along with other measures that may be viewed as having
anti-takeover effects (such as Proposal No. 3 to classify the American River
Holdings board of directors), may discourage an unfriendly acquisition or
business combination involving American River Holdings that a shareholder might
consider to be in such shareholder's best interest, including an unfriendly
acquisition or business combination that might result in payment of a premium
over the market price for the shares held by the shareholder. For example, the
proposed amendment may discourage the accumulation of large minority
shareholdings (as a prelude to an unfriendly acquisition or business combination
proposal or otherwise) by persons who would not make that acquisition without
being assured of representation on the board of directors.
CONFORMING BYLAW AMENDMENT
If this Proposal No. 4 is adopted by the American River Holdings
shareholders, in order to make the bylaws consistent with the amendment to the
articles of incorporation set forth in this Proposal No. 4, upon effectiveness
of the filing of the amended and restated articles of incorporation with the
California Secretary of State, Section 2.8 of Article II of the bylaws shall be
amended to read as set forth in Annex H which is incorporated here by this
reference.
VOTE REQUIRED FOR APPROVAL
Approval of the proposal to add Article Eight to the articles of
incorporation and to amend Section 2.8 of the bylaws requires that holders of a
majority of the outstanding shares of common stock of American River Holdings
vote "FOR" the proposal.
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RECOMMENDATION OF MANAGEMENT
The board of directors believes that this proposal is in the best
interests of American River Holdings and its shareholders, and unanimously
recommends a vote "FOR" its approval.
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PROPOSAL NO. 5
ELECTION OF AMERICAN RIVER HOLDINGS DIRECTORS
The number of directors authorized for election at this meeting is nine
(9). Management has nominated the nine (9) incumbent directors to serve as the
American River Holdings' directors. Each director will hold office until his or
her successor is elected and qualified.
All proxies will be voted for the election of the nine (9) nominees
listed below (all of whom are incumbent directors) recommended by the board of
directors unless authority to vote for the election of any directors is
withheld. The nominees receiving the highest number of affirmative votes of the
shares entitled to be voted for them shall be elected as directors, and will be
elected (a) to the class designated opposite their names, provided that Proposal
No. 3 is approved and American River Holdings common stock is listed for trading
on the Nasdaq National Market, and (b) in the event Proposal No. 3 is not
approved and/or American River Holdings common stock is not listed for trading
on the Nasdaq National Market, then as directors without classification.
Abstentions and votes cast against nominees have no effect on the election of
directors. If any of the nominees should unexpectedly decline or be unable to
act as a director, their proxies may be voted for a substitute nominee to be
designated by the board of directors. The board of directors has no reason to
believe that any nominee will be become unavailable and has no present intention
to nominate persons in addition to or in lieu of those named below.
<TABLE>
<CAPTION>
<S> <C> <C>
James O. Burpo (Class 2) Wayne C. Matthews, M.D. (Class 1) Roger J. Taylor, D.D.S. (Class 2)
Charles D. Fite (Class 3) David T. Taber (Class 3) Stephen H. Waks (Class 3)
Sam J. Gallina (Class 2) Marjorie G. Taylor (Class 1) William L. Young (Class 1)
</TABLE>
See "Proposal No. 3" on page 157, for information regarding the classification
of the board of directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At the close of business on the record date, directors and executive
officers of American River Holdings and their affiliates beneficially owned and
were entitled to vote approximately 662,517 shares of American River Holdings
common stock, which represented approximately 33.4% of the shares of American
River Holdings common stock outstanding on that date. Each of those directors
and executive officers has agreed to vote, or cause to be voted, the American
River Holdings common stock owned by him or her "FOR" approval of the merger
agreement, the merger and the resulting issuance of American River Holdings
common stock to North Coast Bank, N.A.'s shareholders under the terms of the
merger agreement and "FOR" the proposals to approve the American River Holdings
2000 Stock Option Plan, the amendments to the American River Holdings articles
of incorporation and bylaws to provide for the classification of the board of
directors and to eliminate cumulative voting in the election of directors,
election of management's nominees as directors of American River Holdings, and
to ratify the appointment of Perry-Smith LLP as independent accountants for the
year 2000, at American River Holdings' annual meeting.
As of the record date, no individual known to American River Holdings
owned more than five percent (5%) of the outstanding shares of its common stock
except as described in the table below and the directors and executive officers
of American River Holdings beneficially owned shares of American River Holdings
common stock as described in the following table. Unless otherwise indicated in
the table or the notes to the table, (i) each beneficial owner listed below
possesses sole voting power and sole investment power; (ii) all of the shares
shown in the following table are owned both of record and beneficially; (iii)
the address for beneficial owners, all of whom are incumbent directors and
executive officers of American River Holdings and American River Bank, is the
address of American River Holdings, 1545 River Park
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Drive, Suite 107, Sacramento, California 95815; and (iv) American River Holdings
no par value common stock is the only class of shares outstanding.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership (1) Percent of Class (2)
-------------------- ------------------------ --------------------
Kevin B. Bender 4,351 *
Richard M. Borst 5,306(3) *
James O. Burpo 40,589(4) 2.3%
Mitchell A. Derenzo 18,472(5) 1.0%
Charles D. Fite 101,635(6) 5.6%
Sam J. Gallina 87,000(7) 4.8%
Wayne C. Matthews, M.D 58,480(8) 3.2%
David T. Taber 76,925(9) 4.2%
Marjorie G. Taylor 35,529(10) 2.0%
Roger J. Taylor, D.D.S 118,088(11) 6.5%
Douglas E. Tow 6,597(12) *
Stephen H. Waks 27,750(13) 1.5%
William L. Young 81,633(14) 4.4%
All directors and executive 662,517(15) 33.4%
officers as a group (13
persons)
----------------------------
(1) Except as otherwise noted, may include shares held by or with such person's
spouse (except where legally separated) and minor children; shares held by
any other relative of such person who has the same home; shares held by a
family trust as to which such person is a trustee with sole voting and
investment power (or shared power with a spouse); or shares held in an
individual retirement account or pension plan of which such person is the
sole beneficiary, and as to which such person has pass-through voting
rights and investment power.
(2) Includes stock options outstanding to purchase common stock exercisable
within 60 days of the record date. The shares "beneficially owned" are
determined under Securities and Exchange Commission Rules, and do not
necessarily indicate ownership for any other purpose. In general,
beneficial ownership includes shares over which a person has sole or shared
voting or investment power and shares which the person has the right to
acquire within 60 days. An * indicates less than one percent.
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(3) Includes 3,819 shares which Mr. Borst has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(4) Includes 6,946 shares which Mr. Burpo has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(5) Includes 10,419 shares which Mr. Derenzo has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(6) Includes 17,365 shares which Mr. Fite has the right to acquire upon the
exercise of stock options within 60 days of the record date. Mr. Fite has
indirect voting powers as to 43,247 shares under general proxies signed by
D. Bruce and Darlyne Fite, and Charles F. Fite.
(7) Includes 17,365 shares which Mr. Gallina has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(8) Includes 7,915 shares which Dr. Matthews has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(9) Includes 43,412 shares which Mr. Taber has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(10) Includes 6,433 shares which Ms. Taylor has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(11) Includes 17,365 shares which Dr. Taylor has the right to acquire upon the
exercise of stock options within 60 days of the record date. Dr. Taylor has
indirect voting powers as to 20,908 shares under general proxies signed by
Gary W. Taylor, Robert P. Taylor and Frederick S. Taylor.
(12) Includes 5,285 shares which Mr. Tow has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(13) Includes 10,419 shares which Mr. Waks has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(14) Includes 43,412 shares which Mr. Young has the right to acquire upon the
exercise of stock options within 60 days of the record date.
(15) Includes 190,317 stock options outstanding to purchase common stock
exercisable within 60 days of the record date.
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BACKGROUND AND BUSINESS EXPERIENCE OF MANAGEMENT
The following table sets forth certain information as of the record
date July 25, 2000 with respect to those persons whom management has nominated
for election as directors of American River Holdings, each of whom is an
incumbent director, as well as all executive officers, including their
respective ages, positions with American River Holdings and its subsidiaries and
a brief account of the business experience for a minimum of five years of each
director and executive officer listed below.
American River Holdings knows of no arrangements, including any pledge
by any person of securities of American River Holdings, the operation of which
may, at a subsequent date, result in a change in control of American River
Holdings. There are no arrangements or understandings by which any of the
executive officers or directors of either American River Holdings or its
subsidiaries were selected. There is no family relationship between any of the
directors or executive officers, except that Marjorie G. Taylor was married to
Roger J. Taylor's deceased father.
NAME AGE POSITION
Kevin B. Bender 36 Senior Vice President and Chief Information
Officer of American River Bank since 1999.
Formerly, Vice President of Credit Administration
of American River Bank since 1986.
Richard M. Borst 44 Senior Vice President and Client Services Manager
of American River Bank since 1991.
James O. Burpo 77 Director of American River Holdings, American
River Bank and First Source Capital since 1995,
1994 and 1999, respectively. Chairman of the
Sacramento office of Alburger Basso De Grosz, Inc.
Insurance Brokers, which engages in commercial
insurance brokerage. Real estate developer in
Sacramento.
Mitchell A. Derenzo 38 Chief Financial Officer of American River Holdings
since 1995. Senior Vice President and Chief
Financial Officer of American River Bank since
1992. Chief Financial Officer of First Source
Capital since 1999.
Charles D. Fite 42 Director of American River Holdings, (Chairman)
American River Bank and First Source Capital since
1995, 1993 and 1999, respectively. President, Fite
Development Company, a real estate development
firm in Sacramento.
Sam J. Gallina 68 Director (Chairman) of American River Holdings,
American River Bank and (Chairman) First Source
Capital since 1995, 1986 and 1999, respectively.
Senior Partner, S. J. Gallina & Co., Certified
Public Accountants in Sacramento.
Wayne C. Matthews, M.D. 70 Director of American River Holdings, American
River Bank and First Source Capital since 1995,
1984 and 1999, respectively. Family Practitioner
in Sacramento.
167
<PAGE>
David T. Taber 40 Director of American River Holdings, American
River Bank and First Source Capital since 1995,
1989 and 1999, respectively. President and Chief
Executive Officer of American River Holdings since
1995 and Executive Vice President of American
River Bank 1989 to 1999. President and Chief
Executive Officer of First Source Capital since
1999.
Marjorie G. Taylor 66 Director and Corporate Secretary of American River
Holdings, American River Bank and First Source
Capital since 1995, 1983 and 1999, respectively.
Property Manager (self-employed) in Sacramento.
Roger J. Taylor D.D.S. 54 Director (Vice-Chairman) of American River
Holdings, American River Bank and First Source
Capital since 1995, 1983 and 1999, respectively.
Dentist (Retired) and National Executive Director
of Impax Health Prime, a worldwide distributor of
nutritional supplements, based in Sacramento, and
a real estate developer in Sacramento.
Douglas E. Tow 46 Senior Vice President and Credit Administrator of
American River Bank since 1994.
Stephen H. Waks 53 Director of American River Holdings, American
River Bank and First Source Capital since 1995,
1986 and 1999, respectively. Attorney-at-Law and
owner of Stephen H. Waks, Inc. in Sacramento.
William L. Young 58 Director of American River Holdings, American
River Bank and First Source Capital since 1995,
1988 and 1999, respectively. President and Chief
Executive Officer of American River Bank since
1989.
None of the directors of American River Holdings or its subsidiaries is
a director of any other company with a class of securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended, or subject to
the requirements of Section 15(d) of such Act or any company registered as an
investment company under the Investment Company Act of 1940, whose common stock
is registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended.
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<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee, whose members are James O. Burpo, Wayne C.
Matthews, M.D. (Chairman) and Marjorie G. Taylor, oversees American River
Holdings and its subsidiaries' independent public accountants, analyzes the
results of internal and regulator examinations and monitors the financial and
accounting organization and reporting. The Audit Committee met four (4) times in
1999.
The board of directors has not established a nominating committee. The
full board of directors performs the functions of a nominating committee with
responsibility for considering appropriate candidates for election as directors.
The Compensation Committee, whose members include Charles D. Fite, Sam
J. Gallina, and Roger J. Taylor, D.D.S. (Chairman), oversees the performance and
reviews the compensation of the executive officers of American River Holdings
and its subsidiaries. The Compensation Committee met one (1) time during 1999.
The Finance and Capital Committee, whose members include Wayne C.
Matthews, M.D., David T. Taber and Marjorie G. Taylor (Chairman), has the
responsibility to oversee asset liability management and the investment
portfolio including recommending to the full board of directors the annual
investment strategy; approve and recommend to the full board of directors
capital expenditures of $20,000 and above; oversee and recommend to the full
board of directors the annual operating budget for American River Holdings and
its subsidiaries; and review premises leases for recommendation to the full
board of directors. The Finance and Capital Committee met five (5) times during
1999.
The Loan and Discount Committee, whose members include James O. Burpo,
Charles D. Fite (Chairman), Sam J. Gallina, Roger J. Taylor, D.D.S., and
Stephen H. Waks, has the responsibility for establishing loan policy and
approving loans which exceed certain dollar limits and reviews the outside loan
review firm's examination of the loan portfolio. The Loan and Discount Committee
met twenty-nine (29) times during 1999.
The Executive Committee, whose members include Charles D. Fite, Sam J.
Gallina (Chairman), David T. Taber, Roger J. Taylor, D.D.S., and William L.
Young, oversees long range planning, and the Technology Strategic Plan and its
implementation; formulates and recommends policy positions for the full board of
directors to consider; and is responsible for evaluating and recommending to the
full board of directors matters pertaining to mergers and acquisitions. The
Executive Committee met eight (8) times during 1999.
During 1999, American River Holdings' board of directors held twelve
(12) meetings. All directors attended at least 75% of the aggregate of the total
number of meetings of the board of directors and the number of meetings of the
committees on which they served.
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COMPENSATION OF DIRECTORS
The fees paid to non-employee directors during 1999 included a retainer
of $250 per month, a base fee of $250 per month for attendance at board meetings
of American River Holdings and its subsidiaries, and a fee of $150 per month for
attendance at committee meetings, other than the Loan and Discount Committee
whose outside director members received a fee of $200 for each meeting attended.
Outside director members of the Executive Committee received an additional
retainer fee of $150 per month. In addition to the fees received as non-employee
directors in connection with the meetings and matters described above, the
chairman of the board of directors also received a retainer fee of $100 per
month, each chairman of the Loan and Discount Committee, Audit Committee, and
Finance and Capital Committee also received a retainer fee of $50 per month, and
the chairman of the Compensation Committee received a retainer fee of $150 per
year. The total amount of fees paid to all directors as a group was $100,700 in
1999.
On August 25, 1995, the board of directors authorized the grant to each
outside director of a nonstatutory stock option to purchase 10,000 shares of
American River Holdings common stock at $10.50 per share ($6.047 as adjusted for
stock splits and stock dividends).
On June 18, 1997, the board of directors approved a Gross-Up Plan to
compensate for the tax effects of the exercise of nonstatutory stock options.
The Plan encourages participating optionees to retain shares acquired through
the exercise of nonstatutory stock options by American River Holdings paying to
the participating optionee, an amount equal to the taxable income resulting from
an exercise of a nonstatutory stock option multiplied by American River
Holdings' effective tax rate, subject to the optionee's agreement to hold the
shares acquired for a minimum of one (1) year. In the event that the shares
acquired upon exercise are not held for at least one year from the date of
acquisition, the optionee is required to reimburse the amount paid to the
optionee under the Plan. During 1999, one director executed an agreement in
return for a payment of $29,187, and two other directors deferred payments in
the aggregate amount of $56,960 to January, 2000.
Effective May 1, 1998, a Deferred Fee Plan was established for the
purpose of providing the directors an opportunity to defer director fees.
Participating directors may elect to defer a portion, up to 100%, of their
monthly directors fees. American River Bank bears the administration costs, but
does not make contributions to the Plan. During 1999, one director participated
in the Plan and deferred $5,609.
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<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation of the executive officers of American River Holdings
and its subsidiaries is reviewed and approved annually by the board of directors
on recommendation by the Compensation Committee. During 1999, Charles D. Fite,
Sam J. Gallina, and Roger J. Taylor, D.D.S. (Chairman), served as members of the
Committee. Executive officers of American River Holdings and/or subsidiaries
during 1999 were David T. Taber, Mitchell A. Derenzo, William L. Young, Richard
M. Borst, Douglas E. Tow, and Kevin B. Bender.
The Compensation Committee's philosophy is that compensation should be
designed to reflect the value created for shareholders while supporting American
River Holdings' strategic goals. The Compensation Committee reviews annual the
compensation of the executive officers to insure that American River Holdings'
compensation programs are related to financial performance and consistent
generally with employers of comparable size in the industry. Annual compensation
for American River Holdings' executive officers includes the following
components:
Base salary is related to the individual executive officer's level of
responsibility and comparison with comparable employers in the industry.
Annual incentive bonus compensation under the Incentive Compensation
Plan for Executive Management based on the return on beginning shareholder
equity for each year and individual performance criteria are considered by the
Compensation Committee for payment to executive officers. Messrs. Young and
Taber are eligible to receive incentive bonus compensation when American River
Bank achieves a 12% net return on beginning shareholder equity in a given year.
Messrs. Derenzo, Borst, Tow, and Bender are entitled to receive incentive bonus
compensation in the discretion of the board of directors and based on the return
on beginning shareholder equity. During 1999, these individuals were eligible to
receive 22% of their annual compensation, which was paid in January 2000.
Stock option grants are intended to increase the executive officers'
interest in American River Holdings' long-term success and link interests of the
executive officer with those of shareholders as measured by American River
Holdings' share price. Stock options are granted in the discretion of the board
of directors and at the prevailing market value of American River Holdings
common stock. Consequently, the value of the options is directly connected to
the increase in value of American River Holdings' stock price.
American River Holdings matches salary deferred by employees
participating in its 401(k) Plan at a rate equal to 50% of the participant's
contribution up to maximum of 6% of such participant's annual compensation.
Executive officers are eligible to participate in the 401(k) plan.
Executive officers may participate in the Gross-Up Plan to the extent
that an executive receives a grant of nonstatutory stock options. The Plan
encourages executive officers to retain shares acquired through the exercise of
nonstatutory stock options by American River Holdings paying to the
participating executive officer, an amount equal to the taxable income resulting
from an exercise of a nonstatutory stock option multiplied by American River
Holdings' effective tax rate, subject to the executive officer agreeing to hold
the shares acquired for a minimum of one (1) year. In the event that the shares
acquired upon exercise are not held for at least one year from the date of
acquisition, the executive officer is required to reimburse the amount received
under the Plan. During 1999, no executive officers received payments under the
Gross-Up Plan, but Messrs. Taber, Young, Derenzo and Bender deferred payments of
$32,416, $69,922, $14,799, and $15,434, respectively, which were paid in January
2000.
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<PAGE>
Effective May 1, 1998, the American River Bank Deferred Compensation
Plan was established for the purpose of providing certain highly compensated
individuals, which includes the executive officers, an opportunity to defer
compensation. Participants, 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. American
River Bank bears all administration costs, but does not make contributions to
the plan.
American River Bank purchased additional life insurance policies on the
lives of David T. Taber and William L. Young. Mr. Taber's policy is a 10-year,
$1,000,000 level-term life insurance policy with American River Bank as the
owner and sole beneficiary. The annual premium cost for the policy on Mr. Taber
is approximately $700. Two policies were purchased on the life of Mr. Young in
the amount of $250,000 each. Each term life insurance policy consists of two
5-year step rates with American River Bank as the owner and sole beneficiary.
The annual premium cost for the policies on Mr. Young is approximately $5,000
for the first 5-year period and $8,000 for the second 5-year period.
/s/ CHARLES D. FITE /s/ SAM J. GALLINA /s/ ROGER J. TAYLOR, D.D.S.
------------------------- ------------------- ---------------------------
Charles D. Fite Sam J. Gallina Roger J. Taylor, D.D.S.
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<PAGE>
EXECUTIVE COMPENSATION
Set forth below is the summary compensation paid during the three years
ended December 31, 1999 to David T. Taber, Mitchell A. Derenzo, William L.
Young, Richard M. Borst, Douglas E. Tow and Kevin B. Bender, the only executive
officers of American River Holdings and its subsidiaries.
<TABLE>
<CAPTION>
Summary Compensation Table
------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
------------------------------------
Annual Compensation Awards Payouts
------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Principal Position ($) (1) ($) (2) Compensation Stock Underlying Payouts Compensation
($) (3) Award(s) ($) Options/SARs ($) ($) (5)
(#) (4)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David T. Taber, President and 1999 $123,057 $ 98,152 -- -- -- -- $ 42,694
Chief Executive Officer,
American River Holdings; 1998 123,057 54,033 -- -- -- -- 39,149
Executive Vice President,
American River Bank; 1997 121,000 50,078 -- -- -- -- 5,455
President and Chief Executive
Officer of First Source
Capital
------------------------------------------------------------------------------------------------------------------------------
Mitchell A. Derenzo, 1999 82,734 19,557 -- -- -- -- 17,868
Chief Financial Officer,
American River Holdings; 1998 78,168 7,759 -- -- -- -- 10,926
Senior Vice President and
Chief Financial Officer, 1997 73,700 8,344 -- -- 17,365 -- 2,461
American River Bank; Chief
Financial Officer, First
Source Capital
------------------------------------------------------------------------------------------------------------------------------
William L. Young, President 1999 123,057 98,152 -- -- -- -- 75,618
and Chief Executive Officer,
American River Bank 1998 123,057 54,093 -- -- -- -- 5,672
1997 121,000 54,313 -- -- -- -- 5,440
------------------------------------------------------------------------------------------------------------------------------
Richard M. Borst, Senior Vice 1999 71,373 16,895 -- -- -- -- 2,648
President and Client Services
Manager, American River Bank 1998 67,519 6,914 -- -- -- -- 2,233
1997 64,800 7,302 -- -- 17,365 -- 8,405
------------------------------------------------------------------------------------------------------------------------------
Douglas E. Tow, Senior Vice 1999 92,922 22,786 -- -- -- -- 4,057
President and Credit
Administrator, American River 1998 91,144 9,423 -- -- 7,875 -- 3,017
Bank
1997 89,400 18,420 -- -- -- -- 3,234
------------------------------------------------------------------------------------------------------------------------------
Kevin B. Bender, Senior Vice 1999 58,782 11,153 -- -- 10,000 -- 17,444
President and Chief
Information Officer, American 1998 55,689 4,391 -- -- -- -- 1,802
River Bank
1997 51,044 4,543 -- -- -- -- 1,668
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
173
<PAGE>
(1) Amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers under the 401(k) Plan and the Deferred Compensation Plan.
(2) Amounts indicated as incentive bonus payments are listed in the year paid.
Additional amounts accrued in 1999 and paid in the first quarter of 2000
were $144,465 to Mr. Taber, $18,202 to Mr. Derenzo, $144,465 to Mr. Young,
$15,702 to Mr. Borst, $20,443 to Mr. Tow, and $10,777 to Mr. Bender.
(3) No executive officer received perquisites or other personal benefits in
excess of the lesser of $50,000 or 10% of each such officer's total annual
salary and bonus during 1999, 1998 and 1997.
(4) Amounts shown represent the number of shares granted as adjusted for stock
splits and stock dividends. American River Bank has a 1995 Stock Option
Plan (the "1995 Plan") pursuant to which options can be granted to
directors and key, full-time salaried, officers and employees of American
River Holdings and its subsidiaries. Options granted under the 1995 Plan
were either incentive options or nonstatutory options. Options granted
under the 1995 Plan became exercisable in accordance with a vesting
schedule established at the time of grant. Vesting can not extend beyond
ten years from the date of grant. Upon a change in control of American
River Holdings, all outstanding options under the 1995 Plan will become
fully vested and exercisable. Options granted under the 1995 Plan are
adjusted to protect against dilution in the event of certain changes in
American River Holdings' capitalization, including stock splits and stock
dividends. All options granted to the named executive officers are
incentive stock options and have an exercise price equal to the fair market
value of American River Holdings common stock on the date of grant.
(5) Amounts shown for each named executive officer include 401(k) matching
contributions, the use of an automobile owned by American River Bank,
payments received as well as amounts deferred at the election of those
executive officers under the Gross-Up Plan, and earned but unpaid interest
on amounts deferred under the American River Bank Deferred Compensation
Plan.
The following table sets forth certain information concerning the
granting of options under the 1995 Stock Option Plan during the year ended
December 31, 1999.
<TABLE>
<CAPTION>
Option/SAR Grants In Last Fiscal Year
-------------------------------------------------------------------------------------------------
Individual Grants
-------------------------------------------------------------------------------------------------
Number of Percentage of
Securities Underlying Total Options/SARs
Option/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) (1) Fiscal Year ($/Sh) (2) Date
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kevin B. Bender 10,000 100% $ 15.375 11/17/09
-------------------------------------------------------------------------------------------------
</TABLE>
(1) Options granted under the 1995 Plan were either incentive options or
nonstatutory options. Options granted under the 1995 Plan became
exercisable in accordance with a vesting schedule established at the time
of grant. Vesting can not extend beyond ten years from the date of grant.
Upon a change in control of American River Holdings, all outstanding
options under the 1995 Plan will become fully vested and exercisable.
Options granted under the 1995 Plan are adjusted to protect against
dilution in the event of certain changes in American River Holdings'
capitalization, including stock splits and stock dividends. All options
granted to the named executive officers are incentive stock options and
174
<PAGE>
have an exercise price equal to the fair market value of American River
Holdings common stock on the date of grant.
(2) The exercise price was determined based upon the closing price of American
River Holdings common stock on the grant date.
The following table sets forth the number of shares of common stock
acquired by each of the named executive officers upon the exercise of stock
options during fiscal 1999, the net value realized upon exercise, the number of
shares of common stock represented by outstanding stock options held by each of
the named executive officers as of December 31, 1999, the value of such options
based on the closing price of American River Holdings common stock, and certain
information concerning unexercised options under the 1995 Stock Option Plan.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises In Last Fiscal Year And
FY-End Option/SAR Values
------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs Options/SARs
at Fiscal Year- at Fiscal Year-
Shares Value End (#) End ($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e) (1)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David T. Taber 5,788 84,969 34,730 / 8,682 297,920 / 74,480
--------------------------------------------------------------------------------
Mitchell A. Derenzo 2,910 38,791 6,946 /10,419 27,585 / 41,378
--------------------------------------------------------------------------------
William L. Young 12,679 183,282 34,730 / 8,682 297,920 / 74,480
--------------------------------------------------------------------------------
Richard M. Borst 6,600 21,756 346 /10,419 1,374 / 41,378
--------------------------------------------------------------------------------
Douglas E. Tow 1,500 8,881 5,285 / 9,774 18,757 / 21,053
--------------------------------------------------------------------------------
Kevin B. Bender 2,756 40,457 -- /10,000 -- / --
------------------------------------------------------------------------------------
</TABLE>
(1) The aggregate value has been determined based upon the closing price for
American River Holdings common stock at year-end, minus the exercise price.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
On May 29, 1996, American River Bank entered into employment agreements
with David T. Taber and William L. Young. The agreements provide for an original
term of two years subject to automatic extensions of two years following
expiration of the original term and one-year extensions thereafter unless
terminated in accordance with the terms of the agreements. The agreements
provide for a base salary which is disclosed for 1999 in the Summary
Compensation Table above. The base salary under each agreement is reviewed
annually and is subject to adjustment at the discretion of the board of
directors. Additionally, the agreements provide for, among other things (i) an
annual incentive bonus based upon American River Bank's achievement of certain
profitability, growth and asset quality standards as set forth in the
agreements; (ii) reduction of base salary payments by the amounts received from
state disability insurance or workers' compensation or other similar insurance
benefits through policies provided by American River Bank; (iii) stock option
grants in the discretion of the board of directors under American
175
<PAGE>
River Holdings' stock option plan; (iv) four weeks annual paid vacation leave;
(v) use of an automobile; and (vi) reimbursement for ordinary and necessary
expenses incurred in connection with employment.
The agreements may be terminated with or without cause, but if the
agreements are terminated without cause due to the occurrence of circumstances
that make it impossible or impractical for American River Bank to conduct or
continue its business, the loss by American River Bank of its legal capacity to
contract or American River Bank's breach of the terms of the agreement, the
employee is entitled to receive severance compensation equal to six months of
the existing base salary plus any incentive bonus due. The agreements further
provide that in the event of a "change in control" as defined therein and within
a period of two years following consummation of such change in control (i) the
employee's employment is terminated; or (ii) any adverse change occurs in the
nature and scope of the employee's position, responsibilities, duties, salary,
benefits or location of employment; or (iii) any event occurs which reasonably
constitutes a demotion, significant diminution or constructive termination of
employment, then the employee will be entitled to receive severance compensation
in an amount equal to one and one-half times the employee's average annual
compensation for the five years immediately preceding the change in control.
On March 18, 1998, American River Bank adopted the American River Bank
Employee Severance Policy. The Policy allows for certain named employees to
receive severance payments equal to six times their monthly base pay should
these named employees be terminated within one year of a "change in control."
The board of directors has designated executive officers, Mitchell A. Derenzo,
Douglas E. Tow, Richard M. Borst and Kevin B. Bender to be covered under the
Policy.
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<PAGE>
COMPARISON OF AMERICAN RIVER HOLDINGS SHAREHOLDER RETURN
Set forth below is a line graph comparing the annual percentage change
in the cumulative total return on American River Holdings common stock with the
cumulative total return of the SNL Securities Index of National Peer Banks
(asset size of less than $500 million) and the S&P 500 Index as of the end of
each of American River Holdings' last five fiscal years.
The following table assumes that $100.00 was invested on December 31,
1994 in American River Holdings common stock and each index, and that all
dividends were reinvested. Returns have been adjusted for any stock dividends
and stock splits declared by American River Holdings. Shareholder returns over
the indicated period should not be considered indicative of future shareholder
returns.
[GRAPHIC CHART OMITTED]
AMERICAN RIVER HOLDINGS
Total Return Performance
PERIOD ENDING
---------------------------------------------------------------
INDEX 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
------------------------------------------------------------------------------
American R 100.00 137.69 168.44 361.49 344.58 328.68
S&P 500 100.00 137.58 169.03 225.44 289.79 350.78
SNL <$500l 100.00 136.80 176.08 300.16 274.06 253.69
177
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
American River Holdings does not currently have a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended,
nor is it required to file reports with the Securities and Exchange Commission
under Section 13 of the Securities Exchange Act of 1934. Consequently, American
River Holdings' directors, executive officers and ten percent or more
shareholders of American River Holdings equity securities are not required to
file reports of initial ownership and changes in ownership of its equity
securities with the Securities and Exchange Commission under Section 16(a) of
the Securities Exchange Act of 1934.
In connection with the merger, American River Holdings will register
its common stock under Section 12 of the Securities Exchange Act and thereafter
will be required to file reports under Section 13 of the Securities Exchange Act
with the Securities and Exchange Commission. At that time, the directors,
executive officers and ten percent or more shareholders of American River
Holdings equity securities will be required to file such ownership reports with
the Securities and Exchange Commission under Section 16(a) of the Securities
Exchange Act of 1934.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
There have been no transactions, or series of similar transactions,
during 1999, or any currently proposed transaction, or series of similar
transactions, to which American River Holdings and its subsidiaries was or is to
be a party, in which the amount involved exceeded or will exceed $60,000 and in
which any director or executive officer of American River Holdings or its
subsidiaries, any shareholder owning of record or beneficially 5% or more of
American River Holdings common stock, or any member of the immediate family of
any of the foregoing persons, had, or will have, a direct or indirect material
interest, except as follows:
American River Bank leases premises at 9750 Business Park Drive,
Sacramento, California, from Bradshaw Plaza Group, which is owned in part by
Charles D. Fite, a director of American River Holdings. The lease term is 7
years and expires on November 30, 2006, subject to extension for one five year
option term. The premises consist of 4,590 square feet on the ground floor. The
current monthly rent is $7,100. The approximate aggregate rental payments for
the period from January 1, 2000 through the lease term expiring on November 30,
2006 will be $613,000. If the five year option is exercised, the approximate
aggregate rental payments for the option term will be $474,000.
American River Bank leases premises at 10123 Fair Oaks Boulevard, Fair
Oaks, California, from Marjorie Taylor, a director of American River Holdings.
The lease term is 12 years and expires on March 1, 2009. The premises consist of
2,380 square feet on the ground floor and the current monthly rent is $1,653.
The approximate aggregate rental payments for the period from January 1, 2000
through the lease term expiring on March 1, 2009 will be $201,000.
CERTAIN BUSINESS RELATIONSHIPS
There were no business relationships during 1999 of the type requiring
disclosure under Item 404(b) of Regulation S-K.
INDEBTEDNESS OF MANAGEMENT
American River Holdings, through its subsidiaries, has had, and expects
in the future to have banking transactions in the ordinary course of its
business with many of American River Holdings' directors and officers and their
associates, including transactions with corporations of which such persons
178
<PAGE>
are directors, officers or controlling shareholders, on substantially the same
terms (including interest rates and collateral) as those prevailing for
comparable transactions with others. Management believes that in 1999 such
transactions comprising loans did not involve more than the normal risk of
collectibility or present other unfavorable features. Loans to executive
officers of American River Holdings and its subsidiaries are subject to
limitations as to amount and purposes prescribed in part by the Federal Reserve
Act, as amended, and the regulations of the Federal Deposit Insurance
Corporation.
179
<PAGE>
PROPOSAL NO. 6
RATIFICATION OF THE APPOINTMENT OF PERRY-SMITH LLP AS INDEPENDENT
ACCOUNTANTS FOR THE YEAR 2000
The board of directors has selected Perry-Smith LLP as independent
accountants for American River Holdings for the fiscal year ending December 31,
2000 and recommends that the appointment of Perry-Smith LLP be ratified by the
shareholders of American River Holdings. Perry-Smith LLP audited American River
Holdings' financial statements for the fiscal year ending December 31, 1999.
A representative from Perry-Smith LLP will be present at the annual
meeting of shareholders and will be afforded the opportunity to make a statement
if he or she desires to do so and will be available to respond to questions.
VOTE REQUIRED FOR APPROVAL
The ratification of the appointment of Perry-Smith LLP as American
River Holdings' independent accountants requires that holders of a majority of
the shares of common stock of American River Holdings voting in person or by
proxy at the annual meeting, cast votes "FOR" the proposal.
RECOMMENDATION OF MANAGEMENT
The Board of Directors believes that this proposal is in the best
interests of American River Holdings and its shareholders, and unanimously
recommends a vote "FOR" its approval.
180
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2000
AND
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
181
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
2000 1999
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 12,536,000 $ 8,274,000
Federal funds sold 1,150,000 7,125,000
Interest-bearing deposits in banks 5,631,000 5,527,000
Investment securities (market value of $53,355,000 at
March 31, 2000 and $57,372,000 at December 31,
1999) (Note 2) 53,597,000 57,567,000
Loans, less allowance for loan losses of $1,736,000 at
March 31, 2000 and $1,679,000 at December 31,
1999 (Notes 3, 8, 9 and 12) 118,485,000 117,308,000
Bank premises and equipment, net (Note 4) 542,000 463,000
Accounts receivable servicing receivables (Notes 5
and 11) 2,280,000 2,123,000
Accrued interest receivable and other assets 3,108,000 2,975,000
------------- -------------
$ 197,329,000 $ 201,362,000
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 45,311,000 $ 47,994,000
Interest bearing (Note 6) 131,018,000 133,002,000
------------- -------------
Total deposits 176,329,000 180,996,000
Long-term debt (Note 8) 2,115,000 2,125,000
Accrued interest payable and other liabilities 1,485,000 1,628,000
------------- -------------
Total liabilities 179,929,000 184,749,000
------------- -------------
Commitments and contingencies (Note 9)
Shareholders' equity (Note 10):
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 1,793,274
shares 6,722,000 6,722,000
Retained earnings 10,965,000 10,171,000
Accumulated other comprehensive loss (Notes 2
and 13) (287,000) (280,000)
------------- -------------
Total shareholders' equity 17,400,000 16,613,000
------------- -------------
$ 197,329,000 $ 201,362,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
182
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
2000 1999
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 2,804,000 $ 2,649,000
Interest on Federal funds sold 38,000 32,000
Interest on deposits in banks 86,000 72,000
Interest and dividends on investment securities:
Taxable 711,000 453,000
Exempt from Federal income taxes 111,000 63,000
Dividends 16,000 13,000
------------ ------------
Total interest income 3,766,000 3,282,000
------------ ------------
Interest expense:
Interest on deposits (Note 6) 1,279,000 985,000
Interest on short-term borrowings (Note 7) 6,000 1,000
Interest on long-term debt (Note 8) 32,000 33,000
------------ ------------
Total interest expense 1,317,000 1,019,000
------------ ------------
Net interest income 2,449,000 2,263,000
Provision for loan losses (Note 3) 105,000 94,000
------------ ------------
Net interest income after provision for loan losses 2,344,000 2,169,000
------------ ------------
Non-interest income:
Service charges 113,000 114,000
Gains on sale of investment securities (Note 2) 5,000
Other income (Note 11) 337,000 190,000
------------ ------------
Total non-interest income 455,000 304,000
------------ ------------
Other expenses:
Salaries and employee benefits (Note 3) 935,000 842,000
Occupancy (Note 4) 111,000 101,000
Furniture and equipment (Note 4) 59,000 59,000
Other expense (Note 11) 420,000 378,000
------------ ------------
Total other expenses 1,525,000 1,380,000
------------ ------------
Income before income taxes 1,274,000 1,093,000
Income taxes 480,000 420,000
------------ ------------
Net income $ 794,000 $ 673,000
============ ============
Basic earnings per share (Note 10) $ .44 $ .37
============ ============
Diluted earnings per share (Note 10) $ .42 $ .35
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
183
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000 AND THE YEAR ENDED DECEMBER 31, 1999
Accumulated
Common Stock Other
------------------------ Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income
----------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 1,722,406 $ 6,031,000 $ 9,167,000 $ 178,000 $15,376,000
Comprehensive income (Note 13):
Net income 2,901,000 2,901,000 $ 2,901,000
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (458,000) (458,000) (458,000)
-----------
Total comprehensive income $ 2,443,000
===========
Cash dividends (416,000) (416,000)
5% stock dividend 85,879 1,474,000 (1,474,000)
Fractional shares redeemed (7,000) (7,000)
Stock options exercised 74,742 692,000 692,000
Retirement of common stock (89,753) (1,475,000) (1,475,000)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 1,793,274 6,722,000 10,171,000 (280,000) 16,613,000
Comprehensive income (Note 13):
Net income 794,000 794,000 $ 794,000
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (7,000) (7,000) (7,000)
-----------
Total comprehensive income $ 787,000
===========
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2000 1,793,274 $ 6,722,000 $10,965,000 $ (287,000) $17,400,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
184
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 794,000 $ 673,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 105,000 94,000
Deferred loan origination fees (costs), net 49,000 (37,000)
Depreciation and amortization 59,000 59,000
(Accretion) amortization of investment security
discounts premiums, net (93,000) 2,000
Gain on sale of securities (5,000)
Gain on sale of equipment (2,000)
Loss on sale of other real estate 3,000
Increase in accrued interest receivable and
other assets (186,000) (7,000)
Increase (decrease) in accrued interest payable
and other liabilities 72,000 (11,000)
------------ ------------
Net cash provided by operating activities 793,000 776,000
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities 7,000 998,000
Proceeds from called held-to-maturity investment
securities 155,000
Proceeds from matured available-for-sale investment
securities 11,500,000 8,200,000
Proceeds from matured held-to-maturity investment
securities 750,000 1,000,000
Purchases of available-for-sale investment securities (8,289,000) (5,493,000)
Purchases of held-to-maturity investment securities (487,000) (1,989,000)
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 422,000 495,000
Net increase in interest-bearing deposits in banks (104,000)
Net increase in loans (1,290,000) (1,597,000)
Net (increase) decrease in accounts receivable servicing
receivables (157,000) 314,000
Proceeds from the sale of equipment 10,000
Purchases of equipment (131,000) (12,000)
Proceeds from sale of other real estate 104,000
------------ ------------
Net cash used in investing activities 2,386,000 2,020,000
------------ ------------
</TABLE>
(Continued)
185
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Continued)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net decrease in demand, interest-bearing and
savings deposits $ (7,414,000) $ (6,502,000)
Net increase in time deposits 2,747,000 3,351,000
Repayment of Federal Home Loan Bank advance (10,000) (10,000)
Payment of cash dividends (215,000) (185,000)
Cash paid for fractional shares (2,000)
Cash paid to repurchase common stock (440,000)
Exercise of stock options 303,000
------------ ------------
Net cash used by financing activities (4,892,000) (3,485,000)
------------ ------------
Decrease in cash and cash equivalents (1,713,000) (689,000)
Cash and cash equivalents at beginning of period 15,399,000 15,263,000
------------ ------------
Cash and cash equivalents at end of period $ 13,686,000 $ 14,574,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest expense $ 1,265,000 $ 1,036,000
Income taxes $ 260,000 $ 235,000
Net change in unrealized gain on available-for-sale
investment securities $ (10,000) $ (102,000)
</TABLE>
The accompanying notes are an integral part of these financial statements.
186
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in a condensed format and, therefore, do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion
of management, all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation have been
reflected in the financial statements. The results of operations for
the three months ended March 31, 2000 are not necessarily indicative of
the results to be expected for the full year. Certain reclassifications
have been made to prior period amounts to present them on a basis
consistent with classifications for the three months ended March 31,
2000.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at March 31, 2000 and December 31, 1999 consisted of the following:
AVAILABLE-FOR-SALE:
<TABLE>
<CAPTION>
March 31, 2000
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 19,128,000 $ 1,000 $ (219,000) $ 18,910,000
Obligations of states
and political sub-
divisions 8,798,000 32,000 (285,000) 8,545,000
Corporate stock 1,063,000 24,000 (13,000) 1,074,000
Federal Home Loan
Bank stock 555,000 555,000
Commercial paper 4,890,000 4,890,000
------------ --------- ----------- ------------
$ 34,434,000 $ 57,000 $ (517,000) $ 33,974,000
============ ========= =========== ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $460,000 were recorded, net of $173,000 in tax benefits, as
accumulated other comprehensive loss within shareholders' equity.
Proceeds and gross realized gains from the sale of available-for-sale
investment securities for the three months ended March 31, 2000 totaled
$7,000 and $5,000, respectively.
187
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. INVESTMENT SECURITIES (Continued)
AVAILABLE-FOR-SALE: (Continued)
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 17,837,000 $ 4,000 $ (144,000) $ 17,697,000
Obligations of states
and political sub-
divisions 8,462,000 15,000 (348,000) 8,129,000
Corporate stock 764,000 40,000 (17,000) 787,000
Federal Home Loan
Bank stock 547,000 547,000
Commercial paper 9,908,000 9,908,000
------------ --------- ----------- ------------
$ 37,518,000 $ 59,000 $ (509,000) $ 37,068,000
============ ========= =========== ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $450,000 were recorded, net of $170,000 in tax benefits, as
accumulated other comprehensive loss within shareholders' equity. There
were no sales of available-for-sale investment securities for the three
month period ended March 31, 1999.
HELD-TO-MATURITY:
<TABLE>
<CAPTION>
March 31, 2000
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 2,501,000 $ (7,000) $ 2,494,000
Obligations of states
and political sub-
divisions 2,019,000 $ 9,000 (9,000) 2,019,000
Government guaran-
teed mortgage-
backed securities 11,462,000 1,000 (187,000) 11,276,000
Corporate debt
securities 3,613,000 (49,000) 3,564,000
Other debt securities 28,000 28,000
------------ --------- ----------- ------------
$ 19,623,000 $ 10,000 $ (252,000) $ 19,381,000
============ ========= =========== ============
</TABLE>
188
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. INVESTMENT SECURITIES (Continued)
HELD-TO-MATURITY: (Continued)
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 3,003,000 $ 3,000 $ (7,000) $ 2,999,000
Obligations of states
and political sub-
divisions 2,188,000 16,000 (7,000) 2,197,000
Government guaran-
teed mortgage-
backed securities 11,891,000 (155,000) 11,736,000
Corporate debt
securities 3,387,000 (45,000) 3,342,000
Other debt securities 30,000 30,000
------------ --------- ----------- ------------
$ 20,499,000 $ 19,000 $ (214,000) $ 20,304,000
============ ========= =========== ============
</TABLE>
There were no sales or transfers of held-to-maturity investment
securities for the three month periods ended March 31, 2000 and 1999.
189
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at March 31, 2000 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
---------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Within one year $ 11,071,000 $ 11,062,000 $ 3,426,000 $ 3,405,000
After one year
through five years 14,442,000 14,192,000 4,684,000 4,649,000
After five years
through ten years 450,000 423,000 23,000 23,000
After ten years 6,853,000 6,668,000
------------ ------------ ------------ ------------
32,816,000 32,345,000 8,133,000 8,077,000
Investment securities
not due at a single
maturity date:
SBA loan pools 28,000 28,000
Government guaranteed
mortgage-backed
securities 11,462,000 11,276,000
Corporate stock 1,063,000 1,074,000
Federal Home
Loan Bank
stock 555,000 555,000
------------ ------------ ------------ ------------
$ 34,434,000 $ 33,974,000 $ 19,623,000 $ 19,381,000
============ ============ ============ ============
</TABLE>
Investment securities with amortized costs totaling $8,018,000 and
$8,021,000 and market values totaling $7,929,000 and $7,957,000 were
pledged to secure treasury tax and loan accounts, U.S. Bankruptcy Court
trustee accounts and State Treasury funds on deposit at March 31, 2000
and December 31, 1999, respectively.
190
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
3. LOANS
Outstanding loans are summarized as follows:
March 31, December 31,
2000 1999
------------- -------------
Commercial $ 31,840,000 $ 30,265,000
Real estate-mortgage 71,243,000 62,867,000
Real estate-construction 13,087,000 21,307,000
Consumer 4,411,000 4,859,000
------------- -------------
120,581,000 119,298,000
Deferred loan fees, net (360,000) (311,000)
Allowance for loan losses (1,736,000) (1,679,000)
------------- -------------
$ 118,485,000 $ 117,308,000
============= =============
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Three Month Periods Ended
March 31, Year Ended
--------------------------- December 31,
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of period $ 1,679,000 $ 1,362,000 $ 1,362,000
Provision charged to operations 105,000 94,000 407,000
Losses charged to allowance (7,000) (4,000) (100,000)
Amounts transferred to accounts
receivable servicing receivables
valuation reserve (41,000)
Recoveries 10,000
------------ ------------ ------------
Balance, end of period $ 1,736,000 $ 1,452,000 $ 1,679,000
============ ============ ============
</TABLE>
At March 31, 2000 and December 31, 1999, nonaccrual loans totaled
$9,000 and $30,000, respectively. Interest foregone on nonaccrual loans
for the three month periods ended March 31, 2000 and 1999 were not
material. The recorded investment in loans that were considered to be
impaired totaled $9,000 and $30,000 at March 31, 2000 and December 31,
1999, respectively. The related allowance for loan losses for these
loans at March 31, 2000 and December 31, 1999 was $1,000 and $12,000,
respectively. The average recorded investment in impaired loans for the
three month periods ended March 31, 2000 and 1999, was $20,000 and
$107,000, respectively. Interest income on impaired loans recognized
during those same periods using a cash-basis method was not material.
191
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
3. LOANS (Continued)
Salaries and employee benefits totaling $80,000 and $60,000 have been
deferred as loan origination costs for the three month periods ended
March 31, 2000 and 1999, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
March 31, December 31,
2000 1999
----------- -----------
Furniture, fixtures and equipment $ 1,805,000 $ 1,778,000
Leasehold improvements 490,000 432,000
----------- -----------
2,295,000 2,210,000
Less accumulated depreciation
and amortization (1,753,000) (1,747,000)
----------- -----------
$ 542,000 $ 463,000
=========== ===========
Depreciation and amortization included in occupancy and furniture and
equipment expenses totaled $44,000 and $49,000 for the three month
periods ended March 31, 2000 and 1999, respectively.
5. ACCOUNTS RECEIVABLE SERVICING RECEIVABLES
The Bank purchases existing accounts receivable on a discounted basis
from selected borrowers and assumes the related billing and collection
responsibilities. Accounts receivable servicing fees included in other
income totaled $89,000 and $29,000 for the three month periods ended
March 31, 2000 and 1999, respectively (see Note 11).
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
March 31, December 31,
2000 1999
------------ ------------
Savings $ 8,396,000 $ 8,506,000
Money market 47,235,000 53,111,000
NOW accounts 16,563,000 15,308,000
Time, $100,000 or more 37,885,000 35,503,000
Other time 20,939,000 20,574,000
------------ ------------
$131,018,000 $133,002,000
============ ============
192
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
6. INTEREST-BEARING DEPOSITS (Continued)
Interest expense recognized on interest-bearing deposits consisted of
the following:
Three Month Periods Ended
March 31,
------------------------------
2000 1999
------------- -------------
Savings $ 48,000 $ 41,000
Money market 402,000 301,000
NOW accounts 44,000 41,000
Time, $100,000 or more 321,000 328,000
Other time 464,000 274,000
------------- -------------
$ 1,279,000 $ 985,000
============= =============
7. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has a total of $11,000,000 in unsecured short-term borrowing
arrangements with two of its correspondent banks. There were no
borrowings outstanding under these arrangements at March 31, 2000 and
December 31, 1999.
8. LONG-TERM DEBT
The Bank can borrow up to $4,464,000 from the Federal Home Loan Bank
secured by qualifying mortgage loans with unpaid balances of $6,232,000
at March 31, 2000. Long-term debt consisted of an advance from the
Federal Home Loan Bank totaling $2,115,000 and $2,125,000 at March 31,
2000 and December 31, 1999, respectively, bearing a fixed interest rate
of 6.13%, due in monthly installments of approximately $14,000,
including principal and interest, with the final principal payment of
$1,711,000 due December 21, 2007.
9. COMMITMENTS AND CONTINGENCIES
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank grants real estate mortgage, real estate construction,
commercial and consumer loans to clients throughout Sacramento, Placer,
Yolo and El Dorado counties.
Although the Bank has a diversified loan portfolio, a substantial
portion of its portfolio is secured by commercial and residential real
estate. However, personal and business income represent the primary
source of repayment for a majority of these loans.
193
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
CONTINGENCIES
The Company and its subsidiaries are subject to legal proceedings and
claims which arise in the ordinary course of business. In the opinion
of management, the amount of ultimate liability with respect to such
actions will not materially affect the financial position or results of
operations of the Company or its subsidiaries.
10. SHAREHOLDERS' EQUITY
REGULATORY CAPITAL
The Bank is subject to certain regulatory capital requirements
administered by the Federal Deposit Insurance Corporation (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 Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. The
Company is subject to similar capital requirements administered by the
Board of Governors of the Federal Reserve System.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets. Each of these components is defined
in the regulations. The consolidated average assets and risk-weighted
assets of the Company and the average assets and risk-weighted assets
of the Bank are not materially different at March 31, 2000 and December
31, 1999. Management believes that the Company and the Bank meet all
their capital adequacy requirements as of March 31, 2000.
In addition, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth on the following page. There are no
conditions or events since that notification that management believes
have changed the Bank's category.
194
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL (Continued)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------- -------------------------
Amount Ratio Amount Ratio
------------- ------- ------------- -------
LEVERAGE RATIO
<S> <C> <C> <C> <C>
American River Holdings and
Subsidiaries $ 17,536,000 8.8% $ 16,741,000 9.2%
American River Bank $ 17,232,000 8.7% $ 16,414,000 9.0%
Minimum requirement for "Well-
Capitalized" institution $ 9,915,000 5.0% $ 9,095,000 5.0%
Minimum regulatory requirement $ 7,932,000 4.0% $ 7,276,000 4.0%
TIER 1 RISK-BASED CAPITAL RATIO
American River Holdings and
Subsidiaries $ 17,536,000 12.3% $ 16,741,000 11.6%
American River Bank $ 17,232,000 12.1% $ 16,414,000 11.4%
Minimum requirement for "Well-
Capitalized" institution $ 8,571,000 6.0% $ 8,639,000 6.0%
Minimum regulatory requirement $ 5,714,000 4.0% $ 5,759,000 4.0%
TOTAL RISK-BASED CAPITAL RATIO
American River Holdings and
Subsidiaries $ 19,272,000 13.5% $ 18,420,000 12.8%
American River Bank $ 18,968,000 13.3% $ 18,093,000 12.6%
Minimum requirement for "Well-
Capitalized" institution $ 14,286,000 10.0% $ 14,398,000 10.0%
Minimum regulatory requirement $ 11,429,000 8.0% $ 14,518,000 8.0%
</TABLE>
195
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
For the Three Month Shares Per Share
Periods Ended Net Income Outstanding Amount
-------------------------------- ------------ ----------- -----------
MARCH 31, 2000
<S> <C> <C> <C>
Basic earnings per share $ 794,000 1,793,274 $ .44
===========
Effect of dilutive stock options 84,229
------------ -----------
Diluted earnings per share $ 794,000 1,877,503 $ .42
============ =========== ===========
MARCH 31, 1999
Basic earnings per share $ 673,000 1,832,036 $ .37
===========
Effect of dilutive stock options 114,667
------------ -----------
Diluted earnings per share $ 673,000 1,946,703 $ .35
============ =========== ===========
</TABLE>
11. OTHER INCOME AND EXPENSE
Other income consisted of the following:
Three Month Periods Ended
March 31,
-------------------------
2000 1999
------------ -----------
Accounts receivable servicing fees $ 89,000 $ 29,000
Merchant fee income 52,000 42,000
Income from residential lending division 22,000 34,000
State servicing contract fees 39,000 26,000
Financial services income 45,000 19,000
Other 208,000 154,000
------------ -----------
$ 455,000 $ 304,000
============ ===========
196
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
11. OTHER INCOME AND EXPENSE (Continued)
Other expense consisted of the following:
Three Month Periods Ended
March 31,
-------------------------
2000 1999
------------ -----------
Outsourced item processing $ 68,000 $ 54,000
Telephone and postage 53,000 50,000
Directors compensation 46,000 52,000
Professional fees 69,000 35,000
Stationery and supplies 22,000 30,000
Advertising and promotion 36,000 23,000
Other real estate 14,000
Other operating expenses 126,000 120,000
------------ -----------
$ 420,000 $ 378,000
============ ===========
12. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions
with related parties, including Directors and affiliates. These
transactions include borrowings from the Bank 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 2000:
Balance, January 1, 2000 $ 2,246,000
Amounts repaid (9,000)
-----------
Balance, March 31, 2000 $ 2,237,000
===========
The Bank also leases bank premises from members of the Board of
Directors. Rental payments to the Directors totaled $26,000 for each of
the three month periods ended March 31, 2000 and 1999.
13. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all
periods presented. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of other comprehensive
income (loss) that historically has not been recognized in the
calculation of net income. Unrealized gains and losses on the Company's
available-for-sale investment securities are included in other
comprehensive income (loss). Total comprehensive income and the
components of accumulated other comprehensive income (loss) are
presented in the Statement of Changes in Shareholders' Equity.
197
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
13. COMPREHENSIVE INCOME (Continued)
At March 31, 2000 and December 31, 1999, the Company held securities
classified as available-for-sale which had unrealized losses as
follows:
<TABLE>
<CAPTION>
Before Tax After
Tax Benefit Tax
----------- ----------- -----------
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<S> <C> <C> <C>
Other comprehensive loss:
Unrealized holding losses $ (10,000) $ 3,000 $ (7,000)
=========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1999
Other comprehensive income:
Unrealized holding gains $ (740,000) $ 282,000 $ (458,000)
=========== =========== ===========
</TABLE>
14. MERGER AND ACQUISITION ACTIVITY
On March 1, 2000, the Directors of American River Holdings and North
Coast Bank approved a definitive merger agreement between the two
companies. As a result, North Coast Bank, American River Bank, and
first source capital will operate as wholly-owned subsidiaries under
American River Holdings. Under the agreement, each share of North Coast
Bank will be converted into the right to receive .9644 of a share of
the common stock of American River Holdings. The transaction will be
accounted for under the pooling-of-interests method of accounting. It
is expected that this merger will be accomplished in the third quarter
of 2000, subject to shareholder and regulatory approval.
The unaudited pro forma information set forth below assumes that the
merger of the two companies took place on January 1, 1999. This
information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would
have been achieved had the merger been consummated at that time, nor do
they consider any potential cost savings or revenue enhancements.
<TABLE>
<CAPTION>
Three Month Periods Ended
March 31,
-------------------------- Year Ended
December 31,
2000 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net interest income $ 3,152,000 $ 2,797,000 $11,754,000
Net income $ 890,000 $ 710,000 $ 3,128,000
Basic earnings per common share $ .40 $ .31 $ 1.37
Diluted earnings per common share $ .38 $ .29 $ 1.30
</TABLE>
198
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors
American River Holdings and Subsidiaries
We have audited the accompanying consolidated balance sheet of American
River Holdings and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American River Holdings and subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ PERRY-SMITH LLP
----------------------------
Perry-Smith LLP
Certified Public Accountants
Sacramento, California
February 24, 2000,
except for Note 18, as to which
the date is March 1, 2000
199
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 8,274,000 $ 11,538,000
Federal funds sold 7,125,000 3,725,000
Interest-bearing deposits in banks 5,527,000 5,015,000
Investment securities (market value of $57,372,000
in 1999 and $40,920,000 in 1998) (Note 2) 57,567,000 40,800,000
Loans, less allowance for loan losses of $1,679,000
in 1999 and $1,362,000 in 1998 (Notes 3, 8, 10
and 14) 117,308,000 112,329,000
Other real estate 561,000
Bank premises and equipment, net (Note 4) 463,000 450,000
Accounts receivable servicing receivables (Notes 5
and 12) 2,123,000 1,189,000
Accrued interest receivable and other assets (Note 9) 2,975,000 2,217,000
------------- -------------
$ 201,362,000 $ 177,824,000
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 47,994,000 $ 43,255,000
Interest bearing (Note 6) 133,002,000 115,696,000
------------- -------------
Total deposits 180,996,000 158,951,000
Long-term debt (Note 8) 2,125,000 2,164,000
Accrued interest payable and other liabilities 1,628,000 1,333,000
------------- -------------
Total liabilities 184,749,000 162,448,000
------------- -------------
Commitments and contingencies (Note 10)
Shareholders' equity (Note 11):
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 1,793,274
shares in 1999 and 1,722,406 shares in 1998 6,722,000 6,031,000
Retained earnings 10,171,000 9,167,000
Accumulated other comprehensive (loss) income
(Notes 2 and 15) (280,000) 178,000
------------- -------------
Total shareholders' equity 16,613,000 15,376,000
------------- -------------
$ 201,362,000 $ 177,824,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
200
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $10,543,000 $10,472,000 $ 9,352,000
Interest on Federal funds sold 299,000 283,000 300,000
Interest on deposits in banks 290,000 293,000 281,000
Interest and dividends on
investment securities:
Taxable 2,066,000 1,867,000 1,872,000
Exempt from Federal income
taxes 330,000 209,000 150,000
Dividends 51,000 63,000 61,000
----------- ----------- -----------
Total interest income 13,579,000 13,187,000 12,016,000
----------- ----------- -----------
Interest expense:
Interest on deposits (Note 6) 4,143,000 4,318,000 4,201,000
Interest on short-term borrowings
(Note 7) 6,000 8,000 3,000
Interest on long-term debt (Note 8) 131,000 135,000 10,000
----------- ----------- -----------
Total interest expense 4,280,000 4,461,000 4,214,000
----------- ----------- -----------
Net interest income 9,299,000 8,726,000 7,802,000
Provision for loan losses (Note 3) 407,000 360,000 535,000
----------- ----------- -----------
Net interest income after
provision for loan losses 8,892,000 8,366,000 7,267,000
----------- ----------- -----------
Non-interest income:
Service charges 438,000 447,000 424,000
Other income (Notes 5 and 12) 1,082,000 856,000 574,000
----------- ----------- -----------
Total non-interest income 1,520,000 1,303,000 998,000
----------- ----------- -----------
</TABLE>
(Continued)
201
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---------- ---------- ----------
Other expenses:
Salaries and employee benefits
(Notes 3 and 13) $3,496,000 $3,310,000 $2,893,000
Occupancy (Notes 4 and 10) 420,000 409,000 405,000
Furniture and equipment (Note 4) 257,000 289,000 335,000
Other expense (Note 12) 1,570,000 1,592,000 1,353,000
---------- ---------- ----------
Total other expenses 5,743,000 5,600,000 4,986,000
---------- ---------- ----------
Income before income
taxes 4,669,000 4,069,000 3,279,000
Income taxes (Note 9) 1,768,000 1,564,000 1,278,000
---------- ---------- ----------
Net income $2,901,000 $2,505,000 $2,001,000
========== ========== ==========
Basic earnings per share (Note 11) $ 1.59 $ 1.37 $ 1.09
========== ========== ==========
Diluted earnings per share (Note 11) $ 1.50 $ 1.24 $ .99
========== ========== ==========
Cash dividends per share of issued and
outstanding common stock, adjusted
for stock splits and dividends $ .230 $ .195 $ .174
========== ========== ==========
The accompanying notes are an integral
part of these financial statements
202
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated
Common Stock Other
------------------------ Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income
----------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 1,608,079 $ 4,757,000 $ 8,040,000 $ 42,000 $12,839,000
Comprehensive income (Note 15):
Net income 2,001,000 2,001,000 $ 2,001,000
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 77,000 77,000 77,000
------------
Total comprehensive income $ 2,078,000
============
Cash dividends (322,000) (322,000)
5% stock dividend 79,748 1,164,000 (1,164,000)
Stock options exercised (Note 11) 16,950 151,000 151,000
Retirement of common stock (Note 11) (37,314) (531,000) (531,000)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 1,667,463 5,541,000 8,555,000 119,000 14,215,000
Comprehensive income (Note 15):
Net income 2,505,000 2,505,000 $ 2,505,000
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 59,000 59,000 59,000
------------
Total comprehensive income $ 2,564,000
============
Cash dividends (357,000) (357,000)
5% stock dividend 81,751 1,531,000 (1,531,000)
Fractional shares redeemed (5,000) (5,000)
Stock options exercised (Note 11) 63,246 610,000 610,000
Retirement of common stock (Note 11) (90,054) (1,651,000) (1,651,000)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 1,722,406 6,031,000 9,167,000 178,000 15,376,000
----------- ----------- ----------- ----------- -----------
</TABLE>
(Continued)
203
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated
Common Stock Other
------------------------ Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income
----------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 1,722,406 $ 6,031,000 $ 9,167,000 $ 178,000 $ 15,376,000
Comprehensive income (Note 15):
Net income 2,901,000 2,901,000 $ 2,901,000
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (Note 2) (458,000) (458,000) (458,000)
-----------
Total comprehensive income $ 2,443,000
===========
Cash dividends (416,000) (416,000)
5% stock dividend 85,879 1,474,000 (1,474,000)
Fractional shares redeemed (7,000) (7,000)
Stock options exercised (Note 11) 74,742 692,000 692,000
Retirement of common stock (Note 11) (89,753) (1,475,000) (1,475,000)
----------- ----------- ----------- ----------- ------------
Balance, December 31, 1999 1,793,274 $ 6,722,000 $10,171,000 $ (280,000) $ 16,613,000
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
204
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 2,901,000 $ 2,505,000 $ 2,001,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 407,000 360,000 535,000
Deferred loan origination fees
and costs, net (59,000) (29,000) (8,000)
Depreciation and amortization 206,000 280,000 324,000
Accretion of investment
security discounts, net (54,000) (60,000) (260,000)
Loss on sale of other real estate 3,000 9,000
Provision for losses on other
real estate 7,000 104,000
Increase in accrued interest
receivable and other assets (351,000) (252,000) (93,000)
Increase in accrued interest
payable and other liabilities 265,000 686,000 132,000
Deferred taxes (166,000) (169,000) 8,000
----------- ----------- -----------
Net cash provided by
operating activities 3,159,000 3,425,000 2,648,000
----------- ----------- -----------
</TABLE>
(Continued)
205
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from the sale of available-
for-sale investment securities $ 1,996,000
Proceeds from called available-for-
sale investment securities $ 250,000
Proceeds from matured available-
for-sale investment securities 23,370,000 30,507,000 $ 32,609,000
Proceeds from matured held-to-
maturity investment securities 3,330,000 1,750,000 1,260,000
Purchases of available-for-sale
investment securities (38,331,000) (29,295,000) (41,492,000)
Purchases of held-to-maturity
investment securities (10,865,000) (6,553,000) (6,140,000)
Proceeds from principal repayments
for held-to-maturity mortgage-
related securities 3,047,000 4,906,000 1,476,000
Net increase in interest-bearing
deposits in banks (512,000) (387,000) (101,000)
Net increase in loans (5,203,000) (12,401,000) (11,836,000)
Net increase in accounts receivable
servicing receivables (934,000) (906,000) (125,000)
Purchases of equipment (201,000) (114,000) (68,000)
Proceeds from the sale of other
real estate 450,000 291,000 363,000
Purchase of other real estate (23,000) (233,000)
Capitalized other real estate costs (4,000) (28,000)
------------ ------------ ------------
Net cash used in
investing activities (23,853,000) (11,979,000) (24,315,000)
------------ ------------ ------------
</TABLE>
(Continued)
206
<PAGE>
<TABLE>
<CAPTION>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest-
bearing and savings deposits $ 11,472,000 $ 8,334,000 $ 20,878,000
Net increase in time deposits 10,573,000 4,051,000 3,623,000
Proceeds from Federal Home Loan
Bank advance 2,200,000
Repayment of Federal Home Loan
Bank advance (39,000) (36,000)
Net decrease in short-term
borrowings (650,000)
Exercise of stock options 692,000 610,000 151,000
Cash paid to repurchase common
stock (1,475,000) (1,651,000) (531,000)
Payment of cash dividends (386,000) (338,000) (306,000)
Cash paid for fractional shares (7,000) (5,000)
------------ ------------ ------------
Net cash provided by
financing activities 20,830,000 10,965,000 25,365,000
------------ ------------ ------------
Increase in cash and
cash equivalents 136,000 2,411,000 3,698,000
Cash and cash equivalents at
beginning of year 15,263,000 12,852,000 9,154,000
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 15,399,000 $ 15,263,000 $ 12,852,000
============ ============ ============
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest expense $ 4,328,000 $ 4,451,000 $ 4,147,000
Income taxes $ 1,720,000 $ 1,325,000 $ 1,153,000
Non-cash investing activities:
Real estate acquired through
foreclosure $ 128,000 $ 395,000
Net change in unrealized gain
on available-for-sale
investment securities $ (740,000) $ 96,000 $ 127,000
Non-cash financing activities:
Dividends declared, adjusted for
stock splits and dividends, $.12
per share in 1999, $.10 per share
in 1998 and $.09 per share in 1997 $ 215,000 $ 185,000 $ 166,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
207
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
American River Holdings (the "Company") was incorporated on January 24,
1995 and subsequently obtained approval of the Board of Governors of
the Federal Reserve System to be a bank holding company. On June 16,
1995, American River Bank (the "Bank") consummated a merger with
American River Holdings that was effected through the exchange of one
share of the Company's stock for each share of the Bank's stock. The
Bank's primary source of revenue is generated from providing a
wide-range of products to small and middle-market businesses and
individuals throughout Sacramento, Placer, Yolo and El Dorado counties.
On June 29, 1999, first source capital was incorporated as a
wholly-owned subsidiary of American River Holdings, providing brokerage
leasing services to businesses.
The accounting and reporting policies of the Company and its
subsidiaries conform with generally accepted accounting principles and
prevailing practices within the banking industry.
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1999.
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.
INVESTMENT SECURITIES
Investments are classified into the following categories:
o Available-for-sale securities, reported at fair value, with
unrealized gains and losses excluded from earnings and reported,
net of taxes, as accumulated other comprehensive income (loss)
within shareholders' equity.
o Held-to-maturity securities, which management has the positive
intent and ability to hold, reported at amortized cost, adjusted
for the accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments
at the time of purchase and may only change the classification in
certain limited circumstances. All transfers between categories are
accounted for at fair value.
Gains or losses on the sale of investment securities are computed on
the specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums. In
addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
208
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS
Loans are stated at principal balances outstanding. Interest is accrued
daily based upon outstanding loan balances. However, when, in the
opinion of management, loans are considered to be impaired and the
future collectibility of interest and principal is in serious doubt,
loans are placed on nonaccrual status and the accrual of interest
income is suspended. Any interest accrued but unpaid is charged against
income. Payments received are applied to reduce principal to the extent
necessary to ensure collection. Subsequent payments on these loans, or
payments received on nonaccrual loans for which the ultimate
collectibility of principal is not in doubt, are applied first to
earned but unpaid interest and then to principal.
An impaired loan is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical matter, at the loan's observable market price or the
fair value of collateral if the loan is collateral dependent. A loan is
considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect all amounts due
(including both principal and interest) in accordance with the
contractual terms of the loan agreement.
Loan origination fees, commitment fees, direct loan origination costs
and purchase premiums and discounts on loans are deferred and
recognized as an adjustment of yield, to be amortized to interest
income over the contractual term of the loan. The unamortized balance
of deferred fees and costs is reported as a component of net loans.
LOAN SALES AND SERVICING
Included in the portfolio are loans which are 75% to 90% guaranteed by
the Small Business Administration (SBA). The guaranteed portion of
these loans may be sold to a third party, with the Bank retaining the
unguaranteed portion. The Bank generally receives a premium in excess
of the adjusted carrying value of the loan at the time of sale. The
Bank may be required to refund a portion of the sales premium if the
borrower defaults or the loan prepays within ninety days of the
settlement date. However, there were no sales of loans subject to these
recourse provisions at December 31, 1999, 1998 and 1997.
The Bank serviced SBA loans for others totaling $4,106,000 and
$4,916,000 as of December 31, 1999 and 1998, respectively. The Bank
also serviced loans that are participated with other financial
institutions totaling $5,330,000 and $8,133,000 as of December 31, 1999
and 1998, respectively. In addition, the Bank serviced loans originated
by others totaling $21,517,000 and $15,087,000 as of December 31, 1999
and 1998, 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.
209
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained to provide for probable
losses related to impaired loans and loans identified by management as
doubtful, substandard and special mention, as well as losses that can
be expected to occur in the normal course of business related to
currently performing loans. The determination of the allowance is based
on estimates made by management, to include consideration of the
character of the loan portfolio, specifically identified problem loans,
inherent risk of loss in the portfolio taken as a whole and economic
conditions in the Bank's service area.
Commercial and real estate loans determined to be impaired or
classified are individually evaluated by management for specific risk
of loss. In addition, reserve factors are assigned to currently
performing loans based on management's assessment of the following for
each identified loan type: (1) inherent credit risk, (2) historical
losses and, (3) where the Company has not experienced losses, the loss
experience of peer banks. Management also computes specific and
expected loss reserves for loan commitments. Finally, a residual
component is maintained to cover the margin of imprecision inherent in
the assumptions used to estimate losses. These estimates are
particularly susceptible to changes in the economic environment and
market conditions.
The Bank's Loan Committee reviews the adequacy of the allowance for
loan losses at least quarterly, to include consideration of the
relative risks in the portfolio and current economic conditions. The
allowance is adjusted based on that review if, in management's
judgement, changes are warranted.
The allowance is established through a provision for loan losses which
is charged to expense. Additions to the allowance are expected to
maintain the adequacy of the total allowance after credit losses and
loan growth. The allowance for loan losses at December 31, 1999 and
1998, respectively, reflect management's estimate of losses in the
portfolio.
OTHER REAL ESTATE
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the Bank's recorded investment in the loan balance and accrued
interest income over the estimated fair market value of the property is
charged against the allowance for loan losses. A valuation allowance
for losses on other real estate is maintained to provide for temporary
declines in value. The allowance is established through a provision for
losses on other real estate which is included in other expenses.
Subsequent gains or losses on sales or writedowns resulting from
permanent impairments are recorded in other income or expense as
incurred.
BANK PREMISES AND EQUIPMENT
Bank 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 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.
210
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in income for the period. The cost
of maintenance and repairs is charged to expense as incurred.
INCOME TAXES
The Company files its income taxes on a consolidated basis with its
subsidiaries. The allocation of income tax expense (benefit) represents
each entity's proportionate share of the consolidated provision for
income taxes.
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement
and tax basis of existing assets and liabilities. On the balance sheet,
net deferred tax assets are included in accrued interest receivable and
other assets.
211
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH EQUIVALENTS
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one day periods.
EARNINGS PER SHARE
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method has been applied to
determine the dilutive effect of stock options in computing diluted
EPS. Earnings per share is retroactively adjusted for stock splits and
stock dividends for all periods presented.
STOCK-BASED COMPENSATION
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of grant over the exercise price.
However, if the fair value of stock-based compensation computed under a
fair value based method, as prescribed in Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
is material to the financial statements, pro forma net income and
earnings per share are disclosed as if the fair value method had been
applied.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activity, which was
subsequently amended by SFAS 137 to delay the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Management
does not believe that the adoption of SFAS 133 will have a significant
impact on its financial position and results of operations when
implemented.
212
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at December 31, 1999 and 1998 consisted of the following:
AVAILABLE-FOR-SALE:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 17,837,000 $ 4,000 $ (144,000) $ 17,697,000
Obligations of states
and political sub-
divisions 8,462,000 15,000 (348,000) 8,129,000
Corporate stock 764,000 40,000 (17,000) 787,000
Federal Home Loan
Bank stock 547,000 547,000
Commercial paper 9,908,000 9,908,000
------------ --------- ----------- ------------
$ 37,518,000 $ 59,000 $ (509,000) $ 37,068,000
============ ========= =========== ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $450,000 were recorded, net of $170,000 in tax benefits, as
accumulated other comprehensive loss within shareholders' equity.
Proceeds from the sale of available-for-sale investment securities for
the year ended December 31, 1999 totaled $1,996,000. No gains or losses
were recognized.
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 502,000 $ 1,000 $ 503,000
U.S. Government
agencies 11,658,000 139,000 11,797,000
Obligations of states
and political sub-
divisions 2,944,000 92,000 $ (4,000) 3,032,000
Corporate stock 765,000 64,000 (2,000) 827,000
Federal Home Loan
Bank stock 512,000 512,000
Commercial paper 7,952,000 7,952,000
------------ --------- ----------- ------------
$ 24,333,000 $ 296,000 $ (6,000) $ 24,623,000
============ ========= =========== ============
</TABLE>
213
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
AVAILABLE-FOR-SALE: (Continued)
Net unrealized gains on available-for-sale investment securities
totaling $290,000 were recorded, net of $112,000 in tax liabilities, as
accumulated other comprehensive income within shareholders' equity.
There were no sales or transfers of available-for-sale investment
securities for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
HELD-TO-MATURITY:
1999
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 3,003,000 $ 3,000 $ (7,000) $ 2,999,000
Obligations of states
and political sub-
divisions 2,188,000 16,000 (7,000) 2,197,000
Government guaran-
teed mortgage-
backed securities 11,891,000 (155,000) 11,736,000
Corporate debt
securities 3,387,000 (45,000) 3,342,000
Other debt securities 30,000 30,000
------------ --------- ----------- ------------
$ 20,499,000 $ 19,000 $ (214,000) $ 20,304,000
============ ========= =========== ============
1998
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 504,000 $ 5,000 $ 509,000
U.S. Government
agencies 4,011,000 67,000 4,078,000
Obligations of states
and political sub-
divisions 2,209,000 78,000 $ (1,000) 2,286,000
Government guaran-
teed mortgage-
backed securities 6,534,000 8,000 (45,000) 6,497,000
Corporate debt
securities 2,868,000 8,000 2,876,000
Other debt securities 51,000 51,000
------------ --------- ----------- ------------
$ 16,177,000 $ 166,000 $ (46,000) $ 16,297,000
============ ========= =========== ============
</TABLE>
214
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
HELD-TO-MATURITY: (Continued)
There were no sales or transfers of held-to-maturity investment
securities for the years ended December 31, 1999, 1998 and 1997.
The amortized cost and estimated market value of investment securities
at December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
---------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Within one year $ 16,389,000 $ 16,387,000 $ 2,375,000 $ 2,371,000
After one year
through five years 12,512,000 12,348,000 6,172,000 6,136,000
After five years
through ten years 450,000 424,000 31,000 31,000
After ten years 6,856,000 6,575,000
------------ ------------ ------------ ------------
36,207,000 35,734,000 8,578,000 8,538,000
Investment securities
not due at a single
maturity date:
SBA loan pools 30,000 30,000
Government guaranteed
mortgage-backed
securities 11,891,000 11,736,000
Corporate stock 764,000 787,000
Federal Home Loan
Bank stock 547,000 547,000
------------ ------------ ------------ ------------
$ 37,518,000 $ 37,068,000 $ 20,499,000 $ 20,304,000
============ ============ ============ ============
</TABLE>
Investment securities with amortized costs totaling $8,021,000 and
$1,500,000 and market values totaling $7,957,000 and $1,524,000 were
pledged to secure treasury tax and loan accounts, U.S. Bankruptcy Court
trustee accounts and State Treasury funds on deposit at December 31,
1999 and 1998, respectively.
215
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. LOANS
Outstanding loans are summarized as follows:
December 31,
--------------------------------
1999 1998
--------------- ---------------
Commercial $ 30,265,000 $ 27,615,000
Real estate-mortgage 62,867,000 61,034,000
Real estate-construction 21,307,000 20,768,000
Consumer 4,859,000 4,644,000
--------------- ---------------
119,298,000 114,061,000
Deferred loan fees, net (311,000) (370,000)
Allowance for loan losses (1,679,000) (1,362,000)
--------------- ---------------
$ 117,308,000 $ 112,329,000
=============== ===============
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,362,000 $ 1,174,000 $ 1,169,000
Provision charged to operations 407,000 360,000 535,000
Losses charged to allowance (100,000) (324,000) (550,000)
Recoveries 10,000 152,000 20,000
-------------- -------------- --------------
Balance, end of year $ 1,679,000 $ 1,362,000 $ 1,174,000
============== ============== ==============
</TABLE>
At December 31, 1999 and 1998, nonaccrual loans totaled $30,000 and
$110,000, respectively. Interest foregone on nonaccrual loans for the
year ended December 31, 1999 was not material. Interest foregone on
nonaccrual loans totaled $77,000 and $64,000 for the years ended
December 31, 1998 and 1997, respectively.
The recorded investment in loans that were considered to be impaired
totaled $30,000 and $110,000 at December 31, 1999 and 1998,
respectively. The related allowance for loan losses for these loans at
December 31, 1999 and 1998 was $12,000 and $47,000, respectively. The
average recorded investment in impaired loans for the years ended
December 31, 1999, 1998 and 1997 was $279,000, $254,000 and $548,000,
respectively. The Bank recognized $45,000, $8,000 and $7,000 in
interest income on impaired loans during those same periods using a
cash-basis method.
Salaries and employee benefits totaling $312,000, $336,000 and $300,000
have been deferred as loan origination costs for the years ended
December 31, 1999, 1998 and 1997, respectively.
216
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
December 31,
----------------------------
1999 1998
------------- -------------
Furniture, fixtures and equipment $ 1,778,000 $ 1,832,000
Leasehold improvements 432,000 538,000
------------- -------------
2,210,000 2,370,000
Less accumulated depreciation
and amortization (1,747,000) (1,920,000)
------------- -------------
$ 463,000 $ 450,000
============= =============
Depreciation and amortization included in occupancy and furniture and
equipment expenses totaled $188,000, $253,000 and $307,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
5. ACCOUNTS RECEIVABLE SERVICING RECEIVABLES
The Bank purchases existing accounts receivable on a discounted basis
from selected borrowers and assumes the related billing and collection
responsibilities. Accounts receivable servicing fees included in other
income totaled $272,000, $102,000 and $13,000 for the years ended
December 31, 1999, 1998 and 1997, respectively (see Note 12).
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
----------------------------
1999 1998
------------- -------------
Savings $ 8,506,000 $ 7,541,000
Money market 53,111,000 47,588,000
NOW accounts 15,308,000 15,063,000
Time, $100,000 or more 35,503,000 27,305,000
Other time 20,574,000 18,199,000
------------- -------------
$ 133,002,000 $ 115,696,000
============= =============
217
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. INTEREST-BEARING DEPOSITS (Continued)
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
------------
2000 $ 45,556,000
2001 3,429,000
2002 732,000
2003 2,211,000
2004 4,114,000
Thereafter 35,000
--------------
$ 56,077,000
==============
Interest expense recognized on interest-bearing deposits consisted of
the following:
Year Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
Savings $ 186,000 $ 182,000 $ 164,000
Money market 1,250,000 1,412,000 1,550,000
NOW accounts 170,000 192,000 177,000
Time, $100,000 or more 1,392,000 1,314,000 1,103,000
Other time 1,145,000 1,218,000 1,207,000
------------- ------------- -------------
$ 4,143,000 $ 4,318,000 $ 4,201,000
============= ============= =============
7. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has a total of $11,000,000 in unsecured short-term borrowing
arrangements with two of its correspondent banks. There were no
borrowings outstanding under these arrangements at December 31, 1999
and 1998.
8. LONG-TERM DEBT
The Bank can borrow up to $4,624,000 from the Federal Home Loan Bank
secured by qualifying mortgage loans with unpaid balances of $6,471,000
at December 31, 1999. Long-term debt consisted of an advance from the
Federal Home Loan Bank totaling $2,125,000 and $2,164,000 at December
31, 1999 and 1998, respectively, bearing a fixed interest rate of
6.13%, due in monthly installments of approximately $14,000, including
principal and interest, with the final principal payment of $1,711,000
due December 21, 2007.
218
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. LONG-TERM DEBT (Continued)
Future minimum principal payments on long-term debt are as follows:
Year Ending
December 31,
------------
2000 $ 41,000
2001 44,000
2002 47,000
2003 50,000
2004 54,000
Thereafter 1,889,000
-------------
$ 2,125,000
=============
9. INCOME TAXES
The provision for income taxes for the years ended December 31, 1999,
1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
Federal State Total
------------- ------------- -------------
1999
----
<S> <C> <C> <C>
Current $ 1,419,000 $ 515,000 $ 1,934,000
Deferred (122,000) (44,000) (166,000)
------------- ------------- -------------
Income tax expense $ 1,297,000 $ 471,000 $ 1,768,000
============= ============= =============
1998
----
Current $ 1,267,000 $ 466,000 $ 1,733,000
Deferred (125,000) (44,000) (169,000)
------------- ------------- -------------
Income tax expense $ 1,142,000 $ 422,000 $ 1,564,000
============= ============= =============
1997
----
Current $ 934,000 $ 336,000 $ 1,270,000
Deferred (9,000) 17,000 8,000
------------- ------------- -------------
Income tax expense $ 925,000 $ 353,000 $ 1,278,000
============= ============= =============
</TABLE>
219
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 560,000 $ 409,000
Future benefit of State tax deduction 157,000 133,000
Bank premises and equipment 56,000 42,000
Unrealized loss on available-for-sale
investment securities 170,000
Other real estate 46,000
Deferred compensation 41,000 5,000
Other 8,000 8,000
------------ ------------
Total deferred tax assets 992,000 643,000
------------ ------------
Deferred tax liabilities:
Discount on purchased loans (57,000) (73,000)
Future liability of State deferred tax assets (46,000) (30,000)
Unrealized gain on available-for-sale
investment securities (112,000)
Federal Home Loan Bank stock dividends (37,000) (24,000)
------------ ------------
Total deferred tax liabilities (140,000) (239,000)
------------ ------------
Net deferred tax assets $ 852,000 $ 404,000
============ ============
</TABLE>
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rate to operating income
before income taxes. The significant items comprising these differences
for the years ended December 31, 1999, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
Amount Rate % Amount Rate % Amount Rate %
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
expense, at
statutory rate $ 1,588,000 34.0 $ 1,383,000 34.0 $ 1,115,000 34.0
State franchise tax,
net of Federal tax
effect 290,000 6.2 230,000 5.6 227,000 6.9
Tax benefit of interest
on obligations of
states and political
subdivisions (102,000) (2.2) (63,000) (1.6) (45,000) (1.4)
Tax benefit of corpor-
ate dividends (12,000) (.3) (15,000) (.4) (15,000) (.4)
Other 4,000 .2 29,000 .8 (4,000) (.1)
----------- ------ ----------- ------ ----------- ------
Total income
tax expense $ 1,768,000 37.9 $ 1,564,000 38.4 $ 1,278,000 39.0
=========== ====== =========== ====== =========== ======
</TABLE>
220
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Bank leases its branch facilities and administrative offices under
noncancelable operating leases which expire on various dates through
the year 2009 and have five year renewal options. Certain branch
facilities are leased from members of the Board of Directors.
Future minimum lease payments are as follows:
Year Ending
December 31,
------------
2000 $ 235,000
2001 189,000
2002 195,000
2003 198,000
2004 206,000
Thereafter 454,000
-------------
$ 1,477,000
=============
Rental expense included in occupancy expense totaled $334,000 for the
year ended December 31, 1999 and $309,000 for each of the years ended
December 31, 1998 and 1997.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank 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 own 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 in the balance sheet.
The Bank'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 Bank
uses the same credit policies in making commitments and letters of
credit as it does for loans included on the balance sheet.
221
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES (Continued)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
The following financial instruments represent off-balance-sheet credit
risk:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Commitments to extend credit:
Revolving lines of credit secured by
1-4 family residences $ 1,107,000 $ 1,212,000
Commercial real estate, construction
and land development commitments
secured by real estate 13,352,000 13,553,000
Other commercial commitments not
secured by real estate 28,081,000 21,461,000
------------- -------------
$ 42,540,000 $ 36,226,000
============= =============
Letters of credit $ 2,311,000 $ 695,000
============= =============
</TABLE>
Real estate commitments are generally secured by property with a
loan-to-value ratio of 70% to 80%. In addition, the majority of the
Bank'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. The Bank evaluates each client's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank 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 real estate and income-producing commercial properties.
Letters of credit are conditional commitments issued by the Bank 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.
222
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES (Continued)
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank grants real estate mortgage, real estate construction,
commercial and consumer loans to clients throughout Sacramento, Placer,
Yolo and El Dorado counties.
Although the Bank has a diversified loan portfolio, a substantial
portion of its portfolio is secured by commercial and residential real
estate. However, personal and business income represent the primary
source of repayment for a majority of these loans.
CORRESPONDENT BANKING AGREEMENTS
The Bank maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements.
Uninsured deposits totaled $9,854,000 at December 31, 1999.
FEDERAL RESERVE REQUIREMENTS
Banks are required to maintain reserves with the Federal Reserve Bank
equal to a percentage of their reservable deposits. Reserve balances
held with the Federal Reserve Bank totaled $540,000 and $470,000 at
December 31, 1999 and 1998, respectively.
CONTINGENCIES
The Company and its subsidiaries are subject to legal proceedings and
claims which arise in the ordinary course of business. In the opinion
of management, the amount of ultimate liability with respect to such
actions will not materially affect the financial position or results of
operations of the Company or its subsidiaries.
11. SHAREHOLDERS' EQUITY
DIVIDENDS
Upon declaration by the Board of Directors of the Company, all
shareholders of record will be entitled to receive dividends. The
Company's primary source of income with which to pay dividends is
dividends from the Bank. The California Financial Code restricts the
total dividend payment of any bank in any calendar year to the lesser
of (1) the bank's retained earnings or (2) the bank's net income for
its last three fiscal years, less distributions made to shareholders
during the same three-year period. At December 31, 1999, the Bank had
$3,862,000 in retained earnings available for dividend payments to the
Company.
STOCK SPLIT
On April 21, 1999, the Company's Board of Directors approved a 3-for-2
stock split to shareholders of record at the close of business on May
14, 1999, effective May 28, 1999. All per share and shares outstanding
data in the consolidated financial statements and notes to consolidated
financial statements have been retroactively restated to reflect the
stock split.
223
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
-------------------------------- ------------- ------------- ------------
DECEMBER 31, 1999
<S> <C> <C> <C>
Basic earnings per share $ 2,901,000 1,820,013 $ 1.59
============
Effect of dilutive stock options 112,800
------------- -------------
Diluted earnings per share $ 2,901,000 1,932,813 $ 1.50
============= ============= ============
DECEMBER 31, 1998
Basic earnings per share $ 2,505,000 1,829,351 $ 1.37
============
Effect of dilutive stock options 194,836
------------- -------------
Diluted earnings per share $ 2,505,000 2,024,187 $ 1.24
============= ============= ============
DECEMBER 31, 1997
Basic earnings per share $ 2,001,000 1,844,151 $ 1.09
============
Effect of dilutive stock options 172,324
------------- -------------
Diluted earnings per share $ 2,001,000 2,016,475 $ .99
============= ============= ============
</TABLE>
STOCK OPTION PLAN
In 1995, the Board of Directors adopted a stock option plan for which
336,182 shares of common stock are reserved for issuance to employees
and directors under incentive and nonstatutory agreements. The plan
requires that the option price may not be less than the fair market
value at the date the option is granted. The purchase price of
exercised options is payable in full in cash or shares of the Company's
common stock owned by the optionee. The options expire on dates
determined by the Board of Directors, but not later than ten years from
the date of grant. Options vest ratably over a five year period.
224
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTION PLAN (Continued)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation expense has been recognized
for its stock option plans. Had compensation cost been determined based
on the fair value at grant date for awards in 1995 through 1998
consistent with the provisions of SFAS No.123, the Company's net
earnings and earnings per share would have been reduced to the pro
forma amounts indicated below. Compensation expense for awards in 1999
is not included because these options do not begin to vest until 2000.
Pro forma compensation expense is recognized in the years in which the
options have become vested.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings - as reported $ 2,901,000 $ 2,505,000 $ 2,001,000
Net earnings - pro forma $ 2,795,000 $ 2,449,000 $ 1,960,000
Basic earnings per share - as reported $ 1.59 $ 1.37 $ 1.09
Basic earnings per share - pro forma $ 1.54 $ 1.34 $ 1.06
Diluted earnings per share - as reported $ 1.50 $ 1.24 $ .99
Diluted earnings per share - pro forma $ 1.45 $ 1.21 $ .97
The fair value of each option is estimated on the date of grant using
an option-pricing model with the following assumptions:
Year Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Dividend yield 1.53% 1.13% 1.51%
Expected volatility 66.32% 50.87% 55.49%
Risk-free interest rate 6.59% 5.20% 5.78%
Expected option life 10 years 10 years 10 years
</TABLE>
225
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTION PLAN (Continued)
A summary of the activity within the plan follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 340,190 $ 9.01 319,688 $ 6.88 291,000 $ 6.65
Options granted 10,000 $ 15.38 66,750 $ 17.65 30,000 $ 11.75
Options from stock
dividend 13,699 $ 9.40 16,998 $ 8.59 15,638 $ 6.87
Options exercised (74,742) $ 5.20 (63,246) $ 5.56 (16,950) $ 6.07
----------- ----------- -----------
Options outstanding,
end of year 289,147 $ 9.59 340,190 $ 9.01 319,688 $ 6.88
=========== =========== ===========
Options exercisable,
end of year 156,745 $ 7.31 153,566 $ 6.23 195,288 $ 3.74
=========== =========== ===========
Weighted average
fair value of options
granted during the
year $ 6.04 $ 6.71 $ 4.46
</TABLE>
A summary of options outstanding at December 31, 1999 follows:
<TABLE>
<CAPTION>
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 1999 Life 1999
------------------------ -------------- ----------- -----------
<S> <C> <C> <C> <C>
$ 6.05 170,632 5.6 years 131,101
$ 7.92 7,184 6.0 years 3,710
$ 10.65 28,130 7.4 years 7,292
$ 16.93 65,326 8.7 years 13,067
$ 15.71 7,875 9.0 years 1,575
$ 15.38 10,000 9.9 years
-------------- -----------
289,147 156,745
============== ===========
</TABLE>
226
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
COMMON STOCK REPURCHASE PROGRAM
During 1997, the Board of Directors authorized the annual repurchase of
up to five percent of the Company's common stock in conjunction with
recurring annual distributions of a five percent common stock dividend.
Repurchases are generally made in the open market at market prices.
REGULATORY CAPITAL
The Bank is subject to certain regulatory capital requirements
administered by the Federal Deposit Insurance Corporation (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 Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. The
Company is subject to similar capital requirements administered by the
Board of Governors of the Federal Reserve System.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets. Each of these components is defined
in the regulations. The consolidated average assets and risk-weighted
assets of the Company and the average assets and risk-weighted assets
of the Bank are not materially different at December 31, 1999, 1998 and
1997. Management believes that the Company and the Bank meet all their
capital adequacy requirements as of December 31, 1999.
In addition, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth below. There are no conditions or events
since that notification that management believes have changed the
Bank's category.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ----- -------------- ----- ------------- -----
LEVERAGE RATIO
<S> <C> <C> <C> <C> <C> <C>
American River Holdings and
Subsidiaries $ 16,741,000 9.2% $ 15,005,000 8.9% $ 13,862,000 9.2%
American River Bank $ 16,414,000 9.0% $ 14,740,000 8.8% $ 13,656,000 9.1%
Minimum requirement for "Well-
Capitalized" institution $ 9,095,000 5.0% $ 8,376,000 5.0% $ 7,503,000 5.0%
Minimum regulatory requirement $ 7,276,000 4.0% $ 6,700,000 4.0% $ 6,002,000 4.0%
</TABLE>
227
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ----- -------------- ----- ------------- -----
TIER 1 RISK-BASED CAPITAL RATIO
<S> <C> <C> <C> <C> <C> <C>
American River Holdings and
Subsidiaries $ 16,741,000 11.6% $ 15,005,000 11.3% $ 13,862,000 11.3%
American River Bank $ 16,414,000 11.4% $ 14,740,000 11.1% $ 13,656,000 11.1%
Minimum requirement for "Well-
Capitalized" institution $ 8,639,000 6.0% $ 7,927,000 6.0% $ 7,382,000 6.0%
Minimum regulatory requirement $ 5,759,000 4.0% $ 5,283,000 4.0% $ 4,921,000 4.0%
TOTAL RISK-BASED CAPITAL RATIO
American River Holdings and
Subsidiaries $ 18,420,000 12.8% $ 16,366,000 12.4% $ 15,036,000 12.2%
American River Bank $ 18,093,000 12.6% $ 16,102,000 12.2% $ 14,830,000 12.1%
Minimum requirement for "Well-
Capitalized" institution $ 14,398,000 10.0% $ 13,212,000 10.0% $ 12,303,000 10.0%
Minimum regulatory requirement $ 11,518,000 8.0% $ 10,569,000 8.0% $ 9,842,000 8.0%
</TABLE>
12. OTHER INCOME AND EXPENSE
Other income consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Accounts receivable servicing fees $ 272,000 $ 102,000 $ 13,000
Merchant fee income 191,000 156,000 149,000
Income from residential lending
division 133,000 254,000 168,000
State servicing contract fees 123,000 65,000
Financial services income 111,000 44,000 24,000
Other 253,000 235,000 220,000
------------ ------------ ------------
$ 1,083,000 $ 856,000 $ 574,000
============ ============ ============
</TABLE>
228
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. OTHER INCOME AND EXPENSE (Continued)
Other expense consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Outsourced item processing $ 222,000 $ 213,000 $ 185,000
Telephone and postage 198,000 194,000 184,000
Directors' compensation 194,000 201,000 122,000
Professional fees 165,000 158,000 141,000
Stationery and supplies 121,000 118,000 122,000
Advertising and promotion 105,000 91,000 73,000
Other real estate 77,000 153,000 56,000
Other operating expenses 488,000 464,000 470,000
------------ ------------ ------------
$ 1,570,000 $ 1,592,000 $ 1,353,000
============ ============ ============
</TABLE>
13. EMPLOYEE BENEFIT PLANS
AMERICAN RIVER BANK 401(K) PLAN
The American River Bank 401(k) Plan commenced January 1, 1993 and is
available to all employees. Under the plan, the Bank will match 50% of
each participants' contribution up to a maximum of 6% of their annual
compensation. Employer contributions vest at a rate of 20% per year
over a five year period and totaled $72,000, $64,000 and $56,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company is the administrator of an Employee Stock Purchase Plan
which allows employees to purchase the Company's stock at fair market
value as of the date of purchase. The Company bears all costs of
administering the Plan, including broker's fees, commissions, postage
and other costs actually incurred.
DEFERRED COMPENSATION PLAN
Effective May 1, 1998, the Bank established the American River Bank
Deferred Compensation Plan for certain members of the management group
and the Deferred Fee Agreement for Directors for the purpose of
providing the opportunity to defer compensation to participants.
Participants, 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 Bank bears all administration costs, and funds
the interest earned on participant deferrals at a rate based on U.S.
Government Treasury rates. Deferred compensation, including interest
earned, totaled $91,000 and $12,000 for the years ended December 31,
1999 and 1998, respectively.
229
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions
with related parties, including Directors and affiliates. These
transactions include borrowings from the Bank 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 1999:
Balance, January 1, 1999 $ 2,283,000
Amounts repaid (37,000)
-------------
Balance, December 31, 1999 $ 2,246,000
=============
The Bank also leases bank premises from members of the Board of
Directors (see Note 9). Rental payments to the Directors totaled
$106,000, $102,000 and $98,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
15. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all
periods presented. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of other comprehensive
income (loss) that historically has not been recognized in the
calculation of net income. Unrealized gains and losses on the Company's
available-for-sale investment securities are included in other
comprehensive income (loss). Total comprehensive income and the
components of accumulated other comprehensive income (loss) are
presented in the Statement of Changes in Shareholders' Equity.
At December 31, 1999, 1998 and 1997, the Company held securities
classified as available-for-sale which had unrealized (losses) gains as
follows:
<TABLE>
<CAPTION>
Tax
Before Benefit After
Tax (Expense) Tax
----------- ----------- ------------
FOR THE YEAR ENDED DECEMBER 31, 1999
<S> <C> <C> <C>
Other comprehensive loss:
Unrealized holding losses $ (740,000) $ 282,000 $ (458,000)
=========== =========== ============
FOR THE YEAR ENDED DECEMBER 31, 1998
Other comprehensive income:
Unrealized holding gains $ 96,000 $ (37,000) $ 59,000
=========== =========== ============
FOR THE YEAR ENDED DECEMBER 31, 1997
Other comprehensive income:
Unrealized holding gains $ 127,000 $ (50,000) $ 77,000
=========== =========== ============
</TABLE>
230
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which
it is practicable to estimate fair value. These estimates are made at a
specific point in time based on relevant market data and information
about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering the Company's
entire holdings of a particular financial instrument for sale at one
time, nor do they attempt to estimate the value of anticipated future
business related to the instruments. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the fair values presented.
The following methods and assumptions were used by the Company to
estimate the fair value of its financial instruments at December 31,
1999 and 1998:
CASH AND CASH EQUIVALENTS: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
INTEREST-BEARING DEPOSITS IN BANKS: The fair values of interest-bearing
deposits in banks are estimated by discounting their future cash flows
using rates at each reporting date for instruments with similar
remaining maturities offered by comparable financial institutions.
INVESTMENT SECURITIES: For investment securities, fair values are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices for
similar securities and indications of value provided by brokers.
LOANS: For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted
cash flow analyses, using interest rates being offered at each
reporting date for loans with similar terms to borrowers of comparable
creditworthiness. The carrying amount of accrued interest receivable
approximates its fair value.
ACCOUNTS RECEIVABLE SERVICING RECEIVABLES: The carrying amount of
accounts receivable servicing receivables approximates its fair value
because of the relatively short period of time between the origination
of the receivables and their expected collection.
DEPOSITS: The fair values for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date represented by
their carrying amount. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow analysis using
interest rates offered at each reporting date by the Bank for
certificates with similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
231
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
LONG-TERM DEBT: The fair value of long-term debt is estimated using a
discounted cash flow analysis using interest rates currently available
to the Bank for similar debt instruments.
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit are
primarily for variable rate loans. For these commitments, there is no
difference between the committed amounts and their fair values.
Commitments to fund fixed rate loans and letters of credit are at rates
which approximate fair value at each reporting date.
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 8,274,000 $ 8,274,000 $ 11,538,000 $ 11,538,000
Federal funds sold 7,125,000 7,125,000 3,725,000 3,725,000
Interest-bearing deposits
in banks 5,527,000 5,527,000 5,015,000 5,035,000
Investment securities 57,567,000 57,372,000 40,800,000 40,920,000
Loans 117,308,000 117,288,000 112,329,000 112,794,000
Accounts receivable servicing
receivable 2,123,000 2,123,000 1,189,000 1,189,000
Accrued interest receivable 1,219,000 1,219,000 1,140,000 1,140,000
------------ ------------ ------------ ------------
$199,143,000 $198,928,000 $175,736,000 $176,341,000
============ ============ ============ ============
Financial liabilities:
Deposits $180,996,000 $180,942,000 $158,951,000 $159,069,000
Long-term debt 2,125,000 2,028,000 2,164,000 2,160,000
Accrued interest payable 214,000 214,000 262,000 262,000
------------ ------------ ------------ ------------
$183,335,000 $183,184,000 $161,377,000 $161,491,000
============ ============ ============ ============
Off-balance-sheet financial
instruments:
Commitments to extend
credit $ 42,540,000 $ 42,540,000 $ 36,226,000 $ 36,226,000
Letters of credit 2,311,000 2,311,000 695,000 695,000
------------ ------------ ------------ ------------
$ 44,851,000 $ 44,851,000 $ 36,921,000 $ 36,921,000
============ ============ ============ ============
</TABLE>
232
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 327,000 $ 241,000
Investment in subsidiaries 16,367,000 15,112,000
Dividends receivable from subsidiary 215,000 185,000
Other assets 7,000 23,000
------------ ------------
$ 16,916,000 $ 15,561,000
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable to shareholders $ 215,000 $ 185,000
Other liabilities 88,000
------------ ------------
Total liabilities 303,000 185,000
------------ ------------
Shareholders' equity:
Common stock 6,722,000 6,031,000
Retained earnings 10,171,000 9,167,000
Accumulated other comprehensive (loss)
income (280,000) 178,000
------------ ------------
Total shareholders' equity 16,613,000 15,376,000
------------ ------------
$ 16,916,000 $ 15,561,000
============ ============
</TABLE>
233
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income:
Dividends declared by subsidiaries -
eliminated in consolidation $1,368,000 $1,558,000 $ 848,000
---------- ---------- ----------
Expenses:
Directors' compensation 80,000 103,000 20,000
Professional fees 19,000 33,000 11,000
Other expenses 32,000 20,000 22,000
---------- ---------- ----------
Total expenses 131,000 156,000 53,000
---------- ---------- ----------
Income before equity in
undistributed income of
subsidiaries 1,237,000 1,402,000 795,000
Equity in undistributed income of
subsidiaries 1,613,000 1,043,000 1,186,000
---------- ---------- ----------
Income before income taxes 2,850,000 2,445,000 1,981,000
Income tax benefit 51,000 60,000 20,000
---------- ---------- ----------
Net income $2,901,000 $2,505,000 $2,001,000
========== ========== ==========
</TABLE>
234
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,901,000 $ 2,505,000 $ 2,001,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiaries (1,643,000) (1,062,000) (1,201,000)
Decrease (increase) in other assets 16,000 13,000 (12,000)
Increase in other liabilities 88,000
----------- ----------- -----------
Net cash provided by operating
activities 1,362,000 1,456,000 788,000
----------- ----------- -----------
Cash flows used in investing activities:
Investment in leasing company (100,000)
----------- ----------- -----------
Cash flows from financing activities:
Cash dividends paid (386,000) (338,000) (306,000)
Exercise of stock options 692,000 610,000 151,000
Cash paid to repurchase common stock (1,475,000) (1,651,000) (531,000)
Cash paid for fractional shares (7,000) (5,000)
----------- ----------- -----------
Net cash used in financing activities (1,176,000) (1,384,000) (686,000)
----------- ----------- -----------
Net increase in cash and cash
equivalents 86,000 72,000 102,000
Cash and cash equivalents at beginning
of year 241,000 169,000 67,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 327,000 $ 241,000 $ 169,000
=========== =========== ===========
Supplemental disclosures of cash flow
information:
Non-cash investing activities:
Net change in unrealized gain on available-
for-sale investment securities $ (740,000) $ 96,000 $ 127,000
Non-cash financing activities:
Dividends declared, adjusted for stock
splits and dividends, $.12 per share in
1999, $.10 per share in 1998 and
$.09 per share in 1997 $ 215,000 $ 185,000 $ 166,000
</TABLE>
235
<PAGE>
AMERICAN RIVER HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. SUBSEQUENT EVENT
On March 1, 2000, the Directors of American River Holdings and North
Coast Bank approved a definitive merger agreement between the two
companies. As a result, North Coast Bank, American River Bank, and
first source capital will operate as wholly-owned subsidiaries under
American River Holdings. Under the agreement, each share of North Coast
Bank will be converted into the right to receive .9644 of a share of
the common stock of American River Holdings. The transaction will be
accounted for under the pooling-of-interests method of accounting. It
is expected that this merger will be accomplished in the third quarter
of 2000, subject to shareholder and regulatory approval.
The unaudited pro forma information set forth below assumes that the
merger of the two companies took place on January 1, 1997. This
information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would
have been achieved had the merger been consummated at that time, nor do
they consider any potential cost savings or revenue enhancements.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net interest income $ 11,754,000 $ 10,743,000 $ 9,582,000
Net income $ 3,128,000 $ 2,850,000 $ 2,347,000
Basic earnings per common share $ 1.37 $ 1.25 $ 1.02
Diluted earnings per common share $ 1.30 $ 1.14 $ .94
</TABLE>
236
<PAGE>
NORTH COAST BANK, N.A.
FINANCIAL STATEMENTS
UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2000
AND
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
237
<PAGE>
NORTH COAST BANK
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,723,715 $ 2,626,289
Federal funds sold 3,150,000 1,000,000
Interest-bearing deposits in banks 1,037,600 793,000
Available-for-sale investment securities (Note 2) 1,696,400 1,708,000
Loans and leases, less allowance for loan and lease
losses of $433,727 in 2000 and $383,310 in 1999
(Notes 3, 5 and 8) 39,648,285 39,735,527
Bank premises and equipment, net 729,643 750,750
Accrued interest receivable and other assets 559,034 564,358
------------ ------------
$ 49,544,677 $ 47,177,924
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 9,097,714 $ 10,149,768
Interest bearing (Note 4) 35,246,858 31,931,394
------------ ------------
Total deposits 44,344,572 42,081,162
Short-term borrowings (Note 6) 1,000,000 1,000,000
Accrued interest payable and other liabilities 106,324 98,342
------------ ------------
Total liabilities 45,450,896 43,179,504
------------ ------------
Commitments and contingencies (Note 5)
Shareholders' equity (Note 7):
Common stock - $4.00 par value; 6,250,000
shares authorized; 472,354 shares issued
and outstanding 1,889,416 1,889,416
Additional paid-in capital 1,826,945 1,826,945
Retained earnings 391,666 295,630
Accumulated other comprehensive loss
(Notes 2 and 10) (14,246) (13,571)
------------ ------------
Total shareholders' equity 4,093,781 3,998,420
------------ ------------
$ 49,544,677 $ 47,177,924
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
238
<PAGE>
NORTH COAST BANK
STATEMENT OF INCOME
(UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
2000 1999
---------- ----------
Interest income:
Interest and fees on loans $1,000,095 $ 752,871
Interest on investment securities:
Taxable 19,503 12,458
Exempt from Federal income taxes 2,122 2,122
Dividends 4,121 2,998
Interest on Federal funds sold 20,710 48,296
Interest on deposits in banks 10,911 6,308
---------- ----------
Total interest income 1,057,462 825,053
Interest expense:
Deposits (Note 4) 338,748 291,264
Short-term borrowings (Note 6) 15,053
---------- ----------
Total interest expense 353,801 291,264
---------- ----------
Net interest income 703,661 533,789
---------- ----------
Provision for loan and lease losses (Note 3) 27,500 30,000
---------- ----------
Net interest income after provision for
loan and lease losses 676,161 503,789
---------- ----------
Non-interest income:
Service charges 31,417 22,603
Merchant card processing fees 30,480 15,200
Other income 23,805 20,312
---------- ----------
Total non-interest income 85,702 58,115
---------- ----------
Other expenses:
Salaries and employee benefits (Note 3) 251,937 228,824
Occupancy and equipment 117,088 97,885
Other (Note 9) 230,802 175,937
---------- ----------
Total other expenses 599,827 502,646
---------- ----------
Income before income taxes 162,036 59,258
Income taxes 66,000 22,000
---------- ----------
Net income $ 96,036 $ 37,258
========== ==========
Basic earnings per share (Note 7) $ .20 $ .08
========== ==========
Diluted earnings per share (Note 7) $ .19 $ .08
========== ==========
The accompanying notes are an integral part of these financial statements.
239
<PAGE>
NORTH COAST BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000 AND THE YEAR ENDED DECEMBER 31, 1999
Common Stock Additional
------------------------ Paid-in Retained
Shares Amount Capital Earnings
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1999 472,354 $ 1,889,416 $ 1,826,945 $ 68,636
Comprehensive income (Note 10):
Net income 226,994
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities
Total comprehensive income
----------- ----------- ----------- --------
Balance, December 31, 1999 472,354 1,889,416 1,826,945 295,630
Comprehensive income (Note 10):
Net income 96,036
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (Note 2)
Total comprehensive income
----------- ----------- ----------- --------
Balance, March 31, 2000 472,354 $ 1,889,416 $ 1,826,945 $391,666
=========== =========== =========== ========
Accumulated
Other
Comprehensive Shareholders' Comprehensive
Income (Loss) Equity Income
------------- ------------ -------------
<S> <C> <C>
Balance, January 1, 1999 $ 7,029 $ 3,792,026
Comprehensive income (Note 10):
Net income 226,994 $ 226,994
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (20,600) (20,600) (20,600)
-----------
Total comprehensive income $ 206,394
===========
Five-for-four stock split
------------ ------------
Balance, December 31, 1999 (13,571) 3,998,420
Comprehensive income (Note 10):
Net income 96,036 $ 96,036
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (Note 2) (675) (675) (675)
-----------
Total comprehensive income $ 95,361
===========
------------ ------------
Balance, March 31, 2000 $ (14,246) $ 4,093,781
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
240
<PAGE>
NORTH COAST BANK
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
2000 1999
--------- ---------
Cash flows from operating activities:
Net income $ 96,036 $ 37,258
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Provision for loan losses 27,500 30,000
Depreciation, amortization and accretion, net 28,082 26,165
Decrease in deferred loan origination
fees and costs, net (7,761) (11,169)
Decrease (increase) in accrued interest
receivable and other assets 5,411 (74,233)
Increase (decrease) in accrued interest
payable and other liabilities 7,982 (135,447)
--------- ---------
Net cash provided by (used in) operating
activities 157,250 (127,426)
--------- ---------
Cash flows from investing activities:
Net increase in interest-bearing
deposits in banks (244,600) (198,000)
Proceeds from matured and called
available-for-sale investment securities 450,000
Principal payments received from available-
for-sale mortgage-backed securities 14,869 126,322
Purchase of available-for-sale investment
securities (2,400) (250,400)
Net decrease in loans 67,503 150,759
Purchase of premises and equipment (8,606) (182,946)
--------- ---------
Net cash (provided by) used in
investing activities (173,234) 95,735
--------- ---------
(Continued)
241
<PAGE>
NORTH COAST BANK
STATEMENT OF CASH FLOWS
(UNAUDITED)
(Continued)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
2000 1999
----------- -----------
Cash flows from financing activities:
Net increase in demand, interest bearing
and savings deposits $ 656,738 $ 582,349
Net increase (decrease) in time deposits 1,606,672 (1,110,465)
----------- -----------
Net cash provided by (used in) financing
activities 2,263,410 (528,116)
----------- -----------
Increase (decrease) in cash and cash
equivalents 2,247,426 (559,807)
Cash and cash equivalents at beginning of
period 3,626,289 8,084,967
----------- -----------
Cash and cash equivalents at end of period $ 5,873,715 $ 7,525,160
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest expense $ 352,901 $ 288,327
Income taxes $ 97,000
Non-cash investing activities:
Net change in unrealized (loss) gain on
available-for-sale investment securities $ (762) $ (3,890)
The accompanying notes are an integral
part of these financial statements.
242
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in a
condensed format and, therefore, do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. However, in the opinion of management,
all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been reflected in the
financial statements. The results of operations for the three months
ended March 31, 2000 are not necessarily indicative of the results to
be expected for the full year. Certain reclassifications have been made
to prior period amounts to present them on a basis consistent with
classifications for the three months ended March 31, 2000.
2. AVAILABLE-FOR-SALE INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale
investment securities at March 31, 2000 and December 31, 1999 consisted
of the following:
<TABLE>
<CAPTION>
March 31, 2000
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 983,341 $ (12,341) $ 971,000
U.S. Government
guaranteed
mortgage-backed
securities 212,844 (2,844) 210,000
Obligations of states
and political sub-
divisions 173,120 (9,120) 164,000
Federal Home Loan
Bank stock 178,900 178,900
Federal Reserve
Bank stock 111,500 111,500
Other investments 61,000 61,000
------------ ---------- ----------- ------------
$ 1,720,705 $ -- $ (24,305) $ 1,696,400
============ ========== =========== ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $24,305 were recorded, net of $10,059 in tax benefits, as
accumulated other comprehensive loss within shareholders' equity at
March 31, 2000. There were no sales of available-for-sale investment
securities for the three month period ended March 31, 2000.
243
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 981,633 $ (8,633) $ 973,000
U.S. Government
guaranteed
mortgage-backed
securities 227,815 (2,815) 225,000
Obligations of states
and political sub-
divisions 173,095 (12,095) 161,000
Federal Home Loan
Bank stock 176,500 176,500
Federal Reserve
Bank stock 111,500 111,500
Other investments 61,000 61,000
------------ ---------- ----------- ------------
$ 1,731,543 $ -- $ (23,543) $ 1,708,000
============ ========== =========== ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $23,543 were recorded, net of $9,972 in tax benefits, as
accumulated other comprehensive loss within shareholders' equity at
December 31, 1999. There were no sales of available-for-sale investment
securities in 1999.
244
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at March 31, 2000 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
------------ ------------
After one year through five years $ 1,067,531 $ 1,054,000
After ten years 301,774 291,000
------------ ------------
1,369,305 1,345,000
Investment securities not due at a single
maturity date:
Federal Home Loan Bank stock 178,900 178,900
Federal Reserve Bank stock 111,500 111,500
Other investments 61,000 61,000
------------ ------------
$ 1,720,705 $ 1,696,400
============ ============
Investment securities with amortized costs of $250,000 and $250,000 and
estimated market values of $241,000 and $242,000 were pledged to secure
treasury tax and loan accounts at March 31, 2000 and December 31, 1999,
respectively.
3. LOANS AND LEASES
Outstanding loans and leases are summarized below:
March 31, December 31,
2000 1999
------------ ------------
Commercial $ 11,687,009 $ 11,883,098
Real estate - commercial 13,557,687 12,711,222
Real estate - residential 3,535,747 2,798,572
Real estate - construction 3,737,706 4,476,824
Agriculture 6,588,533 7,199,565
Lease financing receivables 78,352 121,521
Consumer 863,032 898,050
Other 135,039 138,839
------------ ------------
40,183,105 40,227,691
Deferred loan fees, net (101,093) (108,854)
Allowance for loan and lease losses (433,727) (383,310)
------------ ------------
$ 39,648,285 $ 39,735,527
============ ============
245
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
3. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
Three Month Periods Ended
March 31, Year Ended
------------------------ December 31,
2000 1999 1999
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 383,310 $ 330,755 $ 330,755
Provision charged to operations 27,500 30,000 175,000
Losses charged to allowance (130,804)
Recoveries 22,917 8,359
---------- ---------- ----------
Balance, end of year $ 433,727 $ 360,755 $ 383,310
========== ========== ==========
</TABLE>
During the three month period ended March 31, 2000 and the year ended
December 31, 1999, the Bank had no significant impaired loans or loans
placed on nonaccrual status.
Salaries and employee benefits totaling $40,130 and $26,216 were
deferred as loan origination costs for the three month periods ended
March 31, 2000 and 1999, respectively.
4. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
March 31, December 31,
2000 1999
------------- -------------
Savings $ 4,551,110 $ 4,231,966
Money market 11,359,943 9,759,646
NOW accounts 3,509,348 3,719,997
Time, $100,000 or more 7,089,290 5,612,900
Other time 8,737,167 8,606,885
------------- -------------
$ 35,246,848 $ 31,931,394
============= =============
246
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. INTEREST-BEARING DEPOSITS (Continued)
Interest expense recognized on interest-bearing consisted of the
following:
Three Month Periods Ended
March 31,
----------------------------
2000 1999
------------- -------------
Savings $ 26,848 $ 29,288
Money market 97,818 73,699
NOW accounts 12,953 14,361
Time, $100,000 or more 90,316 76,005
Other time 110,813 97,911
------------- -------------
$ 338,748 $ 291,264
============= =============
5. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The following financial instruments represent off-balance-sheet credit
risk:
March 31, December 31,
2000 1999
------------- -------------
Commitments to extend credit $ 9,234,000 $ 8,757,000
Credit card arrangements $ 401,000 $ 397,000
Letters of credit $ 50,000 $ 150,000
CONTINGENCIES
The Bank is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount
of ultimate liability with respect to such actions will not materially
affect the financial position or results of operations of the Bank.
6. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has a total of $2,000,000 in unsecured Federal funds lines of
credit with two of its correspondent banks to meet short-term liquidity
needs. In addition, the Bank has a line of credit available with the
Federal Home Loan Bank totaling $1,000,000 which is secured by pledged
mortgage loans. An advance from the Federal Home Loan Bank totaling
$1,000,000 was outstanding at March 31, 2000 and December 31, 1999
bearing an interest rate of 5.9% and a maturity date of April 12, 2000.
247
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
7. SHAREHOLDERS' EQUITY
EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
For the Three Month Shares Per Share
Periods Ended Net Income Outstanding Amount
-------------------------------- ---------- ----------- ----------
MARCH 31, 2000
<S> <C> <C> <C>
Basic earnings per share $ 96,036 472,354 $ .20
==========
Effect of dilutive stock options 28,623
---------- ----------
Diluted earnings per share $ 96,036 500,977 $ .19
========== ========== ==========
MARCH 31, 1999
Basic earnings per share $ 37,258 472,354 $ .08
==========
Effect of dilutive stock options 18,734
---------- ----------
Diluted earnings per share $ 37,258 491,088 $ .08
========== ========== ==========
</TABLE>
REGULATORY CAPITAL
The Bank is subject to certain regulatory capital requirements
administered by the Office of the Comptroller of the Currency (OCC).
Failure to meet these minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital to risk-weighted assets and of Tier 1 capital
to average assets. Each of these components is defined in the
regulations. Management believes that the Bank meets all its capital
adequacy requirements as of March 31, 2000.
248
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
7. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL (Continued)
In addition, the most recent notification from the OCC categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth below. There are no conditions or events
since that notification that management believes have changed the
Bank's category.
<TABLE>
<CAPTION>
2000 1999
---------------------- ---------------------
Amount Ratio Amount Ratio
------------ ----- ------------ -----
LEVERAGE RATIO
<S> <C> <C> <C> <C>
North Coast Bank $ 4,108,000 8.5% $ 4,012,000 9.3%
Minimum requirement for "Well-
Capitalized" institution $ 2,406,000 5.0% $ 2,163,000 5.0%
Minimum regulatory requirement $ 1,925,000 4.0% $ 1,730,000 4.0%
TIER 1 RISK-BASED CAPITAL RATIO
North Coast Bank $ 4,108,000 10.3% $ 4,012,000 10.0%
Minimum requirement for "Well-
Capitalized" institution $ 2,383,000 6.0% $ 2,395,000 6.0%
Minimum regulatory requirement $ 1,589,000 4.0% $ 1,597,000 4.0%
TOTAL RISK-BASED CAPITAL RATIO
North Coast Bank $ 4,542,000 11.4% $ 4,395,000 11.0%
Minimum requirement for "Well-
Capitalized" institution $ 3,972,000 10.0% $ 3,992,000 10.0%
Minimum regulatory requirement $ 3,177,000 8.0% $ 3,194,000 8.0%
</TABLE>
8. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions
with related parties, including Directors and officers. These
transactions include borrowings from the Bank 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 the three months ended March 31, 2000:
Balance, January 1, 2000 $ 1,511,542
Disbursements 66,444
Amounts repaid (772,670)
------------
Balance, March 31, 2000 $ 805,316
============
Undisbursed commitments to related parties,
March 31, 2000 $ 488,531
============
249
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
9. OTHER EXPENSES
Other expenses consisted of the following:
Three Month Periods Ended
March 31,
--------------------------
2000 1999
------------ ------------
Data processing $ 50,530 $ 47,736
Merchant processing fees 35,953 22,190
Advertising 17,392 12,778
Stationery and supplies 13,838 16,270
Legal and accounting 34,670 6,315
Brokerage and consulting fees 7,272 11,247
Insurance 9,759 7,714
Other operating expenses 61,388 51,687
------------ ------------
$ 230,802 $ 175,937
============ ============
10. 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 Bank's
available-for-sale investment securities are included in other
comprehensive income (loss). Total comprehensive income and the
components of accumulated other comprehensive income (loss) are
presented in the Statement of Changes in Shareholders' Equity.
For the three month period ended March 31, 2000 and the year ended
December 31, 1999, the Bank held securities classified as
available-for-sale which had unrealized losses as follows:
<TABLE>
<CAPTION>
Before Tax After
Tax Benefit Tax
---------- ---------- -----------
For the Three Months Period Ended
March 31, 2000
---------------------------------
<S> <C> <C> <C>
Other comprehensive loss:
Unrealized holding losses $ (762) $ 87 $ (675)
========== ========== ===========
</TABLE>
250
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
10. COMPREHENSIVE INCOME (Continued)
<TABLE>
<CAPTION>
Before Tax After
Tax Benefit Tax
---------- ---------- -----------
For the Year Ended
December 31, 1999
------------------
<S> <C> <C> <C>
Other comprehensive loss:
Unrealized holding losses $ (30,572) $ 9,972 $ (20,600)
========== ========== ===========
</TABLE>
11. MERGER AND ACQUISITION ACTIVITY
On March 1, 2000, the Directors of North Coast Bank and American River
Holdings approved a definitive merger agreement between the two
companies. As a result, North Coast Bank, American River Bank, and
first source capital will operate as wholly-owned subsidiaries under
American River Holdings. Under the agreement, each share of North Coast
Bank will be converted into the right to receive .9644 of a share of
the common stock of American River Holdings. The transaction will be
accounted for under the pooling-of-interests method of accounting. It
is expected that this merger will be accomplished in the third quarter
of 2000, subject to shareholder and regulatory approval.
The unaudited pro forma information set forth below assumes that the
merger of the two companies took place on January 1, 1999. This
information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would
have been achieved had the merger been consummated at that time, nor do
they consider any potential cost savings or revenue enhancements.
<TABLE>
<CAPTION>
Three Month Periods Ended
March 31,
---------------------------- Year Ended
December 31,
2000 1999 1999
------------- ------------- -------------
<S> <C> <C> <C>
Net interest income $ 3,152,000 $ 2,797,000 $ 11,754,000
Net income $ 890,000 $ 710,000 $ 3,128,000
Basic earnings per common share $ .40 $ .31 $ 1.37
Diluted earnings per common share $ .38 $ .29 $ 1.30
</TABLE>
251
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Shareholders and
Board of Directors
North Coast Bank
We have audited the accompanying balance sheet of North Coast Bank as
of December 31, 1999 and the related statements of income, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit. The
financial statements of North Coast Bank as of December 31, 1998 and 1997 were
audited by other auditors whose report dated February 19, 1999 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present
fairly, in all material respects, the financial position of North Coast Bank as
of December 31, 1999, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ PERRY-SMITH LLP
----------------------------
Perry-Smith LLP
Certified Public Accountants
Sacramento, California
February 17, 2000,
except for Note 15, as to which
the date is March 1, 2000
252
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
North Coast Bank
Santa Rosa, California
We have audited the accompanying balance sheets of North Coast Bank as of
December 31, 1998 and 1997, and the related statements of operations, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of North Coast Bank at December
31, 1998 and 1997, and the results of its operations and cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/s/ RICHARDSON & COMPANY
-------------------------
Richardson & Company
February 19, 1999
253
<PAGE>
<TABLE>
<CAPTION>
NORTH COAST BANK
BALANCE SHEET
DECEMBER 31, 1999 AND 1998
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,626,289 $ 3,484,967
Federal funds sold 1,000,000 4,600,000
Interest-bearing deposits in banks 793,000 693,000
Available-for-sale investment securities (Note 2) 1,708,000 1,428,995
Loans and leases, less allowance for loan and lease
losses of $383,310 in 1999 and $330,755 in 1998
(Notes 3, 7 and 11) 39,735,527 30,802,994
Bank premises and equipment, net (Note 4) 750,750 608,930
Accrued interest receivable and other assets (Note 6) 564,358 557,804
------------ ------------
$ 47,177,924 $ 42,176,690
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 10,149,768 $ 8,153,261
Interest bearing (Note 5) 31,931,394 29,999,782
------------ ------------
Total deposits 42,081,162 38,153,043
Short-term borrowings (Note 8) 1,000,000
Accrued interest payable and other liabilities 98,342 231,621
------------ ------------
Total liabilities 43,179,504 38,384,664
------------ ------------
Commitments and contingencies (Note 7)
Shareholders' equity (Note 9):
Common stock - $4.00 par value; 6,250,000
shares authorized; 472,354 shares issued
and outstanding 1,889,416 1,889,416
Additional paid-in capital 1,826,945 1,826,945
Retained earnings 295,630 68,636
Accumulated other comprehensive (loss) income
(Notes 2 and 13) (13,571) 7,029
------------ ------------
Total shareholders' equity 3,998,420 3,792,026
------------ ------------
$ 47,177,924 $ 42,176,690
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
254
<PAGE>
NORTH COAST BANK
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $3,382,954 $2,610,116 $2,162,208
Interest on investment securities:
Taxable 46,471 145,723 256,034
Exempt from Federal income taxes 8,488 5,988
Dividends 13,916 12,195 11,711
Interest on Federal funds sold 151,845 191,987 98,451
Interest on deposits in banks 45,845 23,422 5,097
---------- ---------- ----------
Total interest income 3,649,519 2,989,431 2,533,501
Interest expense:
Deposits (Note 5) 1,173,013 972,712 753,233
Short-term borrowings (Note 8) 21,785
---------- ---------- ----------
Total interest expense 1,194,798 972,712 753,233
---------- ---------- ----------
Net interest income 2,454,721 2,016,719 1,780,268
---------- ---------- ----------
Provision for loan and lease losses (Note 3) 175,000 148,585 70,500
---------- ---------- ----------
Net interest income after provision for
loan and lease losses 2,279,721 1,868,134 1,709,768
---------- ---------- ----------
Non-interest income:
Service charges 99,670 87,905 103,566
Gain on sale of loans 82,707
Gain on sale of investment securities, net
(Note 2) 6,593
Merchant card processing fees 102,358 54,137 42,391
Other income 65,355 55,586 41,500
---------- ---------- ----------
Total non-interest income 267,383 204,221 270,164
---------- ---------- ----------
Other expenses:
Salaries and employee benefits (Notes 3
and 10) 869,878 712,255 775,868
Occupancy and equipment (Notes 4 and 7) 479,100 300,989 299,029
Other (Note 12) 818,132 604,155 559,185
---------- ---------- ----------
Total other expenses 2,167,110 1,617,399 1,634,082
---------- ---------- ----------
Income before income taxes 379,994 454,956 345,850
Income taxes (Note 6) 153,000 109,000
---------- ---------- ----------
Net income $ 226,994 $ 345,956 $ 345,850
========== ========== ==========
Basic earnings per share (Note 9) $ .48 $ .73 $ .73
========== ========== ==========
Diluted earnings per share (Note 9) $ .46 $ .70 $ .72
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
255
<PAGE>
<TABLE>
<CAPTION>
NORTH COAST BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Retained
Common Stock Additional Earnings
------------------------ Paid-in Accumulated
Shares Amount Capital Deficit
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 471,644 $ 1,886,670 $ 1,825,715 $ (623,170)
Comprehensive income (Note 13):
Net income 345,850
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities
Total comprehensive income
----------- ----------- ----------- ----------
Balance, December 31, 1997 471,644 1,886,670 1,825,715 (277,320)
Comprehensive income (Note 13):
Net income 345,956
Other comprehensive loss, net of tax:
Unrealized losses on available-for-
sale investment securities, net of
reclassification adjustment
Total comprehensive income
Stock options exercised (Note 9) 710 2,746 1,230
----------- ----------- ----------- ----------
Balance, December 31, 1998 472,354 1,889,416 1,826,945 68,636
----------- ----------- ----------- -----------
Accumulated
Other
Comprehensive Shareholders' Comprehensive
Income (Loss) Equity Income
------------- ------------ -------------
<S> <C> <C> <C>
Balance, January 1, 1997 $ 7,696 $ 3,096,911
Comprehensive income (Note 13):
Net income 345,850 $ 345,850
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 5,944 5,944 5,944
-----------
Total comprehensive income $ 351,794
----------- ------------- ===========
Balance, December 31, 1997 13,640 3,448,705
Comprehensive income (Note 13):
Net income 345,956 $ 345,956
Other comprehensive loss, net of tax:
Unrealized losses on available-for-
sale investment securities, net of
reclassification adjustment (6,611) (6,611) (6,611)
-----------
Total comprehensive income $ 339,345
===========
Stock options exercised (Note 9) 3,976
----------- ------------
Balance, December 31, 1998 7,029 3,792,026
----------- ------------
</TABLE>
(Continued)
256
<PAGE>
<TABLE>
<CAPTION>
NORTH COAST BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Retained
Common Stock Additional Earnings
------------------------ Paid-in Accumulated
Shares Amount Capital Deficit
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 472,354 $ 1,889,416 $ 1,826,945 $ 68,636
Comprehensive income (Note 13):
Net income 226,994
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities (Note 2)
Total comprehensive income
Five-for-four stock split 94,452 (94) 94
----------- ----------- ----------- ----------
Balance, December 31, 1999 472,354 $ 1,889,416 $ 1,826,945 $ 295,630
=========== =========== =========== ==========
Disclosure of reclassification amount,
net of taxes (Note 13):
Unrealized holding losses arising
during 1998
Reclassification adjustment for gains
included in net income
Net unrealized losses on available-for-sale
investment securities
Accumulated
Other
Comprehensive Shareholders' Comprehensive
Income (Loss) Equity Income
------------- ------------ -------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ 7,029 $ 3,792,026
Comprehensive income (Note 13):
Net income 226,994 $ 226,994
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities (Note 2) (20,600) (20,600) (20,600)
-----------
Total comprehensive income $ 206,394
===========
Five-for-four stock split
------------ ------------
Balance, December 31, 1999 $ (13,571) $ 3,998,420
============ ============
Disclosure of reclassification amount,
net of taxes (Note 13):
Unrealized holding losses arising
during 1998 $ (10,567)
Reclassification adjustment for gains
included in net income (3,956)
------------
Net unrealized losses on available-for-sale
investment securities $ (6,611)
============
The accompanying notes are an integral part of these financial statements.
</TABLE>
257
<PAGE>
NORTH COAST BANK
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 226,994 $ 345,956 $ 345,850
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 175,000 148,585 70,500
Depreciation, amortization and
accretion, net 71,514 96,115 102,804
Net gain on the sale of available-for-
sale investment securities (6,593)
Increase (decrease) in deferred loan
origination fees and costs, net 23,137 90,631 (4,913)
Increase in accrued interest receivable
and other assets (92,199) (58,385) (82,001)
Decrease (increase) in servicing assets 36,617 4,104 (40,721)
(Decrease) increase in accrued interest
payable and other liabilities (133,279) 121,830 (38,951)
Loss on sale of other real estate 2,000
Deferred taxes 59,000 (47,000) (59,000)
----------- ----------- -----------
Net cash provided by operating
activities 366,784 695,243 295,568
----------- ----------- -----------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing
deposits in banks (100,000) (672,134) 99,488
Proceeds from the sale of available-for-
sale investment securities 599,023
Proceeds from matured and called
available-for-sale investment securities 450,000 1,963,170 1,518,743
Principal payments received from available-
for-sale mortgage-backed securities 301,500
Purchase of available-for-sale investment
securities (1,060,425) (532,395) (415,088)
Proceeds from sale of other real estate 2,700
Net increase in loans (9,067,256) (9,455,022) (2,205,593)
Purchase of premises and equipment (277,400) (121,800) (59,885)
----------- ----------- -----------
Net cash used in investing activities (9,753,581) (8,219,158) (1,059,635)
----------- ----------- -----------
</TABLE>
(Continued)
258
<PAGE>
NORTH COAST BANK
STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest bearing
and savings deposits $ 4,066,930 $ 3,901,583 $ 1,890,124
Net (decrease) increase in time deposits (138,811) 4,488,243 1,267,913
Increase in short-term borrowings 1,000,000
Proceeds from exercise of stock options 3,976
----------- ----------- -----------
Net cash provided by financing
activities 4,928,119 8,393,802 3,158,037
----------- ----------- -----------
(Decrease) increase in cash and
cash equivalents (4,458,678) 869,887 2,393,970
Cash and cash equivalents at beginning of
year 8,084,967 7,215,080 4,821,110
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,626,289 $ 8,084,967 $ 7,215,080
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest expense $ 1,192,061 $ 965,663 $ 747,147
Income taxes $ 237,066 $ 93,300 $ 56,000
Non-cash investing activities:
Net change in unrealized gain on
available-for-sale investment securities $ (30,572) $ (6,611) $ 5,944
Loans transferred to other real estate
during the year $ 80,300
Sale of foreclosed other real estate
financed through loans $ 75,600
</TABLE>
The accompanying notes are an integral part of these financial statements.
259
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
North Coast Bank (the "Bank") is a National Banking Association and, as
such, is regulated by the Office of the Comptroller of the Currency,
the Federal Reserve and the Federal Deposit Insurance Corporation. The
regulations of these agencies govern most aspects of the Bank's
business. The Bank was incorporated on March 26, 1990 as Windsor Oaks
National Bank and was in organization until operations formally
commenced on October 25, 1990. Effective January 8, 1997, the Bank
changed its name to North Coast Bank.
The Bank provides a variety of banking services to individuals and
businesses in its primary service area of northern Sonoma County,
California and the immediate surrounding area. The Bank offers
depository and lending services primarily to meet the needs of its
business and professional clientele. These services include a variety
of demand deposit, savings and time deposit account alternatives, and
special merchant and business services. The Bank's lending activities
are directed primarily towards granting short and medium-term
commercial loans and customized lines of credits for such purposes as
operating capital, business and professional start-ups, inventory,
equipment and accounts receivable, and interim construction financing.
The Bank also targets Small Business Administration guaranteed loans to
qualified small business borrowers.
The accounting and reporting policies of the Bank conform with
generally accepted accounting principles and prevailing practices
within the banking industry.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1999.
INVESTMENT SECURITIES
Investments are classified into one of the following categories:
o Available-for-sale securities, reported at fair value, with
unrealized gains and losses excluded from earnings and reported,
net of taxes, as accumulated other comprehensive income (loss)
within shareholders' equity.
o Held-to-maturity securities, which management has the positive
intent and ability to hold, reported at amortized cost, adjusted
for the accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments
at the time of purchase and may only change the classification in
certain limited circumstances. All transfers between categories are
accounted for at fair value.
260
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENT SECURITIES (Continued)
Gains or losses on the sale of securities are computed using the
specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums. In
addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
LOANS AND LEASES
Loans and leases are stated at principal balances outstanding, except
for loans and leases transferred from loans and leases held for sale
which are carried at the lower of principal balance or market value at
the date of transfer, adjusted for accretion of discounts. Interest is
accrued daily based upon outstanding loan and lease balances. However,
when, in the opinion of management, loans and leases are considered to
be impaired and the future collectibility of interest and principal is
in serious doubt, loans and leases are placed on nonaccrual status and
the accrual of interest income is suspended. Any interest accrued but
unpaid is charged against income. Payments received are applied to
reduce principal to the extent necessary to ensure collection.
Subsequent payments on these loans and leases, or payments received on
nonaccrual loans or leases for which the ultimate collectibility of
principal is not in doubt, are applied first to earned but unpaid
interest and then to principal.
An impaired loan or lease is measured based on the present value of
expected future cash flows discounted at the instrument's effective
interest rate or, as a practical matter, at the instrument's observable
market price or the fair value of collateral if the loan or lease is
collateral dependent. A loan or lease is considered impaired when,
based on current information and events, it is probable that the Bank
will be unable to collect all amounts due (including both principal and
interest) in accordance with the contractual terms of the loan or lease
agreement.
Loan and lease origination fees, commitment fees, direct loan and lease
origination costs and purchase premiums and discounts on loans and
leases are deferred and recognized as an adjustment of yield, to be
amortized to interest income over the contractual term of the loan or
lease. The unamortized balance of deferred fees and costs is reported
as a component of net loans and leases.
Loans with unpaid balances of $6,236,305 and $3,868,698 were serviced
for others at December 31, 1999 and 1998, respectively.
261
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOAN SALES AND SERVICING
The guaranteed portion of certain Small Business Administration (SBA)
loans are sold to third parties with the Bank retaining the
unguaranteed portion. The Bank generally receives a premium in excess
of the adjusted carrying value of the loan at the time of sale. The
Bank may be required to refund a portion of this premium if the
borrower defaults or the loan prepays within ninety days of the
settlement date. However, there were no sales of loans subject to these
recourse provisions at December 31, 1999, 1998 or 1997. SBA loans with
unpaid balances of $138,950 and $1,227,623 were being serviced for
others at December 31, 1999 and 1998, 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. Fair values are estimated using
discounted cash flows based on current market interest rates. For
purposes of measuring impairment, servicing assets are stratified based
on note rate and term. The amount of impairment recognized is the
amount by which the servicing assets for a stratum exceed their fair
value.
In addition, assets (accounted for as interest-only (IO) strips) are
recorded at the fair value of the difference between note rates and
rates paid to purchasers (the interest spread) and contractual
servicing fees, if applicable. IO strips are carried at fair value with
gains or losses recorded as a component of shareholders' equity,
similar to available-for-sale investment securities.
The Bank's investment in the loan is allocated between the retained
portion of the loan, the servicing asset, the IO strip, and the sold
portion of the loan based on their relative fair values on the date the
loan is sold. The gain on the sold portion of the loan is recognized as
income at the time of sale. The carrying value of the retained portion
of the loan is discounted based on the estimated value of a comparable
non-guaranteed loan. The servicing asset is amortized over the
estimated life of the related loan. Significant future prepayments of
these loans will result in the recognition of additional amortization
of related servicing assets and an adjustment to the carrying value of
related IO strips.
In connection with the Bank's sale of SBA loans during the year ended
December 31, 1997, the Bank recognized servicing assets totaling
$40,721. Amortization of these servicing assets totaled $4,104 for the
year ended December 31, 1998. The carrying amount at December 31, 1998
was $36,617, which approximates the fair value. During the year ended
December 31, 1997, the Bank recognized interest-only strips of $23,761.
The carrying amount at December 31, 1998 was $19,298, which
approximates the fair value. The loans related to these servicing
assets and IO strips were repaid during 1999. Accordingly, the
servicing assets and IO strips were written off and losses of $53,323
were recognized. In addition, revenue of $60,735 related to the
discounted retained portion of the loans was recognized.
262
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained to provide for
losses related to impaired loans and leases and other losses that can
be expected to occur in the normal course of business. The
determination of the allowance is based on estimates made by
management, to include consideration of the character of the loan and
lease portfolio, specifically identified problem loans and leases,
potential losses inherent in the portfolio taken as a whole and
economic conditions in the Bank's service area. These estimates are
particularly susceptible to changes in the economic environment and
market conditions. The allowance is established through a provision for
loan and lease losses which is charged to expense.
OTHER REAL ESTATE
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the Bank's recorded investment in the loan balance and accrued
interest income over the estimated fair market value of the property,
net of estimated selling costs, is charged against the allowance for
loan and lease losses. A valuation allowance for losses on other real
estate is maintained to provide for temporary declines in value. The
allowance is established through a provision for losses on other real
estate which is included in other expenses. Subsequent gains or losses
on sales or writedowns resulting from permanent impairments are
recorded in other income or expense as incurred. On the balance sheet,
other real estate is included in accrued interest receivable and other
assets.
BANK PREMISES AND EQUIPMENT
Bank 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 lives of furniture, fixtures
and equipment are estimated to be three to forty 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
and amortization are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of maintenance
and repairs is charged to expense as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement
and tax basis of existing assets and liabilities. On the balance sheet,
net deferred tax assets are included in accrued interest receivable and
other assets.
CASH EQUIVALENTS
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one day periods.
263
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Bank. The treasury stock method has been applied to
determine the dilutive effect of stock options in computing diluted
EPS.
STOCK-BASED COMPENSATION
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price
of the Bank's stock at the date of grant over the exercise price.
However, if the fair value of stock-based compensation computed under a
fair value based method, as prescribed in Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
is material to the financial statements, pro forma net income and
earnings per share are disclosed as if the fair value method had been
applied.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NEW FINANCIAL ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activity, which was
subsequently amended by SFAS 137 to delay the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Management
does not believe that the adoption of SFAS 133 will have a significant
impact on its financial position and results of operations when
implemented.
264
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. AVAILABLE-FOR-SALE INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale
investment securities at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 981,633 $ (8,633) $ 973,000
U.S. Government
guaranteed
mortgage-backed
securities 227,815 (2,815) 225,000
Obligations of states
and political sub-
divisions 173,095 (12,095) 161,000
Federal Home Loan
Bank stock 176,500 176,500
Federal Reserve
Bank stock 111,500 111,500
Other investments 61,000 61,000
------------ ---------- ----------- ------------
$ 1,731,543 $ -- $ (23,543) $ 1,708,000
============ ========== =========== ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $23,543 were recorded, net of $9,972 in tax benefits, as
accumulated other comprehensive loss within shareholders' equity for
the year ended December 31, 1999. There were no sales of
available-for-sale investment securities for the year ended December
31, 1999.
265
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 249,674 $ 1,263 $ 250,937
U.S. Government
agencies 200,000 313 200,313
U.S. Government
guaranteed
mortgage-backed
securities 530,325 3,065 $ (1,443) 531,947
Obligations of states
and political sub-
divisions 173,017 3,831 176,848
Federal Home Loan
Bank stock 104,200 104,200
Federal Reserve
Bank stock 105,450 105,450
Other investments 59,300 59,300
------------ ---------- ----------- ------------
$ 1,421,966 $ 8,472 $ (1,443) $ 1,428,995
============ ========== =========== ============
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $7,029 were recorded as accumulated other comprehensive income
within shareholders' equity for the year ended December 31, 1998.
Proceeds and gross realized gains on available-for-sale investment
securities totaled $599,023 and $6,593, respectively, for the year
ended December 31, 1998. There were no sales of available-for-sale
investment securities in 1997.
266
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
------------- -------------
Within one year $ 136,719 $ 135,000
After one year through five years 1,072,729 1,063,000
After ten years 173,095 161,000
------------- -------------
1,382,543 1,359,000
Investment securities not due at a
single maturity date:
Federal Home Loan Bank stock 176,500 176,500
Federal Reserve Bank stock 111,500 111,500
Other investments 61,000 61,000
------------- -------------
$ 1,731,543 $ 1,708,000
============= =============
Investment securities with amortized costs of $250,000 and $249,675 and
estimated market values of $242,000 and $251,000 were pledged to secure
treasury tax and loan accounts at December 31, 1999 and 1998,
respectively.
3. LOANS AND LEASES
Outstanding loans and leases are summarized below:
December 31,
----------------------------
1999 1998
------------- -------------
Commercial $ 11,883,098 $ 9,301,330
Real estate - commercial 12,711,222 11,298,073
Real estate - residential 2,798,572 4,243,403
Real estate - construction 4,476,824 1,586,915
Agriculture 7,199,565 3,416,398
Lease financing receivables 121,521 363,913
Consumer 898,050 914,736
Other 138,839 94,698
------------- -------------
40,227,691 31,219,466
Deferred loan fees, net (108,854) (85,717)
Allowance for loan and lease losses (383,310) (330,755)
------------- -------------
$ 39,735,527 $ 30,802,994
============= =============
267
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 330,755 $ 352,417 $ 345,785
Provision charged to operations 175,000 148,585 70,500
Losses charged to allowance (130,804) (183,322) (71,105)
Recoveries 8,359 13,075 7,237
----------- ---------- ----------
Balance, end of year $ 383,310 $ 330,755 $ 352,417
=========== ========== ==========
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, the Bank had
no significant impaired loans or loans placed on nonaccrual status.
Salaries and employee benefits totaling $189,501, $152,461 and $143,519
were deferred as loan origination costs for the years ended December
31, 1999, 1998 and 1997, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
December 31,
----------------------------
1999 1998
------------- -------------
Land $ 149,001 $ 149,001
Building and improvements 212,975 212,975
Furniture, fixtures and equipment 967,466 841,019
Leasehold improvements 180,188 118,120
------------- -------------
1,509,630 1,321,115
Less accumulated depreciation
and amortization (758,880) (712,185)
------------- -------------
$ 750,750 $ 608,930
============= =============
Depreciation and amortization included in occupancy and equipment
expense totaled $135,580, $104,064 and $118,861 for the years ended
December 31, 1999, 1998 and 1997, respectively.
268
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
----------------------------
1999 1998
------------- -------------
Savings $ 4,231,966 $ 4,977,851
Money market 9,759,646 7,222,047
NOW accounts 3,719,997 3,441,288
Time, $100,000 or more 5,612,900 6,313,085
Other time 8,606,885 8,045,511
------------- -------------
$ 31,931,394 $ 29,999,782
============= =============
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
------------
2000 $ 13,678,479
2001 511,949
2002 13,012
2003 16,345
--------------
$ 14,219,785
==============
Interest expense recognized on interest-bearing deposits for the years
ended December 31, 1999, 1998 and 1997 consisted of the following:
1999 1998 1997
------------- ------------- -------------
Savings $ 120,664 $ 133,546 $ 122,160
Money market 325,503 151,591 84,149
NOW accounts 56,226 58,819 54,294
Time, $100,000 or more 285,373 256,524 167,701
Other time 385,247 372,232 324,929
------------- ------------- -------------
$ 1,173,013 $ 972,712 $ 753,233
============= ============= =============
269
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INCOME TAXES
The provision for income taxes for the years ended December 31, 1999,
1998 and 1997 consisted of the following:
Federal State Total
----------- ----------- -----------
1999
----
Current $ 82,000 $ 12,000 $ 94,000
Deferred 32,000 27,000 59,000
----------- ----------- -----------
Income tax expense $ 114,000 $ 39,000 $ 153,000
=========== =========== ===========
1998
----
Current $ 107,000 $ 49,000 $ 156,000
Deferred (32,000) (15,000) (47,000)
----------- ----------- -----------
Income tax expense $ 75,000 $ 34,000 $ 109,000
=========== =========== ===========
1997
----
Current $ 17,000 $ 42,000 $ 59,000
Deferred (17,000) (42,000) (59,000)
----------- ----------- -----------
Income tax expense $ -- $ -- $ --
=========== =========== ===========
Deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 114,000 $ 98,000
Loans held for sale 27,000
Future benefit of State income tax deduction 5,000 16,000
Other 14,000
Unrealized losses on available-for-sale
investment securities 10,000
---------- ----------
Total deferred tax assets 129,000 155,000
---------- ----------
Deferred tax liabilities:
Bank premises and equipment (32,000) (21,000)
Future liability of State deferred tax asset (7,000)
Other (11,000) (6,000)
---------- ----------
Total deferred tax liabilities (50,000) (27,000)
---------- ----------
Net deferred tax assets $ 79,000 $ 128,000
========== ==========
</TABLE>
270
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INCOME TAXES (Continued)
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rates to operating income
before income taxes. The significant items comprising these differences
for the years ended December 31, 1999, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
Amount Rate % Amount Rate % Amount Rate %
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
expense, at statutory
rate $ 129,000 34.0 $ 155,000 34.0 $ 118,000 34.0
Graduated rate benefit (1,000) (.2)
State franchise tax,
net of Federal tax
effect 28,000 7.4 32,000 7.1 24,000 6.9
Interest on obligations
of states and political
subdivisions (3,000) (.8)
Valuation allowance for
deferred tax assets (81,000) (17.8) (140,000) (40.5)
Other (1,000) (.3) 3,000 .7 (1,000) (.2)
----------- ------ ----------- ------ ----------- ------
Total income
tax expense $ 153,000 40.3 $ 109,000 24.0 $ -- --
=========== ====== =========== ====== =========== ======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Bank leases two of its branch offices and various equipment under
noncancelable operating leases. Future minimum lease payments are as
follows:
Year Ending
December 31,
------------
2000 $ 213,264
2001 219,419
2002 225,759
2003 128,802
2004 122,976
Thereafter 506,851
-----------
$ 1,417,071
===========
The Bank has an option to renew its Windsor branch office lease for two
five-year terms after the initial lease ends February 1, 2003.
Additionally, the Bank has an option to renew its Santa Rosa branch
office lease for two five-year terms after the initial lease ends
October 31, 2008.
271
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. COMMITMENTS AND CONTINGENCIES (Continued)
OPERATING LEASES (Continued)
Rental expense included in occupancy and equipment expense, net of
related rental income, totaled $175,123, $84,134 and $70,136 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Bank subleases a portion of the Windsor branch office for $2,012
per month. The sublease ends September 1, 2000. Additionally, the Bank
sublet a portion of the Santa Rosa branch office for $600 per month.
This lease ended in November 1999 and was not renewed. The Bank
received rental income of $26,944, $20,744 and $20,272 for the years
ended December 31, 1999, 1998 and 1997, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank 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 own exposure to fluctuations
in interest rates. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amount recognized on the balance sheet.
The Bank'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 Bank
uses the same credit policies in making commitments as it does for
loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
December 31,
----------------------------
1999 1998
------------- -------------
Commitments to extend credit $ 8,757,000 $ 4,462,000
Credit card arrangements $ 397,000 $ 497,000
Letters of credit $ 150,000 $ 150,000
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition 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. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies,
but may include savings accounts, accounts receivable, inventory,
equipment, and deeds of trust on residential real estate and
income-producing commercial properties.
272
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. COMMITMENTS AND CONTINGENCIES (Continued)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
At December 31, 1999, commercial loan commitments represent
approximately 62% of total commitments and are generally secured by
accounts receivable and inventory. Real estate loan commitments
represent approximately 37% of total commitments and are generally
secured by property with a loan-to-value ratio not to exceed 80%.
Unsecured credit card and equity line commitments represent the
remaining 1% of total commitments. In addition, the majority of the
Bank's loan commitments have variable interest rates.
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank grants real estate mortgage, real estate construction,
commercial, agricultural and consumer loans to customers in Northern
California, primarily in Sonoma County. Although the Bank has a
diversified loan portfolio, a substantial portion of its portfolio is
secured by commercial and residential real estate. However, personal
and business income represent the primary source of repayment for a
majority of these loans.
CORRESPONDENT BANKING AGREEMENTS
The Bank maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements. There
were no uninsured deposits at December 31, 1999.
FEDERAL RESERVE REQUIREMENTS
Banks are required to maintain reserves with the Federal Reserve Bank
equal to a percentage of their reservable deposits. The Bank had a
reserve requirement with the Federal Reserve Bank of $156,000 and
$86,000 as of December 31, 1999 and 1998, respectively.
CONTINGENCIES
The Bank is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount
of ultimate liability with respect to such actions will not materially
affect the financial position or results of operations of the Bank.
273
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. SHORT-TERM BORROWING ARRANGEMENT
The Bank has a total of $2,000,000 in unsecured Federal funds lines of
credit with two of its correspondent banks to meet short-term liquidity
needs. In addition, the Bank has a line of credit available with the
Federal Home Loan Bank totaling $1,400,000 which is secured by pledged
mortgage loans. An advance totaling $1,000,000 was outstanding from the
Federal Home Loan Bank at December 31, 1999 bearing an interest rate of
5.9% and a maturity date of April 12, 2000. There were no short-term
borrowings outstanding at December 31, 1998.
9. SHAREHOLDERS' EQUITY
DIVIDENDS
Upon declaration by the Board of Directors, all shareholders of record
will be entitled to receive dividends. Under applicable Federal laws,
the Comptroller of the Currency (OCC) restricts the total dividend
payment of any national banking association in any calendar year to the
net income of the year, as defined, combined with the net income for
the two preceding years, less distributions made to shareholders during
the same three-year period. At December 31, 1999, retained earnings of
$295,630 were free of such restrictions.
EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
Shares Per Share
For the Year Ended Net Income Outstanding Amount
-------------------------------- ------------ ----------- -----------
DECEMBER 31, 1999
<S> <C> <C> <C>
Basic earnings per share $ 226,994 472,354 $ .48
===========
Effect of dilutive stock options 17,318
------------ -----------
Diluted earnings per share $ 226,994 489,672 $ .46
============ =========== ===========
DECEMBER 31, 1998
Basic earnings per share $ 345,956 471,794 $ .73
===========
Effect of dilutive stock options 22,036
------------ -----------
Diluted earnings per share $ 345,956 493,830 $ .70
============ =========== ===========
</TABLE>
274
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. SHAREHOLDERS' EQUITY (Continued)
EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
-------------------------------- ------------- ------------- ------------
DECEMBER 31, 1997
<S> <C> <C> <C>
Basic earnings per share $ 345,850 471,667 $ .73
============
Effect of dilutive stock options 10,178
------------- ------------
Diluted earnings per share $ 345,850 481,845 $ .72
============= ============= ============
</TABLE>
Weighted average number of shares outstanding are adjusted for stock
splits for all periods presented.
Options to purchase 62,500 shares of common stock at $9.26 per share
were outstanding during the first and third quarters of 1999 and
options to purchase 135,625 shares of common stock at a weighted
average price of $8.87 were outstanding during the fourth quarter of
1999 but were not included in the computation of diluted earnings per
share because the exercise price was greater than the average market
price of the common shares. Options to purchase 16,500 shares of common
stock at $10 per share were outstanding during 1997, but were not
included in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the common
shares.
STOCK OPTIONS
In 1990, the Bank established a stock option plan for which 128,126
shares of common stock are reserved for issuance to employees and
directors under incentive and nonstatutory agreements. The plan
requires that the option price may not be less than the fair market
value of the stock at the date the option is granted, and that the
stock must be paid for in full at the time the option is exercised. All
options expire on a date determined by the Board of Directors, but not
later than ten years from the date of grant. Nonstatutory options
become twenty percent vested immediately upon grant, with the remaining
options vesting ratably over the next four years. Incentive options
vest ratably over a five year period beginning one year from the date
of grant.
275
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
The Bank has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation expense has been
recognized under its stock option plan. Had compensation cost for the
plan been determined based on the fair value at grant date for awards
in 1999, 1998 and 1996 consistent with the provisions of SFAS No. 123,
the Bank's net income and income per share for the years ended December
31, 1999, 1998 and 1997 would have been reduced to the pro forma
amounts indicated below. Compensation expense is included in pro forma
income when the options become vested. The fair value of options
granted in 1999 and 1998 was estimated to be $4.45 and $3.61,
respectively.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income - as reported $ 226,994 $ 345,956 $ 345,850
Net income - pro forma $ 154,403 $ 295,057 $ 321,490
Basic income per share - as reported $ .48 $ .73 $ .73
Basic income per share - pro forma $ .33 $ .63 $ .68
Diluted income per share - as reported $ .46 $ .70 $ .72
Diluted income per share - pro forma $ .32 $ .60 $ .66
</TABLE>
The fair value of each option was estimated on the date of grant using
an option-pricing model with the following assumptions:
1999 1998
----------- -----------
Dividend yield (not applicable)
Expected volatility 73.32% 9.53%
Risk-free interest rate 6.00% 4.91%
Expected option life 10 years 10 years
276
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
A summary of the activity within the plan follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
beginning of year 153,665 $ 7.46 92,750 $ 6.22 126,875 $ 6.19
Options granted 52,500 $ 8.75 62,500 $ 9.26
Options exercised (710) $ 5.60
Options canceled (13,750) $ 7.65 (875) $ 5.60 (34,125) $ 6.12
------------ ------------ ------------
Options outstanding,
end of year 192,415 $ 7.80 153,665 $ 7.46 92,750 $ 6.22
=========== =========== ===========
Options exercisable,
end of year 102,949 $ 7.19 78,790 $ 6.91 52,750 $ 6.66
=========== =========== ===========
</TABLE>
A summary of options outstanding at December 31, 1999 follows:
<TABLE>
<CAPTION>
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 1999 Life 1999
------------------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
$ 5.60 52,415 6.8 years 40,199
$ 6.20 12,500 4.2 years 12,500
$ 8.00 18,750 .7 years 18,750
$ 8.75 52,500 10 years 9,000
$ 9.26 56,250 8.7 years 22,500
------------ ----------- ------------
192,415 102,949
============ ============
</TABLE>
277
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL
The Bank is subject to certain regulatory capital requirements
administered by the Office of the Comptroller of the Currency (OCC).
Failure to meet these minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital to risk-weighted assets and of Tier 1 capital
to average assets. Each of these components is defined in the
regulations. Management believes that the Bank meets all its capital
adequacy requirements as of December 31, 1999.
In addition, the most recent notification from the OCC categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth below. There are no conditions or events
since that notification that management believes have changed the
Bank's category.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ----- -------------- ----- ------------- -----
LEVERAGE RATIO
<S> <C> <C> <C> <C> <C> <C>
North Coast Bank $ 4,012,000 9.3% $ 3,781,000 9.8% $ 3,432,000 11.2%
Minimum requirement for "Well-
Capitalized" institution $ 2,163,000 5.0% $ 1,937,000 5.0% $ 1,525,000 5.0%
Minimum regulatory requirement $ 1,730,000 4.0% $ 1,550,000 4.0% $ 1,220,000 4.0%
TIER 1 RISK-BASED CAPITAL RATIO
North Coast Bank $ 4,012,000 10.0% $ 3,781,000 12.0% $ 3,432,000 15.9%
Minimum requirement for "Well-
Capitalized" institution $ 2,395,000 6.0% $ 1,898,000 6.0% $ 1,297,000 6.0%
Minimum regulatory requirement $ 1,597,000 4.0% $ 1,265,000 4.0% $ 865,000 4.0%
TOTAL RISK-BASED CAPITAL RATIO
North Coast Bank $ 4,395,000 11.0% $ 4,112,000 13.0% $ 3,703,000 17.1%
Minimum requirement for "Well-
Capitalized" institution $ 3,992,000 10.0% $ 3,163,000 10.0% $ 2,161,000 10.0%
Minimum regulatory requirement $ 3,194,000 8.0% $ 2,531,000 8.0% $ 1,729,000 8.0%
</TABLE>
278
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. EMPLOYEE BENEFIT PLANS
SAVINGS PLAN
The North Coast Bank 401(k) Savings Plan commenced January 1, 1993 and
is available to employees meeting certain service requirements. Under
the plan, employees may defer a selected percentage of their annual
compensation. The Bank's contribution to the plan is discretionary and
is allocated as follows:
o A matching contribution to be determined by the Board of
Directors each plan year under which the Bank will match a
percentage of each participant's contribution.
o The Bank may make additional contributions to the plan at the
discretion of the Board of Directors that shall be allocated in
the same ratio as each participant's contribution bears to total
compensation.
Bank contributions totaled $13,216, $8,560 and $8,031 for the years
ended December 31, 1999, 1998, and 1997, respectively.
11. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions
with related parties, including Directors and officers. These
transactions include borrowings from the Bank 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 1999:
Balance, January 1, 1999 $ 291,596
Disbursements 1,586,068
Amounts repaid (366,122)
------------
Balance, December 31, 1999 $ 1,511,542
============
Undisbursed commitments to related parties,
December 31, 1999 $ 934,195
============
279
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
12. OTHER EXPENSES
Other expenses for the years ended December 31, 1999, 1998 and 1997
consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Data processing $ 188,234 $ 165,602 $ 168,186
Merchant processing fees 139,819 74,019 56,809
Advertising 72,521 37,566 16,882
Stationery and supplies 71,190 45,119 47,525
Legal and accounting 33,276 38,746 51,082
Brokerage and consulting fees 30,746 38,401 24,875
Insurance 26,805 27,938 29,399
Other operating expenses 255,581 176,764 164,427
------------ ------------ ------------
$ 818,132 $ 604,155 $ 559,185
============ ============ ============
</TABLE>
13. 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 Bank's
available-for-sale investment securities are included in other
comprehensive income (loss). Total comprehensive income and the
components of accumulated other comprehensive income (loss) are
presented in the Statement of Changes in Shareholders' Equity.
At December 31, 1999, 1998 and 1997, the Bank held securities
classified as available-for-sale which had unrealized (losses) gains as
follows:
<TABLE>
<CAPTION>
Tax
Before Benefit After
Tax (Expense) Tax
------------ ------------ ------------
FOR THE YEAR ENDED DECEMBER 31, 1999
<S> <C> <C> <C>
Other comprehensive loss:
Unrealized holding losses $ (30,572) $ 9,972 $ (20,600)
============ ============ ============
FOR THE YEAR ENDED DECEMBER 31, 1998
Other comprehensive loss:
Unrealized holding losses $ (17,824) $ 7,257 $ (10,567)
Reclassification adjustment for net
gains included in net income 6,593 (2,637) 3,956
------------ ------------ ------------
Total other comprehensive
loss $ (11,231) $ 4,620 $ (6,611)
============ ============ ============
</TABLE>
280
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
13. COMPREHENSIVE INCOME (Continued)
<TABLE>
<CAPTION>
Tax
Before Benefit After
Tax (Expense) Tax
------------ ------------ ------------
FOR THE YEAR ENDED DECEMBER 31, 1997
<S> <C> <C> <C>
Other comprehensive income:
Unrealized holding gains $ 10,099 $ (4,155) $ 5,944
============ ============ ============
</TABLE>
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which
it is practicable to estimate fair value. These estimates are made as
of 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
Bank'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 Bank'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 Bank to estimate
the fair value of its financial instruments at December 31, 1999 and
1998:
CASH AND DUE FROM BANKS, CASH EQUIVALENTS AND SHORT-TERM BORROWINGS:
For cash and due from banks, cash equivalents and short-term
borrowings, the carrying amount is estimated to be fair value.
INTEREST-BEARING DEPOSITS IN BANKS: The fair value 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.
281
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
LOANS AND LEASES: For variable-rate loans and leases that reprice
frequently with no significant change in credit risk, fair values are
based on carrying values. The fair values for other loans and leases
are estimated using discounted cash flow analyses, using interest rates
offered at each reporting date for loans with similar terms to
borrowers of comparable creditworthiness. The carrying amount of
accrued interest receivable approximates its fair value.
DEPOSITS: The fair values for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date represented by
their carrying amount. Fair values for fixed-rate certificates of
deposit are estimated using discounted cash flow analyses using
interest rates offered at each reporting date by the Bank for
certificates with similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT: Commitments to
extend credit and letters of credit are primarily for variable rate
loans. For these commitments, there is no difference between the
committed amounts and their fair values. Commitments to fund fixed rate
loans and letters of credit are at rates which approximate fair value
at each reporting date.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- --------------- --------------- ----------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 2,626,289 $ 2,626,289 $ 3,484,967 $ 3,484,967
Federal funds sold 1,000,000 1,000,000 4,600,000 4,600,000
Interest-bearing deposits
in banks 793,000 793,000 693,000 693,000
Investment securities 1,708,000 1,708,000 1,428,995 1,428,995
Loans and leases 39,735,527 39,323,000 30,802,994 30,836,411
Accrued interest receivable 250,478 250,478 206,119 206,119
---------------- --------------- --------------- ----------------
$ 46,113,294 $ 45,700,767 $ 41,216,075 $ 41,249,492
================ =============== =============== ================
Financial liabilities:
Deposits $ 42,081,162 $ 42,113,000 $ 38,153,043 $ 38,155,639
Accrued interest payable 39,624 39,624 36,887 36,887
---------------- --------------- --------------- ----------------
$ 42,120,786 $ 42,152,624 $ 38,189,930 $ 38,192,526
================ =============== =============== ================
Off-balance-sheet financial
instruments:
Commitments to extend
credit $ 8,757,000 $ 8,757,000 $ 4,462,000 $ 4,462,000
Credit card arrangements 397,000 397,000 497,000 497,000
Letters of credit 150,000 150,000 150,000 150,000
---------------- --------------- --------------- ----------------
$ 9,304,000 $ 9,304,000 $ 5,109,000 $ 5,109,000
================ =============== =============== ================
</TABLE>
282
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
15. SUBSEQUENT EVENT
On March 1, 2000, the Directors of North Coast Bank and American River
Holdings approved a definitive merger agreement between the two
companies. As a result, North Coast Bank, American River Bank, and
First Source Capital will operate as wholly-owned subsidiaries under
American River Holdings. Under the agreement, each share of North Coast
Bank will be converted into the right to receive .9644 of a share of
the common stock of American River Holdings. The transaction will be
accounted for under the pooling-of-interests method of accounting. It
is expected that this merger will be accomplished in the third quarter
of 2000, subject to shareholder and regulatory approval.
The unaudited pro forma information set forth below assumes that the
merger of the two companies took place on January 1, 1997. This
information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would
have been achieved had the merger been consummated at that time.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net interest income $ 11,754,000 $ 10,743,000 $ 9,582,000
Net income $ 3,128,000 $ 2,850,000 $ 2,347,000
Basic earnings per common share $ 1.37 $ 1.25 $ 1.02
Diluted earnings per common share $ 1.30 $ 1.14 $ .94
</TABLE>
283
<PAGE>
EXPERTS
The consolidated financial statements of American River Holdings
included in this document for the year ended December 31, 1999 have been audited
by Perry-Smith LLP, independent accountants, as stated in their report, given
upon their authority as experts in accounting and auditing.
The financial statements of North Coast Bank, N.A. included in this
document for the year ended December 31, 1999 have been audited by Perry-Smith
LLP, independent accountants, as stated in their report, given upon their
authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of American River Holdings common stock
offered hereby and material legal matters in connection with the merger will be
passed upon for American River Holdings by Coudert Brothers, San Jose,
California. Certain federal and California tax matters will be passed upon by
Perry-Smith LLP, Sacramento, California.
SHAREHOLDER PROPOSALS
Next years' annual meeting of shareholders of American River Holdings
is currently scheduled to be held on May 15, 2001. Any shareholder desiring to
submit a proposal for action and to be included in the proxy statement for the
2001 Annual Meeting of Shareholders, should mail such proposal by certified
mail, return receipt requested, to American River Holdings, 1545 River Park
Drive, Suite 107, Sacramento, California 95815, Attention: David T. Taber,
President and Chief Executive Officer. All such proposals must be received by
American River Holdings not later than December 14, 2000. Matters pertaining to
such proposals, including the number and length thereof, eligibility of persons
entitled to have such proposals included, and other aspects related to such
proposals, are regulated by the Securities Exchange Act of 1934, as amended.
SOLICITATION OF PROXIES
Each of American River Holdings and North Coast Bank, N.A. will bear
the cost of the solicitation of proxies from their respective shareholders. In
addition to solicitation by mail, the directors, officers and employees of
American River Holdings or North Coast Bank, N.A. may solicit proxies from their
respective shareholders by telephone or telegram or in person. Those persons
will not be additionally compensated, but will be reimbursed for reasonable
out-of-pocket expenses incurred in connection with the solicitations.
Arrangements will also be made with brokerage firms, nominees, fiduciaries and
other custodians, for the forwarding of solicitation materials to the beneficial
owners of shares held of record by those persons, and American River Holdings or
North Coast Bank, N.A., as applicable, will reimburse those persons for their
reasonable out-of-pocket expenses in connection with those solicitations. North
Coast Bank, N.A. has retained Chase Mellon Shareholder Services of San
Francisco, California, to aid in the solicitation of proxies and to verify
records related to the solicitations. Chase Mellon Shareholder Services will
receive $4,500 as compensation for its services and $2,000 as reimbursement for
its related out-of-pocket expenses.
ANNUAL DISCLOSURE STATEMENT
Copies of the Annual Disclosure Statements of American River Bank and
North Coast Bank, N.A., respectively, are available, upon request, at no cost to
you. Additional copies may be obtained for a nominal fee. See "Where You Can
Find More Information" on page 285.
284
<PAGE>
ANNUAL REPORT
The Annual Reports to Shareholders for American River Holdings and
North Coast Bank, N.A., respectively, for the year ended December 31, 1999, were
previously mailed to their respective shareholders. A copy of the American River
Holdings and/or the North Coast Bank, N.A. Annual Report to Shareholders is
available, upon request, at no cost to you. Additional copies may be obtained
for a nominal fee. See "Where You Can Find More Information" below.
OTHER MATTERS
Management is not aware of any other matters to be presented at the
American River Holdings annual meeting or North Coast Bank, N.A. special meeting
other than those set forth above. However, if other matters properly come before
the respective annual meeting or special meeting, it is the intention of the
persons named in the accompanying proxy to vote the proxy in accordance with the
recommendations of the board of directors, and the discretionary authority
granted to the proxy holders named in the proxy.
WHERE YOU CAN FIND MORE INFORMATION
Neither American River Holdings nor North Coast Bank, N.A. currently
has a class of securities registered under Section 12 of the Securities Exchange
Act of 1934, as amended, nor is it required to file reports with the Securities
and Exchange Commission under Section 13 of the Securities Exchange Act of 1934.
In connection with the merger, American River Holdings will register its common
stock under Section 12 of the Securities Exchange Act and thereafter will be
required to file reports, proxy statements and other information under Section
13 of the Securities Exchange Act with the Securities and Exchange Commission.
American River Holdings has filed with the Securities and Exchange
Commission a registration statement on Form S-4 under the Securities Act of
1933, as amended, relating to the shares of American River Holdings common stock
to be issued in connection with the merger. This document also constitutes the
prospectus of American River Holdings filed as part of the registration
statement and does not contain all the information set forth in the registration
statement and exhibits thereto. You may copy and read the registration statement
and its exhibits at the Securities and Exchange Commission's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. You may
also obtain copies of this information by mail from the Public Reference Section
of the SEC, 450 5th Street, N.W., Room 1024, Washington, D.C. 20549 at
prescribed rates. Please call the Securities and Exchange Commission at (800)
SEC-0330 for further information on the public reference rooms. The Securities
and Exchange Commission also maintains an Internet World Wide Web site at
"http://www.sec.gov" at which any information filed by American River Holdings
will be available.
American River Holdings and North Coast Bank, N.A. will provide without
charge, to each person to whom this document is delivered, upon written or oral
request, a copy of their respective Annual Disclosure Statement and Annual
Report to Shareholders. These requests should be directed to:
<TABLE>
<CAPTION>
<S> <C>
American River Holdings North Coast Bank, N.A.
1545 River Park Drive, Suite 107 50 Santa Rosa Avenue
Sacramento, California 95815 Santa Rosa, California 95404
Attention: David T. Taber, President and Attention: Kathy A. Pinkard, President and
Chief Executive Officer Chief Executive Officer
(916) 565-6100 (707) 528-6300
</TABLE>
285
<PAGE>
In deciding how to vote on the transactions contemplated by the merger
agreement, including the merger, you should rely only on the information
contained in this document. Neither American River Holdings nor North Coast
Bank, N.A. has authorized any person to provide you with any information that is
different from what is contained in this document. This document is dated August
10, 2000. You should not assume that the information contained in this document
is accurate as of any date other than the date of this document, and neither the
mailing to you of this document nor the issuance to you of shares of American
River Holdings common stock will create any implication to the contrary. This
document does not constitute an offer to sell or a solicitation of any offer to
buy any securities, or the solicitation of a proxy in any jurisdiction in which,
or to any person to whom, it is unlawful.
286
<PAGE>
ANNEX A
MERGER AGREEMENT
(AGREEMENT AND PLAN OF REORGANIZATION AND MERGER, DATED AS OF MARCH 1,
2000, AND EXHIBITS A, B, C, D, & E)
<PAGE>
AGREEMENT
AND
PLAN OF REORGANIZATION AND MERGER
BY AND AMONG
AMERICAN RIVER HOLDINGS,
ARH INTERIM NATIONAL BANK
AND
NORTH COAST BANK, NATIONAL ASSOCIATION
MARCH 1, 2000
<PAGE>
TABLE OF CONTENTS
PAGE
1. The Merger...........................................................A-2
1.1 Effective Date and Time.......................................A-2
1.2 Effect of the Merger..........................................A-2
2. Conversion And Cancellation Of Shares................................A-3
2.1 Conversion of NCB Shares......................................A-3
2.2 Fractional Shares.............................................A-3
2.3 Surrender of NCB Shares.......................................A-3
2.4 Further Transfers of NCB Shares...............................A-4
2.5 Adjustments...................................................A-4
2.6 Treatment of Stock Options....................................A-4
2.7 Dissenting Shareholders.......................................A-5
2.8 Interim Bank as Party.........................................A-5
3. Covenants Of The Parties.............................................A-5
3.1 Covenants of ARH..............................................A-5
a. Amendment of Interim Bank Articles and Bylaws............A-5
b. Appointment of ARH Directors.............................A-6
c. Amendment of ARH Stock Option Plan.......................A-6
d. Reservation, Issuance and Registration of ARH Shares.....A-6
e. Nasdaq Stock Market Listing..............................A-6
f. Director and Officer Liability...........................A-7
g. Business Combination.....................................A-8
3.2 Covenants of NCB..............................................A-9
a. Termination of NCB Stock Option Plan.....................A-9
b. Termination or Merger of NCB Benefit Plans...............A-9
c. Capital Commitments and Expenditures.....................A-9
d. Compensation.............................................A-9
e. Loans....................................................A-9
f. Certain Notices.........................................A-10
g. Loan Review.............................................A-10
h. Loan Provision..........................................A-11
i. No Merger or Solicitation...............................A-11
3.3 Mutual Covenants of ARH and NCB..............................A-12
-i-
<PAGE>
PAGE
a. Appointment of Executive Officers.......................A-12
b. Appointment of Bank Directors...........................A-12
c. Executive Management Committee..........................A-12
d. Cumulative Voting; Classified Board of Directors........A-12
e. Approval by Shareholders................................A-13
f. Shareholder Lists and Other Information.................A-14
g. Government Approvals....................................A-14
h. Notification of Breach of Representations, Warranties
and Covenants...........................................A-14
i. Financial Statements....................................A-14
j. Conduct of Business in the Ordinary Course..............A-15
k. Press Releases..........................................A-17
l. Employee Benefit Plans..................................A-17
m. Certain Changes; Dividends..............................A-17
n. Access to Properties, Books and Records;
Confidentiality.......................................A-18
o. Loan Performance........................................A-19
p. Preparation of Joint Proxy Statement/Prospectus.........A-20
q. Pooling Accounting......................................A-20
4. Representations And Warranties Of NCB...............................A-20
a. Corporate Status and Power to Enter Into Agreements.....A-20
b. Articles, Bylaws, Books and Records.....................A-20
c. Compliance With Laws, Regulations and Decrees...........A-21
d. Capitalization..........................................A-21
e. Trademarks and Trade Names..............................A-21
f. Financial Statements, Regulatory Reports................A-22
g. Tax Returns.............................................A-22
h. Material Adverse Change.................................A-23
i. No Undisclosed Liabilities..............................A-23
j. Properties and Leases...................................A-24
k. Material Contracts......................................A-25
l. Classified Loans........................................A-25
m. No Restrictions on Investments..........................A-26
n. NCB Benefit Plans/ERISA.................................A-26
o. Collective Bargaining and Employment Agreements.........A-27
p. Compensation of Officers and Employees..................A-28
q. Legal Actions and Proceedings...........................A-28
r. Execution and Delivery of the Agreements................A-28
s. Retention of Broker or Consultant.......................A-29
t. Insurance...............................................A-29
u. Loan Loss Reserves......................................A-29
v. Transactions With Affiliates............................A-30
w. Risk Management Instruments.............................A-30
x. Year 2000...............................................A-30
-ii-
<PAGE>
PAGE
y. Community Reinvestment Act Compliance...................A-31
z. Information in ARH Registration Statement...............A-31
aa. Accuracy and Effective Date of Representations and
Warranties, Covenants and Agreements....................A-31
bb. Brokered Deposits.......................................A-32
5. Representations And Warranties Of ARH...............................A-32
a. Corporate Status and Power to Enter Into Agreements.....A-32
b. Articles, Bylaws, Books and Records.....................A-33
c. Compliance With Laws, Regulations and Decrees...........A-33
d. Capitalization..........................................A-33
e. Trademarks and Trade Names..............................A-34
f. Financial Statements, Regulatory Reports................A-34
g. Tax Returns.............................................A-35
h. Material Adverse Change.................................A-35
i. No Undisclosed Liabilities..............................A-36
j. Properties and Leases...................................A-36
k. Material Contracts......................................A-37
l. Classified Loans........................................A-38
m. No Restrictions on Investments..........................A-38
n. ARH Benefit Plans/ERISA.................................A-38
o. Collective Bargaining and Employment Agreements.........A-39
p. Compensation of Officers and Employees..................A-40
q. Legal Actions and Proceedings...........................A-40
r. Execution and Delivery of the Agreements................A-40
s. Retention of Broker or Consultant.......................A-41
t. Insurance...............................................A-41
u. Loan Loss Reserves......................................A-42
v. Transactions With Affiliates............................A-42
w. Risk Management Instruments.............................A-42
x. Year 2000...............................................A-43
y. Community Reinvestment Act Compliance...................A-43
z. Information in ARH Registration Statement...............A-43
aa. Accuracy and Effective Date of Representations and
Warranties, Covenants and Agreements....................A-44
bb. Brokered Deposits.......................................A-44
6. Securities Act Of 1933; Securities Exchange Act Of 1934.............A-44
a. Preparation and Filing of Registration Statement........A-44
b. Effectiveness of Registration Statement.................A-45
c. Sales and Resales of Common Stock.......................A-45
d. Rule 145................................................A-45
7. Conditions To The Obligations Of ARH................................A-45
-iii-
<PAGE>
a. Representations and Warranties..........................A-46
b. Compliance and Performance Under Agreements.............A-46
c. Material Adverse Change.................................A-46
d. Approval of Agreements..................................A-46
e. Officer's Certificate...................................A-46
f. Opinion of Counsel......................................A-46
g. Absence of Proceedings..................................A-46
h. Effectiveness of Registration Statement.................A-47
i. Government Approvals....................................A-47
j. Tax Opinion.............................................A-47
k. Accountant's Comfort Letters............................A-48
l. Dissenting Shares.......................................A-49
m. Unaudited Financials....................................A-49
n. Affiliate Agreements....................................A-49
o. Closing Documents.......................................A-49
p. Consents................................................A-49
q. Fairness Opinion........................................A-49
r. Accounting Treatment....................................A-49
s. Shareholder Agreements..................................A-50
t. Performance Tests.......................................A-50
8. Conditions To The Obligations Of NCB................................A-50
a. Representations and Warranties..........................A-50
b. Compliance and Performance Under Agreement..............A-51
c. Material Adverse Change.................................A-51
d. Approval of Agreements..................................A-51
e. Officer's Certificate...................................A-51
f. Opinion of Counsel......................................A-51
g. Absence of Proceedings..................................A-51
h. Effectiveness of Registration Statement.................A-51
i. Government Approvals....................................A-52
j. Tax Opinion.............................................A-52
k. Accountant's Comfort Letters............................A-53
l. Dissenting Shares.......................................A-53
m. Unaudited Financials....................................A-54
n. Affiliate Agreements....................................A-54
o. Closing Documents.......................................A-54
p. Consents................................................A-54
q. Fairness Opinion........................................A-54
r. Accounting Treatment....................................A-54
s. Shareholder Agreements..................................A-54
t. Performance Tests.......................................A-55
-iv-
<PAGE>
9. Closing.............................................................A-55
a. Closing Date............................................A-55
b. Delivery of Documents...................................A-55
c. Filings.................................................A-55
10. Post-Closing Matters................................................A-55
11. Expenses............................................................A-56
12. Amendment; Termination..............................................A-56
a. Amendment...............................................A-56
b. Termination.............................................A-56
c. Termination Date........................................A-58
d. Notice..................................................A-59
e. Effect of Termination; Liquidated Damages...............A-59
13. Indemnification.....................................................A-59
a. By ARH..................................................A-59
b. By NCB..................................................A-60
c. Notification............................................A-60
14. Miscellaneous.......................................................A-61
a. Notices.................................................A-61
b. Knowledge...............................................A-61
c. Binding Agreement.......................................A-61
d. Material Adverse Effect.................................A-62
e. Survival of Representations and Warranties..............A-62
f. Governing Law...........................................A-62
g. Attorneys' Fees.........................................A-62
h. Entire Agreement; Severability..........................A-62
i. Counterparts............................................A-63
-v-
<PAGE>
EXHIBITS
A. Agreement of Merger
B. NCB Affiliate Agreement
C. NCB Shareholder Agreement
D. ARH Affiliate Agreement
E. ARH Shareholder Agreement
-vi-
<PAGE>
AGREEMENT
AND
PLAN OF REORGANIZATION AND MERGER
THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER, dated as of March
1, 2000, ("Merger Agreement"), is made and entered into by and among American
River Holdings, a California corporation and bank holding company registered
under the Bank Holding Company Act of 1956, as amended ("ARH"), ARH Interim
National Bank, an interim national banking association to be formed at the
direction of ARH ("Interim Bank") and North Coast Bank, National Association, a
national banking association chartered under the laws of the United States
("NCB").
A. The Boards of Directors of ARH and NCB deem it advisable and
in the best interests of ARH and NCB, and their respective
shareholders, that ARH, Interim Bank and NCB enter into a
business combination, with the expectation that the resulting
multibank holding company structure will combine the best
elements of ARH and its subsidiaries, American River Bank, a
California state chartered banking corporation ("ARB") and
First Source Capital, a California corporation ("FSC"), and
NCB. Pursuant to a forward triangular merger under the
authority of 12 U.S.C. 215a, NCB shall merge with and into
Interim Bank (the "Merger") and the resulting national banking
association will continue with the national bank charter
number of NCB and the name "North Coast Bank, National
Association" as a wholly-owned subsidiary of ARH.
B. Upon organization of the Interim Bank, the Interim Bank will
become a party to this Merger Agreement by the execution and
delivery of an addendum or amendment to this Merger Agreement,
in form and substance acceptable to ARH, NCB and the directors
and shareholders of the Interim Bank.
C. This Merger Agreement and the Agreement of Merger,
substantially in the form attached hereto as Exhibit A and
intended to be filed with the Office of the Comptroller of the
Currency (the "Agreement of Merger"), have been approved by
the Boards of Directors of ARH and NCB, and will be approved
by the directors and shareholders of the Interim Bank, and the
principal terms of the Merger will be submitted for approval
of the shareholders of ARH and NCB at special meetings of
their respective shareholders.
D. The Merger is intended to qualify as a tax-free reorganization
within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "IRC"), and the Merger shall be
accounted for as a "pooling of interests."
A-1
<PAGE>
E. Pursuant to the Merger, each NCB shareholder will receive, in
exchange for each share of NCB common stock ("NCB Share" or
"NCB Shares"), the number of shares of ARH common stock ("ARH
Share" or "ARH Shares") determined in accordance with the
conversion ratio as more fully set forth in this Merger
Agreement and in the Agreement of Merger (the "Conversion
Ratio").
F. The Boards of Directors of ARH, ARB, FSC and NCB have
determined that the Merger and the other transactions
contemplated by this Merger Agreement are consistent with, and
will contribute to the furtherance of, their respective
business strategies and goals.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and in the Agreement of Merger, the parties hereto
agree as follows:
1. THE MERGER.
1.1 EFFECTIVE DATE AND TIME. Subject to the terms and conditions
of this Merger Agreement, the Merger shall become effective on the date
("Effective Date") and at the time ("Effective Time of the Merger") selected by
the parties after the Merger has been certified by the Office of the Comptroller
of the Currency ("OCC"), an executed copy of the Agreement of Merger has been
filed with and accepted by the OCC, all Government Approvals have been received
and satisfied and all other conditions to the Merger set forth in this Merger
Agreement have been satisfied.
1.2 EFFECT OF THE MERGER. Subject to the terms and conditions of
this Merger Agreement, at the Effective Time of the Merger, NCB shall be merged
with and into the Interim Bank and the resulting national banking association in
the Merger (the "Resulting Association") will continue as a wholly-owned
subsidiary of ARH with the national bank charter number of NCB and the name
"North Coast Bank, National Association." All assets, rights, privileges,
immunities, powers, franchises and interests of NCB in and to every type of
property (real, personal and mixed) and choses in action, as they exist as of
the Effective Date, including appointments, designations and nominations and all
other rights and interests as assignee, receiver and in any fiduciary capacity,
shall pass and be transferred to and vest in the Resulting Association by virtue
of the Merger at the Effective Time of the Merger without any deed, conveyance
or other transfer; the separate corporate existence of NCB and the Interim Bank
shall cease; and the Resulting Association shall be deemed to be the same entity
as each of NCB and the Interim Bank and shall be subject to all of their duties
and liabilities of every kind and description. The Resulting Association shall
be responsible and liable for all the liabilities and obligations of each of NCB
and the Interim Bank; and any claim existing or action or proceeding pending by
or against NCB or the Interim Bank may be prosecuted as if the Merger had not
taken place, or the Resulting Association may be substituted in the place of NCB
or the Interim Bank. Neither the rights of creditors nor any liens upon the
property of either NCB or the Interim Bank shall be impaired by reason of the
Merger.
A-2
<PAGE>
2. CONVERSION AND CANCELLATION OF SHARES.
2.1 CONVERSION OF NCB SHARES. At the Effective Time of the Merger,
by virtue of the Merger and without any action on the part of ARH, NCB or any
holder of NCB Shares, subject to Section 2.2, 2.3 and 2.5 of this Merger
Agreement, each outstanding NCB Share (other than any shares as to which
dissenters' rights have been perfected as provided in Section 2.7 of this Merger
Agreement), shall be converted into the right to receive a number of ARH Shares
(or fraction thereof, subject to Section 2.2 of this Merger Agreement) based on
a conversion ratio of .9644 of an ARH Share for each such NCB Share (the
"Conversion Ratio").
2.2 FRACTIONAL SHARES. Notwithstanding any other provision hereof,
no fractional shares of ARH Shares shall be issued to holders of NCB Shares. In
lieu thereof, each such holder entitled to a fraction of an ARH Share shall
receive, at the time of surrender of the certificate or certificates
representing such holder's NCB Shares, an amount in cash equal to the average of
the closing bid and asked prices for an ARH Share quoted on the OTC Bulletin
Board for each of the twenty (20) trading days ending on the third business day
immediately preceding the Effective Date, multiplied by the fraction of an ARH
Share to which such holder otherwise would be entitled and rounded to the
nearest penny. No such holder shall be entitled to dividends, voting rights,
interest on the value of, or any other rights in respect of a fractional share.
2.3 SURRENDER OF NCB SHARES.
a. Prior to the Effective Date, ARH shall appoint U.S. Stock
Transfer Corporation, or its successor, or any other bank or trust company
(having capital of at least $50 million) mutually acceptable to ARH and NCB, as
exchange agent (the "Exchange Agent") for the purpose of exchanging certificates
representing NCB Shares and at and after the Effective Time of the Merger, ARH
shall issue and deliver to the Exchange Agent such number of certificates
representing ARH Shares and cash for payment of fractional shares, as shall be
required to be delivered to holders of NCB Shares pursuant to the Agreement of
Merger. As soon as practicable after the Effective Time of the Merger, each
holder of NCB Shares converted pursuant to Section 2.1, upon surrender to the
Exchange Agent of one or more certificates for such NCB Shares for cancellation,
will be entitled to receive a certificate or certificates representing the
number of ARH Shares determined in accordance with Section 2.1 and a payment in
cash with respect to fractional shares, if any, determined in accordance with
Section 2.2.
b. No dividends or other distributions of any kind which are
declared payable to shareholders of record of the ARH Shares after the Effective
Date will be paid to persons entitled to receive such certificates for ARH
Shares until such persons surrender their certificates representing NCB Shares.
Upon surrender of such certificates representing NCB Shares, the holder thereof
shall be paid, without interest, any dividends or other distributions with
respect to
A-3
<PAGE>
the ARH Shares as to which the record date and payment date occurred on or after
the Effective Date and on or before the date of surrender.
c. If any certificate for ARH Shares is to be issued in a name
other than that in which the certificate for NCB Shares surrendered in exchange
therefor is registered, any transfer costs or expenses (except taxes) required
by reason of the issuance of certificates for such ARH Shares in a name other
than the registered holder of the certificate surrendered shall be paid by the
person requesting such change.
d. All dividends or distributions, and any cash to be paid
pursuant to Section 2.2 in lieu of fractional shares, if held by the Exchange
Agent for payment or delivery to the holders of unsurrendered certificates
representing NCB Shares and unclaimed at the end of one year from the Effective
Date, shall (together with any interest earned thereon) at such time be paid or
redelivered by the Exchange Agent to ARH, and after such time any holder of a
certificate representing NCB Shares who has not surrendered such certificate to
the Exchange Agent shall, subject to applicable law, only have the rights of a
general creditor of ARH for payment or delivery by ARH of such dividends or
distributions or cash, as the case may be.
2.4 FURTHER TRANSFERS OF NCB SHARES. At the Effective Time of the
Merger, the stock transfer books of NCB shall be closed and no transfer of NCB
Shares theretofore outstanding shall thereafter be made.
2.5 ADJUSTMENTS. If, between the date of this Merger Agreement and
the Effective Date, the outstanding shares of ARH Shares or NCB Shares shall
have been changed into a different number of shares or a different class by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment, or a stock dividend or stock split thereon
shall be declared with a record date within such period, the Conversion Ratio
shall be proportionately adjusted with the result that the holders of NCB Shares
shall receive the same economic benefit set forth in Section 2.1 of this Merger
Agreement.
2.6 TREATMENT OF STOCK OPTIONS.
a. Each person holding one or more options to purchase NCB
Shares ("NCB Option" or "NCB Options") including NCB Options issued pursuant to
the North Coast Bank, National Association 1990 Stock Option Plan, as amended to
date ("NCB Stock Option Plan") and NCB Options issued directly by NCB outside of
the NCB Stock Option Plan, shall have the right, in his or her discretion, to
either:
(i) exercise any vested portion (including any portion
vested as a result of the Merger) of the NCB Option to acquire
NCB Shares prior to the Effective Date; or
A-4
<PAGE>
(ii) as of the Effective Time of the Merger, surrender
the NCB Option agreement to ARH, in which event such person
will be entitled to receive a substitute option ("Substitute
Option") exercisable for (a) the number of ARH Shares equal to
the number of NCB Shares for which such person held NCB
Options multiplied by the Conversion Ratio and rounded down to
the nearest whole share, and (b) the exercise price for the
shares subject to the NCB Option shall be adjusted by dividing
the pre-Merger exercise price for the NCB Option by the
Conversion Ratio, rounded to the nearest penny.
b. The Substitute Options to be received in exchange for NCB
Options shall be, to the greatest extent practicable, vested to the same extent
as before the Merger (including any portion vested as a result of the Merger),
shall continue to vest on the same vesting schedule as provided under the
original applicable NCB Option agreement, shall be exercisable as provided in
the original applicable NCB Option agreement and shall otherwise preserve the
characteristics, terms and conditions of the original NCB Option to the greatest
extent possible, subject to the requirements of law and any applicable rules and
regulations of the OCC.
2.7 DISSENTING SHAREHOLDERS. Any NCB Shares held by persons who
have satisfied the requirements of 12 U.S.C. Section 215a(b), (c) and (d) with
respect to such NCB Shares shall not be converted pursuant to this Merger
Agreement, but the holders thereof shall be entitled only to such rights as are
granted them by Section 215a(b), (c) and (d). Each dissenting shareholder who is
entitled to payment of his or her NCB Shares pursuant to Section 215a(b), (c)
and (d) shall receive payment from ARH in an amount as determined pursuant to
Section 215a(b), (c) and (d).
2.8 INTERIM BANK AS PARTY. ARH and NCB agree that, when organized
and chartered by the OCC, the Interim Bank shall become a party to this Merger
Agreement by the execution and delivery of an addendum or an amendment to the
Merger Agreement, in form and substance acceptable to ARH, NCB and the directors
and shareholders of the Interim Bank.
3. COVENANTS OF THE PARTIES.
3.1 COVENANTS OF ARH. During the period from the date of this
Merger Agreement and continuing until the Effective Time of the Merger, except
as expressly contemplated or permitted by this Merger Agreement or to the extent
that NCB shall otherwise consent in writing, which consent will not be
unreasonably withheld or delayed more than three (3) business days after the
request for consent is delivered:
a. AMENDMENT OF INTERIM BANK ARTICLES AND BYLAWS. The Board of
Directors of ARH shall take all necessary corporate action, to be effective at
the Effective Time of the Merger, to amend the Articles of Association and
Bylaws of the Interim Bank to the extent required by applicable law or
regulation and subject to any required approvals of shareholders, government
agencies or regulatory authorities, to: (i) change the name of the Resulting
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Association to "North Coast Bank, National Association"; and (ii) provide for a
range in the number of authorized directors of not less than five (5) and not
more than twenty-five (25), and to adopt a resolution fixing the exact number of
directors at eleven (11) or such other number agreed to by ARH and NCB.
b. APPOINTMENT OF ARH DIRECTORS. Promptly after the Effective
Time of the Merger, two (2) of the existing directors of NCB (to be initially
designated by the NCB Board of Directors and subject to ARH approval) shall be
appointed to the ARH Board of Directors. One such director shall serve as a
Class II Director and the other such director shall serve as a Class III
Director, under the classified Board structure contemplated by Section 3.3.d.
below, provided that (i) a proposal for classification of the ARH Board of
Directors is approved by ARH shareholders as contemplated by Section 3.3.d.
below and (ii) ARH Shares are listed for trading on the Nasdaq National Market
as contemplated by Section 3.1.e. below. If the ARH shareholders do not approve
the proposal to classify the ARH Board of Directors, or the ARH Shares are not
listed for trading on the Nasdaq National Market, the two NCB directors intended
to be appointed to the ARH Board of Directors to serve as a Class II Director
and as a Class III Director, respectively, shall instead be appointed to the ARH
Board of Directors without classification to serve until their successors are
duly elected and qualified. In such event, ARH shall nominate the two NCB
directors for election in 2001 and 2002 in connection with any proposal to elect
directors to the ARH Board of Directors whether at a meeting of ARH shareholders
or as otherwise permitted by the ARH bylaws.
c. AMENDMENT OF ARH STOCK OPTION PLAN. ARH shall take all
necessary corporate action, including any required approval of the shareholders
of ARH to amend its 1995 Stock Option Plan ("ARH Stock Option Plan") or
establish a new stock option plan (at the meeting described in Section 3.3.e
hereof) and shall cause to be filed and become effective under the Securities
Act of 1933, as amended (the "1933 Act"), as of or as soon as practicable
following the Effective Time of the Merger, a registration statement with
respect to the options to be granted and shares to be issued thereunder to
fulfill the obligations to grant Substitute Options to holders of NCB Options
pursuant to Section 2.6 of this Merger Agreement.
d. RESERVATION, ISSUANCE AND REGISTRATION OF ARH SHARES. ARH
shall reserve for issuance in connection with the Merger and in accordance with
the terms of this Merger Agreement (i) a number of ARH Shares sufficient to
complete the exchange of ARH Shares for the outstanding NCB Shares pursuant to
the Conversion Ratio and the provisions of Section 2.1 above and (ii) the
maximum number of ARH Shares to which the holders of Substitute Options may be
entitled pursuant to Section 2.6 above at or after the Effective Time of the
Merger. ARH shall cause such ARH Shares to be registered under the 1933 Act, as
provided in Section 6 below.
e. NASDAQ STOCK MARKET LISTING. ARH shall take all necessary
action to list ARH's Shares with the Nasdaq Stock Market for trading on the
Nasdaq National Market, to be effective as soon as practicable following the
Effective Time of the Merger.
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f. DIRECTOR AND OFFICER LIABILITY. In the event of any
threatened or actual claim, action, suit, proceeding or investigation, whether
civil, criminal or administrative, including, without limitation, any such
claim, action, suit, proceeding or investigation in which any person who is now,
or has been at any time prior to the date of this Merger Agreement, or who
becomes prior to the Effective Time of the Merger, a director, officer or
employee of NCB ("Indemnified Parties") is, or is threatened to be, made a party
based in whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he is or was a director or officer of NCB or any
predecessor or (ii) this Merger Agreement or any of the transactions
contemplated hereby, whether in any case asserted or arising before or after the
Effective Date, ARH and NCB agree to cooperate and use their best efforts to
defend against and respond thereto. It is understood and agreed that after the
Effective Date, ARH shall indemnify and hold harmless, as and to the fullest
extent permitted by law, each such Indemnified Party against any losses, claims,
damages, liabilities, costs, expenses (including reasonable attorney's fees and
expenses in advance of the final disposition of any claim, suit, proceeding or
investigation to each Indemnified Party to the fullest extent permitted by law
upon receipt of any undertaking required by applicable law), judgments, fines
and amounts paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation and in the event of any such
threatened or actual claim, action, suit, proceeding, or investigation (whether
asserted or arising before or after the Effective Date), the Indemnified Parties
may retain counsel reasonably satisfactory to them after consultation with ARH;
provided, however, that (1) ARH shall have the right to assume the defense
thereof and upon such assumption ARH shall not be liable to any Indemnified
Party for any legal expenses of other counsel or any other expenses subsequently
incurred by any Indemnified Party in connection with the defense thereof, except
that if ARH elects not to assume such defense or counsel for the Indemnified
Parties reasonably advises the Indemnified Parties that there are issues which
raise conflicts of interest between ARH and the Indemnified Parties, the
Indemnified Parties may retain counsel reasonably satisfactory to them after
consultation with ARH, and ARH shall pay the reasonable fees and expenses of
such counsel for the Indemnified Parties, (2) ARH shall be obligated pursuant to
this paragraph to pay for only one firm of counsel for all Indemnified Parties,
unless an Indemnified Party shall have reasonably concluded based on the advice
of counsel that in order to be adequately represented, separate counsel is
necessary for such Indemnified Party, in which case, ARH shall be obligated to
pay for such separate counsel, (3) ARH shall not be liable for any settlement
effected without its prior written consent (which consent shall not be
unreasonably withheld), and (4) ARH shall have no obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final and non-appealable,
that indemnification of such Indemnified Party in the manner contemplated hereby
is prohibited by applicable law; provided, further, that ARH hereby expressly
undertakes the indemnification of certain officers and directors and former
officers and directors in existing matters for which indemnification is being
provided by NCB and, notwithstanding the provisions of this Section 3.1.f., such
indemnification shall be on the same terms and subject to the same limitations
as shall exist on the Effective Date. Any Indemnified Party wishing to claim
Indemnification under this Section 3.1.f., upon learning of any such
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claim, action, suit, proceeding or investigation, shall notify ARH thereof,
provided that the failure to so notify shall not affect the obligations of ARH
under this Section 3.1.f. except to the extent such failure to notify materially
prejudices ARH. ARH's obligations under this Section 3.1.f. continue in full
force and effect for a period of three (3) years from the Effective Date;
provided, however, that all rights to indemnification in respect of any claim
("Claim") asserted or made within such period shall continue until the final
disposition of such Claim and provided further that ARH shall have the right of
setoff against any payments required to be made by ARH to an Indemnified Party
pursuant to this Section 3.1.f. to the extent that such Indemnified Party shall
have received the indemnification to which such Indemnified Party is entitled
from an insurer under a directors' and officers' liability insurance policy
maintained by NCB or ARH.
ARH, from and after the Effective Date, will directly or
indirectly cause the persons who served as directors or officers of NCB on or
before the Effective Date to be covered by ARH's existing directors' and
officers' liability insurance policy (provided that ARH may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions which are not less advantageous than such policy) or so-called tail
coverage obtained in connection with NCB's directors' and officers' liability
insurance policies in effect as of the Effective Date; provided that ARH shall
not be obligated to make annual premium payments for such insurance to the
extent such premiums exceed 150% of the premiums paid as of the date hereof by
NCB for such insurance. Subject to the preceding sentence, such insurance
coverage, shall commence on the Effective Date and will be provided for a period
of no less than three (3) years after the Effective Date. From the date hereof
through the Effective Date and subject to the foregoing, NCB shall use its best
efforts to arrange for tail coverage related to its then current policies of
directors' and officers' liability insurance and, following the Effective Date,
ARH shall exercise those rights which it may have in order to commence such
coverage. In connection with any active, pending claim under an existing NCB
directors' and officers' liability insurance policy, ARH will take no action
that would have the effect of waiving any such claim and will not omit to take
any action that is necessary to preserve such a claim.
In the event ARH or any of its successors or assigns (A)
consolidates with or merges into any third person, group or entity and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger, or (B) transfers or conveys all or substantially all of its properties
and assets to any third person, group or entity, then, and in each such case, to
the extent necessary, proper provision shall be made so that the successors and
assigns of ARH assume the obligations set forth in this Section 3.1.f. The
provisions of this Section 3.1.f. are intended to be for the benefit of, and
shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
g. BUSINESS COMBINATION. ARH shall not solicit or accept any
offer from any third party regarding a Business Combination (as defined in
Section 3.2.i. below) of ARH or ARB with any other third person, group or entity
unless such offer is expressly conditioned upon the performance by ARH or the
successor in interest of ARH's obligations under this Merger Agreement.
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3.2 COVENANTS OF NCB. During the period from the date of this
Merger Agreement and continuing until the Effective Time of the Merger, except
as expressly contemplated or permitted by this Merger Agreement or to the extent
that ARH shall otherwise consent in writing, which consent will not be
unreasonably withheld or delayed more than three (3) business days after the
request for consent is delivered:
a. TERMINATION OF NCB STOCK OPTION PLAN. NCB shall take all
necessary action to cause the termination of the NCB Stock Option Plan effective
at the Effective Time of the Merger and the exercise or surrender (in exchange
for Substitute Options) of NCB Options outstanding thereunder.
b. TERMINATION OR MERGER OF NCB BENEFIT PLANS. If requested by
ARH, NCB shall take all necessary action to cause the termination, amendment, or
merger of NCB Benefit Plans (as defined in Section 4.n. hereof) at the Effective
Time of the Merger.
c. CAPITAL COMMITMENTS AND EXPENDITURES. After the execution
of this Merger Agreement, no new capital commitments shall be entered into, and
no capital expenditures shall be made by NCB in excess of Twenty-Five Thousand
Dollars ($25,000) in the aggregate, including but not limited to, creation of
any new branches and acquisitions or leases of real property, except commitments
or expenditures within existing operating and capital budgets including, without
limitation, the "Forecast 2000" budget model heretofore furnished to and
approved in writing by ARH.
d. COMPENSATION. NCB shall not make or approve any increase in
the compensation payable or to become payable by it to any of its directors or
agents, or to its officers or employees with annual salaries in excess of
Seventy-Five Thousand Dollars ($75,000) including, but not limited to,
compensation through any profit sharing, pension, retirement, severance,
incentive or other employee benefit program or arrangement, nor shall any bonus
payment or any agreement or commitment to make a bonus payment be made, nor
shall any stock option, warrant or other right to acquire capital stock be
granted (except as provided in Section 2.6), or employment agreement (other than
any such employment agreement that may arise by operation of law upon the hiring
of any new employee) or consulting agreement be entered into by NCB with any
such directors, officers, employees or agents unless ARH has given its prior
written consent. Nothing herein shall prevent the payment to officers and
employees of NCB with salaries below Seventy-Five Thousand Dollars ($75,000) of
salary increases in connection with regular salary reviews consistent with past
practices, or bonuses consistent with past practices, provided, that such salary
increases and bonuses have been disclosed by NCB to ARH and listed in the NCB
Disclosure Schedule (defined in Section 4 of this Merger Agreement).
e. LOANS. NCB shall not, without first having obtained the
written consent of ARH (which shall be deemed to have been given if no response
is provided following written request therefor within three (3) business days of
receipt of such request), cause, allow, or suffer its officers or agents to
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commit to any loan, loan renewal or amendment, loan participation or other
extension of credit in any form whatsoever, which does not comply in all
material respects with its credit policies in effect and as disclosed and
provided to ARH prior to the date of this Merger Agreement. All loan
participations, real estate construction or development loans and loans to NCB
directors and officers regardless of amount and all other extensions of credit
over Six Hundred Fifty Thousand Dollars ($650,000), except for conforming FHLMC
and FNMA loans, shall be subject to the prior written consent of ARH; provided,
however, that the prior written consent of ARH shall be deemed waived for any
new standalone extension of credit (other than loan participations, real estate
construction or development loans and loans to NCB directors and officers) which
is below Six Hundred Fifty Thousand Dollars ($650,000) and where such new
standalone extension of credit is in compliance with NCB credit policy and
either has been approved by the approving officer with the requisite lending
authority or has been approved by the NCB loan committee or equivalent committee
of the NCB Board of Directors performing such function. NCB shall promptly
provide to ARH for its review and comment relevant information concerning any
proposed new standalone extension of credit or the renewal or amendment of an
existing extension of credit in excess of Two Hundred Thousand Dollars
($200,000).
f. CERTAIN NOTICES. NCB shall notify ARH promptly (but not
less often than weekly) in writing upon the occurrence of any of the following:
(i) the classification of any loan as "Non-Accrual,"
"Watch," "Other Assets Specially Mentioned," "Substandard,"
"Doubtful" or "Loss"; or
(ii) the filing or commencement of any legal action or
other proceeding or investigation by or against NCB, its
directors, officers or employees.
g. LOAN REVIEW. Until the Effective Date, NCB will submit to
ARH upon request (but not less often than monthly) a list of loans that may
reasonably be described as or are included in any of the following categories or
specifications: (i) any new standalone extension of credit over One Hundred
Thousand Dollars ($100,000), (ii) any restructured loan as defined under SFAS
15, regardless of amount, (iii) any renewal or upgrade or other change in status
of an existing loan over Fifty Thousand Dollars ($50,000), (iv) any renewal of
an existing loan previously classified by management or internal policy or
procedure of NCB, or by any outside review examiner, accountant or any bank
regulatory authority as "Non-Accrual," "Watch," "Other Assets Specially
Mentioned," "Substandard," "Doubtful," or "Loss," or classified using categories
or words with similar import, in a commitment amount over Twenty-Five Thousand
Dollars ($25,000) or where the aggregate debt of the borrower and its affiliates
and/or related interests will exceed Twenty-Five Thousand Dollars ($25,000) and
(v) any loan to an NCB director or officer. NCB will provide to ARH a copy of
the loan approval/credit write-up and supporting information on any loan
described in subsections (i), (ii), (iii), (iv) or (v) above at the time of
delivery of such list of loans. Copies of such supporting information shall be
returned to NCB within seven (7) days of receipt.
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h. LOAN PROVISION. NCB shall maintain adequate reserves for
loan losses. Without limiting the generality of the foregoing, each month
following the date of this Merger Agreement through the Effective Date, NCB
shall expense as a provision to its allowance for loan losses, (i) such amount
as may be required by the written loan loss policy and procedures adopted by the
Board of Directors of NCB and (ii) not less than the amount specified in the NCB
"Forecast 2000" budget model, in each case of (i) and (ii) above as provided to
ARH prior to the date of this Merger Agreement.
i. NO MERGER OR SOLICITATION.
(i) Subject to the continuing fiduciary duty of the
Board of Directors of NCB to its shareholders, prior to the
Effective Time of the Merger, NCB shall not effect or agree to
effect or enter into a transaction or series of transactions
with one or more third persons, groups or entities providing
for the acquisition of all or a substantial part of NCB or its
subsidiaries, whether by way of merger, exchange of stock,
sale of assets, or otherwise ("Business Combination"), acquire
or agree to acquire any of its own capital stock or the
capital stock or asset (except in a fiduciary capacity or in
the Ordinary Course of Business and consistent with past
practices) of any other entity, or commence any proceedings
for winding up and dissolution affecting either of them.
(ii) Subject to the continuing fiduciary duty of the
Board of Directors of NCB to its shareholders, prior to the
Effective Time of the Merger, neither NCB nor any of its
officers, directors or affiliates, nor any investment banker,
attorney, accountant or other agent, advisor or
representative retained by NCB shall (a) solicit or
encourage, directly or indirectly, any inquiries, discussions
or proposals for, continue, propose or enter into discussions
or negotiations looking toward, or enter into any agreement
or understanding providing for, any Business Combination with
any third party; or (b) disclose, directly or indirectly, any
nonpublic information to any corporation, partnership, person
or other entity or group concerning NCB's business and
properties or afford any such other party access to its
properties, books or records or otherwise assist or encourage
any such other party in connection with the foregoing, or (c)
furnish or cause to be furnished any information concerning
its business, financial condition, operations, properties or
prospects to another person, having any actual or prospective
role with respect to any such Business Combination.
(iii) NCB shall notify ARH immediately of the details of
any indication of interest of any person, corporation, firm,
association or group to acquire by any means a controlling
interest in NCB or engage in any Business Combination with
NCB.
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(iv) Notwithstanding anything to the contrary contained
in this Merger Agreement, in the event the Board of Directors
of NCB receives a bona fide unsolicited offer for a Business
Combination of NCB with another entity, and reasonably
determines, upon advice of counsel, that as a result of such
offer, any duty to act or to refrain from doing any act
pursuant to this Merger Agreement is inconsistent with the
continuing fiduciary duties of the Board of Directors to its
shareholders, subject to the provisions of this Merger
Agreement including, without limitation, Section 12.e.(ii) and
the rights accorded ARH thereunder which shall remain in
effect, such duty to act or to refrain from doing any act
shall be excused and such failure to act or refrain from doing
any act shall not (a) constitute the failure of any condition,
breach of any covenant or otherwise constitute any breach of
this Merger Agreement, or (b) create any claim or cause of
action asserting any liability against any member of the Board
of Directors of NCB.
3.3 MUTUAL COVENANTS OF ARH AND NCB.
a. APPOINTMENT OF EXECUTIVE OFFICERS. At the Effective Time of
the Merger, the following persons shall become executive officers of the
Resulting Association and shall be appointed to the positions indicated: Kathy
A. Pinkard, President and Chief Executive Officer, David A. Wattell, Senior Vice
President and Chief Credit Officer, and Debbie K. Fakalata, Senior Vice
President and Chief Financial Officer.
b. APPOINTMENT OF BANK DIRECTORS. At the Effective Time of the
Merger, all of the nine (9) existing directors of NCB, as named below, shall
become members of the Board of Directors of the Resulting Association, to serve
until their successors are duly elected and qualified: Leo J. Becnel, M. Edgar
Deas, Michael P. Merrill, Kathy A. Pinkard, William A. Robotham, Herbert C.
Steiner, Larry L. Wasem, Philip A. Wright, and Robert A. Young. In addition, two
(2) of the existing directors of ARH (to be designated by the ARH Board of
Directors) shall also become members of the Board of Directors of the Resulting
Association at the Effective Time of the Merger.
c. EXECUTIVE MANAGEMENT COMMITTEE. From and after the
Effective Time of the Merger, Kathy A. Pinkard, President and Chief Executive
Officer of NCB, shall become a member of the Executive Management Committee of
ARH.
d. CUMULATIVE VOTING; CLASSIFIED BOARD OF DIRECTORS. After
execution hereof, the ARH Board of Directors will adopt amendments
("Amendments") to ARH's Articles of Incorporation and Bylaws, as applicable, to
(i) eliminate cumulative voting in the election of directors and (ii) provide
that the ARH Board of Directors shall be divided into three classes of
directors, each consisting of a number of directors equal as nearly as
practicable to one-third of the total number of directors, for so long as such
Board consists of at least nine (9) authorized directors and, in the event that
the total number of authorized directors on such Board is at least six (6) but
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less than nine (9), for classification of the Board of Directors into two
classes, each consisting of a number of directors equal as nearly as practicable
to one-half the total number of directors. Each class of directors would be
subject to election every third year and would serve for a three-year term for
so long as the Board remained classified into three classes, or would be subject
to election every second year and would serve for a two-year term in the event
the Board were classified into two classes. Currently, all of the directors of
ARH are elected each year to serve a one-year term. ARH shall cause the
Amendments to be submitted for the approval of its shareholders, together with
the other principal terms of the Merger, as provided in Section 3.3.e. below. In
connection with the approval of the Merger as provided in Section 3.3.e., NCB
shall advise its shareholders of the proposed Amendments and their approval of
the Merger will constitute their consent to the Amendments. If the Merger,
including the Amendments, is approved by the shareholders of ARH and NCB, and
subject to the listing of ARH Shares on the Nasdaq Stock Market as provided in
Section 3.1.e. of this Merger Agreement, the ARH Board of Directors will, for
purposes of initial implementation, designate three classes of directors for
election at the 2000 Annual Meeting of Shareholders of ARH, as follows: Class I
will be elected initially for a one-year term expiring at the 2001 ARH Annual
Meeting of Shareholders; Class II will be elected initially for a two-year term
expiring at the 2002 ARH Annual Meeting of Shareholders; and Class III will be
elected for a three-year term expiring at the ARH Annual Meeting of Shareholders
to be held in the year 2003; and, in each case, until their successors are duly
elected and qualified. At each ARH Annual Meeting after the 2000 Annual Meeting,
only directors of the class whose term is expiring would be voted upon, and upon
election each such director would serve a three-year term. Commencing with the
ARH Annual Meeting of Shareholders scheduled to occur in 2001, directors elected
to Class I would serve for a three-year term and until their successors are duly
elected and qualified, subject to any decrease in the total number of authorized
directors, as described above. Subsequently, in the years 2002 and 2003,
directors elected to Class II and Class III, respectively, would also be elected
for a three-year term and until their successors are duly elected and qualified.
e. APPROVAL BY SHAREHOLDERS. ARH and NCB shall each cause the
principal terms of the Merger and in the case of ARH, separate proposals
regarding the Amendments, to be submitted promptly for the approval of their
respective shareholders at meetings to be called and held in accordance with
applicable laws. Subject to continuing fiduciary duties to their shareholders,
the Board of Directors of ARH and the Board of Directors of NCB, in authorizing
the execution and delivery of this Merger Agreement, unanimously recommend that
the principal terms of the Merger be approved by their respective shareholders.
In connection with the call of such meetings, ARH and NCB shall cause the Joint
Proxy Statement/Prospectus described in Section 6 of this Merger Agreement to be
mailed to their respective shareholders. Subject to its continuing fiduciary
duty to the shareholders of ARH or NCB, as the case may be, the Board of
Directors of ARH and the Board of Directors of NCB shall at all times prior to
and during such meetings of their respective shareholders recommend that the
principal terms of the Merger be approved and, subject to such duty, use its
best efforts to cause such approvals.
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f. SHAREHOLDER LISTS AND OTHER INFORMATION. After execution
hereof, each of ARH and NCB shall from time to time make available to the other
party, upon request, a list of its shareholders and their addresses and such
other information as the other party shall reasonably request regarding the
ownership of the common stock of ARH and NCB, respectively.
g. GOVERNMENT APPROVALS. Each party will use its best efforts
in good faith to take or cause to be taken as promptly as practicable all such
steps as shall be necessary to obtain (i) the prior approval of the Merger and
the transactions contemplated pursuant to this Merger Agreement and the
Agreement of Merger by applicable government agencies and regulatory authorities
including, without limitation, the Federal Deposit Insurance Corporation (the
"FDIC"), the Board of Governors of the Federal Reserve System (the "FRB"), the
OCC, and (ii) all other such consents or approvals of government agencies and
regulatory authorities as shall be required by law or otherwise desirable, and
shall do any and all acts and things necessary or appropriate in order to cause
the Merger to be consummated on the terms provided in the Agreement of Merger
and this Merger Agreement as promptly as practicable. All such approvals
described in this Section 3.3.g. are referred to in this Merger Agreement as the
"Government Approvals."
h. NOTIFICATION OF BREACH OF REPRESENTATIONS, WARRANTIES AND
COVENANTS. Each party shall promptly give written notice to the each other party
upon becoming aware of the occurrence or impending or threatened occurrence of
any event which would cause or constitute a breach of any of the
representations, warranties or covenants of that party contained or referred to
in the Agreement of Merger or this Merger Agreement and shall use its best
efforts to prevent the same or to remedy the same promptly.
i. FINANCIAL STATEMENTS.
(i) ARH and NCB have delivered to each other prior to
the date hereof or shall deliver as soon as available, true
and correct copies of (consolidated, as applicable) statements
of income, changes in shareholders' equity and, as applicable,
statements of cash flows, for the fiscal years ended December
31, 1999, 1998, 1997, 1996 and 1995, and balance sheets as of
December 31, 1999, 1998, 1997, 1996 and 1995. Such financial
statements at December 31, 1999, 1998, 1997, 1996, and 1995
and for the fiscal years ended December 31, 1999, 1998, 1997,
1996, and 1995 have been or shall be audited by Perry-Smith
LLP, as independent public accountants for ARH during the
relevant periods, and Perry-Smith LLP and its predecessors, as
independent public accountants for NCB during the relevant
periods, and include or shall include an opinion of such
accounting firms to the effect that such financial statements
have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the
periods covered by such financial statements and present
fairly, in all material respects, the (consolidated, as
applicable) financial position, results of operations and cash
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flows of each party at the dates indicated and for the periods
then ending. The opinions of such accounting firms do not and
shall not contain any qualifications.
(ii) ARH and NCB shall provide to each other, at or
prior to the Effective Date, copies of all financial
statements and proxy statements issued or to be issued to its
shareholders between the date of this Merger Agreement and the
Effective Date.
(iii) ARH and NCB have delivered or shall deliver, to
each other true and complete copies of its Annual Reports to
Shareholders for the years ended December 31, 1999, 1998,
1997, 1996, and 1995, all periodic reports required to be
filed by it pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act")
or Section 12(i) of the 1934 Act since December 31, 1994, all
proxy statements and other written material furnished to its
shareholders since December 31, 1994, and all other material
reports, including call reports, relating to ARH, ARB, FSC and
NCB filed by ARH, ARB, FSC and NCB with the California
Department of Financial Institutions ("CDFI"), FDIC, FRB, OCC
or other government agency or regulatory authority during 1995
through the Effective Date. As of their respective filing
dates, each of the documents described in the preceding
sentence complied or shall comply in all material respects
with all legal and regulatory requirements applicable thereto.
j. CONDUCT OF BUSINESS IN THE ORDINARY COURSE. Prior to the
Effective Time of the Merger, ARH and NCB shall conduct their businesses
(including the businesses of their subsidiaries) in the ordinary course as
heretofore conducted. For purposes of this Merger Agreement, the "Ordinary
Course of Business" of each party shall consist of the banking and related
businesses as presently conducted by it and its subsidiaries in compliance with
customary safe and sound banking practices and applicable laws and regulations.
Unless a party has given its previous written consent (which shall not be
unreasonably withheld and shall be deemed to have been given if no response is
provided following written request therefor within three (3) business days of
receipt of such request) to any act or omission to the contrary, each party
shall, and shall cause its subsidiaries to, until the Effective Date:
(i) preserve its business and business organizations
intact;
(ii) preserve the good will of customers and others
having business relations with it and take no action that
would impair the benefit to each party of the goodwill of it
or the other benefits of the Merger;
(iii) consult with each party as to the making of any
decisions or the taking of any actions in matters other than
in the Ordinary Course of Business;
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(iv) maintain its properties in customary repair,
working order and condition (reasonable wear and tear
excepted);
(v) comply with all laws, regulations and decrees
applicable to the conduct of its business;
(vi) use its best efforts to keep in force at not less
than its present limits all policies of insurance (including
deposit insurance of the FDIC) to the extent reasonably
practicable in light of the prevailing market conditions in
the insurance industry;
(vii) use its reasonable best commercial efforts to keep
available the services of its present officers and employees
(it being understood that each party shall have the right to
terminate the employment of any of its officers or employees
in accordance with its established employment procedures);
(viii) comply with all orders of and agreements or
memoranda of understanding with respect to it or its
subsidiaries made by or with the CDFI, FDIC, FRB, OCC, or any
other government agency or regulatory authority of competent
jurisdiction, and promptly forward to each party all
communications received from any such agency or authority that
are not prohibited by such agency or authority from being so
disclosed and inform each party of any material restrictions
imposed by any government agency or regulatory authority on
its business;
(ix) file in a timely manner (taking into account any
extensions duly obtained) all reports, tax returns and other
documents required to be filed with federal, state, local and
other authorities;
(x) conduct an environmental audit prior to foreclosure
on any property concerning which it has knowledge, or should
have knowledge, that asbestos or asbestos containing material,
PCB's or PCB-contaminated materials, any petroleum product, or
hazardous substance or waste (as defined under any applicable
environmental laws) was or is present, manufactured, recycled,
reclaimed, released, stored, treated, or disposed of, and
provide the results of such audit to and consult with each
party regarding the significance of the audit prior to the
foreclosure on any such property;
(xi) not sell, lease, pledge, assign, encumber or
otherwise dispose of any of its assets except in the Ordinary
Course of Business, for adequate value, without recourse and
consistent with its customary practice;
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(xii) not take any action with respect to its investments
or risk management arrangements which are inconsistent with
the policies established by its Board of Directors;
(xiii) not take any action to create, relocate or
terminate the operations of any banking office or branch, or
to form any new subsidiary or affiliated entity; and
(xiv) not settle or otherwise take any action to release
or reduce any of its rights with respect to any litigation
involving a claim of more than Twenty-Five Thousand Dollars
($25,000) in which it is a party.
k. PRESS RELEASES. No party shall issue any press release or
written statement for general circulation relating to the Merger, this Merger
Agreement or the Agreement of Merger unless previously provided to each party
for review and approval (which approval will not be unreasonably withheld or
delayed) and each party shall cooperate with each other party in the development
and distribution of all news releases and other public information disclosures
with respect to the Merger, this Merger Agreement or the Agreement of Merger;
provided that a party may, without the consent of each other party, make any
disclosure with regard to the Merger, this Merger Agreement or the Agreement of
Merger that it determines with advice of counsel is required under any
applicable law or regulation.
l. EMPLOYEE BENEFIT PLANS. The parties agree that the employee
benefit plans of NCB shall be terminated, frozen, amended, modified or merged
into the employee benefit plans of ARH on or after the Effective Date in
accordance with applicable laws and regulations and the provisions of the IRC,
as determined by mutual agreement of the parties or by ARH. On the Effective
Date, NCB employees that become employees of ARH or ARB will commence
participation in ARH's employee benefit plans in accordance with the terms and
conditions provided under such plans; provided, however, that each employee of
NCB who becomes an employee of ARH or ARB or the national bank resulting from
the merger of NCB with and into the Interim Bank ("Transferred Employee") shall
receive credit for his or her years of service with NCB for purposes of
eligibility and vesting under ARH's employee benefit plans; provided, further,
that each Transferred Employee who elects coverage under ARH's health plan
within thirty (30) days after coverage is extended to him or her shall not be
subject to any preexisting condition limitation under such health plan.
m. CERTAIN CHANGES; DIVIDENDS. On or after the date of this
Merger Agreement hereof and at or prior to the Effective Time of the Merger,
except with the prior written consent of each other party or as otherwise
provided in this Merger Agreement and the Agreement of Merger:
(i) Neither ARH nor NCB shall amend its Articles of
Incorporation or Association or Bylaws or the Articles of
Incorporation or Bylaws of its subsidiaries except as may be
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required to comply with the terms of this Merger Agreement and
to perform its obligations thereunder; make any change in
their respective authorized, issued or outstanding capital
stock or any other equity security; issue, grant, sell,
pledge, assign or otherwise encumber or dispose of, or
purchase, redeem, retire or otherwise acquire (other than in a
fiduciary capacity), shares of or securities convertible into,
capital stock or other equity securities of their respective
companies, or enter into any agreement, call or commitment of
any character so to do; grant or issue any stock option
relating to or right to acquire shares of their capital stock
or other equity security; or agree to do any of the foregoing,
except as expressly provided herein. Nothing herein shall
prohibit the issuance of shares upon exercise of options
granted under the ARH Stock Option Plan or the NCB Stock
Option Plan and outstanding at the time this Merger Agreement
is executed;
(ii) Neither ARH nor NCB shall declare, set aside or pay
any dividend or other distribution in respect of its common
stock (including, without limitation, any stock dividend or
distribution) other than regular quarterly or semiannual cash
dividends on its common stock in amounts substantially
equivalent to cash dividends paid in the two (2) years prior
to the date hereof (it being understood that declaration of a
quarterly or semiannual cash dividend equal to the most recent
previous quarterly or semiannual cash dividend will be deemed
to meet this standard), which shall include percentage
increases in such amount as may be consistent with the
increases in cash dividends paid during such two (2) year
period;
(iii) Neither ARH nor NCB shall change its lending,
investment, liability management and other material policies
and procedures except as required by law or by regulations
promulgated by applicable government agencies or regulatory
authorities having jurisdiction over the business conducted by
ARH and its subsidiaries or NCB; and
(iv) Neither ARH nor NCB shall change the methods of
accounting applicable to their respective businesses except as
required by changes in generally accepted accounting
principles as concurred in by the independent accountants for
ARH and NCB.
n. ACCESS TO PROPERTIES, BOOKS AND RECORDS; CONFIDENTIALITY.
Prior to the Effective Time of the Merger, each party shall give each other
party and its counsel, independent accountants and agents, full access during
normal business hours and upon reasonable request, to all of its properties,
books, contracts, commitments and records including, but not limited to, the
corporate, financial and operational records, papers, reports, instructions,
procedures, tax returns and filings, tax settlement letters, material contracts
or commitments, regulatory examinations and correspondences (but excluding any
documents or materials subject to the attorney-client privilege or related to
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consideration of the Merger), and shall allow each other party to make copies of
such materials (excluding regulatory examinations and correspondence to the
extent prohibited by applicable law or regulation) and shall furnish each other
party with all such information concerning its affairs as each other party may
reasonably request. Each party shall also use its best efforts to cause its
independent accountants to make available to each other party, its accountants,
counsel and other agents, to the extent reasonably requested in connection with
such review, such independent accountants' work papers and documentation
relating to its work papers and its audits of the books and records of each
party. The availability or actual delivery of such information about a party
shall not affect the covenants, representations and warranties of any party
contained in this Merger Agreement and in the Agreement of Merger. Each party
shall use its best efforts to cause its officers, directors, employees,
auditors, independent accountants and attorneys to cooperate with each other
party in its reasonable requests for information. Each party shall treat as
confidential all such information in the same manner as each party treats
similar confidential information of its own, and if this Merger Agreement is
terminated, each party shall continue to treat all such information as
confidential and to cause its employees to keep all such information
confidential and shall return such documents theretofore delivered by each other
party as each other party shall request, and shall use such information, or
cause it to be used, solely for the purposes of evaluating and completing the
transactions contemplated hereby; provided that each party may disclose any such
information to the extent required by federal or state securities laws or
otherwise required by any government agency or regulatory authority, or by
generally accepted accounting principles. The foregoing confidentiality
obligations shall not apply in respect of any information publicly available or
to any information previously known to the party in question, the use of which
is not otherwise restricted. Notwithstanding the foregoing, the parties agree to
comply with the terms and provisions of that certain Confidentiality Agreement
entered into between the parties dated January 10, 2000, and any inconsistency
between the terms and provisions of that Confidentiality Agreement and the
foregoing provisions shall be resolved in favor of the terms and provisions
contained in the Confidentiality Agreement.
o. LOAN PERFORMANCE. From and after the date of this Merger
Agreement until the Effective Date, each party will provide to the other the
following reports for each such month concurrent with the distribution of the
monthly board report materials for the respective Boards of Directors of ARH,
ARB and NCB:
(i) a status report on all loans classified as watch,
other assets specially mentioned, special mention,
substandard, doubtful or loss;
(ii) past due reports by loan;
(iii) nonaccrual reports by loan;
(iv) loss reports by loan;
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(v) restructured loans reports; and
(vi) quarterly call reports submitted to regulators
during such month, if any.
p. PREPARATION OF JOINT PROXY STATEMENT/PROSPECTUS. NCB shall
cooperate with ARH in the preparation pursuant to Section 6 hereof of a joint
proxy statement and prospectus of ARH and NCB to be sent to the shareholders of
ARH and NCB (the proxy materials and prospectus, together with any amendments or
supplements thereto, being herein referred to as the "Joint Proxy
Statement/Prospectus").
q. POOLING ACCOUNTING. ARH and NCB shall cooperate and use
their respective best efforts to cause the Merger to qualify for the pooling of
interests method of accounting in accordance with generally accepted accounting
principles.
4. REPRESENTATIONS AND WARRANTIES OF NCB
NCB represents and warrants to ARH that, except as set forth on a
schedule dated the date of this Merger Agreement (the "NCB Disclosure
Schedule"), a copy of which shall be delivered to ARH for review no less than
one (1) day prior to execution and delivery of this Merger Agreement,
corresponding in number with the applicable section of this Merger Agreement:
a. CORPORATE STATUS AND POWER TO ENTER INTO AGREEMENTS. (i)
NCB is a national banking association, organized and existing under the laws of
the United States of America, (ii) subject to obtaining the Government Approvals
and approval of the principal terms of the Merger by the NCB shareholders, NCB
has all necessary corporate power to enter into this Merger Agreement and the
Agreement of Merger and to carry out all of the terms and provisions hereof and
thereof to be carried out by it, (iii) NCB holds a currently valid national bank
charter, issued by the OCC to engage in the commercial banking business with
offices in the State of California at the locations at which it is licensed and
currently conducts business, and (iv) NCB is not subject to any directive,
resolution, memorandum of understanding or order of the FDIC, OCC or any other
regulatory authority having jurisdiction over its business or any of its assets
or properties. Neither the scope of the business of NCB nor the location of its
properties requires it to be licensed to do business in any jurisdiction other
than the State of California. NCB's deposits are insured by the FDIC to the
maximum extent permitted by applicable law and regulation.
b. ARTICLES, BYLAWS, BOOKS AND RECORDS. The copies of the
Articles of Association and Bylaws of NCB heretofore delivered to ARH are
complete and accurate copies thereof as in effect on the date hereof. The minute
books of NCB made available to ARH contain a complete and accurate record of all
meetings of NCB's Board of Directors (and committees thereof) and shareholders.
The corporate books and records (including financial statements) of NCB fairly
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reflect the material transactions to which NCB is a party or by which its
properties are subject or bound, and such books and records have been properly
kept and maintained.
c. COMPLIANCE WITH LAWS, REGULATIONS AND DECREES. NCB (i) has
the corporate power to own or lease its properties and to conduct its business
as currently conducted, (ii) to its knowledge, has complied in all material
respects with, and is not in material default of any laws, regulations,
ordinances, orders or decrees applicable to the conduct of its business and the
ownership of its properties, including but not limited to all federal and state
laws (including but not limited to the Bank Secrecy Act), rules and regulations
relating to the offer, sale or issuance of securities, and the operation of a
commercial bank, other than where such noncompliance or default is not likely to
result in a material limitation on the conduct of the business of NCB or is not
likely to otherwise have a material adverse effect on NCB, (iii) has not failed
to file with the proper federal, state, local or other authorities any material
report or other document required to be filed, and (iv) has all approvals,
authorizations, consents, licenses, clearances and orders of, and has currently
effective all registrations with, all government and regulatory authorities
which are necessary to the business and operations of NCB as now being
conducted.
d. CAPITALIZATION. As of the date of this Merger Agreement,
the authorized capital stock of NCB consists of 5,000,000 shares of NCB common
stock, par value $4.00 per share, of which 472,354 shares are duly authorized,
validly issued, fully paid and nonassessable and currently outstanding. Said
capital stock has been offered, sold and issued in compliance with all
applicable securities laws. As of the date of this Merger Agreement, there are
outstanding options to purchase 192,415 shares of NCB common stock, at a
weighted average exercise price of $7.80 per share, issued pursuant to the NCB
Stock Option Plan and directly from NCB outside of the NCB Stock Option Plan.
Said options were issued and, upon issuance in accordance with the terms of the
outstanding options said shares shall be issued, in compliance with all
applicable securities laws. Otherwise, there are no outstanding (i) options,
agreements, calls or commitments of any character which would obligate NCB to
issue, sell, pledge, assign or otherwise encumber or dispose of, or to purchase,
redeem or otherwise acquire, any NCB common stock or any other equity security
of NCB, or (ii) warrants or options relating to, rights to acquire, or debt or
equity securities convertible into, shares of NCB common stock or any other
equity security of NCB. The outstanding common stock of NCB is not registered
with the Securities and Exchange Commission (the "Commission") pursuant to
Section 12(g) of the 1934 Act and NCB has not heretofore filed periodic reports
under Section 12(i), 13(a) or 15(d) of the 1934 Act. Except as collateral for
outstanding loans held in its loan portfolio, NCB does not own, directly or
indirectly, any equity interest in any bank, corporation or other entity.
e. TRADEMARKS AND TRADE NAMES. To the best of its knowledge,
NCB (i) owns and has the exclusive right to use all trademarks, trade names,
patents, copyrights, service marks, trade secrets, or other intellectual
property rights (collectively, "Intellectual Property Rights") used in or
necessary for the conduct of its business as now or heretofore conducted; and
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(ii) its not infringing upon the Intellectual Property Rights of any other
person or entity. No claim is pending or threatened by any person or entity
against or otherwise affecting the use by NCB of any Intellectual Property
Rights and, to the best of its knowledge, there is no valid basis for any such
claim.
f. FINANCIAL STATEMENTS, REGULATORY REPORTS. No financial
statement or other document provided or to be provided to ARH as required by
Section 3.3(i) hereof, as of the date of such document, contained, or as to
documents to be delivered after the date hereof, will contain, any untrue
statement of a material fact, or, at the date thereof, omitted or will omit to
state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which such statements were or will
be made, not misleading; provided, however, that information as of a later date
shall be deemed to modify contrary information as of any earlier date. NCB has
filed all material documents and reports required to be filed by it with any
government agency or regulatory authority having jurisdiction over its business,
assets or properties. All such reports conform in all material respects with the
requirements promulgated by such government agencies and regulatory authorities.
All compliance or corrective action relating to NCB required by government
agencies and regulatory authorities having jurisdiction over NCB has been taken.
Except as disclosed in such statements, reports or documents, NCB has not
received any notification, formally or informally, from any agency or department
of any federal, state or local government or any regulatory authority or the
staff thereof (i) asserting that it is not in compliance with any of the
statutes, regulations or ordinances which such government or regulatory
authority enforces, or (ii) threatening to revoke any license, franchise, permit
or government authorization. NCB has paid all assessments made or imposed by any
government agency. NCB has delivered to ARH copies of all annual management
letters and opinions, and has made available to ARH for inspection all reviews,
correspondence and other documents in the files of NCB prepared by certified
public accountants engaged by NCB and delivered to NCB since December 31, 1995.
The financial records of NCB have been, and are being and shall be, maintained
in all material respects in accordance with all applicable legal and accounting
requirements sufficient to insure that all transactions reflected therein are,
in all material respects, executed in accordance with management's general or
specific authorization and recorded in conformity with generally accepted
accounting principles or as applicable, regulatory accounting principles, at the
time in effect. The data processing equipment, data transmission equipment,
related peripheral equipment and software used by NCB in the operation of its
business to generate and retrieve its financial records are adequate for the
current needs of NCB.
g. TAX RETURNS.
(i) NCB has timely filed all federal, state, county,
local and foreign tax returns required to be filed by it,
including, without limitation, estimated tax, use tax, excise
tax, real property and personal property tax reports and
returns, employer's withholding tax returns, other withholding
tax returns and Federal Unemployment Tax Returns, and all
other reports or other information required or requested to be
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filed by NCB, and each such return, report or other
information was, when filed, complete and accurate in all
material respects. NCB has paid all taxes, fees and other
government charges, including any interest and penalties
thereon, when they have become due, except those that are
being contested in good faith, which contested matters have
been disclosed to ARH. NCB has not been requested to give nor
has it given any currently effective waivers extending the
statutory period of limitation applicable to any tax return
required to be filed by it for any period. There are no claims
pending against NCB for any alleged deficiency in the payment
of any taxes, and NCB does not know of any pending or
threatened audits, investigations or claims for unpaid taxes
or relating to any liability in respect of any taxes. There
have been no events, including a change in ownership, that
would result in a reappraisal and establishment of a new
base-year full value for purposes of applicable provisions of
the California Constitution, of any real property owned in
whole or in part by NCB or to the best of NCB's knowledge, of
any real property leased by NCB.
(ii) NCB has heretofore delivered to ARH or will deliver
to ARH prior to or concurrent with filing, copies of all its
tax returns with respect to taxes payable to the United States
of America and the State of California for the fiscal years
ended December 31, 1999, 1998, 1997, 1996, and 1995.
(iii) No consent has been filed relating to NCB pursuant
to Section 341(f) of the IRC.
h. MATERIAL ADVERSE CHANGE. Since December 31, 1999, there has
been (i) no material adverse change in the business, assets, licenses, permits,
franchises, results of operations or financial condition of NCB (whether or not
in the Ordinary Course of Business), (ii) no change in any of the assets,
licenses, permits or franchises of NCB that has had or can reasonably be
expected to have a material adverse effect on any of the items listed in clause
(h)(i) above, (iii) no damage, destruction, or other casualty loss (whether or
not covered by insurance) that has had or can reasonably be expected to have a
material adverse effect on any of the items listed in clause (h)(i) above, (iv)
no amendment, modification, or termination of any existing, or entering into of
any new, contract, agreement, plan, lease, license, permit or franchise that is
material to the business, financial condition, assets, liabilities or operations
of NCB, except in the Ordinary Course of Business; and (v) no disposition by NCB
of one or more assets that, individually or in the aggregate, are material to
NCB, except sales of assets in the Ordinary Course of Business.
i. NO UNDISCLOSED LIABILITIES. Except for items for which
reserves have been established in the unaudited balance sheet (and will also be
established in the audited balance sheet) of NCB as of December 31, 1999, NCB
has not incurred or discharged, and is not legally obligated with respect to,
any indebtedness, liability (including, without limitation, a liability arising
out of an indemnification, guarantee, hold harmless or similar arrangement) or
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obligation (accrued or contingent, whether due or to become due, and whether or
not subordinated to the claims of its general creditors), other than as a result
of operations in the Ordinary Course of Business after such date. No agreement
pursuant to which any loans or other assets have been or will be sold by NCB
entitles the buyer of such loans or other assets, unless there is a material
breach of a representation or covenant by NCB, to cause NCB to repurchase such
loan or other asset or to pursue any other form of recourse against NCB. NCB has
not knowingly made or shall make any representation or covenant in any such
agreement that contained or shall contain any untrue statement of a material
fact or omitted or shall omit to state a material fact necessary in order to
make the statements contained therein, in light of the circumstances under which
such representations and/or covenants were made or shall be made, not
misleading. No cash, stock or other dividend or any other distribution with
respect to the NCB Shares has been declared, set aside or paid, nor have any of
the NCB Shares been purchased, redeemed or otherwise acquired, directly or
indirectly, by NCB since December 31, 1997.
j. PROPERTIES AND LEASES.
(i) NCB has good and marketable title, free and clear
of all liens and encumbrances and the right of possession,
subject to existing leaseholds, to all real properties and
good title, free and clear of all liens and encumbrances, to
all other property and assets, tangible and intangible,
reflected in the NCB balance sheet as of December 31, 1999
(except property held as lessee under leases disclosed in
writing prior to the date hereof and except personal property
sold or otherwise disposed of since December 31, 1999, in the
Ordinary Course of Business), except for (a) liens for taxes
or assessments not delinquent, (b) such other liens and
encumbrances and imperfections of title as do not materially
affect the value of such property as reflected in the NCB
balance sheet as of December 31, 1999, or as currently shown
on the books and records of NCB and which do not interfere
with or impair its present and continued use, or (c)
exceptions disclosed in title reports and preliminary title
reports, copies of which have been provided to ARH. To the
knowledge of NCB, all tangible properties of NCB conform in
all material respects with all applicable ordinances,
regulations and zoning laws. All tangible properties of NCB
are in a good state of maintenance and repair and are adequate
for the current business of NCB. No properties of NCB, and, to
the best of NCB's knowledge, no properties in which NCB holds
a collateral or contingent interest or purchase option, are
the subject of any pending or threatened investigation, claim
or proceeding relating to the use, storage or disposal on such
property of or contamination of such property by any toxic or
hazardous waste material or substance. To the best of its
knowledge, NCB does not own, possess or have a collateral or
contingent interest or purchase option in any properties or
other assets which contain or have located within or thereon
any hazardous or toxic waste material or substance unless the
location of such hazardous or toxic waste material or other
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substance or its use thereon conforms in all material respects
with all federal, state and local laws, rules, regulations or
other provisions regulating the discharge of materials into
the environment. As to any real property not owned or leased
by NCB and held as security for a loan or in which NCB
otherwise has an interest, NCB has not controlled, directed or
participated in the operation or management of any such real
property or any facilities or enterprise conducted thereon,
such that it has become an owner or operator of such real
property under applicable environmental laws.
(ii) All properties held by NCB under leases are held
under valid, binding and enforceable leases (subject to
applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability,
to equitable principles of general applicability), with such
exceptions as are not material and do not interfere with the
conduct of the business of NCB, and NCB enjoys quiet and
peaceful possession of such leased property. NCB is not in
material default in any respect under any material lease,
agreement or obligation regarding its properties to which it
is a party or by which it is bound.
(iii) All of NCB's rights and obligations under the
leases referred to in Section 4(j)(ii) above do not require
the consent of any other party to the transactions
contemplated by this Merger Agreement and the Agreement of
Merger. Where required, NCB shall obtain, prior to the
Effective Date, the consent of such parties to such
transactions.
k. MATERIAL CONTRACTS. Excluding loans, lines of credit, loan
commitments or letters of credit to which NCB is a party, NCB is not a party to
or bound by any contract or other agreement made in the Ordinary Course of
Business which involves aggregate future payments by or to NCB of more than
Twenty-Five Thousand Dollars ($25,000) and which is made for a fixed period
expiring more than one year from the date hereof, and NCB is not a party to or
bound by any agreement not made in the Ordinary Course of Business which is to
be performed at or after the date hereof. Each of the contracts and agreements
disclosed to ARH pursuant to this Section 4(k) is a legal and binding obligation
(subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to equitable
principles of general applicability), and no breach or default (and no condition
which, with notice or passage of time, or both, could become a breach or
default) exists with respect thereto.
l. CLASSIFIED LOANS. There are no loans presently owned by NCB
that have been classified by NCB management or NCB internal policy or procedure,
any outside review examiner, accountant or any bank regulatory authority as
"Non-Accrual," "Watch," "Other Assets Specially Mentioned," "Substandard,"
"Doubtful," or "Loss" or classified using categories or words with similar
import and all loans or portions thereof so classified have been reserved to the
extent required. NCB regularly reviews and appropriately classifies its loans in
accordance with all applicable legal and regulatory requirements and generally
accepted banking practices. All loans and investments of NCB are legal, valid
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and binding obligations enforceable in accordance with their respective terms
and are not subject to any setoffs, counterclaims or disputes (subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to equitable principles of general
applicability), except as disclosed in the NCB Disclosure Schedule or reserved
for in the audited balance sheet of NCB as of December 31, 1999, and were duly
authorized under and made in compliance with applicable federal and state laws
and regulations. NCB does not have any extensions of credit, investments,
guarantees, indemnification agreements or commitments for the same (including
without limitation commitments to issue letters of credit, to create
acceptances, or to repurchase securities, federal funds or other assets) other
than those documented on the books and records of NCB.
m. NO RESTRICTIONS ON INVESTMENTS. Except for pledges to
secure public and trust deposits, repurchase agreements in the Ordinary Course
of Business and securities classified as "held to maturity" as defined under
SFAS No. 115, none of the investments reflected in the NCB balance sheet as of
December 31, 1999, and none of the investments made by NCB since December 31,
1999, is subject to any restriction, whether contractual or statutory, which
materially impairs the ability of NCB to freely dispose of such investment at
any time.
n. NCB BENEFIT PLANS/ERISA.
(i) NCB has provided to ARH an accurate list setting
forth all bonus, incentive compensation, profit sharing,
pension, retirement including, without limitation, salary
continuation and supplemental retirement plans, stock
purchase, stock option, deferred compensation, severance,
hospitalization, medical, dental, vision, group insurance,
death benefit, disability and other fringe benefit plans,
trust agreements, arrangements and commitments of NCB
(including but not limited to any such plans, agreements,
arrangements and commitments applicable to current and former
employees or retired employees, and current and former
directors or retired directors, or for which such persons are
eligible) (individually, a "NCB Benefit Plan" and
collectively, "NCB Benefit Plans"), if any, together with
copies of all such Benefit Plans that are documented and any
and all contracts of employment, and has made available to ARH
any Board of Directors' minutes (or committee minutes)
authorizing, approving or guaranteeing such NCB Benefit Plans
and contracts; and
(ii) All contributions, premiums or other payments due
from NCB to (or under) any NCB Benefit Plans have been fully
paid or adequately provided for on NCB's audited financial
statements for the year ended December 31, 1999. All accruals
thereon (including, where appropriate, proportional accruals
for partial periods) have been made in accordance with
generally accepted accounting principles consistently applied
on a reasonable basis; and
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(iii) NCB has disclosed in writing to ARH the names of
each director, officer and employee of NCB; and
(iv) The NCB Benefit Plans have, to the best of NCB's
knowledge, been administered where required in substantial
compliance with ERISA, the IRC and the terms of such NCB
Benefit Plans. There is no pending or to the best of NCB's
knowledge any threatened litigation relating to any such NCB
Benefit Plan; and
(v) NCB has not offered in the past health benefits for
retired employees or directors and has no intention to offer
any additional health or other benefits for retired employees
or directors; and
(vi) Each NCB Benefit Plan is in full force and effect,
and neither NCB nor any other party thereto is in material
default under any of them, and there have been no claims of
default and there are no facts or conditions which if
continued, or on notice, will result in a material default
under any NCB Benefit Plans; and
(vii) NCB has provided to ARH a list of all agreements or
other understandings pursuant to which the consummation of the
transactions contemplated hereby will (a) entitle any current
or former employee, officer or director of NCB to severance
pay, retirement benefits or payments, unemployment
compensation or any other payment, or (b) accelerate the time
of payment or vesting or increase the amount of compensation
due any such employee, officer or director, and the aggregate
amount of such payments under all such agreements or other
understandings. None of such payments will constitute an
"excess parachute" payment within the meaning of Section 280G
of the IRC.
o. COLLECTIVE BARGAINING AND EMPLOYMENT AGREEMENTS. NCB has no
union or collective bargaining or written employment agreements, contracts or
other agreements with any labor organization or with any member of management,
or any management or consultation agreement not terminable at will by NCB
without liability and no such contract or agreement has been requested by, or is
under discussion by management with, any group of employees, any member of
management or any other person. There are no material controversies pending
between NCB and any current or former employees, and to the best of NCB's
knowledge, there are no efforts presently being made by any labor union seeking
to organize any of such employees.
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p. COMPENSATION OF OFFICERS AND EMPLOYEES.
(i) no officer or employee of NCB is receiving
aggregate direct remuneration at a rate exceeding Seventy-Five
Thousand Dollars ($75,000) per annum.
(ii) the consummation of the transactions contemplated
by this Agreement and the Agreement of Merger will not (either
alone or upon the occurrence of any additional or further acts
or events) result in any payment (whether of severance pay or
otherwise) becoming due from NCB or ARH to any employee of
NCB.
q. LEGAL ACTIONS AND PROCEEDINGS. NCB is not a party to, or so
far as known to it, threatened with, and to NCB's knowledge, there is no
reasonable basis for, any legal action or other proceeding or investigation
before any court, any arbitrator of any kind or any government agency, and NCB
is not subject to any potential adverse claim, the outcome of which could
involve the payment or receipt by NCB of any amount in excess of Twenty-Five
Thousand Dollars ($25,000), unless an insurer has agreed to defend against and
pay the amount of any resulting liability without reservation, or, if any such
legal action, proceeding, investigation or claim will not involve the payment by
NCB of a monetary amount, which could have a material adverse effect on NCB or
its business or property or the transactions contemplated hereby. NCB has no
knowledge of any pending or threatened claims or charges under the Community
Reinvestment Act, before the Equal Employment Opportunity Commission, the
California Department of Fair Housing & Economic Development, the California
Unemployment Appeals Board, or any federal or state human relations commission
or agency. There is no labor dispute, strike, slowdown or stoppage pending or,
to the best of the knowledge of NCB, threatened against NCB.
r. EXECUTION AND DELIVERY OF THE AGREEMENTS.
(i) The execution and delivery of this Merger Agreement
and the Agreement of Merger have been duly authorized by the
Board of Directors of NCB and, when the principal terms of the
Merger, this Merger Agreement and the Agreement of Merger have
been duly approved by the affirmative vote of the holders of
two-thirds of the outstanding NCB Shares at a meeting of
shareholders duly called and held, the Merger, this Merger
Agreement and the Agreement of Merger will be duly and validly
authorized by all necessary corporate action on the part of
NCB.
(ii) This Merger Agreement has been duly executed and
delivered by NCB and (assuming due execution and delivery by
ARH) constitutes, and the Agreement of Merger, upon its
execution and delivery by NCB (and assuming due execution and
delivery by ARH) will constitute, a legal and binding
obligation of NCB in accordance with its terms.
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(iii) The execution and delivery by NCB of this Merger
Agreement and the Agreement of Merger and the consummation of
the transactions herein and therein contemplated (a) do not
violate any provision of the Articles of Association or Bylaws
of NCB, or violate in any material respect any provision of
federal or state law or any government rule or regulation
(assuming (1) receipt of the Government Approvals, (2) receipt
of the requisite NCB shareholder approval referred to in
Section 4(r)(i) hereof, (3) due registration of the ARH Shares
under the 1933 Act, and (4) receipt of appropriate permits or
approvals under state securities or "blue sky" laws), and (b)
do not require any consent of any person under, conflict in
any material respect with or result in a material breach of,
or accelerate the performance required by any of the terms of,
any material debt instrument, lease, license, covenant,
agreement or understanding to which NCB is a party or by which
it is bound or any order, ruling, decree, judgment,
arbitration award or stipulation to which NCB is subject, or
constitute a material default thereunder or result in the
creation of any lien, claim, security interest, encumbrance,
charge, restriction or right of any third party of any kind
whatsoever upon any of the properties or assets of NCB.
s. RETENTION OF BROKER OR CONSULTANT. No broker, agent,
finder, consultant or other party (other than legal, compliance, loan reviewers
and accounting advisors) has been retained by NCB or is entitled to be paid
based upon any agreements, arrangements or understandings made by NCB in
connection with any of the transactions contemplated by this Merger Agreement or
the Agreement of Merger, except that NCB has engaged the firm of Carpenter &
Company, to provide consulting services to NCB, including an opinion regarding
the fairness of the consideration to be received by NCB shareholders in the
Merger. NCB has provided ARH with a true and accurate copy of its agreement(s)
with Carpenter & Company.
t. INSURANCE. NCB is and continuously since its inception has
been, insured with reputable insurers against all risks normally insured against
by banks, and all of the insurance policies and bonds maintained by NCB are in
full force and effect, NCB is not in default thereunder and all material claims
thereunder have been filed in due and timely fashion. In the best judgment of
the management of NCB, such insurance coverage is adequate for NCB. Since
December 31, 1999, there has not been any damage to, destruction of, or loss of
any assets of NCB not covered by insurance that could have a material adverse
effect on the business, financial condition, properties, assets or results of
operations of NCB.
u. LOAN LOSS RESERVES. The allowance for loan losses in the
NCB balance sheet dated December 31, 1999 is, and as of the third business day
prior to the Closing Date ("Determination Date") will be, adequate in all
material respects under the requirements of all applicable state and federal
laws and regulations to provide for possible loan losses on outstanding loans,
net of recoveries and in compliance in all material respects with the credit
policies of NCB in effect and as disclosed and provided to ARH prior to the date
of this Merger Agreement. NCB has disclosed to ARH in writing prior to the date
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hereof, and will promptly inform ARH of the amounts of all loans, leases, other
extensions of credit or commitments, or other interest-bearing assets of NCB,
that have been classified as of the date hereof or hereafter by NCB management
or NCB internal policy or procedure, any outside review examiner, accountant or
any bank regulatory authority as "Other Loans Specially Mentioned," "Special
Mention," "Substandard," "Doubtful," or "Loss" or classified using categories or
words with similar import in the case of loans (or that would have been so
classified, in the case of other interest-bearing assets, had they been loans).
Notwithstanding the above, NCB shall be under no obligation to disclose to ARH
any such classification by any bank regulatory authority where such disclosure
would violate any obligation of confidentiality of NCB imposed by such bank
regulatory authority. NCB has furnished and will continue to furnish to ARH true
and accurate information concerning the loan portfolio of NCB, and no material
information with respect to the loan portfolio has been or will be withheld from
ARH.
v. TRANSACTIONS WITH AFFILIATES. Except in the Ordinary Course
of Business, NCB has not extended credit, committed itself to extend credit, or
transferred any asset to or assumed or guaranteed any liability of the employees
or directors of NCB, or to any spouse or child of any of them, or to any of
their "affiliates" or "associates" as such terms are defined in Rule 405 under
the 1933 Act. NCB has not entered into any other transactions with the employees
or directors of NCB or any spouse or child of any of them, or any of their
affiliates or associates, except as disclosed in writing to ARH. Any such
transactions have been on terms no less favorable to NCB than those which would
prevail in an arms-length transaction with an independent third party. NCB has
not violated any applicable regulation of any government agency or regulatory
authority having jurisdiction over NCB in connection with any such transactions
described in this subsection.
w. RISK MANAGEMENT INSTRUMENTS. All interest rate swaps, caps,
floors, option agreements, futures and forward contracts and other similar risk
management arrangements, whether entered into for NCB's own account (all of
which are listed on the NCB Disclosure Schedule), if any, were entered into in
accordance with prudent business practices and all applicable laws, rules,
regulations and regulatory policies and with counterparties believed to be
financially responsible at the time; and each of them constitutes the valid and
legally binding obligation of NCB, enforceable in accordance with its terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles), and are in full force and effect. Neither NCB, nor to NCB's
knowledge, any other party thereto, is in breach of any of its obligations under
any such agreement or arrangement.
x. YEAR 2000. NCB has not experienced any Year 2000 problems
of any kind or nature whatsoever which have had or might reasonably be expected
to have a material adverse effect upon NCB. To the knowledge of NCB, the mission
critical computer software operated by NCB is currently capable of providing, or
is being adapted to provide, uninterrupted millennium functionality to record,
store, process and present calendar dates falling on or after January 1, 2000 in
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substantially the same manner and with substantially the same functionality as
such mission critical software recorded, stored, processed and presented such
calendar dates falling on or before December 31, 1999. To the knowledge of NCB,
the costs of adaptations referred to in this clause will not have a material
adverse effect with respect to the business and operations of NCB. NCB has not
received, and does not reasonably expect to receive, any deficiency notice from
any federal banking authority. NCB has previously disclosed to ARH a complete
and accurate copy of its plan, including an estimate of anticipated associated
costs, for addressing the issues set forth in all Federal Financial Institutions
Examination Council Interagency Statements as such issues affect NCB. Between
the date of this Merger Agreement and the Effective Time of the Merger, NCB
shall use commercially reasonable and practicable efforts to implement such
plan.
y. COMMUNITY REINVESTMENT ACT COMPLIANCE. NCB is in
substantial compliance with the applicable provisions of the Community
Reinvestment Act of 1977 and the regulations promulgated thereunder
(collectively, the "CRA") and has received a CRA rating of "satisfactory" in its
most recent examination, and NCB has no knowledge of the existence of any fact
or circumstance or set of facts or circumstances which could be reasonably
expected to result in NCB failing to be in substantial compliance with such
provisions or having its current rating lowered.
z. INFORMATION IN ARH REGISTRATION STATEMENT. The information
pertaining to NCB which has been or will be furnished to ARH for or on behalf of
NCB for inclusion in the ARH Registration Statement and the Joint Proxy
Statement/Prospectus, or in the applications to be filed to obtain the
Government Approvals (the "Applications"), does not and will not contain any
untrue statement of any material fact or omit or will omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading;
provided, however, that information of a later date shall be deemed to modify
contrary information as of an earlier date. All financial statements of NCB
included in the ARH Registration Statement and the Joint Proxy
Statement/Prospectus, or the Applications, will present fairly the financial
condition and results of operations of NCB at the dates and for the periods
covered by such statements in accordance with generally accepted accounting
principles consistently applied throughout the periods covered by such
statements. NCB shall promptly advise ARH in writing if prior to the Effective
Time of the Merger NCB shall obtain knowledge of any facts that would make it
necessary to amend or supplement the ARH Registration Statement, the Joint Proxy
Statement/Prospectus or any Application, in order to make the statements therein
not misleading or to comply with applicable law or regulation.
aa. ACCURACY AND EFFECTIVE DATE OF REPRESENTATIONS AND
WARRANTIES, COVENANTS AND AGREEMENTS. Each representation, warranty, covenant
and agreement of NCB set forth in this Merger Agreement shall be deemed to be
made on and as of the date hereof (except to the extent that a representation or
warranty is qualified as set forth in the NCB Disclosure Schedule in a section
corresponding in number with the applicable section of such representation or
warranty), the Closing Date and the Effective Time of the Merger. No
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representation or warranty by NCB, and no statement by NCB in any certificate,
agreement, NCB Disclosure Schedule or other document furnished or to be
furnished in connection with the transactions contemplated by this Merger
Agreement or the Agreement of Merger, was or will be inaccurate, incomplete or
incorrect in any material respect as of the date furnished or contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact necessary to make such representation, warranty or statement
not misleading to ARH.
bb. BROKERED DEPOSITS. NCB has no "brokered deposits" as that
term is defined in applicable FDIC regulations.
5. REPRESENTATIONS AND WARRANTIES OF ARH.
In the following representations and warranties, all references to
assets, liabilities, properties, rights, obligations, financial condition,
operations, knowledge, information and other characteristics of ARH shall be
deemed to include reference to those characteristics of ARH on a consolidated
basis, except as the context otherwise indicates or requires. ARH represents and
warrants to NCB that, except as set forth on a schedule dated the date of this
Merger Agreement (the "ARH Disclosure Schedule"), a copy of which shall be
delivered to NCB for review no less than one (1) day prior to execution and
delivery of this Merger Agreement, corresponding in number with the applicable
section of this Merger Agreement:
a. CORPORATE STATUS AND POWER TO ENTER INTO AGREEMENTS. (i)
ARH is a corporation duly incorporated, validly existing and in good standing
under California law and is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHC Act"), (ii) subject to obtaining
the Government Approvals and approval of the principal terms of the Merger by
the ARH shareholders, ARH has all necessary corporate power to enter into this
Merger Agreement and the Agreement of Merger and to carry out all of the terms
and provisions hereof and thereof to be carried out by it, (iii) ARB holds a
currently valid license issued by the California Commissioner of Financial
Institutions to engage in the commercial banking business in the State of
California at the locations at which it is licensed and currently conducts
business, (iv) FSC is authorized under Regulation Y of the BHC Act and
applicable FRB regulations to engage in equipment lease brokerage as a permitted
non-banking activity in the State of California at the locations at which it
currently conducts business, and (v) neither ARH, ARB, nor FSC is subject to any
directive, resolution, memorandum of understanding or order of the California
Commissioner of Financial Institutions, FDIC, FRB, or any other regulatory
authority having jurisdiction over its business or any of its assets or
properties. Neither the scope of the business of ARH nor the location of its
properties requires ARH or ARB to be licensed to do business in any jurisdiction
other than the State of California. ARB's deposits are insured by the FDIC to
the maximum extent permitted by applicable law and regulation. ARBCO
Investments, Inc. and American River Mortgage are inactive California
corporations and wholly-owned subsidiaries of ARB.
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b. ARTICLES, BYLAWS, BOOKS AND RECORDS. The copies of the
Articles of Incorporation and Bylaws of ARH heretofore delivered to NCB are
complete and accurate copies thereof as in effect on the date hereof. The minute
books of ARH made available to NCB contain a complete and accurate record of all
meetings of ARH's Board of Directors (and committees thereof) and shareholders.
The corporate books and records (including financial statements) of ARH fairly
reflect the material transactions to which ARH is a party or by which its
properties are subject or bound, and such books and records have been properly
kept and maintained.
c. COMPLIANCE WITH LAWS, REGULATIONS AND DECREES. ARH (i) has
the corporate power to own or lease its properties and to conduct its business
as currently conducted, (ii) to its knowledge, has complied in all material
respects with, and is not in material default of any laws, regulations,
ordinances, orders or decrees applicable to the conduct of its business and the
ownership of its properties, including but not limited to all federal and state
laws (including but not limited to the Bank Secrecy Act), rules and regulations
relating to the offer, sale or issuance of securities, and the operation of a
commercial bank, other than where such noncompliance or default is not likely to
result in a material limitation on the conduct of the business of ARH or is not
likely to otherwise have a material adverse effect on ARH, ARB and FSC, taken as
a whole, (iii) have not failed to file with the proper federal, state, local or
other authorities any material report or other document required to be filed,
and (iv) have all approvals, authorizations, consents, licenses, clearances and
orders of, and have currently effective all registrations with, all government
agencies and regulatory authorities which are necessary to the business and
operations of ARH, ARB and FSC as now being conducted.
d. CAPITALIZATION. As of the date of this Merger Agreement,
the authorized capital stock of ARH consists of 20,000,000 shares of ARH common
stock, no par value, of which 1,793,274 shares are duly authorized, validly
issued, fully paid and nonassessable and currently outstanding. Said capital
stock has been offered, sold and issued in compliance with all applicable
securities laws. As of the date of this Merger Agreement, there are currently
outstanding options to purchase 283,358 shares of ARH common stock, at a
weighted average exercise price of $9.4358 per share, issued pursuant to the ARH
Stock Option Plan. Said options were issued and, upon issuance in accordance
with the terms of the outstanding options said shares shall be issued, in
compliance with all applicable securities laws. Otherwise, there are no
outstanding (i) options, agreements, calls or commitments of any character which
would obligate ARH to issue, sell, pledge, assign or otherwise encumber or
dispose of, or to purchase, redeem or otherwise acquire, any ARH common stock or
any other equity security of ARH, or (ii) warrants or options relating to,
rights to acquire, or debt or equity securities convertible into, shares of ARH
common stock or any other equity security of ARH. ARH owns all of the
outstanding equity securities of ARB and FSC. The outstanding common stock of
ARH is not registered with the Commission pursuant to Section 12(g) of the 1934
Act and ARH has not heretofore filed periodic reports under Section 12(i), 13(a)
or 15(d) of the 1934 Act. ARB owns all of the outstanding equity securities of
ARBCO Investments, Inc. and American River Mortgage. Except for such equity
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securities owned by ARH and ARB, and financial institution equity securities
owned by ARB, and except as collateral for outstanding loans held in their loan
portfolios, neither ARH, ARB nor FSC owns, directly or indirectly, any equity
interest in any bank, corporation or other entity.
e. TRADEMARKS AND TRADE NAMES. To the best of ARH's knowledge,
ARH, ARB and FSC (i) own and have the exclusive right to use all Intellectual
Property Rights used in or necessary for the conduct of their businesses as now
or heretofore conducted; and (ii) are not infringing upon the Intellectual
Property Rights of any other person or entity. No claim is pending or threatened
by any person or entity against or otherwise affecting the use by ARH, ARB or
FSC of any Intellectual Property Rights and, to the best of its knowledge, there
is no valid basis for any such claim.
f. FINANCIAL STATEMENTS, REGULATORY REPORTS. No financial
statement or other document provided or to be provided to NCB as required by
Section 3.3(i) hereof, as of the date of such document, contained, or as to
documents to be delivered after the date hereof, will contain, any untrue
statement of a material fact, or, at the date thereof, omitted or will omit to
state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which such statements were or will
be made, not misleading; provided, however, that information as of a later date
shall be deemed to modify contrary information as of any earlier date. ARH, ARB
and FSC have filed all material documents and reports required to be filed by
each of them with any government agency or regulatory authority having
jurisdiction over their business, assets or properties. All such reports conform
in all material respects with the requirements promulgated by such government
agencies and regulatory authorities. All compliance or corrective action
relating to ARH and its subsidiaries required by government agencies and
regulatory authorities having jurisdiction over ARH and its subsidiaries has
been taken. Except as disclosed in such statements, reports or documents,
neither ARH nor its subsidiaries has received any notification, formally or
informally, from any agency or department of any federal, state or local
government or any regulatory authority or the staff thereof (a) asserting that
it is not in compliance with any of the statutes, regulations or ordinances
which such government or regulatory authority enforces, or (b) threatening to
revoke any license, franchise, permit or government authorization. ARH and its
subsidiaries have paid all assessments made or imposed by any government agency.
ARH has delivered to NCB copies of all annual management letters and opinions,
and has made available to NCB for inspection all reviews, correspondence and
other documents in the files of ARH prepared by certified public accountants
engaged by ARH and delivered to ARH since December 31, 1995. The financial
records of ARH have been, and are being and shall be, maintained in all material
respects in accordance with all applicable legal and accounting requirements
sufficient to insure that all transactions reflected therein are, in all
material respects, executed in accordance with management's general or specific
authorization and recorded in conformity with generally accepted accounting
principles or as applicable, regulatory accounting principles, at the time in
effect. The data processing equipment, data transmission equipment, related
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peripheral equipment and software used by ARH in the operation of its business
to generate and retrieve its financial records are adequate for the current
needs of ARH.
g. TAX RETURNS.
(i) ARH has timely filed all federal, state, county,
local and foreign tax returns required to be filed by it,
including, without limitation, estimated tax, use tax, excise
tax, real property and personal property tax reports and
returns, employer's withholding tax returns, other withholding
tax returns and Federal Unemployment Tax Returns, and all
other reports or other information required or requested to be
filed by ARH, and each such return, report or other
information was, when filed, complete and accurate in all
material respects. ARH has paid all taxes, fees and other
government charges, including any interest and penalties
thereon, when they have become due, except those that are
being contested in good faith, which contested matters have
been disclosed to NCB. ARH has not been requested to give nor
has it given any currently effective waivers extending the
statutory period of limitation applicable to any tax return
required to be filed by it for any period. There are no claims
pending against ARH for any alleged deficiency in the payment
of any taxes, and ARH does not know of any pending or
threatened audits, investigations or claims for unpaid taxes
or relating to any liability in respect of any taxes. There
have been no events, including a change in ownership, that
would result in a reappraisal and establishment of a new
base-year full value for purposes of applicable provisions of
the California Constitution, of any real property owned in
whole or in part by ARH or to the best of ARH's knowledge, of
any real property leased by ARH.
(ii) ARH has heretofore delivered to NCB or will deliver
to NCB prior to or concurrent with filing, copies of all its
tax returns with respect to taxes payable to the United States
of America and the State of California for the fiscal years
ended December 31, 1999, 1998, 1997, 1996, and 1995.
(iii) No consent has been filed relating to ARH pursuant
to Section 341(f) of the IRC.
h. MATERIAL ADVERSE CHANGE. Since December 31, 1999, there has
been (i) no material adverse change in the business, assets, licenses, permits,
franchises, results of operations or financial condition of ARH and ARB taken as
a whole (whether or not in the Ordinary Course of Business), (ii) no change in
any of the assets, licenses, permits or franchises of ARH and ARB taken as a
whole that has had or can reasonably be expected to have a material adverse
effect on any of the items listed in clause (h)(i) above, (iii) no damage,
destruction, or other casualty loss (whether or not covered by insurance) that
has had or can reasonably be expected to have a material adverse effect on any
of the items listed in clause (h)(i) above, (iv) no amendment, modification, or
termination of any existing, or entering into of any new, contract, agreement,
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plan, lease, license, permit or franchise that is material to the business,
financial condition, assets, liabilities or operations of ARH and ARB taken as a
whole, except in the Ordinary Course of Business, and (v) no disposition by ARH
or ARB of one or more assets that, individually or in the aggregate, are
material to ARH and ARB taken as a whole, except sales of assets in the Ordinary
Course of Business.
i. NO UNDISCLOSED LIABILITIES. Except for items for which
reserves have been established in the unaudited balance sheet (and will also be
established in the audited balance sheet) of ARH as of December 31, 1999, ARH
has not incurred or discharged, and is not legally obligated with respect to,
any indebtedness, liability (including, without limitation, a liability arising
out of an indemnification, guarantee, hold harmless or similar arrangement) or
obligation (accrued or contingent, whether due or to become due, and whether or
not subordinated to the claims of its general creditors), other than as a result
of operations in the Ordinary Course of Business after such date. No agreement
pursuant to which any loans or other assets have been or will be sold by ARH
entitles the buyer of such loans or other assets, unless there is a material
breach of a representation or covenant by ARH, to cause ARH to repurchase such
loan or other asset or to pursue any other form of recourse against ARH. ARH has
not knowingly made or shall make any representation or covenant in any such
agreement that contained or shall contain any untrue statement of a material
fact or omitted or shall omit to state a material fact necessary in order to
make the statements contained therein, in light of the circumstances under which
such representations and/or covenants were made or shall be made, not
misleading. No cash, stock or other dividend or any other distribution with
respect to the ARH Shares has been declared, set aside or paid, nor have any of
the ARH Shares been purchased, redeemed or otherwise acquired, directly or
indirectly, by ARH since December 31, 1999.
j. PROPERTIES AND LEASES.
(i) ARH has good and marketable title, free and clear
of all liens and encumbrances and the right of possession,
subject to existing leaseholds, to all real properties and
good title, free and clear of all liens and encumbrances, to
all other property and assets, tangible and intangible,
reflected in the ARH balance sheet as of December 31, 1999
(except property held as lessee under leases disclosed in
writing prior to the date hereof and except personal property
sold or otherwise disposed of since December 31, 1999, in the
Ordinary Course of Business), except for (a) liens for taxes
or assessments not delinquent, (b) such other liens and
encumbrances and imperfections of title as do not materially
affect the value of such property as reflected in the ARH
balance sheet as of December 31, 1999, or as currently shown
on the books and records of ARH and which do not interfere
with or impair its present and continued use, or (c)
exceptions disclosed in title reports and preliminary title
reports, copies of which have been provided to NCB. To the
knowledge ARH, all tangible properties of ARH conform in all
material respects with all applicable ordinances, regulations
and zoning laws. All tangible properties of ARH are in a good
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state of maintenance and repair and are adequate for the
current business of ARH. No properties of ARH, and, to the
best of ARH's knowledge, no properties in which ARH holds a
collateral or contingent interest or purchase option, are the
subject of any pending or threatened investigation, claim or
proceeding relating to the use, storage or disposal on such
property of or contamination of such property by any toxic or
hazardous waste material or substance. To the best of ARH's
knowledge, ARH does not own, possess or have a collateral or
contingent interest or purchase option in any properties or
other assets which contain or have located within or thereon
any hazardous or toxic waste material or substance unless the
location of such hazardous or toxic waste material or other
substance or its use thereon conforms in all material respects
with all federal, state and local laws, rules, regulations or
other provisions regulating the discharge of materials into
the environment. As to any real property not owned or leased
by ARH and held as security for a loan or in which ARH
otherwise has an interest, ARH has not controlled, directed or
participated in the operation or management of any such real
property or any facilities or enterprise conducted thereon,
such that it has become an owner or operator of such real
property under applicable environmental laws.
(ii) All properties held by ARH under leases are held
under valid, binding and enforceable leases (subject to
applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability,
to equitable principles of general applicability), with such
exceptions as are not material and do not interfere with the
conduct of the business of ARH, and ARH enjoys quiet and
peaceful possession of such leased property. ARH is not in
material default in any respect under any material lease,
agreement or obligation regarding its properties to which it
is a party or by which it is bound.
(iii) All of ARH's rights and obligations under the
leases referred to in Section 5(j)(ii) above do not require
the consent of any other party to the transactions
contemplated by this Merger Agreement and the Agreement of
Merger. Where required, ARH shall obtain, prior to the
Effective Date, the consent of such parties to such
transactions.
k. MATERIAL CONTRACTS. Excluding loans, lines of credit, loan
commitments or letters of credit to which ARH is a party, ARH is not a party to
or bound by any contract or other agreement made in the Ordinary Course of
Business which involves aggregate future payments by or to ARH of more than
Seventy-Five Thousand Dollars ($75,000) and which is made for a fixed period
expiring more than one year from the date hereof, and ARH is not a party to or
bound by any agreement not made in the Ordinary Course of Business which is to
be performed at or after the date hereof. Each of the contracts and agreements
disclosed to NCB pursuant to this Section 5(k) is a legal and binding obligation
(subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to equitable
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principles of general applicability), and no breach or default (and no condition
which, with notice or passage of time, or both, could become a breach or
default) exists with respect thereto.
l. CLASSIFIED LOANS. There are no loans presently owned by ARH
that have been classified by ARH management or ARH internal policy or procedure,
any outside review examiner, accountant or any bank regulatory authority as
"Non-Accrual," "Watch," "Other Assets Specially Mentioned," "Substandard,"
"Doubtful," or "Loss" or classified using categories or words with similar
import and all loans or portions thereof so classified have been reserved to the
extent required. ARH regularly reviews and appropriately classifies its loans in
accordance with all applicable legal and regulatory requirements and generally
accepted banking practices. All loans and investments of ARH are legal, valid
and binding obligations enforceable in accordance with their respective terms
and are not subject to any setoffs, counterclaims or disputes (subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to equitable principles of general
applicability), except as disclosed to NCB in writing or reserved for in the
audited balance sheet of ARH as of December 31, 1999, and were duly authorized
under and made in compliance with applicable federal and state laws and
regulations. ARH has no extensions of credit, investments, guarantees,
indemnification agreements or commitments for the same (including without
limitation commitments to issue letters of credit, to create acceptances, or to
repurchase securities, federal funds or other assets) other than those
documented on the books and records of ARH.
m. NO RESTRICTIONS ON INVESTMENTS. Except for pledges to
secure public and trust deposits and repurchase agreements in the Ordinary
Course of Business and securities classified as "held to maturity" as defined
under SFAS No. 115, none of the investments reflected in the ARH balance sheet
as of December 31, 1999, and none of the investments made by ARH since December
31, 1999, is subject to any restriction, whether contractual or statutory, which
materially impairs the ability of ARH to freely dispose of such investment at
any time.
n. ARH BENEFIT PLANS/ERISA.
(i) ARH has provided to NCB an accurate list setting
forth all bonus, incentive compensation, profit sharing,
pension, retirement including, without limitation, salary
continuation and supplemental retirement plans, stock
purchase, stock option, deferred compensation, severance,
hospitalization, medical, dental, vision, group insurance,
death benefit, disability and other fringe benefit plans,
trust agreements, arrangements and commitments of ARH and its
subsidiaries (including but not limited to any such plans,
agreements, arrangements and commitments applicable to current
and former employees or retired employees, and current and
former directors or retired directors, or for which such
persons are eligible) (individually an "ARH Benefit Plan" and
collectively, "ARH Benefit Plans"), if any, together with
copies of all such ARH Benefit Plans that are documented and
any and all contracts of employment, and has made available to
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NCB any Board of Directors' minutes (or committee minutes)
authorizing, approving or guaranteeing such ARH Benefit Plans
and contracts; and
(ii) All contributions, premiums or other payments due
from ARH or its subsidiaries to (or under) any ARH Benefit
Plans have been fully paid or adequately provided for on ARH's
audited financial statements for the year ended December 31,
1999. All accruals thereon (including, where appropriate,
proportional accruals for partial periods) have been made in
accordance with generally accepted accounting principles
consistently applied on a reasonable basis; and
(iii) ARH has disclosed in writing to NCB the names of
each director, officer and employee of ARH and its
subsidiaries; and
(iv) The ARH Benefit Plans have, to the best of ARH's
knowledge, been administered where required in substantial
compliance with ERISA, the IRC and the terms of such ARH
Benefit Plans. There is no pending or to the best of ARH's
knowledge any threatened litigation relating to any such ARH
Benefit Plan; and
(v) ARH and its subsidiaries have not offered in the
past health benefits for retired employees or directors and
have no intention to offer any additional health or other
benefits for retired employees or directors; and
(vi) Each ARH Benefit Plan is in full force and effect,
and neither ARH and its subsidiaries, nor any other party
thereto is in material default under any of them, and there
have been no claims of default and there are no facts or
conditions which if continued, or on notice, will result in a
material default under any ARH Benefit Plans; and
(vii) ARH has provided to NCB a list of all agreements or
other understandings pursuant to which the consummation of the
transactions contemplated hereby will (a) entitle any current
or former employee or officer of ARH or its subsidiaries to
severance pay, unemployment compensation or any other payment,
or (b) accelerate the time of payment or vesting or increase
the amount of compensation due any such employee, officer or
director, and the aggregate amount of such payments under all
such agreements or other understandings. None of such payments
will constitute an "excess parachute" payment within the
meaning of Section 280G of the IRC.
o. COLLECTIVE BARGAINING AND EMPLOYMENT AGREEMENTS. ARH has no
union or collective bargaining or written employment agreements, contracts or
other agreements with any labor organization or with any member of management,
or any management or consultation agreement not terminable at will by ARH
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without liability and no such contract or agreement has been requested by, or is
under discussion by management with, any group of employees, any member of
management or any other person. There are no material controversies pending
between ARH and any current or former employees, and to the best of ARH's
knowledge, there are no efforts presently being made by any labor union seeking
to organize any of such employees.
p. COMPENSATION OF OFFICERS AND EMPLOYEES.
(i) No officer or employee of ARH or its subsidiaries
is receiving aggregate direct remuneration at a rate exceeding
Seventy-Five Thousand Dollars ($75,000) per annum.
(ii) The consummation of the transactions contemplated
by this Merger Agreement and the Agreement of Merger will not
(either alone or upon the occurrence of any additional or
further acts or events) result in any payment (whether of
severance pay or otherwise) becoming due from ARH to any
employee of ARH.
q. LEGAL ACTIONS AND PROCEEDINGS. ARH is not a party to, or so
far as known to it, threatened with, and to ARH's knowledge, there is no
reasonable basis for, any legal action or other proceeding or investigation
before any court, any arbitrator of any kind or any government agency, and ARH
is not subject to any potential adverse claim, the outcome of which could
involve the payment or receipt by ARH of any amount in excess of Fifty Thousand
Dollars ($50,000), unless an insurer has agreed to defend against and pay the
amount of any resulting liability without reservation, or, if any such legal
action, proceeding, investigation or claim will not involve the payment by ARH
of a monetary amount, which could reasonably be expected to have a material
adverse effect on ARH or its business or property or the transactions
contemplated hereby. ARH has no knowledge of any pending or threatened claims or
charges under the Community Reinvestment Act, before the Equal Employment
Opportunity Commission, the California Department of Fair Housing and Economic
Development, the California Unemployment Appeals Board, or any federal or state
human relations commission or agency. There is no labor dispute, strike,
slowdown or stoppage pending or, to the best of the knowledge of ARH, threatened
against ARH.
r. EXECUTION AND DELIVERY OF THE AGREEMENTS.
(i) The execution and delivery of this Merger Agreement
and the Agreement of Merger have been duly authorized by the
Boards of Directors of ARH and, when the principal terms of
the Merger, this Merger Agreement and the Agreement of Merger
have been duly approved by the affirmative vote of the holders
of a majority of the outstanding ARH Shares at a meeting of
shareholders duly called and held, the Merger, this Merger
Agreement and the Agreement of Merger will be duly and validly
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authorized by all necessary corporate action on the part of
ARH.
(ii) This Merger Agreement has been duly executed and
delivered by ARH and (assuming due execution and delivery by
NCB) constitutes, and the Agreement of Merger, upon its
execution and delivery by ARH and the Interim Bank (and
assuming due execution and delivery by the Interim Bank and
NCB) will constitute, a legal and binding obligation of ARH in
accordance with its terms.
(iii) The execution and delivery by ARH of this Merger
Agreement and the Agreement of Merger and the consummation of
the transactions herein and therein contemplated (a) do not
violate any provision of the Articles of Incorporation or
Bylaws of ARH, respectively, or violate in any material
respect any provision of federal or state law or any
government rule or regulation (assuming (1) receipt of the
Government Approvals, (2) receipt of the requisite ARH
shareholder approval referred to in Section 5(r)(i) hereof,
(3) due registration of the ARH Shares under the 1933 Act, and
(4) receipt of appropriate permits or approvals under state
securities or "blue sky" laws, and (b) do not require any
consent of any person under, conflict in any material respect
with or result in a material breach of, or accelerate the
performance required by any of the terms of, any material debt
instrument, lease, license, covenant, agreement or
understanding to which ARH is a party or by which it is bound
or any order, ruling, decree, judgment, arbitration award or
stipulation to which ARH is subject, or constitute a material
default thereunder or result in the creation of any lien,
claim, security interest, encumbrance, charge, restriction or
right of any third party of any kind whatsoever upon any of
the properties or assets of ARH.
s. RETENTION OF BROKER OR CONSULTANT. No broker, agent,
finder, consultant or other party (other than legal, compliance, loan reviewers
and accounting advisors) has been retained by ARH or is entitled to be paid
based upon any agreements, arrangements or understandings made by ARH in
connection with any of the transactions contemplated by this Merger Agreement or
the Agreement of Merger, except that ARH has engaged the firm of Hoefer &
Arnett, Incorporated to act as its financial advisor and to render an opinion
regarding the fairness of the Conversion Ratio in the Merger, from a financial
point of view, to ARH shareholders. ARH has provided NCB with a true and
accurate copy of its agreement(s) with Hoefer & Arnett Incorporated.
t. INSURANCE. ARH is and continuously since its inception has
been, insured with reputable insurers against all risks normally insured against
by bank holding companies and banks, and all of the insurance policies and bonds
maintained by ARH are in full force and effect, ARH is not in default thereunder
and all material claims thereunder have been filed in due and timely fashion. In
the best judgment of the management of ARH, such insurance coverage is adequate
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for ARH. Since December 31, 1999, there has not been any damage to, destruction
of, or loss of any assets of ARH not covered by insurance that could reasonably
be expected to have a material adverse effect on the business, financial
condition, properties, assets or results of operations of ARH.
u. LOAN LOSS RESERVES. The allowance for loan losses in the
ARH consolidated balance sheet dated December 31, 1999 is, and as of the
Determination Date will be, adequate in all material respects under the
requirements of all applicable state and federal laws and regulations to provide
for possible loan losses on outstanding loans, net of recoveries and in
compliance in all material respects with the credit policies of ARH in effect
and as disclosed and provided to NCB prior to the date of this Merger Agreement.
ARH has disclosed to NCB in writing prior to the date hereof, and will promptly
inform NCB of the amounts of all loans, leases, other extensions of credit or
commitments, or other interest-bearing assets of ARH, that have been classified
as of the date hereof or hereafter by ARH management or ARH internal policy or
procedure, any outside review examiner, accountant or any bank regulatory
authority as "Non-Accrual," "Watch," "Other Assets Specially Mentioned,"
"Substandard," "Doubtful," or "Loss" or classified using categories or words
with similar import in the case of loans (or that would have been so classified,
in the case of other interest-bearing assets, had they been loans).
Notwithstanding the above, ARH shall be under no obligation to disclose to NCB
any such classification by any bank regulatory authority, where such disclosure
would violate any obligation of confidentiality of ARH or ARB imposed by such
bank regulatory authority. ARH has furnished and will continue to furnish to NCB
true and accurate information concerning the loan portfolio of ARH and ARB, and
no material information with respect to the loan portfolio has been or will be
withheld from NCB.
v. TRANSACTIONS WITH AFFILIATES. Except in the Ordinary Course
of Business, ARH has not extended credit, committed itself to extend credit, or
transferred any asset to or assumed or guaranteed any liability of the employees
or directors of ARH, or to any spouse or child of any of them, or to any of
their "affiliates" or "associates" as such terms are defined in Rule 405 under
the 1933 Act. ARH has not entered into any other transactions with the employees
or directors of ARH or any spouse or child of any of them, or any of their
affiliates or associates, except as disclosed in writing to NCB. Any such
transactions have been on terms no less favorable to ARH than those which would
prevail in an arms-length transaction with an independent third party. ARH has
not violated any applicable regulation of any government agency or regulatory
authority having jurisdiction over ARH in connection with any such transactions
described in this subsection.
w. RISK MANAGEMENT INSTRUMENTS. All interest rate swaps, caps,
floors, option agreements, futures and forward contracts and other similar risk
management arrangements, whether entered into for ARH's own account, or for the
account of one or more of ARH's subsidiaries or their customers (all of which
are listed on the ARH Disclosure Schedule), if any, were entered into in
accordance with prudent business practices and all applicable laws, rules,
regulations and regulatory policies and with counterparties believed to be
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financially responsible at the time; and each of them constitutes the valid and
legally binding obligation of ARH or one of its subsidiaries, enforceable in
accordance with its terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors' rights
or by general equity principles), and are in full force and effect. Neither ARH
nor its subsidiaries, nor to ARH's knowledge, any other party thereto, is in
breach of any of its obligations under any such agreement or arrangement.
x. YEAR 2000. ARH has not experienced any Year 2000 problems
of any kind or nature whatsoever which have had or might reasonably be expected
to have a material adverse effect on ARH. To the knowledge of ARH, the mission
critical computer software operated by ARH and/or any of its subsidiaries is
currently capable of providing, or is being adapted to provide, uninterrupted
millennium functionality to record, store, process and present calendar dates
falling on or after January 1, 2000 in substantially the same manner and with
substantially the same functionality as such mission critical software recorded,
stored, processed and presented such calendar dates falling on or before
December 31, 1999. To the knowledge of ARH, the costs of adaptations referred to
in this clause will not have a material adverse effect with respect to the
business and operations of ARH. Neither ARH nor any of its subsidiaries has
received, and does not reasonably expect to receive, any deficiency notice from
any federal or California banking authority. ARH has previously disclosed to NCB
a complete and accurate copy of its and its subsidiaries' plan, including an
estimate of anticipated associated costs, for addressing the issues set forth in
all Federal Financial Institutions Examination Council Interagency Statements as
such issues affect ARH and/or its subsidiaries. Between the date of this Merger
Agreement and the Effective Time of the Merger, ARH, shall use commercially
reasonable and practicable efforts to implement such plan.
y. COMMUNITY REINVESTMENT ACT COMPLIANCE. ARH and ARB are in
substantial compliance with the applicable provisions of the Community
Reinvestment Act of 1977 and the regulations promulgated thereunder
(collectively, the "CRA") and ARB has received a CRA rating of "satisfactory" in
its most recent examination, and neither ARH nor ARB has any knowledge of the
existence of any fact or circumstance or set of facts or circumstances which
could be reasonably expected to result in ARH failing to be in substantial
compliance with such provisions or having its current rating lowered.
z. INFORMATION IN ARH REGISTRATION STATEMENT. The information
pertaining to ARH which has been or will be included in the ARH Registration
Statement and the Joint Proxy Statement/Prospectus, or in the Applications to be
filed to obtain the Government Approvals, does not and will not contain any
untrue statement of any material fact or omit or will omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading;
provided, however, that information of a later date shall be deemed to modify
contrary information as of an earlier date. All financial statements of ARH
included in the ARH Registration Statement and the Joint Proxy
Statement/Prospectus, or the Applications, will present fairly the financial
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condition and results of operations of ARH at the dates and for the periods
covered by such statements in accordance with generally accepted accounting
principles consistently applied throughout the periods covered by such
statements. ARH shall promptly advise NCB in writing if prior to the Effective
Time of the Merger ARH shall obtain knowledge of any facts that would make it
necessary to amend or supplement the ARH Registration Statement, the Joint Proxy
Statement/Prospectus or any Application, in order to make the statements therein
not misleading or to comply with applicable law or regulation.
aa. ACCURACY AND EFFECTIVE DATE OF REPRESENTATIONS AND
WARRANTIES, COVENANTS AND AGREEMENTS. Each representation, warranty, covenant
and agreement of ARH set forth in this Merger Agreement shall be deemed to be
made on and as of the date hereof (except to the extent that a representation or
warranty is qualified as set forth in the ARH Disclosure Schedule in a section
corresponding in number with the applicable section of such representation or
warranty), the Closing Date and the Effective Time of the Merger. No
representation or warranty by ARH, and no statement by ARH in any certificate,
agreement, ARH Disclosure Schedule or other document furnished or to be
furnished in connection with the transactions contemplated by this Merger
Agreement or the Agreement of Merger, was or will be inaccurate, incomplete or
incorrect in any material respect as of the date furnished or contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact necessary to make such representation, warranty or statement
not misleading to NCB.
bb. BROKERED DEPOSITS. ARH and ARB have no "brokered
deposits" as that term is defined in applicable FDIC regulations.
6. SECURITIES ACT OF 1933; SECURITIES EXCHANGE ACT OF 1934.
a. PREPARATION AND FILING OF REGISTRATION STATEMENT. ARH shall
promptly prepare and file with the Commission (i) a registration statement on
the appropriate form (the "ARH Registration Statement") under and pursuant to
the provisions of the 1933 Act for the purpose of registering a sufficient
number of ARH Shares to complete the exchange of ARH Shares for the outstanding
NCB Shares pursuant to the Conversion Ratio and the provisions of Section 2.1
above, and (ii) in sufficient time to be effective on or before the Effective
Time of the Merger, one or more registration statements or amendments to
existing registration statements under the 1933 Act for the purpose of
registering the maximum number of ARH Shares to which the holders of Substitute
Options may be entitled pursuant to Section 2.6 above at or after the Effective
Time of the Merger. ARH shall promptly prepare a Joint Proxy
Statement/Prospectus for the purpose of submitting the principal terms of the
Merger (including separate proposals to approve the Amendments, as described in
Section 3.3.d. hereof), this Merger Agreement and the Agreement of Merger to the
shareholders of ARH for approval. NCB shall cooperate in all reasonable respects
with regard to the preparation of the Joint Proxy Statement/Prospectus and will
promptly prepare and file with the OCC its proxy materials, incorporating the
Joint Proxy Statement/Prospectus, for the purpose of submitting the principal
terms of the Merger (including the Amendments, as described in Section 3.3.d.
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hereof), this Merger Agreement and the Agreement of Merger to the shareholders
of NCB for approval. The Joint Proxy Statement/Prospectus in definitive form is
expected to serve as the prospectus to be included in the ARH Registration
Statement. ARH and NCB shall each provide promptly to the other such information
concerning its business and financial condition and affairs as may be required
or appropriate for inclusion in the ARH Registration Statement, or the Joint
Proxy Statement/Prospectus and the NCB proxy materials, and shall cause its
counsel and auditors to cooperate with the other's counsel and auditors in the
preparation of the ARH Registration Statement, the Joint Proxy
Statement/Prospectus and the NCB proxy materials.
b. EFFECTIVENESS OF REGISTRATION STATEMENT. ARH and NCB shall
use their best efforts to have the ARH Registration Statement and any amendments
or supplements thereto declared effective under the 1933 Act as soon as
practicable, and thereafter ARH and NCB shall distribute the Joint Proxy
Statement/Prospectus to holders of their respective common stock in accordance
with applicable laws and the Articles of Incorporation or Association, as
applicable, and Bylaws of each.
c. SALES AND RESALES OF COMMON STOCK. ARH shall not be
required to maintain the effectiveness of the ARH Registration Statement for the
purpose of sale or resale of the ARH Shares by any person.
d. RULE 145. Securities representing ARH Shares issued to
affiliates of NCB (as determined by counsel to ARH and NCB) under Rule 145 of
the 1933 Act pursuant to the Merger Agreement may be subject to stop transfer
orders and a restrictive legend which confirm and state that such securities
representing ARH Shares have been issued or transferred to the registered holder
as the result of a transaction to which Rule 145 under the 1933 Act applies, and
that such securities may not be sold, hypothecated, transferred or assigned, and
the issuer or its transfer agent shall not be required to give effect to any
attempted sale, hypothecation, transfer or assignment, except (i) pursuant to a
then current effective registration statement under the 1933 Act, (ii) in a
transaction permitted by Rule 145 as to which the issuer has, in the opinion of
its counsel, received reasonably satisfactory evidence of compliance with the
provisions of Rule 145, or (iii) in a transaction which, in the opinion of
counsel satisfactory to the issuer or as described in a "no action" or
interpretive letter from the staff of the Securities and Exchange Commission, is
not required to be registered under the 1933 Act.
7. CONDITIONS TO THE OBLIGATIONS OF ARH.
The obligations of ARH under this Merger Agreement are, at its option,
subject to fulfillment at or prior to the Effective Time of the Merger of each
of the following conditions; provided, however, that any one or more of such
conditions may be waived by the Board of Directors of ARH, except where contrary
to applicable law, at any time at or prior to the Effective Time of the Merger:
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a. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of NCB in Section 4 hereof shall be true and correct in all material
respects on and as of the date of this Merger Agreement (except to the extent
that a representation or warranty is qualified as set forth in the NCB
Disclosure Schedule corresponding in number with the applicable section of such
representation or warranty), the Closing Date and the Effective Time of the
Merger, with the same effect as though such representations and warranties had
been made on and as of each such date or time except as to any representation or
warranty which specifically relates to an earlier date or time.
b. COMPLIANCE AND PERFORMANCE UNDER AGREEMENTS. NCB shall have
performed and complied in all material respects with all terms, agreements,
covenants and conditions of this Merger Agreement and the Agreement of Merger
required to be performed or complied with by NCB at or prior to the Effective
Time of the Merger.
c. MATERIAL ADVERSE CHANGE. No material adverse change shall
have occurred since December 31, 1999, in the business, financial condition,
results of operations or assets of NCB. Other than as set forth in the NCB
Disclosure Schedule, NCB shall not be a party to or threatened with, and to the
best of NCB's knowledge there is no reasonable basis for, any legal action or
other proceeding before any court, any arbitrator of any kind or any government
agency. No material adverse change shall have occurred as a result of any
subsequent legal action or proceeding, or any subsequent developments in the
legal actions or proceedings as set forth in the NCB Disclosure Schedule, which
in the reasonable judgment of ARH, could have a material adverse effect on the
business, financial condition, results of operations or assets of NCB.
d. APPROVAL OF AGREEMENTS. The principal terms of the Merger,
this Merger Agreement and the Agreement of Merger shall have been duly approved
by (i) the affirmative vote or consent of the holders of a two-thirds majority
of the outstanding NCB Shares and (ii) the affirmative vote or consent of the
holders of a majority of the outstanding ARH Shares.
e. OFFICER'S CERTIFICATE. ARH shall have received a
certificate, dated the Effective Date, signed on behalf of NCB by its President
and Chief Financial Officer in form and substance acceptable to ARH and its
counsel to the effect that the conditions set forth in Section 7, have been
satisfied.
f. OPINION OF COUNSEL. Lillick & Charles LLP, counsel to NCB,
shall have delivered to ARH its opinion dated the Effective Date in form and
substance acceptable to ARH and its counsel.
g. ABSENCE OF PROCEEDINGS. No legal, administrative,
arbitration, investigatory or other proceeding by any government agency or
regulatory authority shall have been instituted or threatened to restrain or
prohibit the Merger or the transactions contemplated by this Merger Agreement.
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h. EFFECTIVENESS OF REGISTRATION STATEMENT. The ARH
Registration Statement and any amendments or supplements thereto shall have
become effective under the 1933 Act, no stop order suspending the effectiveness
of such Registration Statement shall be in effect and no proceedings for such
purpose shall have been initiated or threatened by or before the Commission. The
ARH Shares registered thereby shall have received all state securities and "blue
sky" permits or approvals required to consummate the transactions contemplated
by this Merger Agreement and the Agreement of Merger.
i. GOVERNMENT APPROVALS. All Government Approvals shall be in
effect, and all conditions or requirements prescribed by law or by any such
Approvals shall have been satisfied; provided, however, that no Government
Approval shall be deemed to have been received if it shall require the
divestiture or cessation of any of the present businesses or operations
conducted by any of the parties hereto or shall impose any other condition or
requirement, which condition or requirement ARH in its reasonable judgment shall
deem to be materially burdensome (in which case ARH shall promptly notify NCB).
For purposes of this Merger Agreement, no condition or requirement shall be
deemed to be "materially burdensome" if such condition or requirement does not
materially differ from conditions or requirements regularly imposed in orders
approving transactions of the type contemplated by this Merger Agreement and
compliance with such condition or requirement would not:
(i) require the taking of any action materially
inconsistent with the manner in which ARH, ARB, FSC or NCB has
conducted its business previously;
(ii) have a material adverse effect on the business,
financial condition or results of operations of ARH, ARB, and
FSC, taken as a whole, or NCB; or
(iii) preclude satisfaction of any of the conditions to
consummation of the transactions contemplated by this Merger
Agreement.
j. TAX OPINION. Perry-Smith LLP shall have delivered to ARH
and NCB a tax opinion subject to customary assumptions and exceptions included
in such opinions and the prior delivery of certificates or representation
letters from NCB and ARH, substantially to the effect that under federal income
tax law and California income and franchise tax law:
(i) the Merger will not result in any recognized gain
or loss to ARH or NCB;
(ii) except for any cash received in lieu of any
fractional share, no gain or loss will be recognized by
holders of NCB Shares who receive ARH Shares in exchange for
the NCB Shares which they hold;
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(iii) the holding period of ARH Shares exchanged for NCB
Shares will include the holding period of the NCB Shares for
which they are exchanged, assuming the NCB Shares are capital
assets in the hands of the holder thereof at the Effective
Date;
(iv) the basis of the ARH Shares received in the
exchange will be the same as the basis of the NCB Shares for
which they are exchanged, less any basis attributable to
fractional shares for which cash is received; and
(v) an NCB shareholder who dissents to the Merger and
receives cash for his or her NCB Shares will be treated as
having received a distribution in redemption of his or her NCB
Shares, subject to the provisions and limitations of Section
302 of the IRC. Those NCB shareholders who receive solely
cash, who immediately after the Merger hold no ARH Shares
directly or through the application of Section 318 of the IRC,
and thus whose interests are completely terminated within the
meaning of Section 302(b)(3) of the IRC, will be treated as
receiving a cash distribution in full payment for the NCB
Shares as provided in Section 302(a) of the IRC. Gain or loss
will be recognized to such NCB shareholders measured by the
difference between the redemption price and the adjusted basis
of the NCB Shares. If the NCB shareholder holds such NCB
Shares as a capital asset, such gain or loss will be a capital
gain or loss.
(vi) No gain or loss will be recognized by the holders
of nonqualified options to buy NCB Shares upon the conversion
of those options into nonqualified options to buy ARH Shares
under the same terms and conditions as in effect immediately
prior to the Merger.
(vii) The substitution of incentive stock options to
acquire ARH Shares for incentive stock options to acquire NCB
Shares will not be a modification as defined in Section
424(h)(3) of the IRC, and will not result in the recognition
of income, gain, or loss to the holders of the incentive stock
options to acquire NCB Shares. Such options to acquire ARH
Shares will be incentive stock options as defined in Section
422(b) of the IRC.
k. ACCOUNTANT'S COMFORT LETTERS. On or prior to the date of
effectiveness of the ARH Registration Statement, ARH shall have received a
letter addressed to ARH from Perry-Smith LLP, independent public accountants for
NCB, in form and substance acceptable to ARH and its counsel and customary for
"comfort" letters prepared in accordance with the provisions of Statement of
Accounting Standards No. 71, Interim Financial Information. ARH shall also have
received from Perry-Smith LLP, a "comfort" letter dated the Effective Date, in
form and substance acceptable to ARH and its counsel, as to such matters, as of
a specified date not more than five (5) business days prior to the Effective
Date, as ARH may reasonably request.
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l. DISSENTING SHARES. Holders of not more than nine percent
(9%) of the outstanding NCB Shares and ARH Shares shall have perfected
dissenter's rights (i) in the case of NCB Shares, pursuant to 12 U.S.C. Section
215a(b), (c) and (d) (by voting against the Merger at the NCB meeting of
shareholders or by giving notice in writing at or prior to such meeting that he
or she dissents from the Merger and thereafter submitting a timely request for
the value of his or her NCB Shares in the manner required by the National Bank
Act and the rules and regulations of the OCC) and (ii) in the case of the ARH
Shares, pursuant to Chapter 13 of the California General Corporation Law.
m. UNAUDITED FINANCIALS. Not later than five (5) business days
prior to the Effective Date, NCB shall have furnished ARH a copy of its most
recently prepared unaudited month-end consolidated financial statements,
including a balance sheet and statement of income of NCB, for the month ending
at least ten (10) business days prior to the Effective Date.
n. AFFILIATE AGREEMENTS. ARH shall have received signed
affiliate agreements on or before the date of this Merger Agreement, from each
person who, in the opinion of NCB's and ARH's counsel, might be deemed to be an
affiliate of NCB or ARH under Rule 144 or 145 of the 1933 Act. Said agreements
will include provisions restricting certain actions by an affiliate related to
NCB Shares or ARH Shares, including the sale, purchase, acquisition or transfer
of NCB Shares or ARH Shares in a manner which may render pooling of interests
accounting treatment unavailable in the Merger, and shall be substantially in
the form attached hereto as Exhibits B and D.
o. CLOSING DOCUMENTS. ARH shall have received such
certificates and other closing documents as counsel for ARH shall reasonably
request.
p. CONSENTS. NCB shall have received, or ARH shall have
satisfied itself that NCB will receive, all consents of third parties as may be
required including consents of other parties to and required by material
mortgages, notes, leases, franchises, agreements, licenses and permits
applicable to NCB, in each case in form and substance reasonably acceptable to
ARH and its counsel, and no such consent or license or permit shall have been
withdrawn or suspended.
q. FAIRNESS OPINION. The Board of Directors of ARH shall have
received an opinion of Hoefer & Arnett Incorporated, dated the date of this
Merger Agreement and the date of mailing or a date within three (3) days prior
to the date of mailing the Joint Proxy Statement/Prospectus, to the effect that
the Conversion Ratio in the Merger is fair, from a financial point of view, to
ARH and its shareholders.
r. ACCOUNTING TREATMENT. ARH shall have received a letter from
Perry-Smith LLP, subject to customary qualifications and receipt of such
certificates as may be reasonable and customary in connection with such letters,
acceptable in form and substance to ARH and its counsel, to the effect that the
Merger shall qualify for the pooling of interests method of accounting in
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accordance with generally accepted accounting principles, and all applicable
rules, regulations and policies of the Commission. There shall have been no
determination by any court, tribunal, regulatory authority or other government
agency, that the Merger fails or will fail to qualify for pooling of interests
accounting treatment.
s. SHAREHOLDER AGREEMENTS. ARH and NCB shall have received
signed shareholder agreements from members of the Boards of Directors and the
executive officers of ARH and NCB on or before the date of this Merger
Agreement, pursuant to which each such person in their capacity as a shareholder
commits to vote their ARH Shares or NCB Shares in favor of the Merger and the
transactions contemplated thereby and pursuant to this Merger Agreement and the
Agreement of Merger, and to recommend to shareholders, subject to the exercise
of fiduciary duties, that they vote in favor of the Merger and the transactions
contemplated thereby and pursuant to this Merger Agreement and the Agreement of
Merger. Said agreements shall be substantially in the form attached hereto as
Exhibits C and E.
t. PERFORMANCE TESTS. As of the Determination Date, the
Closing Date and the Effective Date, NCB shall have (i) total shareholders'
equity and leverage, tier 1 and total risk-based capital ratios, respectively,
in amounts required to comply with the "well capitalized" category of applicable
federal banking regulations, (ii) total reserves for losses on outstanding loans
in compliance with the NCB loan loss policy and procedures described in Section
3.2.h. hereof and at a level which, in the reasonable determination of ARH, are
adequate for regulatory purposes and for purposes of generally accepted
accounting principles, (iii) total shareholders' equity of Four Million Thirty
Thousand Dollars ($4,030,000) and (iv) assets classified as "Substandard",
"Doubtful", and "Loss" shall not exceed fifteen percent (15%) of total
shareholders' equity.
8. CONDITIONS TO THE OBLIGATIONS OF NCB.
The obligations of NCB under this Merger Agreement are, at its option,
subject to the fulfillment at or prior to the Effective Time of the Merger of
each of the following conditions; provided, however, that any one or more of
such conditions may be waived by the Board of Directors of NCB, except where
contrary to applicable law, at any time at or prior to the Effective Time of the
Merger:
a. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of ARH in Section 5 hereof shall be true and correct in all material
respects on and as of the date of this Merger Agreement (except to the extent
that a representation or warranty is qualified as set forth in the ARH
Disclosure Schedule corresponding in number with the applicable section of such
representation or warranty), the Closing Date and the Effective Time of the
Merger, with the same effect as though such representations and warranties had
been made on and as of each such date or time except as to any representation or
warranty which specifically relates to an earlier date or time.
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b. COMPLIANCE AND PERFORMANCE UNDER AGREEMENTS. ARH shall have
performed and complied in all material respects with all terms, agreements,
covenants and conditions of this Merger Agreement and the Agreement of Merger
required to be performed or complied with by ARH at or prior to the Effective
Time of the Merger.
c. MATERIAL ADVERSE CHANGE. No material adverse change shall
have occurred since December 31, 1999, in the business, financial condition,
results of operations or assets of ARH, ARB and FSC, taken as a whole, other
than as set forth in the ARH Disclosure Schedule, and ARH shall not be a party
to or threatened with, and to the best of ARH's knowledge there is no reasonable
basis for, any legal action or other proceeding before any court, any arbitrator
of any kind or any government agency. No material adverse change shall have
occurred as a result of any subsequent legal action or proceeding, or any
subsequent developments in the legal actions or proceedings as set forth in the
NCB Disclosure Schedule, which in the reasonable judgment of NCB, could have a
material adverse effect on the business, financial condition, results of
operations or assets of ARH, ARB and FSC, taken as a whole.
d. APPROVAL OF AGREEMENTS. The principal terms of the Merger,
this Merger Agreement and the Agreement of Merger shall have been duly approved
by (i) the affirmative vote or consent of the holders of a majority of the
outstanding ARH Shares and (ii) the affirmative vote or consent of the holders
of a two-thirds majority of the outstanding NCB Shares.
e. OFFICER'S CERTIFICATE. NCB shall have received a
certificate, dated the Effective Date, signed on behalf of ARH by its President
and its Chief Financial Officer, in form and substance acceptable to NCB and its
counsel to the effect that the conditions set forth in Section 8, have been
satisfied.
f. OPINION OF COUNSEL. Coudert Brothers, ARH's counsel, shall
have delivered to NCB its opinion dated the Effective Date in form and substance
acceptable to NCB and its counsel.
g. ABSENCE OF PROCEEDINGS. No legal, administrative,
arbitration, investigatory or other proceeding by any government agency or
regulatory authority shall have been instituted or threatened to restrain or
prohibit the Merger or the transactions contemplated by this Merger Agreement.
h. EFFECTIVENESS OF REGISTRATION STATEMENT. The ARH
Registration Statement and any amendments or supplements thereto shall have
become effective under the 1933 Act, no stop order suspending the effectiveness
of such Registration Statement shall be in effect and no proceedings for such
purpose shall have been initiated or threatened by or before the Commission. The
ARH Shares registered thereby shall have received all state securities and "blue
sky" permits or approvals required to consummate the transactions contemplated
by this Merger Agreement and the Agreement of Merger.
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i. GOVERNMENT APPROVALS. All Government Approvals shall be in
effect, and all conditions or requirements prescribed by law or by any such
Approvals shall have been satisfied; provided, however, that no Government
Approval shall be deemed to have been received if it shall require the
divestiture or cessation of any of the present businesses or operations
conducted by any of the parties hereto or shall impose any other condition or
requirement, which condition or requirement NCB in its reasonable judgment shall
deem to be materially burdensome (in which case NCB shall promptly notify ARH).
For purposes of this agreement no condition or requirement shall be deemed to be
"materially burdensome" if such condition or requirement does not materially
differ from conditions or requirements regularly imposed in orders approving
transactions of the type contemplated by this Merger Agreement and compliance
with such condition or requirement would not:
(i) require the taking of any action materially
inconsistent with the manner in which NCB, ARH, ARB or FSC has
conducted its business previously;
(ii) result in a material adverse change on the
business, financial condition or results of operations of NCB
or ARH, ARB and FSC, taken as a whole; or
(iii) preclude satisfaction of any of the conditions to
consummation of the transactions contemplated by this Merger
Agreement.
j. TAX OPINION. Perry-Smith LLP shall have delivered to ARH
and NCB a tax opinion subject to customary assumptions and exceptions included
in such opinions and the prior delivery of certificates or representation
letters from NCB and ARH, substantially to the effect that under federal income
tax law and California income and franchise tax law:
(i) the Merger will not result in any recognized gain
or loss to NCB or ARH;
(ii) except for any cash received in lieu of any
fractional share, no gain or loss will be recognized by
holders of NCB Shares who receive ARH Shares in exchange for
the NCB Shares which they hold;
(iii) the holding period of ARH Shares exchanged for NCB
Shares will include the holding period of the NCB Shares for
which they are exchanged, assuming the NCB Shares are capital
assets in the hands of the holder thereof at the Effective
Date;
(iv) the basis of the ARH Shares received in the
exchange will be the same as the basis of the NCB Shares for
which they are exchanged, less any basis attributable to
fractional shares for which cash is received; and
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(v) an NCB shareholder who dissents to the Merger and
receives cash for his or her NCB Shares will be treated as
having received a distribution in redemption of his or her NCB
Shares, subject to the provisions and limitations of Section
302 of the IRC. Those NCB shareholders who receive solely
cash, who immediately after the Merger hold no ARH Shares
directly or through the application of Section 318 of the IRC,
and thus whose interests are completely terminated within the
meaning of Section 302(b)(3) of the IRC, will be treated as
receiving a cash distribution in full payment for the NCB
Shares as provided in Section 302(a) of the IRC. Gain or loss
will be recognized to such NCB shareholders measured by the
difference between the redemption price and the adjusted basis
of the NCB Shares. If the NCB shareholder holds such NCB
Shares as a capital asset, such gain or loss will be a capital
gain or loss.
(vi) No gain or loss will be recognized by the holders
of nonqualified options to buy NCB Shares upon the conversion
of those options into nonqualified options to buy ARH Shares
under the same terms and conditions as in effect immediately
prior to the Merger.
(vii) The substitution of incentive stock options to
acquire ARH Shares for incentive stock options to acquire NCB
Shares will not be a modification as defined in Section
424(h)(3) of the IRC, and will not result in the recognition
of income, gain, or loss to the holders of the incentive stock
options to acquire NCB Shares. Such options to acquire ARH
Shares will be incentive stock options as defined in Section
422(b) of the IRC.
k. ACCOUNTANT'S COMFORT LETTERS. On or prior to the date of
effectiveness of the ARH Registration Statement, NCB shall have received a
letter addressed to NCB from Perry-Smith LLP, independent public accountants for
ARH, in form and substance acceptable to NCB and its counsel and customary for
"comfort" letters prepared in accordance with the provisions of Statement of
Accounting Standards No. 71, Interim Financial Information. NCB shall also have
received from Perry-Smith LLP a "comfort" letter dated the Effective Date, in
form and substance acceptable to NCB and its counsel, as to such matters, as of
a specified date not more than five (5) business days prior to the Effective
Date, as NCB may reasonably request.
l. DISSENTING SHARES. Holders of not more than nine percent
(9%) of the outstanding NCB Shares and ARH Shares shall have perfected
dissenter's rights (i) in the case of NCB Shares, pursuant to 12 U.S.C. Section
215a(b), (c) and (d) (by voting against the Merger at the NCB meeting of
shareholders or by giving notice in writing at or prior to such meeting that he
or she dissents from the Merger and thereafter submitting a timely request for
the value of his or her NCB Shares in the manner required by the National Bank
Act and the rules and regulations of the OCC) and (ii) in the case of ARH
Shares, pursuant to Chapter 13 of the California General Corporation Law.
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m. UNAUDITED FINANCIALS. Not later than five (5) business days
prior to the Effective Date, ARH shall have furnished NCB a copy of its most
recently prepared unaudited month-end consolidated financial statements,
including a balance sheet and statement of income of ARH, for the month ending
at least ten (10) business days prior to the Effective Date.
n. AFFILIATE AGREEMENTS. NCB shall have received signed
affiliate agreements on or before the date of this Merger Agreement, from each
person who, in the opinion of NCB's and ARH's counsel, might be deemed to be an
affiliate of NCB or ARH under Rule 144 or 145 of the 1933 Act. Said agreements
will include provisions restricting certain actions by an affiliate related to
NCB Shares or ARH Shares, including the sale, purchase, acquisition or transfer
of NCB Shares or ARH Shares in a manner which may render pooling of interests
accounting treatment unavailable in the Merger, and shall be substantially in
the form attached hereto as Exhibits B and D.
o. CLOSING DOCUMENTS. NCB shall have received such
certificates and other closing documents as counsel for NCB shall reasonably
request.
p. CONSENTS. ARH shall have received, or NCB shall have
satisfied itself that ARH will receive, all consents of third parties as may be
required including consents of other parties to and required by material
mortgages, notes, leases, franchises, agreements, licenses and permits
applicable to ARH, in each case in form and substance reasonably acceptable to
NCB, and no such consent or license or permit shall have been withdrawn or
suspended.
q. FAIRNESS OPINION. The Board of Directors of NCB shall have
received an opinion of Carpenter & Company, dated the date of this Merger
Agreement and the date of mailing or a date within three (3) days prior to the
date of mailing the Joint Proxy Statement/Prospectus, to the effect that the
Conversion Ratio in the Merger is fair, from a financial point of view, to NCB
and its shareholders.
r. ACCOUNTING TREATMENT. NCB shall have received a letter from
Perry-Smith LLP, subject to customary qualifications and receipt of such
certificates as may be reasonable and customary in connection with such letters,
acceptable in form and substance to NCB and its counsel, to the effect that the
Merger shall qualify for the pooling of interests method of accounting in
accordance with generally accepted accounting principles and all applicable
rules, regulations and policies of the Commission. There shall have been no
determination by any court, tribunal, regulatory authority or other government
agency, that the Merger fails or will fail to qualify for pooling of interests
accounting treatment.
s. SHAREHOLDER AGREEMENTS. NCB and ARH shall have received
signed shareholder agreements from members of the Boards of Directors and the
executive officers of NCB and ARH on or before the date of this Merger
Agreement, pursuant to which each such person in their capacity as a shareholder
commits to vote their NCB Shares or ARH Shares in favor of the Merger and the
transactions contemplated thereby and pursuant to this Merger Agreement and the
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Agreement of Merger, and to recommend to shareholders, subject to the exercise
of fiduciary duties, that they vote in favor of the Merger and the transactions
contemplated thereby and pursuant to this Merger Agreement and the Agreement of
Merger. Said agreements shall be substantially in the form attached hereto as
Exhibits C and E.
t. PERFORMANCE TESTS. As of the Determination Date, the
Closing Date and the Effective Date, ARH shall have (i) total shareholders'
equity and leverage, tier 1 and total risk-based capital ratios, respectively,
in amounts required to comply with the "well capitalized" category of applicable
federal banking regulations, (ii) total reserves for losses on outstanding loans
in compliance with the ARH loan loss policy and procedures and at a level which,
in the reasonable determination of NCB, are adequate for regulatory purposes and
for purposes of generally accepted accounting principles, and (iii) total
shareholders' equity of Sixteen Million Seven Hundred Thousand Dollars
($16,700,000).
9. CLOSING.
a. CLOSING DATE. The closing (the "Closing") shall, unless
another date, time or place is agreed to in writing by ARH and NCB, be held at
the offices of Coudert Brothers, 303 Almaden Boulevard, Fifth Floor, San Jose,
California 95110, at a time mutually agreed upon between the parties and on a
date as soon as practicable, but not less than five (5) business days following
the Determination Date and the last to occur of (i) the expiration of any
waiting periods under applicable law or regulation, and (ii) the date on which
all conditions to the obligations of the parties to consummate the Merger have
been satisfied (the "Closing Date").
b. DELIVERY OF DOCUMENTS. At the Closing, the parties shall
use their respective best efforts to deliver or cause to be delivered the
opinions, certificates and other documents required to be delivered by this
Merger Agreement.
c. FILINGS. At the Closing, ARH and NCB shall instruct their
respective representatives to make or confirm such filings as shall be required
in the opinion of counsel to ARH and NCB to give effect to the Merger.
10. POST-CLOSING MATTERS.
ARH will prepare and file with the Commission on the appropriate form
as soon as practicable the results of combined operations of ARH, ARB and the
Resulting Association for the first full calendar quarter after the Effective
Date.
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11. EXPENSES.
Each party hereto agrees to pay as incurred without capitalizing its
expenses incident to the Merger and transactions contemplated pursuant to this
Merger Agreement in compliance with generally accepted accounting principles,
without right of reimbursement from the other party and whether or not the
transactions contemplated by this Merger Agreement or the Agreement of Merger
shall be consummated, relating to the payment of costs and expenses incurred by
such party incident to the performance of its obligations under this Merger
Agreement and the Agreement of Merger, including without limitation, costs
incident to the preparation of the Agreement of Merger, this Merger Agreement,
the ARH Registration Statement and Joint Proxy Statement/Prospectus (including
the audited financial statements of the parties contained therein) and incident
to the consummation of the Merger and of the other transactions contemplated
herein and in the Agreement of Merger, including the fees and disbursements of
counsel, accountants, consultants and financial advisers employed by such party
in connection therewith. Notwithstanding the foregoing, each party shall pay
one-half of (i) the printing costs of the Registration Statement and the Joint
Proxy Statement/Prospectus, (ii) all fees and costs payable pursuant to state
"blue-sky" securities laws, (iii) fees and costs related to obtaining a tax
opinion, (iv) fees and costs related to obtaining a letter from Perry-Smith LLP,
regarding pooling-of-interests accounting treatment, (v) the fee required to be
paid to the Commission to register the ARH Shares, (vi) the fees and costs
related to any amendments to the ARH Stock Option Plan or for the preparation of
a new ARH Stock Option Plan including the cost of obtaining any permits or
approvals of government agencies and regulatory authorities and applicable
filing fees, and (vii) the fees related to preparation and filing of
applications with government agencies or regulatory authorities for approval of
the transactions contemplated by the Merger, this Merger Agreement and the
Agreement of Merger. Each party shall bear the costs of distributing the Joint
Proxy Statement/Prospectus and other information relating to these transactions
to its shareholders and of conducting a meeting of its shareholders.
12. AMENDMENT; TERMINATION.
a. AMENDMENT. This Merger Agreement and the Agreement of
Merger may be amended by ARH and NCB at any time prior to the Effective Time of
the Merger without the approval of the shareholders of ARH and shareholders of
NCB with respect to any of their terms except the terms relating to the
Conversion Ratio or the form or amount of consideration to be delivered to the
NCB shareholders in the Merger or otherwise as required by applicable law.
b. TERMINATION. This Merger Agreement and the Agreement of
Merger may be terminated as follows:
(i) By the mutual consent of the Boards of Directors of
ARH and NCB at any time prior to the Effective Time of the
Merger.
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(ii) By the Boards of Directors of ARH or NCB upon the
failure of the shareholders of ARH or NCB to give the
requisite approval of this Merger Agreement and the
transactions contemplated hereby.
(iii) By the Boards of Directors of ARH or NCB upon the
expiration of thirty (30) days after any government agency or
regulatory authority denies or refuses to grant any approval,
consent or qualification required to be obtained in order to
consummate the transactions contemplated by this Merger
Agreement unless, within said thirty (30) day period after
such denial or refusal, ARH and NCB agree to appeal such
denial or refusal or agree to amend and resubmit the
application to the government agency or regulatory authority
that has denied or refused to grant the approval, consent or
qualification requested.
(iv) By the Board of Directors of ARH within three (3)
business days after receipt by ARH of the NCB Disclosure
Schedule.
(v) By the Board of Directors of ARH on or after the
Termination Date, if any of the conditions in Section 7 to
which the obligations of ARH are subject have not been
fulfilled.
(vi) By the Board of Directors of ARH if a material
adverse change shall have occurred since December 31, 1999, in
the business, financial condition, results of operations or
assets of NCB.
(vii) By the Board of Directors of ARH in the event that
NCB or its affiliates enter into a Business Combination.
(viii) By the Board of Directors of ARH upon the
expiration of forty-five (45) days from delivery of written
notice by ARH to NCB of NCB's breach of or failure to satisfy
any covenant or agreement contained in this Merger Agreement
resulting in a material impairment of the benefit reasonably
expected to be derived by ARH and its subsidiaries from the
performance or satisfaction of such covenant or agreement
(provided that such breach has not been waived by ARH or cured
by NCB prior to expiration of such forty-five (45) day
period).
(ix) By the Board of Directors of NCB within three (3)
business days after receipt by NCB of the ARH Disclosure
Schedule.
(x) By the Board of Directors of NCB if ARH fails to
comply with the provisions of Section 3.1.g.
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(xi) By the Board of Directors of NCB on or after the
Termination Date, if any of the conditions contained in
Section 8 to which the obligations of NCB are subject have not
been fulfilled.
(xii) By the Board of Directors of NCB if a material
adverse change shall have occurred since December 31, 1999 in
the business, financial condition, results of operations or
assets of ARH and its subsidiaries, taken as a whole.
(xiii) By the Board of Directors of NCB upon the
expiration of forty-five (45) days from delivery of written
notice by NCB to ARH of ARH's breach of or failure to satisfy
any covenant or agreement contained in this Merger Agreement
resulting in a material impairment of the benefit reasonably
expected to be derived by NCB from the performance or
satisfaction of such covenant or agreement (provided that such
breach has not been waived by NCB or cured by ARH prior to
expiration of such forty-five (45) day period).
(xiv) By the Board of Directors of ARH in the event that
NCB shall fail to deliver or cause to be delivered to ARH the
following signed documents, in form and substance reasonably
acceptable to ARH and its counsel: (a) the NCB affiliate
agreements to be delivered pursuant to Section 7(n) hereof;
(b) the NCB shareholder agreements to be delivered pursuant to
Section 7(s) hereof; (c) the NCB officer's certificate to be
delivered pursuant to Section 7(e) hereof; and (d) the opinion
of counsel to NCB to be delivered pursuant to Section 7(f)
hereof.
(xv) By the Board of Directors of NCB in the event that
ARH shall fail to deliver or cause to be delivered to NCB the
following signed documents, in form and substance reasonably
acceptable to NCB and its counsel: (a) the affiliate
agreements to be delivered pursuant to Section 8(n) hereof;
(b) the ARH shareholder agreements to be delivered pursuant to
Section 8(s) hereof; (c) the ARH officer's certificate to be
delivered pursuant to Section 8(e) hereof; and (d) the opinion
of counsel to ARH to be delivered pursuant to Section 8(f)
hereof.
c. TERMINATION DATE. This Merger Agreement shall be terminated
if the Closing shall not have occurred on or before September 30, 2000 or such
other date approved by the Boards of Directors of ARH, NCB and the Interim Bank;
provided, however, that if the only conditions to the Closing which remain
unsatisfied at September 30, 2000 are the receipt of the Government Approvals or
the expiration of any waiting periods under applicable law or regulation, the
Closing Date shall be automatically extended to November 30, 2000, or such other
date as the parties may mutually agree upon (the "Termination Date"), for the
purpose of obtaining such Government Approvals or the expiration of such waiting
periods.
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d. NOTICE. The power of termination hereunder may be exercised
by ARH or NCB, as the case may be, only by giving written notice of termination
to ARH or NCB, as applicable, signed on behalf of each such party by its
Chairman of the Board or President.
e. EFFECT OF TERMINATION; LIQUIDATED DAMAGES.
(i) If this Merger Agreement is terminated for any
reason, the Agreement of Merger shall automatically terminate.
Termination of this Merger Agreement shall not terminate or
affect the obligations of the parties to pay expenses as
provided in Section 11, to maintain the confidentiality of the
each party's information obtained pursuant to this Merger
Agreement and the Confidentiality Agreement between the
parties dated January 10, 1999, or the provisions of this
Section 12(e) or the applicable provisions of Section 14.
(ii) If ARH terminates this Merger Agreement pursuant to
Section 12.b.(vii), NCB shall pay to ARH, on demand, the sum
of One Million Dollars ($1,000,000). If ARH terminates this
Merger Agreement pursuant to Section 12.b.(viii) or Section
12.b.(xiv) as a result of NCB's willful or deliberate failure
to comply with Section 12.b.(viii) or Section 12.b.(xiv),
which compliance was not beyond the reasonable control of NCB,
NCB shall pay to ARH, on demand, the sum of Five Hundred
Thousand Dollars ($500,000). In each such case, the amount
indicated shall be deemed liquidated damages for expenses
incurred and the lost opportunity cost for time devoted to the
transactions contemplated by this Merger Agreement.
(iii) If NCB terminates this Merger Agreement pursuant to
Section 12.b.(x), ARH shall pay to NCB, on demand, the sum of
One Million Dollars ($1,000,000). If NCB terminates this
Merger Agreement pursuant to Section 12.b.(xiii) or Section
12.b.(xv) as a result of ARH's willful or deliberate failure
to comply with Section 12.b.(xiii) or Section 12.b.(xv), which
compliance was not beyond the reasonable control of ARH, ARH
shall pay to NCB, on demand, the sum of Five Hundred Thousand
Dollars ($500,000). In each such case, the amount indicated
shall be deemed liquidated damages for expenses incurred and
the lost opportunity cost for time devoted to the transactions
contemplated by this Merger Agreement.
13. INDEMNIFICATION.
a. BY ARH. ARH agrees to defend, indemnify and hold harmless
NCB, its respective officers and directors, attorneys, accountants, and each
person who controls NCB within the meaning of the 1933 Act from and against any
costs, damages, liabilities and expenses of any nature, insofar as such costs,
damages, liabilities and expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the ARH
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Registration Statement and Joint Proxy Statement/Prospectus or any amendments or
supplements thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
ARH shall be liable in any such case only to the extent that any such cost,
damage, liability or expense arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in said
Registration Statement and Joint Proxy Statement/Prospectus or amendments or
supplements thereto, in reliance upon and in conformity with information
provided by and with respect to ARH used in preparing the Registration Statement
and the Joint Proxy Statement/Prospectus. If and to the extent such agreement to
indemnify may be unenforceable for any reason, ARH shall make the maximum
contribution to the payment and satisfaction of each of the indemnified
liabilities which may be permitted under applicable law.
b. BY NCB. NCB agrees to defend, indemnify and hold harmless
ARH, its officers and directors, attorneys, accountants, and each person who
controls ARH within the meaning of the 1933 Act from and against any costs,
damages, liabilities and expenses of any nature, insofar as such costs, damages,
liabilities and expenses arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the ARH Registration
Statement and Joint Proxy Statement/Prospectus or any amendments or supplements
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that NCB shall be
liable in any such case only to the extent that any such cost, damage, liability
or expense arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in said Registration Statement
and Joint Proxy Statement/Prospectus or amendments or supplements thereto, in
reliance upon and in conformity with information provided by and with respect to
NCB used in preparing the Registration Statement and Joint Proxy
Statement/Prospectus. If and to the extent such agreement to indemnify may be
unenforceable for any reason, NCB shall make the maximum contribution to the
payment and satisfaction of each of the indemnified liabilities which may be
permitted under applicable law.
c. NOTIFICATION. Promptly after receipt by any party to be
indemnified pursuant to this subarticle (the "Indemnified Party") of notice of
(i) any claim or (ii) the commencement of any action or proceeding, the
Indemnified Party will give the other party (the "Indemnifying Party") written
notice of such claim or the commencement of such action or proceeding. The
Indemnifying Party shall have the right, at its option, to compromise or defend,
by its own counsel, any such matter involving the Indemnified Party's asserted
liability. In the event that the Indemnifying Party shall undertake to
compromise or defend any such asserted liability, it shall promptly notify the
Indemnified Party of its intention to do so, and the Indemnified Party agrees to
cooperate fully with the Indemnifying Party and its counsel in the compromise
of, or defense against, any such asserted liability. In any event, the
Indemnifying Party shall have the right to participate in the defense of such
asserted liability.
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14. MISCELLANEOUS.
a. NOTICES. Any notice or other communication required or
permitted under this Merger Agreement shall be effective only if it is in
writing and delivered personally, or by Federal Express or similar overnight
courier, or by facsimile or sent by first class United States mail, postage
prepaid, registered or certified mail, addressed as follows:
To ARH: To NCB:
American River Holdings North Coast Bank, National Association
1545 River Park Drive, #107 50 Santa Rosa Avenue
Sacramento, CA 95815 Santa Rosa, CA 95404
Attn: President Attn: President
Telephone: (916) 565-6114 Telephone: (707) 528-9930
Facsimile: (916) 565-4758 Facsimile: (707) 528-6399
With a copy to: With a copy to:
Glenn T. Dodd, Esq. R. Brent Faye, Esq.
Coudert Brothers Lillick & Charles, LLP
303 Almaden Blvd., Fifth Floor Two Embarcadero Center
San Jose, California 95110-2721 San Francisco, California 94111-3996
Telephone: (408) 297-9982 Telephone: (415) 984-8200
Facsimile: (408) 297-3191 Facsimile: (415) 984-8300
or to such other address as either party may designate by notice to the other,
and shall be deemed to have been given upon receipt.
b. KNOWLEDGE. Whenever the term "knowledge" or "to the best
knowledge" or words of similar import are used in this Merger Agreement in
connection with a party's representations and warranties, it shall mean the
actual knowledge of a party after due inquiry of a party's directors and
executive officers including, without limitation, officers holding titles or
positions as President and Chief Executive Officer, Chief Financial Officer and
Senior or Chief Credit or Loan Officer, or positions with the substantially
equivalent responsibilities.
c. BINDING AGREEMENT. This Merger Agreement is binding upon
and is for the benefit of ARH, the Interim Bank and NCB and their respective
successors and permitted assigns. This Merger Agreement is not made for the
benefit of any person, firm, corporation or association not a party hereto, and
no other person, firm, corporation or association shall acquire or have any
right under or by virtue of this Merger Agreement. No party may assign this
Merger Agreement or any of its rights, privileges, duties or obligations
hereunder without the prior written consent of the other party to this Merger
Agreement.
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<PAGE>
d. MATERIAL ADVERSE EFFECT. As used in this Merger Agreement,
any reference to any event, change or effect being "material" with respect to
any entity means an event, change or effect which is material in relation to the
condition (financial or otherwise), properties, assets, liabilities, businesses,
results of operations of such entity and its subsidiaries taken as a whole, and
the term "material adverse effect" means, with respect to any entity, a material
adverse effect (whether or not required to be accrued or disclosed under
Statement of Financial Accounting Standards No. 5 ("SFAS No. 5")) (i) on the
condition (financial or otherwise), properties, assets, liabilities, businesses,
results of operations of such entity and its subsidiaries taken as a whole (but
does not include any such effect resulting from or attributable to any action or
omission by ARH or NCB or any subsidiary of either of them taken with the prior
written consent of the other parties hereto, in contemplation of the
transactions contemplated hereby), or (ii) on the ability of such entity to
perform its obligations hereunder on a timely basis.
e. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. No
investigation by ARH or NCB made before or after the date of this Merger
Agreement shall affect the representations and warranties which are contained in
this Merger Agreement and such representations and warranties shall survive such
investigation, provided that, except with respect to covenants, agreements and
indemnification to be performed in whole or in part subsequent to the Effective
Time of the Merger (as to which the related representations and warranties shall
survive until their performance) which covenants, agreements and indemnification
shall survive the Effective Time of the Merger, the representations, warranties,
covenants and agreements of ARH and NCB contained in this Merger Agreement shall
terminate upon the Effective Time of the Merger.
f. GOVERNING LAW. This Merger Agreement shall be governed by
and construed in accordance with the laws of the State of California.
g. ATTORNEYS' FEES. In any action at law or suit in equity in
relation to this Merger Agreement, the prevailing party in such action or suit
shall be entitled to receive a reasonable sum for its attorneys' fees and all
other reasonable costs and expenses incurred in such action or suit.
h. ENTIRE AGREEMENT; SEVERABILITY. This Merger Agreement and
the documents, certificates, agreements, letters, schedules and exhibits
attached or required to be delivered pursuant hereto set forth the entire
agreement and understandings of the parties in respect of the transactions
contemplated hereby, and supersede all prior agreements, arrangements and
understanding relating to the subject matter hereof, excluding that certain
Confidentiality Agreement between the parties dated January 10, 2000. Each
provision of this Merger Agreement shall be interpreted in a manner to be
effective and valid under applicable law, but if any provision hereof shall be
prohibited or ruled invalid under applicable law, the validity, legality and
enforceability of the remaining provisions shall not, except as otherwise
required by law, be affected or impaired as a result of such prohibition or
ruling.
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i. COUNTERPARTS. This Merger Agreement may be executed in
several counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, ARH and NCB have caused this Agreement and Plan of
Reorganization and Merger to be signed by their duly authorized officers as of
the day and year first above written.
AMERICAN RIVER HOLDINGS NORTH COAST BANK, NATIONAL
ASSOCIATION
By: /s/ DAVID T. TABER By: /s/ KATHY A. PINKARD
-------------------------------- -----------------------------
David T. Taber Kathy A. Pinkard
President and Chief President and Chief
Executive Officer Executive Officer
By: /s/ MITCHELL A. DERENZO By: /s/ DEBBIE K. FAKALATA
--------------------------------- -----------------------------
Mitchell A. Derenzo Debbie K. Fakalata
Chief Financial Officer Chief Financial Officer
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EXHIBIT A
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (the "Agreement of Merger ") is dated as of
_____________________, 2000, by and between North Coast Bank, National
Association, a national banking association chartered under the laws of the
United States, with its head office in Santa Rosa, California ("NCB") and ARH
Interim National Bank ("New Bank"), an interim national banking association
formed as a wholly-owned subsidiary of American River Holdings, a California
corporation and bank holding company registered under the Bank Holding Company
Act of 1956, as amended ("ARH"), solely to facilitate the transactions
contemplated by this Agreement of Merger as provided below.
This Agreement of Merger is being entered into pursuant to the
Agreement and Plan of Reorganization and Merger dated as of March 1, 2000, as
amended by the Addendum to Agreement and Plan of Reorganization and Merger dated
___________, 2000 (the "Merger Agreement") by and among ARH, NCB and New Bank.
In consideration of the premises, and the mutual covenants and
agreements herein contained, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
Section 1.1. "Effective Date" means the date at which the transactions
contemplated by this Agreement of Merger become effective as determined by the
certificate approving the Merger to be issued by the Office of the Comptroller
of the Currency (the "OCC").
Section 1.2. "New Bank Common Stock" means the common stock, par value
$4.00 per share, of New Bank owned by ARH.
Section 1.3. "NCB Common Stock" means the common stock, par value $4.00
per share, of NCB.
Section 1.4. "The Merger" means the merger of NCB with and into New
Bank, as provided in Section 2.1 of this Agreement of Merger.
<PAGE>
Section 1.5. "Resulting Association" means New Bank as the institution
surviving the Merger.
ARTICLE 2
TERMS OF THE MERGER
Section 2.1. THE MERGER. Subject to the terms and conditions set forth
in the Merger Agreement, on the Effective Date, NCB shall be merged with and
into New Bank, with New Bank as the Resulting Association, under the national
bank charter number and name of "North Coast Bank, National Association" as
determined by the OCC, and each of the outstanding shares of NCB Common Stock
shall, and without any action on the part of NCB, be canceled and converted into
the right to receive shares of the common stock of ARH ("ARH Common Stock") in
accordance with Section 3.1 hereof, and the shares of New Bank Common Stock
shall be converted into shares of common stock of the Resulting Association in
accordance with Section 3.4 hereof.
Section 2.2. ARTICLES OF ASSOCIATION, BYLAWS AND FACILITIES OF
RESULTING ASSOCIATION. On the Effective Date and until thereafter amended in
accordance with law, the Articles of Association of the Resulting Association
shall be the same as the Articles of Association of NCB as in effect on the
Effective Date, subject to any amendments required by the OCC. A copy of the
Articles of Association of the Resulting Association is attached hereto as Annex
A. Until altered, amended or repealed as provided herein and in the Articles of
Association of the Resulting Association, the Bylaws of the Resulting
Association shall be the same as the Bylaws of NCB as in effect on the Effective
Date, subject to any amendments required by the OCC. The main office of the
Resulting Association shall be Santa Rosa, California, and all corporate acts,
plans, policies, contracts, approvals and authorizations of NCB and New Bank and
their respective shareholders, boards of directors, committees elected or
appointed thereby, officers and agents, which were valid and effective
immediately prior to the Effective Date, shall be taken for all purposes as the
acts, plans, policies, contracts, approvals and authorizations of the Resulting
Association and shall be as effective and binding as of the Effective Date as
the same had been with respect to NCB and New Bank, respectively.
Section 2.3. EFFECT OF MERGER. On the Effective Date of the Merger, the
corporate existence of NCB and New Bank shall be consolidated into and continued
in the Resulting Association, and the Resulting Association shall be deemed to
be a continuation in entity and identity of NCB and New Bank. All rights,
franchises and interests of NCB and New Bank, respectively, in and to any type
of property and choses in action shall be transferred to and vested in the
Resulting Association by virtue of the Merger without any deed or other
transfer. Resulting Association, without any order or other action on the part
of any court or otherwise, shall hold and enjoy all rights of property,
franchises and interest, including appointments, designations and nominations,
and all other rights and interests as trustee, executor, administrator, transfer
agent or registrar of stocks and bonds, guardian of estates, assignee,
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<PAGE>
receiver and committee of estates of lunatics, and in every other fiduciary
capacity, in the same manner and to the same extent as such rights, franchises
and interests were held or enjoyed by NCB and New Bank, respectively, as of the
Effective Date.
Section 2.4. LIABILITIES OF THE RESULTING ASSOCIATION. On the Effective
Date, the Resulting Association shall be liable for all liabilities of NCB and
New Bank. All deposits, debts, liabilities and obligations of NCB and of New
Bank, respectively, accrued, absolute, contingent or otherwise, and whether or
not reflected or reserved against on balance sheets, books of account or records
of NCB or New Bank, as the case may be, shall be those of the Resulting
Association and shall not be released or impaired by the Merger. All rights of
creditors and other obligees and all liens on property of either NCB or New Bank
shall be preserved unimpaired.
ARTICLE 3
CONVERSION OF SHARES
Section 3.1. CONVERSION OF NCB COMMON STOCK. On the Effective Date,
each share of NCB Common Stock, issued and outstanding immediately prior to the
Effective Date (other than Dissenting Shares as hereinafter defined) shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into the right to receive .9644 of a share of ARH Common Stock in
accordance with the Merger Agreement.
Section 3.2. EXCHANGE OF SHARES. On or immediately prior to the
Effective Date, in accordance with the Merger Agreement, ARH shall make
available shares of its Common Stock in sufficient amount to effect the Merger.
As soon as practicable after the Closing Date (as defined in Section 9 of the
Merger Agreement), the Exchange Agent (as defined in the Merger Agreement) will
send to each shareholder of NCB a letter of transmittal for use in exchanging
such holder's stock certificate(s) for shares of ARH Common Stock. Each
shareholder of NCB shall be entitled to receive ARH Common Stock and cash in
lieu of fractional shares for such holder's shares only upon surrender of the
certificates representing such holder's shares of NCB Common Stock or after
providing an appropriate Affidavit of Lost Certificate and Indemnity Agreement
and/or a bond as may be required in each case by the Exchange Agent. Until so
surrendered, each NCB Common Stock certificate will be deemed for all corporate
purposes to represent and evidence solely the right to receive the amount of ARH
Common Stock to be exchanged therefor pursuant to the Merger Agreement.
Section 3.3. DISSENTING SHARES. Each share of NCB Common Stock issued
and outstanding immediately prior to the Effective Date, the holder of which has
voted against the Merger and who has properly perfected his or her dissenters'
rights of appraisal by following the procedures set forth in the National Bank
Act is referred to herein as a "Dissenting Share." Dissenting Shares owned by
each holder thereof who has not exchanged his certificates representing shares
of NCB Common Stock for the ARH Common Stock and otherwise has not effectively
withdrawn or lost his dissenter's rights, shall not be converted into or
represent the right to receive the ARH Common Stock pursuant to Section 3.1
hereof and shall be entitled only
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<PAGE>
to such rights as are available to such holder pursuant to the applicable
provisions of the National Bank Act. Each holder of Dissenting Shares shall be
entitled to receive the value of such Dissenting Shares held by him or her in
accordance with the applicable provisions of the National Bank Act, provided
such holder complies with the procedures contemplated by and set forth in the
applicable provisions of the National Bank Act. If any holder of Dissenting
Shares shall effectively withdraw or lose his dissenter's rights under the
applicable provisions of the National Bank Act, such Dissenting Shares shall be
converted into the right to receive the ARH Common Stock in accordance with the
provisions of Section 3.1.
Section 3.4. NEW BANK COMMON STOCK. On the Effective Date, the shares
of New Bank Common Stock issued and outstanding immediately prior to the
Effective Date shall be converted automatically and without any action on the
part of the holders thereof into 50,000 shares of common stock, par value $4.00
per share, of the Resulting Association. The shares of common stock of the
Resulting Association into which such New Bank Common Stock are converted shall
represent ownership of 100% of the issued and outstanding capital stock of the
Resulting Association, all of which shall be owned by ARH.
ARTICLE 4
MISCELLANEOUS
Section 4.1. CONDITIONS PRECEDENT. The respective obligations of each
party under this Agreement of Merger shall be subject to the satisfaction, or
waiver by the party permitted to do so, of the conditions set forth in Articles
7 and 8 of the Merger Agreement.
Section 4.2. TERMINATION. This Agreement of Merger shall be terminated
upon the termination of the Merger Agreement in accordance with Article 12
thereof; provided, that any such termination of this Agreement of Merger shall
not relieve any party hereto from liability on account of a breach by such party
of any of the terms hereof or thereof.
Section 4.3. AMENDMENTS. To the extent permitted by law, this Agreement
of Merger may be amended by a subsequent writing signed by all of the parties
hereto upon the approval of the Board of Directors of each of the parties
hereto.
Section 4.4. SUCCESSORS. This Agreement of Merger shall be binding on
the successors of New Bank and NCB.
Section 4.5. RETURN OF SURPLUS. On or as soon as practicable following
the Effective Date, the surplus of the Resulting Association shall be reduced in
the amount equal to the amount paid-in or contributed by ARH in connection with
the organization of the Resulting Association and such amount shall be returned
to ARH.
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<PAGE>
IN WITNESS WHEREOF, New Bank and NCB have caused this Agreement of
Merger to be executed by their duly authorized officers and their corporate
seals to be hereunto affixed as of the date first above written.
Attest: ARH INTERIM NATIONAL BANK
________________________ By: __________________________________
David T. Taber
President and Chief Executive Officer
NORTH COAST BANK, NATIONAL
Attest: ASSOCIATION
_________________________ By: __________________________________
Kathy A. Pinkard
President and Chief Executive Officer
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<PAGE>
EXHIBIT B
NCB AFFILIATE AGREEMENT
I, the undersigned, have been advised that as of the date hereof I may be
deemed to be (but I do not hereby admit to being) an affiliate of North Coast
Bank, National Association ("NCB") for purposes of Rule 145 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
("Rule 145"). The following undertaking is given pursuant to and in compliance
with that certain Agreement and Plan of Reorganization and Merger among American
River Holdings ("ARH"), ARH Interim National Bank ("Interim Bank") and NCB dated
as of March 1, 2000 (the "Merger Agreement"), which provides that NCB shall
merge with and into Interim Bank (the "Merger"), and the surviving national
banking association will continue as a wholly-owned subsidiary of ARH under the
national bank charter number and name of "North Coast Bank, National
Association." Capitalized terms used herein and not defined herein shall have
the meanings given to them in the Agreement.
I understand that ARH is relying on the performance of the covenants
contained herein to insure that they obtain the desired pooling-of-interests
accounting treatment as a result of the Merger and to avoid any appearance of
improper manipulation of ARH's stock price or insider trading in the period
prior to the Merger.
I hereby agree that I will not offer to sell or purchase, sell, transfer,
purchase or acquire, publicly or privately, any shares of ARH common stock ("ARH
Share" or "ARH Shares") or NCB common stock ("NCB Share" or "NCB Shares"), or
cause any other person to do any of the above, except as a result of the
conversion in the Merger of any NCB Shares or options to purchase NCB Shares
held by me, or my exercise by cash payment of the exercise price of any stock
option pursuant to NCB's stock option plan.
I hereby also agree that during the period beginning on the date on which
the Effective Time of the Merger occurs and ending on the date of release and
publication to the general public of financial results covering at least thirty
(30) days of post-merger combined operations of ARH and NCB, I will not offer,
sell or transfer, publicly or privately, any ARH Shares, and that I will not
during such period commit or agree to sell or transfer any of such ARH Shares
after such period.
I hereby also agree that at no time will I offer, sell or transfer,
publicly or privately, any ARH Shares acquired by me in the Merger, whether in
exchange for NCB Shares or for or upon exercise of options to purchase such NCB
Shares, except:
Pursuant to a then current effective registration under the
Securities Act of 1933, as amended (the "1933 Act"); or
Pursuant to the provisions of Rule 145(d) under the 1933 Act; or
<PAGE>
If counsel representing me, satisfactory to ARH, shall have advised
ARH in a written opinion letter in form and substance satisfactory to ARH
and its counsel and upon which ARH and its counsel may rely, that no
registration under the 1933 Act would be required in connection with the
proposed sale, transfer or other disposition.
I agree and confirm that:
(i) the ARH Shares to be acquired by me upon consummation of the
Merger (such ARH Shares being sometimes referred to for purposes of this
Affiliate Agreement as "Acquired Shares") will not be acquired with a view
to the sale or distribution thereof except as permitted by Rule 145;
(ii) the certificate representing the Acquired Shares or any
substitutions therefor, may be subject to stop transfer instructions
and/or a legend which confirm that such securities representing ARH Shares
have been issued or transferred to the registered holder as a result of a
transaction to which Rule 145 under the 1933 Act applies and that such
securities may not be sold, hypothecated, transferred or assigned, and the
issuer or its transfer agent shall not be required to give effect to any
attempted sale, hypothecation, transfer or assignment, except (i) pursuant
to a then current effective registration statement under the 1933 Act,
(ii) in a transaction permitted by Rule 145 as to which the issuer has, in
the opinion of its counsel, received reasonably satisfactory evidence of
compliance with the provisions of Rule 145, or (iii) in a transaction
which, in the opinion of counsel satisfactory to the issuer or as
described in a "no action" or interpretive letter from the staff of the
Securities and Exchange Commission is not required to be registered under
the 1933 Act.
It is understood and agreed that any stop transfer instructions shall be
removed if the undersigned shall have delivered to ARH a written opinion letter
in form and substance satisfactory to ARH and its counsel and upon which ARH and
its counsel may rely, from counsel satisfactory to ARH, that no registration
under the 1933 Act would be required in connection with the proposed sale,
transfer or other disposition.
Date: March 1, 2000 Signed:
------------------------------------------
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EXHIBIT C
NCB SHAREHOLDER AGREEMENT
This Shareholder Agreement (the "Shareholder Agreement") is made and
entered into on March 1, 2000, by and between American River Holdings ("ARH"),
and each of the other persons executing this Shareholder Agreement (each such
person is referred to individually as a "NCB Shareholder" and collectively
referred to as the "NCB Shareholders"), with reference to the following facts:
A. ARH, ARH Interim National Bank ("Interim Bank") and North Coast
Bank, National Association ("NCB") have entered into that certain Agreement and
Plan of Reorganization and Merger (the "Merger Agreement") dated as of March 1,
2000, pursuant to which NCB shall merge with and into Interim Bank (the
"Merger"), and the surviving national banking association will continue as a
wholly-owned subsidiary of ARH under the national bank charter number and name
of "North Coast Bank, National Association," and ARH will pay consideration to
NCB Shareholders in the form of ARH common stock.
B. Each of the NCB Shareholders is also a director or executive officer
of NCB.
C. In order to induce ARH to enter into the Merger Agreement, the NCB
Shareholders desire to enter into this Shareholder Agreement solely in their
capacity as NCB Shareholders.
NOW, THEREFORE, in consideration of the promises and of the respective
representations, warranties and covenants, agreements and conditions contained
herein and in the Merger Agreement, the parties hereto agree as follows:
1. AGREEMENTS OF NCB SHAREHOLDERS.
1.1 AGREEMENT TO VOTE. At any meeting of shareholders of NCB or in
connection with any solicitation of the written consent of the NCB Shareholders
to approve the Merger Agreement and the transactions contemplated thereby, each
of the NCB Shareholders shall vote or cause to be voted all shares of common
stock of NCB ("NCB Share" or "NCB Shares") owned by each such NCB Shareholder,
and any other NCB Shares hereafter acquired by each such NCB Shareholder, in
favor of, and to approve, the principal terms of the Merger and any other matter
contemplated by the Merger Agreement which requires the approval of the NCB
Shareholders.
1.2 AGREEMENT TO RECOMMEND. Unless the Board of Directors of NCB
shall have determined that they have a fiduciary duty to the NCB Shareholders to
recommend that the NCB Shareholders not vote in favor of approval of the
transactions contemplated by the Merger Agreement, each NCB Shareholder shall
recommend to the NCB Shareholders to vote in favor of, and to approve, the
principal terms of the Merger and any other matter contemplated by the Merger
Agreement.
<PAGE>
1.3 AGREEMENT AND PLAN OF REORGANIZATION AND MERGER. Each NCB
Shareholder hereby acknowledges receipt of a copy of the Merger Agreement and
agrees to abide by its terms and to refrain from taking any action that would be
contrary to, or inconsistent with, any of the obligations of NCB as set forth in
the Merger Agreement.
2. REPRESENTATIONS AND WARRANTIES OF NCB SHAREHOLDERS.
Each of the NCB Shareholders severally and not jointly, represents and
warrants to and agrees with ARH, solely with respect to himself or herself, as
follows:
2.1 CAPACITY. Each such NCB Shareholder has all the requisite
capacity and authority to enter into and perform such NCB Shareholder's
obligations under this Shareholder Agreement.
2.2 BINDING AGREEMENT. This Shareholder Agreement constitutes the
valid and legally binding obligation of each such NCB Shareholder.
2.3 NON-CONTRAVENTION. The execution and delivery of this
Shareholder Agreement by each such NCB Shareholder does not, and the performance
by each such NCB Shareholder of his or her obligations hereunder and the
consummation by each such NCB Shareholder of the transactions contemplated
hereby will not, violate or conflict with or constitute a default under any
agreement, instrument, contract or other obligation or any order, arbitration
award, judgment or decree to which such NCB Shareholder is a party or by which
such NCB Shareholder is bound, or any statute, rule or regulation to which such
NCB Shareholder or any of such NCB Shareholder's property is subject.
2.4 OWNERSHIP OF SHARES. Schedule 1 hereto correctly sets forth
the number of NCB Shares owned by each NCB Shareholder, or with respect to which
each NCB Shareholder has good title to all of the NCB Shares indicated as owned
by such NCB Shareholder in the capacity set forth on Schedule 1 as of the date
indicated on such Schedule 1, and such NCB Shares are so owned free and clear of
any liens, security interest, charges or other encumbrances, except as set forth
in such Schedule 1.
3. TERMINATION.
3.1 TERMINATION DATE. This Shareholder Agreement shall terminate
and be of no further force and effect immediately upon the earlier of: (a)
consummation of the Merger; or (b) termination of the Merger Agreement in
accordance with the terms thereof.
3.2 EFFECT OF TERMINATION. Upon the termination of this
Shareholder Agreement in accordance with Section 3.1 hereof, the respective
obligations of the parties hereto shall immediately become void and have no
further force or effect.
4. SPECIFIC PERFORMANCE.
The parties hereto recognize and agree that monetary damages will not
compensate adequately the parties hereto for nonperformance. Accordingly, each
party agrees that its or his or her obligations shall be enforceable by court
order requiring specific performance.
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<PAGE>
5. MISCELLANEOUS.
5.1 EXPENSES. Each party hereto shall pay its or his or her own
costs and expenses, including, but not limited to, those of its or his or her
attorneys and accountants, in connection with this Shareholder Agreement and
transactions covered and contemplated hereby.
5.2 NOTICES. All notices, demands or other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered in person, by telex, telecopy, facsimile transmission, or by United
States mail, certified or registered, with return receipt requested, or
otherwise actually delivered as follows:
(a) If to an NCB Shareholder:
c/o North Coast Bank, National Association
50 Santa Rosa Avenue
Santa Rosa, CA 95404
Attn: President and
Chief Executive Officer
Telephone: (707) 528-9930
Facsimile: (707) 528-6399
With a copy to:
Lillick & Charles LLP
Two Embarcadero Center, Suite 2700
San Francisco, CA 94111-3996
Attn: R. Brent Faye, Esq.
Telephone: (415) 984-8200
Facsimile: (415) 984-8300
(b) If to ARH:
American River Holdings
1545 River Park Drive, Suite 107
Sacramento, CA 95815
Attn: President and
Chief Executive Officer
Telephone: (916) 565-6114
Facsimile: (916) 565-4758
-3-
<PAGE>
With a copy to:
Coudert Brothers
303 Almaden Boulevard, Fifth Floor
San Jose, California 95110-2721
Attn: Glenn T. Dodd, Esq.
Telephone: (408) 297-9982
Facsimile: (408) 297-3191
The persons or address to which mailings or deliveries shall be made may change
from time to time by notice given pursuant to the provisions of this Section
5.2. Any notice, demand or other communication given pursuant to the provisions
of this Section 5.2 shall be deemed to have been given on the date delivered or
three days following the date mailed, as the case may be.
5.3 SUCCESSORS AND ASSIGNS. All terms and provisions of this
Shareholder Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective transferees, successors and assigns;
provided, however, that, except as otherwise contemplated herein, this
Shareholder Agreement and all rights, privileges, duties and obligations of the
parties hereto may not be assigned or delegated by any party hereto without the
prior written consent of the other parties to this Shareholder Agreement and any
purported assignment in violation of this Section 5.3 shall be null and void.
5.4 THIRD PARTY BENEFICIARIES. Each party hereto intends that this
Shareholder Agreement shall not benefit, or create any right or cause of action
in or on behalf of, any person other than the parties hereto. As used in this
Shareholder Agreement, the term party or parties shall refer only to ARH and the
NCB Shareholders, or any of them.
5.5 COUNTERPARTS. This Shareholder Agreement may be executed in
one or more counterparts, all of which taken together shall constitute one
instrument.
5.6 GOVERNING LAW. This Shareholder Agreement is made and entered
into in the State of California and the laws of the State of California shall
govern the validity and interpretation hereof and the performance of the parties
hereto of their respective duties and obligations hereunder.
5.7 CAPTIONS. The captions contained in this Shareholder Agreement
are for convenience of reference only and do not form a part of this Shareholder
Agreement.
5.8 WAIVER AND MODIFICATION. No waiver of any term, provision or
condition of this Shareholder Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such term, provision or condition of this Shareholder
Agreement. This Shareholder Agreement may be modified or amended only by an
instrument of equal formality signed by the parties or their duly authorized
agents.
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<PAGE>
5.9 ATTORNEYS' FEES. In the event any of the parties to this
Shareholder Agreement brings an action or suit against any other party by reason
of any breach of any covenant, agreement, representation, warranty or other
provision hereof, or any breach of any duty or obligation created hereunder by
such other party, the prevailing party in whose favor final judgment is entered
shall be entitled to have and recover of and from the losing party all
reasonable costs and expenses incurred or sustained by such prevailing party in
connection with such suit or action, including without limitation, legal fees
and court costs (whether or not taxable as such).
5.10 ENTIRE AGREEMENT. The making, execution and delivery of this
Shareholder Agreement by the parties hereto have been encouraged by no
representations, statements, warranties or agreements other than those herein
expressed. This Shareholder Agreement embodies the entire understanding of the
parties and there are no further or other agreements or understandings, written
or oral, in effect between the parties relating to the subject matter hereof,
unless expressly referred to by reference herein.
5.11 SEVERABILITY. Whenever possible, each provision of this
Shareholder Agreement and every related document shall be interpreted in such
manner as to be valid under applicable law. However, if any provision of any of
the foregoing shall be invalid or prohibited under said applicable law, it shall
be construed, interpreted and limited to effectuate its purposes to the maximum
legally permissible extent. If it cannot be so construed and interpreted so as
to be valid under such law, such provision shall be ineffective to the extent of
such invalidity or prohibition without invalidating the remainder of such
provision or the remaining provisions of this Shareholder Agreement, and this
Shareholder Agreement shall be construed to the maximum extent possible to carry
out its terms without such invalid or unenforceable provision or portion
thereof.
5.12 SEVERAL OBLIGATIONS. All duties and obligations of each party
to this Shareholder Agreement shall be several and not joint.
IN WITNESS WHEREOF, the parties hereto have caused this Shareholder
Agreement to be duly executed as of the date first above written.
AMERICAN RIVER HOLDINGS
By: /S/ DAVID T. TABER
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David T. Taber, President and
Chief Executive Officer
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<PAGE>
NORTH COAST BANK, NATIONAL ASSOCIATION SHAREHOLDERS:
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SCHEDULE 1
NORTH COAST BANK,
NATIONAL ASSOCIATION NUMBER
SHAREHOLDERS OF SHARES ENCUMBRANCES
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EXHIBIT D
ARH AFFILIATE AGREEMENT
I, the undersigned, have been advised that as of the date hereof I may be
deemed to be (but I do not hereby admit to being) an affiliate of American River
Holdings ("ARH") for purposes of Rule 145 promulgated by the Securities and
Exchange Commission under the Securities Act of 1933, as amended ("Rule 145").
The following undertaking is given pursuant to and in compliance with that
certain Agreement and Plan of Reorganization and Merger among ARH Interim
National Bank ("Interim Bank") and North Coast Bank, National Association
("NCB") dated as of March 1, 2000 (the "Merger Agreement"), which provides that
NCB shall merge with and into Interim Bank (the "Merger"), and the surviving
national banking association will continue as a wholly-owned subsidiary of ARH
under the national bank charter number and name of "North Coast Bank, National
Association." Capitalized terms used herein and not defined herein shall have
the meanings given to them in the Agreement.
I understand that ARH is relying on the performance of the covenants
contained herein to insure that they obtain the desired pooling-of-interests
accounting treatment as a result of the Merger and to avoid any appearance of
improper manipulation of ARH's stock price or insider trading in the period
prior to the Merger.
I hereby agree that I will not offer to sell or purchase, sell, transfer,
purchase or acquire, publicly or privately, any ARH common stock ("ARH Share" or
"ARH Shares") or NCB common stock ("NCB Share" or "NCB Shares"), or cause any
other person to do any of the above, except my exercise by cash payment of the
exercise price of any stock option pursuant to ARH's stock option plan.
I hereby also agree that during the period beginning on the date on which
the Effective Time of the Merger occurs and ending on the date of release and
publication to the general public of financial results covering at least thirty
(30) days of post-merger combined operations of ARH and NCB, I will not offer,
sell or transfer, publicly or privately, any ARH Shares, and that I will not
during such period commit or agree to sell any of such ARH Shares after such
period.
Dated: March 1, 2000 Signed:
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EXHIBIT E
ARH SHAREHOLDER AGREEMENT
This Shareholder Agreement (the "Shareholder Agreement") is made and
entered into on March 1, 2000, by and between North Coast Bank, National
Association ("NCB"), and each of the other persons executing this Shareholder
Agreement (each such person is referred to individually as an "ARH Shareholder"
and collectively referred to as the "ARH Shareholders"), with reference to the
following facts:
A. American River Holdings ("ARH"), ARH Interim National Bank ("Interim
Bank") and NCB have entered into that certain Agreement and Plan of
Reorganization and Merger (the "Merger Agreement") dated as of March 1, 2000,
pursuant to which NCB shall merge with and into Interim Bank (the "Merger"), and
the surviving national banking association will continue as a wholly-owned
subsidiary of ARH under the national bank charter number and name of "North
Coast Bank, National Association," and ARH will pay consideration to NCB
Shareholders in the form of ARH common stock.
B. Each of the ARH Shareholders is also a director or executive officer
of ARH.
C. In order to induce NCB to enter into the Merger Agreement, the ARH
Shareholders desire to enter into this Shareholder Agreement solely in their
capacity as ARH Shareholders.
NOW, THEREFORE, in consideration of the promises and of the respective
representations, warranties and covenants, agreements and conditions contained
herein and in the Merger Agreement, the parties hereto agree as follows:
1. AGREEMENTS OF ARH SHAREHOLDERS.
1.1 AGREEMENT TO VOTE. At any meeting of shareholders of ARH or in
connection with any solicitation of the written consent of ARH Shareholders to
approve the Merger Agreement and the transactions contemplated thereby, each of
the ARH Shareholders shall vote or cause to be voted all shares of ARH common
stock ("ARH Share" or "ARH Shares") owned by each such ARH Shareholder, and any
other ARH Shares hereafter acquired by each such ARH Shareholder, in favor of,
and to approve, the principal terms of the Merger and any other matter
contemplated by the Merger Agreement which requires the approval of the ARH
Shareholders.
1.2 AGREEMENT TO RECOMMEND. Unless the Board of Directors of ARH
shall have determined that they have a fiduciary duty to the ARH Shareholders to
recommend that the ARH Shareholders not vote in favor of approval of the
transactions contemplated by the Merger Agreement, each ARH Shareholder shall
recommend to the ARH Shareholders to vote in favor of, and to approve, the
principal terms of the Merger and any other matter contemplated by the Merger
Agreement.
<PAGE>
1.3 AGREEMENT AND PLAN OF REORGANIZATION AND MERGER. Each ARH
Shareholder hereby acknowledges receipt of a copy of the Merger Agreement and
agrees to abide by its terms and to refrain from taking any action that would be
contrary to, or inconsistent with, any of the obligations of ARH as set forth in
the Merger Agreement.
2. REPRESENTATIONS AND WARRANTIES OF ARH SHAREHOLDERS.
2.1 Each of the ARH Shareholders severally and not jointly,
represents and warrants to and agrees with NCB, solely with respect to himself
or herself, as follows:
2.2 CAPACITY. Each such ARH Shareholder has all the requisite
capacity and authority to enter into and perform such ARH Shareholder's
obligations under this Shareholder Agreement.
2.3 BINDING AGREEMENT. This Shareholder Agreement constitutes the
valid and legally binding obligation of each such ARH Shareholder.
2.4 NON-CONTRAVENTION. The execution and delivery of this
Shareholder Agreement by each such ARH Shareholder does not, and the performance
by each such ARH Shareholder of his or her obligations hereunder and the
consummation by each such ARH Shareholder of the transactions contemplated
hereby will not, violate or conflict with or constitute a default under any
agreement, instrument, contract or other obligation or any order, arbitration
award, judgment or decree to which such ARH Shareholder is a party or by which
such ARH Shareholder is bound, or any statute, rule or regulation to which such
ARH Shareholder or any of such ARH Shareholder's property is subject.
2.5 OWNERSHIP OF SHARES. Schedule 1 hereto correctly sets forth
the number of ARH Shares owned by each ARH Shareholder, or with respect to which
each ARH Shareholder has good title to all of the ARH Shares indicated as owned
by such ARH Shareholder in the capacity set forth on Schedule 1 as of the date
indicated on such Schedule 1, and such ARH Shares are so owned free and clear of
any liens, security interest, charges or other encumbrances, except as set forth
in such Schedule 1.
3. TERMINATION.
3.1 TERMINATION DATE. This Shareholder Agreement shall
terminate and be of no further force and effect immediately upon
the earlier of: (a) consummation of the Merger; or (b)
termination of the Agreement in accordance with the terms thereof.
3.2 EFFECT OF TERMINATION. Upon the termination of this
Shareholder Agreement in accordance with Section 3.1 hereof, the respective
obligations of the parties hereto shall immediately become void and have no
further force or effect.
4. SPECIFIC PERFORMANCE.
The parties hereto recognize and agree that monetary damages will not
compensate adequately the parties hereto for nonperformance. Accordingly, each
party agrees that its or his or her obligations shall be enforceable by court
order requiring specific performance.
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<PAGE>
5. MISCELLANEOUS.
5.1 EXPENSES. Each party hereto shall pay its or his or her own
costs and expenses, including, but not limited to, those of its or his or her
attorneys and accountants, in connection with this Shareholder Agreement and
transactions covered and contemplated hereby.
5.2 NOTICES. All notices, demands or other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered in person, by telex, telecopy, facsimile transmission, or by United
States mail, certified or registered, with return receipt requested, or
otherwise actually delivered as follows:
(a) If to an ARH Shareholder:
c/o American River Holdings
1545 River Park Drive, Suite 107
Sacramento, CA 95815
Attn: President and
Chief Executive Officer
Telephone: (916) 565-6114
Facsimile: (916) 565-4758
With a copy to:
Coudert Brothers
303 Almaden Boulevard, Fifth Floor
San Jose, California 95110-2721
Attn: Glenn T. Dodd, Esq.
Telephone: (408) 297-9982
Facsimile: (408) 297-3191
(b) If to NCB:
North Coast Bank, National Association
50 Santa Rosa Avenue
Santa Rosa, CA 95404
Attn: President and
Chief Executive Officer
Telephone: (707) 528-9930
Facsimile: (707) 528-6399
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<PAGE>
With a copy to:
Lillick & Charles, LLP
Two Embarcadero Center, Suite 2700
San Francisco, CA 94111-3996
Attn: R. Brent Faye, Esq.
Telephone: (415) 984-8200
Facsimile: (415) 984-8300
The persons or address to which mailings or deliveries shall be made may change
from time to time by notice given pursuant to the provisions of this Section
5.2. Any notice, demand or other communication given pursuant to the provisions
of this Section 5.2 shall be deemed to have been given on the date delivered or
three days following the date mailed, as the case may be.
5.3 SUCCESSORS AND ASSIGNS. All terms and provisions of this
Shareholder Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective transferees, successors and assigns;
provided, however, that, except as otherwise contemplated herein, this
Shareholder Agreement and all rights, privileges, duties and obligations of the
parties hereto may not be assigned or delegated by any party hereto without the
prior written consent of the other parties to this Shareholder Agreement and any
purported assignment in violation of this Section 5.3 shall be null and void.
5.4 THIRD PARTY BENEFICIARIES. Each party hereto intends that this
Shareholder Agreement shall not benefit, or create any right or cause of action
in or on behalf of, any person other than the parties hereto. As used in this
Shareholder Agreement, the term party or parties shall refer only to NCB and the
ARH Shareholders, or any of them.
5.5 COUNTERPARTS. This Shareholder Agreement may be executed in
one or more counterparts, all of which taken together shall constitute one
instrument.
5.6 GOVERNING LAW. This Shareholder Agreement is made and entered
into in the State of California and the laws of the State of California shall
govern the validity and interpretation hereof and the performance of the parties
hereto of their respective duties and obligations hereunder.
5.7 CAPTIONS. The captions contained in this Shareholder Agreement
are for convenience of reference only and do not form a part of this Shareholder
Agreement.
5.8 WAIVER AND MODIFICATION. No waiver of any term, provision or
condition of this Shareholder Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such term, provision or condition of this Shareholder
Agreement. This Shareholder Agreement may be modified or amended only by an
instrument of equal formality signed by the parties or their duly authorized
agents.
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<PAGE>
5.9 ATTORNEYS' FEES. In the event any of the parties to this
Shareholder Agreement brings an action or suit against any other party by reason
of any breach of any covenant, agreement, representation, warranty or other
provision hereof, or any breach of any duty or obligation created hereunder by
such other party, the prevailing party in whose favor final judgment is entered
shall be entitled to have and recover of and from the losing party all
reasonable costs and expenses incurred or sustained by such prevailing party in
connection with such suit or action, including without limitation, legal fees
and court costs (whether or not taxable as such).
5.10 ENTIRE AGREEMENT. The making, execution and delivery of this
Shareholder Agreement by the parties hereto have been encouraged by no
representations, statements, warranties or agreements other than those herein
expressed. This Shareholder Agreement embodies the entire understanding of the
parties and there are no further or other agreements or understandings, written
or oral, in effect between the parties relating to the subject matter hereof,
unless expressly referred to by reference herein.
5.11 SEVERABILITY. Whenever possible, each provision of this
Shareholder Agreement and every related document shall be interpreted in such
manner as to be valid under applicable law. However, if any provision of any of
the foregoing shall be invalid or prohibited under said applicable law, it shall
be construed, interpreted and limited to effectuate its purposes to the maximum
legally permissible extent. If it cannot be so construed and interpreted so as
to be valid under such law, such provision shall be ineffective to the extent of
such invalidity or prohibition without invalidating the remainder of such
provision or the remaining provisions of this Shareholder Agreement, and this
Shareholder Agreement shall be construed to the maximum extent possible to carry
out its terms without such invalid or unenforceable provision or portion
thereof.
5.12 SEVERAL OBLIGATIONS. All duties and obligations of each party
to this Shareholder Agreement shall be several and not joint.
IN WITNESS WHEREOF, the parties hereto have caused this Shareholder
Agreement to be duly executed as of the date first above written.
NORTH COAST BANK, NATIONAL ASSOCIATION
By:
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Print or Type Name and Title
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<PAGE>
ARH SHAREHOLDERS:
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<PAGE>
SCHEDULE 1
NUMBER
ARH SHAREHOLDERS OF SHARES ENCUMBRANCES
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<PAGE>
ANNEX B
August 17, 2000
Members of the Board of Directors
American River Holdings
1545 River Park Drive
Suite 107
Sacramento, CA 95815
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the holders of the outstanding shares of American
River Holdings ("ARH") Common Stock, no par value, of the Conversion Ratio, as
defined in Section 2.1 of the Agreement and Plan of Reorganization and Merger
dated as of March 1, 2000 (the "Merger Agreement"), that provides, among other
things, for the exchange of all the Common Stock of North Coast Bank, National
Association ("NCB") for the Common Stock of ARH by means of a merger of NCB with
and into ARH Interim National Bank, a subsidiary of ARH.
Hoefer & Arnett Incorporated, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Hoefer &
Arnett Incorporated provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold securities, of ARH or NCB for its own account
and for the accounts of customers. We are familiar with ARH having acted as its
financial advisor in connection with the Merger.
In connection with this opinion, we have reviewed, among other things, the
Merger Agreement; the Annual Report to Shareholders of ARH and NCB for the years
ended December 31, 1997 and 1998; certain interim reports to shareholders of ARH
and NCB; certain other communications from ARH and NCB to the their respective
shareholders; and certain internal financial analyses and forecasts for ARH and
NCB prepared by their respective managements including forecasts for certain
costs savings and revenue opportunities (the "Synergies") expected to be
achieved as a result of the Merger. We also have held discussions with members
of the senior management of ARH and NCB regarding the strategic rationale for,
and the potential benefits of, the Merger and the past and current business
operations, regulatory relationships, financial condition and future prospects
of their respective companies. In addition, we have reviewed the reported price
and trading activity for the shares of ARH and NCB, compared certain financial
and stock market information for ARH and NCB with similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of certain recent business combinations in the commercial
banking industry and performed such other studies and analyses as we considered
appropriate.
We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed such accuracy and completeness
for purposes of rendering this opinion. In that
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<PAGE>
regard, we have assumed, with your consent, that the financial forecasts,
including, without limitation, the Synergies and projections regarding
under-performing and non-performing assets and net charge-offs have been
reasonably prepared on a basis reflecting the best currently available judgments
and estimates of ARH and NCB and that such forecasts will be realized in the
amounts and at the times contemplated thereby. We are not experts in the
evaluation of loan and lease portfolios for purposes of assessing the adequacy
of the allowances for losses with respect thereto and have assumed, with your
consent, that such allowances for each of ARH and NCB are in the aggregate
adequate to cover all such losses. In addition, we have not reviewed individual
credit files nor have we made an independent evaluation or appraisal of the
assets and liabilities of ARH, NCB or any of their subsidiaries and we have not
been furnished with any such evaluation or appraisal. We also have assumed, with
your consent, that the Merger will be accounted for as a pooling of interests
under generally accepted accounting principles and that obtaining any necessary
regulatory approvals and third party consents for the Merger or otherwise will
not have a material adverse effect on ARH, NCB or the combined company pursuant
to the Merger. In addition, our opinion does not address the relative merits of
the Merger as compared to any alternative business transaction that might be
available to ARH.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of ARH in connection with
its consideration of the Merger and such opinion does not constitute a
recommendation as to how any holder of shares of ARH should vote with respect to
such transaction.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Conversion
Ratio pursuant to the Merger Agreement is fair from a financial point of view to
the holders of the outstanding shares of Common Stock of American River
Holdings.
Very truly yours,
HOEFER & ARNETT INCORPORATED
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ANNEX C
August 17, 2000
Board of Directors
North Coast Bank, National Association
50 Santa Rosa Avenue
Santa Rosa, California 95404
Members of the Board:
With respect to the Agreement and Plan of Reorganization and Merger signed and
entered into on March 1, 2000 (the "Merger Agreement"), between North Coast
Bank, National Association (the "Company") and American River Holdings
("American"), pursuant to which the Company will merge with ARH Interim National
Bank, a national banking association to be formed as a wholly owned subsidiary
of American (the "Merger"), resulting in the Company being a wholly-owned
subsidiary of American, and the current shareholders of the Company to receive
American common stock, in a transaction in which the conversion ratio is .9644
of an American share for each Company share of common stock, you have asked our
opinion as to the fairness from a financial point of view to the shareholders of
the Company of the consideration to be paid in the Merger (the "Merger
Consideration").
In connection with our opinion, we have among other activities: (a) reviewed
certain publicly available financial and other data with respect to the Company,
and American, including the consolidated financial statements for recent years
through December 31, 1999, and certain other relevant financial and operating
data relating to the Company made available to us from published sources and
from the internal records of the Company; (b) reviewed the terms of the Merger
Agreement; (c) reviewed certain historical market prices and trading volume of
common stock of California banking companies; (d) compared the Company and
American from a financial point of view with certain other companies in the
industry which we deemed to be relevant; (e) considered the financial terms, to
the extent publicly available, of selected recent transactions which we deem to
be comparable, in whole or in part, to the Merger; (f) reviewed and discussed
with representatives of the management of the Company certain information of a
business and financial nature regarding the Company and American, including
financial forecasts and related assumptions of the Company and of American; (g)
made inquiries and held discussions on the Merger and the Merger Agreement and
other matters relating thereto with American River Holdings' counsel; and (h)
performed such other analyses and examinations and considered such other
information, financial analyses, and financial, economic and market criteria as
we have deemed appropriate and relevant.
In connection with our review, we have not independently verified any of the
foregoing information with respect to the Company, or American. We have relied
on all such information provided by the Company and have assumed that all such
information is complete and accurate in all material respects. We have assumed
that there have been no material changes in American River Holdings' or
American's assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements made
available to us. We have relied on advice of counsel to the Company as to all
legal matters with respect to the Company, the Merger, and the Merger Agreement.
In addition, we have not made an independent evaluation, appraisal or physical
inspection of the assets or individual properties
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of the Company or American, nor have we been furnished with any such appraisals.
We are not expressing any opinion as to the actual value of American's common
stock when issued to the Company shareholders pursuant to the Merger, or the
prices at which American common stock will trade subsequent to the Merger.
Further, our opinion is necessarily based upon economic, monetary, and market
conditions existing as of the date hereof.
This opinion is furnished pursuant to our engagement letter dated January 26,
2000, and is solely for the benefit of the Board of Directors and stockholders
of the Company. In furnishing this opinion, we do not admit that we are experts
with respect to any registration statement or other securities filing within the
meaning of the term "experts" as used in the Securities Act and the rules and
regulations promulgated thereunder. Nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act. Our opinion is directed to the Board of the Company, covers only
the fairness of the Merger Consideration from a financial point of view as of
the date hereof and does not constitute a recommendation to any holder of
Company common stock as to how such shareholder should vote concerning the
Merger. Except as provided in the engagement letter, this opinion may not be
used or referred to by the Company or quoted or disclosed to any person in any
manner without our prior written consent.
Based upon and subject to the foregoing, and in reliance thereon, it is our
opinion that, as of the date of this opinion, the Merger Consideration is fair
to the shareholders of the Company from a financial point of view.
Very truly yours,
SEAPOWER CARPENTER CAPITAL, INC.,
dba CARPENTER AND COMPANY
C-2
<PAGE>
ANNEX D
CHAPTER 13. DISSENTERS' RIGHTS.
SS. 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS--
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the National Market System of the Nasdaq Stock Market,
and the notice of meeting of shareholders to act upon the reorganization
summarizes this section and Sections 1301, 1302, 1303 and 1304; provided,
however, that this provision does not apply to any shares with respect to which
there exists any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for payment
are filed with respect to 5 percent or more of the outstanding shares of that
class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on their organization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SS. 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND FOR
PURCHASE; TIME; CONTENTS--
D-1
<PAGE>
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SS. 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES--
Within 30 days after the date on which notice of the approval by the outstanding
shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to
the shareholder, the shareholder shall submit to the corporation at its
principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SS. 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT--
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
D-2
<PAGE>
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SS. 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF ISSUES;
APPOINTMENT OF APPRAISERS--
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market values of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SS. 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT; JUDGMENT;
PAYMENT; APPEAL; COSTS--
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
D-3
<PAGE>
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SS. 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST--
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SS. 1307. DIVIDENDS ON DISSENTING SHARES--
Cash dividends declared and paid by the corporation upon the dissenting shares
after the date of approval of the reorganization by the outstanding shares
(Section 152) and prior to payment for the shares by the corporation shall be
credited against the total amount to be paid by the corporation therefor.
SS. 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF
DEMAND FOR PAYMENT--
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SS. 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS--
Dissenting shares lose their status as dissenting shares and the holders thereof
cease to be dissenting shareholders and cease to be entitled to require the
corporation to purchase their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles of incorporation.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
D-4
<PAGE>
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SS. 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL--
If litigation is instituted to test the sufficiency or regularity of the votes
of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SS. 1311. EXEMPT SHARES--
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SS. 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND MERGER
OR REORGANIZATION; RESTRAINING ORDER OR iNJUNCTION; CONDITIONS--
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
D-5
<PAGE>
ANNEX E
TITLE 12, UNITED STATES CODE, SECTION 215a (b),(c) AND (d):
DISSENTING SHAREHOLDERS
(b) If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the shares so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
VALUATION OF SHARES
(c) The value of the shares of any dissenting shareholder shall be
ascertained, as of the effective date of the merger, by an appraisal made by a
committee of three persons, composed of (1) one selected by the vote of the
holders of the majority of the stock, the owners of which are entitled to
payment in cash; (2) one selected by the directors of the receiving association;
and (3) one selected by the two so selected. The valuation agreed upon by any
two of the three appraisers shall govern. If the value so fixed shall not be
satisfactory to any dissenting shareholder who has requested payment, that
shareholder may, within five days after being notified of the appraised value of
his shares, appeal to the Comptroller, who shall cause a reappraisal to be made
which shall be final and binding as to the value of the shares of the appellant.
APPLICATION TO SHAREHOLDERS OF MERGING ASSOCIATIONS; APPRAISAL BY
COMPTROLLER; EXPENSES OF RECEIVING ASSOCIATION; SALE AND RESALE OF SHARES;
STATE APPRAISAL AND MERGER LAW
(d) If, within ninety days from the date of consummation of the merger, for
any reason one or more of the appraisers is not selected as herein provided, or
the appraisers fail to determine the value of such shares, the Comptroller shall
upon written request of any interested party cause an appraisal to be made which
shall be final and binding on all parties. The expenses of the Comptroller in
making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be promptly
paid to the dissenting shareholders by the receiving association. The shares of
stock of the receiving association which would have been delivered to such
dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such public
auction, if it is the highest bidder therefor, for the purpose of reselling such
shares within thirty days thereafter to such person or persons and at such price
not less than par as its board of directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such sale price shall be paid to such
dissenting shareholders. The appraisal of such shares of stock in any State bank
shall be determined in the manner prescribed by the law of the State in such
cases, rather than as provided in this section, if such provision is made in the
State law; and no such merger shall be in contravention of the law of the State
under which such bank is incorporated. The provisions of this subsection shall
apply only to shareholders of (and stock owned by them in) a bank or association
being merged into the receiving association.
E-1
<PAGE>
BC-259
BANKING ISSUANCE
--------------------------------------------------------------------------------
Comptroller of the Currency
Administrator of National Banks
--------------------------------------------------------------------------------
Type: Banking Circular
Subject: Stock Appraisals
--------------------------------------------------------------------------------
To: Chief Executive Officers of National Banks, Deputy Comptrollers
(District), Department and Division Heads, and Examining Personnel
PURPOSE
This banking circular informs all national banks of the valuation methods used
by the Office of the Comptroller of the Currency (OCC) to estimate the value of
a bank's shares when requested to do so by a shareholder dissenting to the
conversion, merger, or consolidation of its bank. The results of appraisals
performed by the OCC between January 1, 1985 and September 30, 1991 are
summarized.
References: 12 U.S.C. 214a, 215 and 215a; 12 CFR 11.590 (Item 2)
BACKGROUND
Under 12 U.S.C. Section 214a, a shareholder dissenting from a conversion,
consolidation, or merger involving a national bank is entitled to receive the
value of his or her shares from the resulting bank. A valuation of the shares
shall be made by a committee of three appraisers (a representative of the
dissenting shareholder, a representative of the resulting bank, and a third
appraiser selected by the other two). If the committee is formed and renders an
appraisal that is acceptable to the dissenting shareholder, the process is
complete and the appraised value of the shares is paid to the dissenting
shareholder by the resulting bank. If, for any reason, the committee is not
formed or if it renders an appraisal that is not acceptable to the dissenting
shareholder, an interested party may request an appraisal by the OCC. 12 U.S.C.
Section 215 provides these appraisal rights to any shareholder dissenting to a
consolidation. Any dissenting shareholder of a target bank in a merger is also
entitled to these appraisal rights pursuant to 12 U.S.C. Section 215a.
--------------------------------------------------------------------------------
Date: March 5, 1992 Page 1 of 7
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<PAGE>
BC-259
BANKING ISSUANCE
--------------------------------------------------------------------------------
Comptroller of the Currency
Administrator of National Banks
--------------------------------------------------------------------------------
Type: Banking Circular
Subject: Stock Appraisals
--------------------------------------------------------------------------------
The above provides only a general overview of the appraisal process. The
specific requirements of the process are set forth in the statutes themselves.
METHODS OF VALUATION USED
Through its appraisal process, the OCC attempts to arrive at a fair estimate of
the value of a bank's shares. After reviewing the particular facts in each case
and the available information on a bank's shares, the OCC selects an appropriate
valuation method, or combination of methods, to determine a reasonable estimate
of the shares' value.
MARKET VALUE
The OCC uses various methods to establish the market value of shares being
appraised. If sufficient trading in the shares exists and the prices are
available from direct quotes from the WALL STREET JOURNAL or a market-maker,
those quotes are considered in determining the market value. If no market value
is readily available, or if the market value available is not well established,
the OCC may use other methods of estimating market value, such as the investment
value and adjusted book value methods.
INVESTMENT VALUE
Investment value requires an assessment of the value to investors of a share in
the future earnings of the target bank. Investment value is estimated by
applying an average price/earnings ratio of banks with similar earnings
potential to the earnings capacity of the target bank.
The peer group selection is based on location, size, and earnings patterns. If
the state in which the subject bank is located provides a sufficient number of
comparable banks using location, size and earnings patterns as the criteria for
selection, the price/earnings ratios assigned to the banks are applied to the
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Date: March 5, 1992 Page 2 of 7
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<PAGE>
BC-259
BANKING ISSUANCE
--------------------------------------------------------------------------------
Comptroller of the Currency
Administrator of National Banks
--------------------------------------------------------------------------------
Type: Banking Circular
Subject: Stock Appraisals
--------------------------------------------------------------------------------
earnings per share estimated for the subject bank. In order to select a
reasonable peer group when there are too few comparable independent banks in a
location that is comparable to that of the subject bank, the pool of banks from
which a peer group is selected is broadened by including one-bank holding
company banks in a comparable location, and/or by selecting banks in less
comparable locations, including adjacent states, that have earnings patterns
similar to the subject bank.
ADJUSTED BOOK VALUE
The OCC also uses an "adjusted book value" method for estimating value.
Historically, the OCC has not placed any weight on the bank's "unadjusted book
value", since that value is based on historical acquisition costs of the bank's
assets, and does not reflect investors' perceptions of the value of the bank as
an ongoing concern. Adjusted book value is calculated by multiplying the book
value of the target bank's assets per share times the average market price to
book value ratio of comparable banking organizations. The average market price
to book value ratio measures the premium or discount to book value, which
investors attribute to shares of similarly situated banking organizations.
Both the investment value method and the adjusted book value method present
appraised values which are based on the target bank's value as a going concern.
These techniques provide estimates of the market value of the shares of the
subject bank.
OVERALL VALUATION
The OCC may use more than one of the above-described methods in deriving the
value of shares of stock. If more than one method is used, varying weights may
be applied in reaching an overall valuation. The weight given to the value by a
particular valuation method is based on how accurately the given method is
believed to represent market value. For example, the OCC may give more weight to
--------------------------------------------------------------------------------
Date: March 5, 1992 Page 3 of 7
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<PAGE>
BC-259
BANKING ISSUANCE
--------------------------------------------------------------------------------
Comptroller of the Currency
Administrator of National Banks
--------------------------------------------------------------------------------
Type: Banking Circular
Subject: Stock Appraisals
--------------------------------------------------------------------------------
a market value representing infrequent trading by shareholders than to the value
derived from the investment value method when the subject bank's earnings trend
is so irregular that it is considered to be a poor predictor of future earnings.
PURCHASE PREMIUMS
For mergers and consolidations, the OCC recognizes that purchase premiums do
exist and may, in some instances, be paid in the purchase of small blocks of
shares. However, the payment of purchase premiums depends entirely on the
acquisition or control plans of the purchasers, and such payments are not
regular or predictable elements of market value. Consequently, the OCC's
valuation methods do not include consideration of purchase premiums in arriving
at the value of shares.
STATISTICAL DATA
The chart below lists the results of appraisals the OCC performed between
January 1, 1985 and September 30, 1991. The OCC provides statistical data on
book value and price/earnings ratios for comparative purposes, but does not
necessarily rely on such data in determining the value of the banks' shares.
Dissenting shareholders should not view these statistics as determinative for
future appraisals.
In connection with disclosures given to shareholders under 12 CFR 11.590 (Item
2), banks may provide shareholders a copy of this banking circular or disclose
the information in the banking circular, including the past results of OCC
appraisals. If the bank discloses the past results of the OCC appraisals, it
should advise shareholders that: (1) the OCC did not rely on all the information
set forth in the chart in performing each appraisal; and, (2) the OCC's past
appraisals are not necessarily determinative of its future appraisals of a
particular bank's shares.
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Date: March 5, 1992 Page 4 of 7
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<PAGE>
BC-259
BANKING ISSUANCE
--------------------------------------------------------------------------------
Comptroller of the Currency
Administrator of National Banks
--------------------------------------------------------------------------------
Type: Banking Circular
Subject: Stock Appraisals
--------------------------------------------------------------------------------
APPRAISAL RESULTS
--------------------------------------------------------------------------------
OCC Average Price/
Appraisal Appraisal Price Book Earnings Ratio
Date * Value Offered Value of Peer Group
--------- ----- ------- ----- -------------
1/1/85 107.05 110.00 178.29 5.3
1/2/85 73.16 NA 66.35 6.8
1/15/85 53.41 60.00 83.95 4.8
1/31/85 22.72 20.00 38.49 5.4
2/1/85 30.63 24.00 34.08 5.7
2/25/85 27.74 27.55 41.62 5.9
4/30/85 25.98 35.00 42.21 4.5
7/30/85 3,153.10 2,640.00 6,063.66 NC
9/1/85 17.23 21.00 21.84 4.7
11/22/85 316.74 338.75 519.89 5.0
11/22/85 30.28 NA 34.42 5.9
12/16/85 66.29 77.00 89.64 5.6
12/27/85 60.85 57.00 119.36 5.3
12/31/85 61.77 NA 73.56 5.9
12/31/85 75.79 40.00 58.74 12.1
1/12/86 19.93 NA 26.37 7.0
3/14/86 59.02 200.00 132.20 3.1
4/21/86 40.44 35.00 43.54 6.4
5/2/86 15.50 16.50 23.69 5.0
7/3/86 405.74 NA 612.82 3.9
7/31/86 297.34 600.00 650.63 4.4
--------------------------------------------------------------------------------
* - The "Appraisal Date" is the consummation date for the conversion,
consolidation, or merger.
NA - Not Available
NC - Not Computed
--------------------------------------------------------------------------------
Date: March 5, 1992 Page 5 of 7
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<PAGE>
BC-259
BANKING ISSUANCE
--------------------------------------------------------------------------------
Comptroller of the Currency
Administrator of National Banks
--------------------------------------------------------------------------------
Type: Banking Circular
Subject: Stock Appraisals
APPRAISAL RESULTS
--------------------------------------------------------------------------------
OCC Average Price/
Appraisal Appraisal Price Book Earnings Ratio
Date * Value Offered Value of Peer Group
--------- ----- ------- ----- -------------
8/22/86 103.53 106.67 136.23 NC
12/26/86 16.66 NA 43.57 4.0
12/31/86 53.39 95.58 69.66 7.1
5/1/87 186.42 NA 360.05 5.1
6/11/87 50.46 70.00 92.35 4.5
6/11/87 38.53 55.00 77.75 4.5
7/31/87 13.10 NA 20.04 6.7
8/26/87 55.92 57.52 70.88 NC
8/31/87 19.55 23.75 30.64 5.0
8/31/87 10.98 NA 17.01 4.2
10/6/87 56.48 60.00 73.11 5.6
3/15/88 297.63 NA 414.95 6.1
6/2/88 27.26 NA 28.45 5.4
6/30/88 137.78 NA 215.36 6.0
8/30/88 768.62 677.00 1,090.55 10.7
3/31/89 773.62 NA 557.30 7.9
5/26/89 136.47 180.00 250.42 4.5
5/29/90 9.87 NA 11.04 9.9
* - The "Appraisal Date" is the consummation date for the conversion,
consolidation, or merger.
NA - Not Available
NC - Not Computed
--------------------------------------------------------------------------------
Date: March 5, 1992 Page 6 of 7
E-7
<PAGE>
BC-259
BANKING ISSUANCE
--------------------------------------------------------------------------------
Comptroller of the Currency
Administrator of National Banks
--------------------------------------------------------------------------------
Type: Banking Circular
Subject: Stock Appraisals
For more information regarding the OCC's stock appraisal process, contact the
Office of the Comptroller of the Currency, Bank Organization and Structure.
/s/ Frank Maguire
--------------------------------------
Frank Maguire
Acting Senior Deputy Comptroller
Corporate Policy and Economic Analysis
--------------------------------------------------------------------------------
Date: March 5, 1992 Page 7 of 7
E-8
<PAGE>
ANNEX F
AMERICAN RIVER HOLDINGS 2000 STOCK OPTION PLAN
<PAGE>
ANNEX F
TABLE OF CONTENTS
PAGE
PURPOSE.....................................................................F-1
ADMINISTRATION..............................................................F-1
ELIGIBILITY.................................................................F-2
THE SHARES..................................................................F-2
OPTION GRANTS...............................................................F-2
Grant Of Options......................................................F-2
Option Price..........................................................F-3
Duration Of Options...................................................F-3
Termination Of Director, Employment Or Consultant Status..............F-3
TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS..............................F-4
Exercise Of Options...................................................F-4
Transferability Of Option And Shares..................................F-5
Withholding...........................................................F-5
Other Terms And Conditions............................................F-5
ADJUSTMENT OF, AND CHANGES IN, THE SHARES...................................F-6
Changes In Capitalization.............................................F-6
Dissolution, Liquidation, Sale Or Merger..............................F-6
Notice Of Adjustments; Fractional Shares..............................F-7
AMENDMENT, EFFECTIVENESS AND TERMINATION OF THE PLAN........................F-7
INFORMATION TO OPTIONEES....................................................F-7
PRIVILEGES OF STOCK OWNERSHIP; SECURITIES LAW COMPLIANCE....................F-8
NOTICE OF SALE..............................................................F-8
INDEMNIFICATION.............................................................F-8
INCENTIVE STOCK OPTION AGREEMENT............................................F-9
Nature Of The Option..................................................F-9
Exercise Price........................................................F-9
Exercise Of Option....................................................F-9
Method Of Payment....................................................F-10
Termination Of Status As An Employee For Any Reason
Other Than Cause...................................................F-10
Termination Of Status As An Employee For Cause.......................F-10
F-i
<PAGE>
Disability Of Optionee...............................................F-11
Death Of Optionee....................................................F-11
Non-Transferability Of Option........................................F-11
Term Of Option.......................................................F-11
Early Disposition Of Stock...........................................F-11
Qualification As An Incentive Stock Option...........................F-12
NONSTATUTORY STOCK OPTION AGREEMENT........................................F-13
Nature Of The Option.................................................F-13
Exercise Price.......................................................F-13
Exercise Of Option...................................................F-13
Method Of Payment....................................................F-14
Termination Of Status As An Employee Or Director For Any
Reason Other Than Cause............................................F-14
Termination Of Status As An Employee For Cause; Removal
From Board Of Directors............................................F-14
Disability Of Optionee...............................................F-15
Death Of Optionee....................................................F-15
Non-Transferability Of Option........................................F-15
Term Of Option.......................................................F-15
Taxation Upon Exercise Of Option.....................................F-15
F-ii
<PAGE>
AMERICAN RIVER HOLDINGS 2000 STOCK OPTION PLAN
PURPOSE
The purpose of this American River Holdings 2000 Stock Option Plan (the
"2000 Plan") is to provide a method whereby those key employees, directors and
consultants of American River Holdings and its affiliates (collectively referred
to as the "Company"), who are primarily responsible for the management and
growth of the Company's business and who are presently making and are expected
to make substantial contributions to the Company's future management and growth,
may be offered incentives in addition to those presently available, and may be
stimulated by increased personal involvement in the fortunes and success of the
Company to continue in its service, thereby advancing the interests of the
Company and its shareholders.
The word "affiliate," as used in the 2000 Plan, means any bank or
corporation in any unbroken chain of banks or corporations beginning or ending
with the Company, if at the time of the granting of an option, each such bank or
corporation other than the last in that chain owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other banks or corporations in the chain.
ADMINISTRATION
The following provisions shall govern the administration of the 2000
Plan:
(a) Subject to paragraphs (b),(c) and (d) below, the 2000 Plan shall be
administered by the Board of Directors (the "Board").
(b) Acts of the Board (i) at a meeting, held at a time and place and in
accordance with rules adopted by the Board, at which a quorum of the Board is
present and acting, or (ii) reduced to and approved in writing by all members of
the Board, shall be the valid acts of the Board.
(c) Options granted to employees or directors of the Company subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") shall be approved by the Board or shall be approved or ratified, in
compliance with Section 14 of the Exchange Act, by the affirmative votes of the
holders of a majority of the voting securities of the Company present or
represented and entitled to vote at a meeting of shareholders duly called and
held pursuant to law, provided that any such ratification shall occur not later
than the date of the next annual meeting of shareholders following the grant.
(d) The grant of options under the 2000 Plan shall be affected by
execution of instruments in writing in a form approved by the Board. Subject to
the express terms and conditions of the 2000 Plan, the Board shall have full
power to construe the 2000 Plan and the terms of any option granted under the
2000 Plan, to prescribe, amend and rescind rules and regulations relating to the
2000 Plan or such options and to make all other determinations necessary or
advisable for the 2000 Plan's administration, including, without limitation, the
power to (i) determine which persons meet the requirements of Section 3 hereof
for selection as participants in the 2000 Plan; (ii) determine to whom of the
eligible persons, if any, options shall be granted under the 2000 Plan; (iii)
establish the terms and conditions required or permitted to be included in every
option agreement or any amendments thereto, including whether options to be
granted shall be "incentive stock options," as defined in Section 422 of the
Internal
F-1
<PAGE>
Revenue Code of 1986, as amended (the "IRC") or nonstatutory stock options not
described in Section 422; (iv) specify the number of shares to be covered by
each option; (v) determine the fair market value of shares of the Company's
common stock for any purpose under the 2000 Plan; (vi) grant options in exchange
for cancellation of options granted earlier under the 2000 Plan or the Company's
1995 Stock Option Plan (the "1995 Plan") at different exercise prices; (vii)
take appropriate action to amend any option under the 2000 Plan, provided that
no such action may be taken without the written consent of the affected
optionee; and (viii) make all other determinations deemed necessary or advisable
for administering the 2000 Plan. The Board's determination on the foregoing
matters shall be conclusive.
ELIGIBILITY
The persons who shall be eligible to receive the grant of options under
this 2000 Plan shall be those key employees and officers of the Company
(including officers who may also be directors of the Company), persons who
became employees of the Company within thirty days of the date of grant of an
option, independent contractor consultants of the Company who render bona fide
services to the Company other than in connection with the offer or sale of
securities in a capital raising transaction ("Consultants"), and directors.
Notwithstanding any other provision of this 2000 Plan, no person shall be
granted options to purchase more than an aggregate of 100,000 shares under this
2000 Plan.
THE SHARES
The shares of stock subject to options authorized to be granted under
the 2000 Plan shall consist of 679,634 shares of the Company's no par value
common stock, less such number of shares (not to exceed 270,128 shares) which
are subject to options outstanding under the 1995 Plan and which are acquired by
exercise of such options (the "Shares"), or the number and kind of shares of
stock or other securities which shall be substituted for such Shares or to which
such Shares shall be adjusted as provided in Section 7 hereof.
Upon the expiration or termination for any reason of an outstanding
option under the 2000 Plan (or under the 1995 Plan) which has not been exercised
in full, all unissued Shares thereunder shall again become available for the
grant of options under the 2000 Plan. Shares of the Company's common stock which
are (i) delivered by an optionee in payment of the exercise price of an option
pursuant to Section 7(a), or (ii) delivered by an optionee, or withheld by the
Company from the shares otherwise due upon exercise of a nonstatutory stock
option, in satisfaction of applicable withholding taxes as permitted by Section
7(c), shall again become available for the grant of options under the 2000 Plan
only to those eligible participants who are not subject to Section 16 of the
Exchange Act.
OPTION GRANTS
Options, in the discretion of the Board, may be granted at any time
prior to the termination of the 2000 Plan to persons included among the eligible
classes of persons specified in Section 3. Options granted by the Board shall be
subject to the following terms and conditions:
GRANT OF OPTIONS
Options granted to employees pursuant to the 2000 Plan may be either
incentive stock options or nonstatutory stock options. If the aggregate fair
market value of the shares issuable upon exercise of incentive stock options
which are exercisable for the first time during any one calendar year under all
F-2
<PAGE>
incentive stock options held by an optionee exceeds $100,000 (determined at the
time of the grant of the options), such options shall be treated as nonstatutory
stock options to the extent of such excess. Options granted to Directors who are
"non-employee directors" within the meaning of Rule 16b-3 as promulgated by the
Securities and Exchange Commission ("SEC") under Section 16(b) of the Exchange
Act, as such rule may be amended from time to time and as interpreted by the SEC
("Rule 16b-3"), and to Consultants, shall be nonstatutory stock options.
OPTION PRICE
The purchase price under each option shall not be less than one hundred
percent of the fair market value of the Shares subject thereto on the date the
option is granted; provided, however, that the purchase price of an option
granted to an individual who owns stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company shall
not be less than one hundred ten percent (110%) of the fair market value of the
Shares subject thereto on the date the option is granted. For any purposes under
this 2000 Plan, fair market value per share shall mean, where there is a public
market for the Company's common stock, the mean of the bid and asked prices (or
the closing price if listed on a stock exchange or the Nasdaq National Market)
of the Company's common stock for the date of grant, as reported in the Wall
Street Journal (or, if not so reported, as otherwise reported by the Nasdaq
Stock Market or the National Quotation Bureau). If such information is not
available for the date of grant, then such information for the last preceding
date for which such information is available shall be considered as the fair
market value.
DURATION OF OPTIONS
Each option shall be for a term determined by the Board; provided,
however, that the term of any option may not exceed ten (10) years and, provided
further, that the term of any incentive stock option granted to an individual
who owns stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company shall not exceed five (5)
years. Each option shall vest in such manner and at such time as the Board shall
determine and the Board may accelerate the time of exercise of any option;
provided, however, that no option shall vest for exercise at a rate of less than
twenty percent (20%) per year during the five (5) year period following the date
of grant of an option.
TERMINATION OF DIRECTOR, EMPLOYMENT OR CONSULTANT STATUS
Upon the termination of an optionee's status as an employee or
Consultant or member of the Board, his or her rights to exercise an option then
held shall be only as follows:
DEATH OR DISABILITY: If an optionee's employment or consulting
relationship or tenure on the Board of Directors is terminated by death
or disability, such optionee or such optionee's qualified
representative (in the event of the optionee's mental disability) or
the optionee's estate (in the event of optionee's death) shall have the
right for a period of twelve (12) months (or such longer period as the
Board may determine at the date of grant or during the term of the
option) following the date of such death or disability to exercise the
option to the extent the optionee was entitled to exercise such option
on the date of the optionee's death or disability; provided the actual
date of exercise is in no event after the expiration of the term of the
option. To the extent the option is not exercised within such period
the option will terminate. An optionee's "estate" shall mean the
optionee's legal representative or any person who acquires the right to
exercise an option by reason of the optionee's death.
F-3
<PAGE>
CAUSE: If by determination of the Board an optionee's
employment or consulting relationship is terminated (1) because such
optionee has committed an act of embezzlement, fraud, dishonesty,
breach of fiduciary duty to the Company, or deliberately disregarded
the rules of the Company which resulted in loss, damage or injury to
the Company, or (2) because the optionee has made any unauthorized
disclosure of any of the secrets or confidential information of the
Company, induced any client or customer of the Company to break any
contract with the Company or induced any principal for whom the Company
acts as agent to terminate such agency relations, or engaged in any
conduct which constitutes unfair competition with the Company, or (3)
if an optionee (including an optionee who is a director) is removed
from any office of the Company or from the Company's Board by any bank
regulatory agency, the optionee shall have the right for a period of
thirty (30) days to exercise the option to the extent the option was
exercisable on the date of termination; provided that the date of
exercise is in no event after the expiration of the term of the option.
To the extent the option is not exercised within such period the option
will terminate. In making any determination pursuant to this paragraph,
the Board shall act fairly and shall give the optionee whose employment
or Consultant status has been terminated an opportunity to appear and
be heard at a hearing before the full Board and present evidence on the
optionee's behalf. For the purpose of this paragraph, termination of
employment or Consultant status shall be deemed to occur when the
Company dispatches notice or advice to the optionee that the optionee's
employment or status as a Consultant is terminated, and not at the time
of optionee's receipt thereof.
OTHER REASONS: If an optionee's employment or consulting
relationship or tenure on the Board of Directors is terminated for any
reason other than those mentioned above under "Death or Disability" and
"Cause," the optionee may, within three (3) months (or such longer
period as the Board may determine at the date of grant or during the
term of the option) following such termination, exercise the option to
the extent such option was exercisable on the date of termination of
the optionee's employment or status as a director or Consultant;
provided the date of exercise is in no event after the expiration of
the term of the option and provided further that any option which is
exercised more than three (3) months following termination shall be
treated as a nonstatutory option whether or not it was designated as
such at the time it was granted. To the extent the option is not
exercised within such period the option will terminate.
TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS
The following terms and conditions shall apply to all options granted
pursuant to the 2000 Plan:
EXERCISE OF OPTIONS
To the extent the right to purchase Shares has vested under an
optionee's stock option agreement, options may be exercised from time to time by
delivering payment therefor in cash, certified check, official bank check, or
the equivalent thereof acceptable to the Company, together with written notice
to the Secretary of the Company, identifying the option or part thereof being
exercised and specifying the number of Shares for which payment is being
tendered. In addition, an option may also be exercised by (1) the delivery and
surrender of shares of Company common stock which have been owned by the
optionee for at least six (6) months or such other period as the Board may
require and have an aggregate fair market value on the date of surrender equal
to the exercise price; or (2) by delivery to the Company of an exercise notice
instructing the Company to deliver the certificates for the Shares purchased to
a designated brokerage firm and a copy of irrevocable instructions delivered to
the brokerage firm to sell
F-4
<PAGE>
the Shares acquired upon exercise of the option and to deliver to the Company
from the sale proceeds sufficient cash to pay the exercise price and any
applicable withholding taxes arising as a result of the exercise.
The Company shall deliver to the optionee, which delivery shall be not
less than fifteen (15) days and not more than thirty (30) days after the giving
of such notice, without transfer or issue tax to the optionee (or other person
entitled to exercise the option), at the principal office of the Company, or
such other place as shall be mutually acceptable, a certificate or certificates
for such Shares dated the date the options were validly exercised; provided,
however, that the time of such delivery may be postponed by the Company for such
period as may be required for it with reasonable diligence to comply with any
requirements of law.
TRANSFERABILITY OF OPTION AND SHARES
Each option shall be transferable only by will or the laws of descent
and distribution or as may otherwise be permitted under Rule 16b-3 or Section
422 of the IRC and shall be exercisable during the optionee's lifetime only by
the optionee, or in the event of disability, the optionee's qualified
representative. In addition, in order for Shares acquired upon exercise of
incentive stock options to receive the tax treatment afforded such Shares, the
Shares may not be disposed of within two (2) years from the date of the option
grant nor within one (1) year after the date of transfer of such Shares to the
option.
WITHHOLDING
The Company shall have the right to condition the issuance of Shares in
connection with the exercise of an option upon payment by the optionee of any
applicable taxes required to be withheld under federal, state or local tax laws
or regulations in connection with such exercise. An optionee may elect to pay
any such tax by (1) requesting the Company to withhold a sufficient number of
Shares from the total number of Shares issuable upon exercise of the option, or
(2) delivering a sufficient number of shares of Company common stock which have
been held by the optionee for at least six (6) months (or such other period as
the Board may require) to the Company. The value of shares withheld or delivered
for such purpose shall be the fair market value of such shares on the date the
exercise becomes taxable as determined by the Board. Such an election is subject
to approval or disapproval by the Board, and if the optionee is subject to
Section 16 of the Exchange Act, the timing of the election must satisfy the
requirements of Rule 16b-3.
OTHER TERMS AND CONDITIONS
Options may also contain such other provisions, which shall not be
inconsistent with any of the foregoing terms, as the Board shall deem
appropriate. No option, however, nor anything contained in the 2000 Plan, shall
confer upon any optionee any right to continue in the employ or in the status as
a director or Consultant of the Company, nor limit in any way the right of the
Company to terminate an optionee's employment or status as a Consultant at any
time.
F-5
<PAGE>
ADJUSTMENT OF, AND CHANGES IN, THE SHARES
CHANGES IN CAPITALIZATION
In the event the shares of common stock of the Company, as presently
constituted, shall be changed into or exchanged for a different number or kind
of shares of stock or other securities of the Company or of another corporation
(whether by reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split, reverse stock split, combination of shares, or
otherwise), or if the number of shares of common stock of the Company shall be
increased through the payment of a stock dividend, there shall be substituted
for or added to each Share of common stock of the Company theretofore
appropriated or thereafter subject or which may become subject to an option
under the 2000 Plan, the number and kind of shares of stock or other securities
into which each outstanding share of common stock of the Company shall be so
changed, or for which each Share shall be exchanged, or to which each such Share
shall be entitled, as the case may be. In addition, appropriate adjustment shall
be made in the number and kind of Shares as to which outstanding options, or
portions thereof then unexercised, shall be exercisable, so that any optionee's
proportionate interest in the Company by reason of his or her rights under
unexercised portions of such options shall be maintained as before the
occurrence of such event. Such adjustment in outstanding options shall be made
without change in the total price of the unexercised portion of the option, and
with a corresponding adjustment in the option price per share.
DISSOLUTION, LIQUIDATION, SALE OR MERGER
In the event of a proposed (i) dissolution or liquidation of the
Company; (ii) reorganization, merger, or consolidation of the Company, with the
result that (A) the Company is not the surviving corporation, or (B) the Company
becomes a subsidiary of another corporation, which shall be deemed to have
occurred if another corporation shall own, directly or indirectly, eighty
percent (80%) or more of the aggregate voting power of all outstanding equity
securities of the Company; or (iii) sale of substantially all the assets of the
Company to another corporation; or (iv) sale of the equity securities of the
Company representing eighty percent (80%) or more of the aggregate voting power
of all outstanding equity securities of the Company to any person or entity, or
any group of persons and/or entities acting in concert, then in those events,
the Company will deliver to each optionee no less than thirty (30) days prior to
each event, written notification of the event and the optionee's right to
exercise all options granted under the 2000 Plan, whether or not vested under
the 2000 Plan or applicable stock option agreement, and all outstanding options
granted under the 2000 Plan will completely vest and become immediately
exercisable prior to the occurrence of the event. This right of exercise will be
conditional upon execution of a final plan of dissolution or liquidation, or a
definitive agreement of reorganization, merger or consolidation. Upon occurrence
of the event, all outstanding options and the 2000 Plan will terminate;
provided, however, that any outstanding options not exercised as of the
occurrence of the event will not terminate if a successor corporation assumes
the outstanding options or substitutes for the options, new options covering
shares of the successor corporation's stock with appropriate adjustments as to
the number, kind and prices of shares, and substantially on the same terms as
the outstanding options.
F-6
<PAGE>
NOTICE OF ADJUSTMENTS; FRACTIONAL SHARES
To the extent the adjustments specified in paragraphs (a) and (b) above
relate to stock or securities of the Company, such adjustments shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. No right to purchase fractional shares shall result from any
adjustment in options pursuant to this Section 8. In case of any such
adjustment, the shares subject to the option shall be rounded down to the
nearest whole share. Notice of any adjustment shall be given by the Company to
each holder of an option which is so adjusted, and such adjustment (whether or
not such notice is given) shall be effective and binding for all purposes of the
2000 Plan.
Any issue by the Company of shares of stock of any class, or securities
convertible into shares of any class, shall not affect the number or price of
shares of common stock subject to the option, and no adjustment by reason
thereof shall be made. The grant of an option pursuant to the 2000 Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
AMENDMENT, EFFECTIVENESS AND TERMINATION OF THE PLAN
The Board shall have complete power and authority to terminate or amend
the 2000 Plan; provided, however, that the Board shall not, without the approval
of the shareholders of the Company, amend the 2000 Plan in a manner that
requires shareholder approval for continued compliance with the terms of Rule
16b-3 as promulgated or amended under the Exchange Act, Section 422 of the IRC,
any successor rules, or other regulatory authority. Except as provided in
Section 8, no termination, modification or amendment of the 2000 Plan may
adversely affect the rights of an optionee to whom an option was previously
granted under the 2000 Plan, without the consent of such optionee. Any consent
required by the preceding sentence may be obtained in any manner deemed
appropriate by the Board.
The 2000 Plan shall become effective upon adoption by the Board, and
subject to the approval by the shareholders of the Company and consummation of
the merger and the transactions contemplated by the Agreement and Plan of
Reorganization and Merger dated March 1, 2000 by and among American River
Holdings, ARH Interim National Bank and North Coast Bank, N.A.
The 2000 Plan, unless sooner terminated, shall terminate on
April 25, 2010, ten (10) years from the date the 2000 Plan was originally
adopted by the Board. An option may not be granted under the 2000 Plan after the
2000 Plan is terminated.
INFORMATION TO OPTIONEES
The Company shall provide to each optionee, during the period for which
he or she has one or more outstanding options, copies of all annual reports and
all other information which is provided to shareholders of the Company. The
Company shall not be required to provide such information to key employees whose
duties in connection with the Company assure their access to equivalent
information.
PRIVILEGES OF STOCK OWNERSHIP; SECURITIES LAW COMPLIANCE
F-7
<PAGE>
No optionee shall be entitled to the privileges of stock ownership as
to any Shares not actually issued and delivered to the optionee. The Company
shall diligently endeavor to comply with all securities laws applicable to the
2000 Plan.
NOTICE OF SALE
An optionee shall give the Company notice of any sale or other
disposition of any Shares acquired upon exercise of an incentive stock option,
not more than five days after such sale or disposition.
INDEMNIFICATION
To the extent permitted by applicable law in effect from time to time,
no member of the Board Of Directors or the Board of Directors itself shall be
liable for any action or omission of any other member of the Board of Directors
or the Board of Directors itself nor for any act or omission on the member's own
part, excepting only the member's own willful misconduct or gross negligence.
The Company shall pay expenses incurred by, and satisfy a judgment or fine
rendered or levied against, a present or former director or member of the Board
of Directors in any action against such person (whether or not the Company is
joined as a party defendant) to impose liability or a penalty on such person for
an act alleged to have been committed by the Company or by such person while a
director or member of the Board of Directors arising with respect to the 2000
Plan or administration thereof or out of membership on the Board of Directors,
or all or any combination of the preceding; provided the director or member of
the Board of Directors was acting in good faith, within what such director or
member of the Board of Directors reasonably believed to have been the scope of
his or her employment or authority and for a purpose which he or she reasonably
believed to be in the best interests of the Company or its shareholders.
Payments authorized hereunder include amounts paid and expenses incurred in
settling any such action or threatened action. This section does not apply to
any action instituted or maintained in the right of the Company by a shareholder
or holder of a voting trust certificate representing shares of the Company. The
provisions of this section shall apply to the estate, executor, administrator,
heirs, legatees or devisees of a director or member of the Board of Directors,
and the term "person" as used in this section shall include the estate,
executor, administrator, heirs, legatees or devisees of such person.
F-8
<PAGE>
AMERICAN RIVER HOLDINGS
INCENTIVE STOCK OPTION AGREEMENT
Date of Grant: ______________
American River Holdings, a California corporation (the "Company"), has
granted to (the "Optionee"), an option (the "Option") to purchase a total of
_______________ shares of Common Stock, at the price determined as provided
herein, and in all respects subject to the terms, definitions and provisions of
American River Holdings 2000 Stock Option Plan (the "2000 Plan"). The terms
defined in the 2000 Plan shall have the same defined meanings herein.
1. NATURE OF THE OPTION.
This Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the IRC.
2. EXERCISE PRICE.
The exercise price is $______________ for each share of Common Stock,
which price is not less than the fair market value per share of the Common Stock
on the date of grant.
3. EXERCISE OF OPTION.
This Option shall be exercisable during its term in accordance with the
provisions of section 5 of the 2000 Plan as follows:
(a) RIGHT TO EXERCISE.
(i) This Option shall vest cumulatively from the date of grant
of the Option, exercisable during a period of _________
months after the date of grant as follows: ______% of the
Shares subject to the Option shall be vested on the first
anniversary of the date of grant, and an additional
_______% of the Shares subject to the Option shall vest on
each anniversary of the date of grant thereafter.
(ii) This Option may not be exercised for less than ten (10)
shares nor for a fraction of a share.
(iii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the
Option is governed by Sections 5, 6, 7 and 8 below.
F-9
<PAGE>
(b) METHOD OF EXERCISE. This Option shall be exercisable by written
notice which shall state the election to exercise the Option, the number of
shares in respect of which the Option is being exercised, and such other
representations and agreements as may be required by the Company pursuant to the
provisions of the 2000 Plan. Such written notice shall be signed by the Optionee
and shall be delivered in person or by certified mail to the Secretary of the
Company accompanied by payment of the exercise price, as applicable.
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock exchange or inter-dealer quotation system upon
which the Shares may then be listed or quoted. Assuming such compliance, the
Shares shall be considered transferred to the Optionee on the date on which the
Option is exercised with respect to such Shares. An Optionee shall have no
rights as a shareholder of the Company with respect to any Shares until the
issuance of a stock certificate to the Optionee for such Shares.
4. METHOD OF PAYMENT.
Payment of the exercise price shall be by cash, certified check,
official bank check, or by the delivery of previously owned shares of the
Company's Common Stock held for the requisite period to avoid a charge to the
Company's reported earnings and with a fair market value on the date of
surrender equal to the exercise price. In addition, the Option may be exercised
by delivery to the Company of (i) a copy of irrevocable written instructions
provided by the Optionee to a designated brokerage firm to effect the immediate
sale of the purchased Shares and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased Shares plus all applicable federal,
state and local income and employment taxes required to be withheld by the
Company by reason of such purchase and (ii) written instructions to the Company
to deliver the certificates for the purchased Shares directly to such brokerage
firm in order to complete the sale transaction.
5. TERMINATION OF STATUS AS AN EMPLOYEE FOR ANY REASON OTHER THAN
CAUSE.
If Optionee ceases to serve as an Employee, he may, but only within
three (3) months after the date he ceases to be an Employee of the Company,
exercise this Option to the extent that the Option was vested as of the date of
such termination; provided that in no event is the date of exercise beyond
expiration of the Option. To the extent that the Option was not vested as of the
date of such termination, or if Optionee does not exercise this Option within
the time specified herein, the Option shall terminate.
6. TERMINATION OF STATUS AS AN EMPLOYEE FOR CAUSE.
If Optionee's status as an Employee is terminated for Cause, as
provided in Section 5(d) of the 2000 Plan, this Option shall terminate on the
thirtieth (30th) day after the date of termination of employment. "Cause" may
consist of an act of embezzlement; fraud; dishonesty; breach of fiduciary duty
to the Company; deliberate disregard of the rules of the Company which results
in loss, damage or injury to the Company; the unauthorized disclosure of any of
the secrets or confidential information of the Company; the inducement of any
client or customer of the Company to break any contract with
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<PAGE>
the Company or the inducement of any principal for whom the Company acts as
agent to terminate such agency relations; engagement in any conduct which
constitutes unfair competition with the Company; or the removal of Optionee from
any office of the Company by any bank regulatory agency.
7. DISABILITY OF OPTIONEE.
Notwithstanding the provisions of Section 5 above, if Optionee is
unable to continue his or her employment with the Company as a result of his or
her disability (as defined below), he or she may, within twelve (12) months from
the date of termination of employment, exercise his or her Option to the extent
the Option was vested as of the date of such termination; provided that in no
event is the date of exercise beyond expiration of the Option; and, provided
further, that, in certain situations, an exercise after three (3) months
following such termination may preclude favorable tax treatment normally
accorded incentive stock options (i.e., the Option will be taxed as a
nonstatutory stock option). To the extent that the Option was not vested as of
the date of termination, or if Optionee does not exercise such Option within the
time specified herein, the Option shall terminate. For purposes of this
provision, "disability" shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Board of Directors or the
Committee on the basis of such medical evidence as the Board of Directors or
Committee deems warranted under the circumstances.
8. DEATH OF OPTIONEE.
In the event of the death of Optionee while Optionee is an Employee of
the Company or during the three (3) month period referred to in Section 5 above,
the Option may be exercised, at any time within twelve (12) months following the
date of death, by Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent the Option
was vested as of the date of death; provided that in no event is the date of
exercise beyond expiration of the Option.
9. NON-TRANSFERABILITY OF OPTION.
This Option may not be transferred in any manner otherwise than by will
or by the laws of descent or distribution or as permitted under the 2000 Plan,
and may be exercised during the Optionee's lifetime only by the Optionee. The
terms of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
10. TERM OF OPTION.
Subject to earlier termination as provided in the 2000 Plan, this
Option shall terminate years from the date of grant of this Option, and may be
exercised during such term only in accordance with the 2000 Plan and the terms
of this Option.
11. EARLY DISPOSITION OF STOCK.
Optionee understands that if he or she disposes of any shares received
under this Option within two (2) years after the date of this Agreement or
within one (1) year after such shares were transferred to him, he will be
treated for federal income tax purposes as having received ordinary income at
the
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<PAGE>
time of such disposition in an amount generally measured by the difference
between the exercise price and the lower of the fair market value of the shares
at the date of the exercise or the fair market value of the shares at the date
of disposition. Optionee agrees to notify the Company in writing within 5 days
after the date of any disposition of the Shares acquired by exercise of this
Option. Optionee understands that if he or she disposes of such shares at any
time after the expiration of such two (2) year and one (1) year holding periods,
any gain on such sale will be taxed as long-term capital gain.
12. QUALIFICATION AS AN INCENTIVE STOCK OPTION.
Optionee understands that the Option is intended to qualify as an
"incentive stock option" within the meaning of Section 422 of the IRC. Optionee
understands, further, that the exercise price for the shares subject to this
Option has been determined in accordance with the 2000 Plan at a price not less
than 100% (or, if Optionee owned at the time of grant more than 10% of the
voting securities of the Company, 110%) of the fair market value of the shares
at the time of grant. The Company believes that the methodology by which the
fair market value was determined at such time represented a good faith attempt,
as defined in the IRC and the regulations thereunder, at reaching an accurate
appraisal of the fair market value of the shares. Optionee understands and
acknowledges, however, that the Company shall not be responsible for any
additional tax liability incurred by Optionee in the event that the Internal
Revenue Service were to determine that the Option does not qualify as an
incentive stock option, for any reason, including a determination that the
valuation did not represent a good faith attempt to value the shares.
AMERICAN RIVER HOLDINGS
By: /s/
------------------------------
Optionee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Board of Directors or the Committee upon any
questions arising under the 2000 Plan.
OPTIONEE
Dated: -----------------------------------------
-----------------------
-----------------------------------------
[TYPE OR PRINT NAME]
F-12
<PAGE>
AMERICAN RIVER HOLDINGS
NONSTATUTORY STOCK OPTION AGREEMENT
Date of Grant: ___________________
American River Holdings, a California corporation (the "Company"), has
granted to (the "Optionee"), an option (the "Option") to purchase a total of
____________ shares of Common Stock, at the price determined as provided herein,
and in all respects subject to the terms, definitions and provisions of American
River Holdings 2000 Stock Option Plan (the "2000 Plan"). The terms defined in
the 2000 Plan shall have the same defined meanings herein.
1. NATURE OF THE OPTION.
This Option is intended by the Company and the Optionee to be a
nonstatutory stock option and does not qualify for any special tax benefits to
the Optionee. This Option is not an Incentive Stock Option within the meaning of
Section 422 of the IRC.
2. EXERCISE PRICE.
The exercise price is $_________________ for each share of Common
Stock, which price is not less than the fair market value per share of the
Common Stock on the date of grant.
3. EXERCISE OF OPTION.
This Option shall be exercisable during its term in accordance with the
provisions of Section 5 of the 2000 Plan as follows:
(a) RIGHT TO EXERCISE.
(i) This Option shall vest cumulatively from the date of grant
of the Option, exercisable during a period of _____ months
after the date of grant as follows: _______% of the Shares
subject to the Option shall be vested on the first
anniversary of the date of grant, and an additional
__________% of the Shares subject to the Option shall vest
on each anniversary of the date of grant thereafter.
(ii) This Option may not be exercised for less than ten (10)
shares nor for a fraction of a share.
(iii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the
Option is governed by Sections 5, 6, 7 and 8 below.
(b) METHOD OF EXERCISE. This Option shall be exercisable by written
notice which shall state the election to exercise the Option, the number of
shares in respect of which the Option is being exercised, and such other
representations and agreements as may be required by the Company pursuant to the
provisions of the 2000 Plan. Such written notice shall be signed by the Optionee
and shall be delivered in person or by certified mail to the Secretary of the
Company accompanied by payment of the exercise price, as applicable.
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<PAGE>
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock exchange or inter-dealer quotation system upon
which the Shares may then be listed or quoted. Assuming such compliance, the
Shares shall be considered transferred to the Optionee on the date on which the
Option is exercised with respect to such Shares. An Optionee shall have no
rights as a shareholder of the Company with respect to any Shares until the
issuance of a stock certificate to the Optionee for such Shares.
4. METHOD OF PAYMENT.
Payment of the exercise price shall be by cash, certified check,
official bank check, or by the delivery of previously owned shares of the
Company's Common Stock held for the requisite period to avoid a charge to the
Company's reported earnings and with a fair market value on the date of
surrender equal to the exercise price. In addition, the Option may be exercised
by delivery to the Company of (i) a copy of irrevocable written instructions
provided by the Optionee to a designated brokerage firm to effect the immediate
sale of the purchased Shares and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased Shares plus all applicable federal,
state and local income and employment taxes required to be withheld by the
Company by reason of such purchase and (ii) written instructions to the Company
to deliver the certificates for the purchased Shares directly to such brokerage
firm in order to complete the sale transaction.
5. TERMINATION OF STATUS AS AN EMPLOYEE OR DIRECTOR FOR ANY
REASON OTHER THAN CAUSE.
If an Optionee ceases to serve as an Employee or Director, he may, but
only within three (3) months [or such longer period as the committee determines]
after the date he ceases to be an Employee or Director of the Company, exercise
this Option to the extent that the Option was vested as of the date of such
termination; provided that in no event is the date of exercise beyond expiration
of the Option. To the extent that the Option was not vested as of the date of
such termination, or if Optionee does not exercise this Option within the time
specified herein, the Option shall terminate.
6. TERMINATION OF STATUS AS AN EMPLOYEE FOR CAUSE; REMOVAL FROM
BOARD OF DIRECTORS.
If an Optionee's status as an Employee is terminated for Cause, as
provided in Section 5(d) of the 2000 Plan, this Option shall terminate on the
thirtieth (30th) day after the date of termination of employment. "Cause" may
consist of an act of embezzlement; fraud; dishonesty; breach of fiduciary duty
to the Company; deliberate disregard of the rules of the Company which result in
loss, damage or injury to the Company; the unauthorized disclosure of any of the
secrets or confidential information of the Company; the inducement of any client
or customer of the Company to break any contract with the Company or the
inducement of any principal for whom the Company acts as agent to terminate such
agency relations; engagement in any conduct which constitutes unfair competition
with the Company; or the removal of Optionee from any office of the Company by
any bank regulatory agency.
If an Optionee's status as a director of the Company is terminated
because the Optionee is removed from the Board of Directors by any bank
regulatory agency, this Option shall terminate on the thirtieth (30th) day after
such removal.
F-14
<PAGE>
7. DISABILITY OF OPTIONEE.
Notwithstanding the provisions of Section 5 above, if Optionee is
unable to continue his or her employment with or status as a director of the
Company as a result of his or her disability (as defined below), he or she may,
within twelve (12) months from the date of termination of employment or
membership on the Board of Directors (or such longer period as the Board of
Directors or Committee determines), exercise his or her Option to the extent the
Option was vested as of the date of such termination; provided that in no event
is the date of exercise beyond expiration of the Option. To the extent that the
Option was not vested as of the date of termination, or if Optionee does not
exercise such Option within the time specified herein, the Option shall
terminate. For purposes of this provision, "disability" shall mean the inability
of Optionee to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Board of Directors or the Committee on the basis of such medical evidence as
the Board of Directors or Committee deems warranted under the circumstances.
8. DEATH OF OPTIONEE.
In the event of the death of Optionee while Optionee is an Employee or
Director or during the period referred to in Section 5 above, the Option may be
exercised, at any time within twelve (12) months following the date of death (or
such longer period as the Committee determines), by Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent the Option was vested as of the date of death; provided
that in no event is the date of exercise beyond the date of expiration of the
Option.
9. NON-TRANSFERABILITY OF OPTION.
This Option may not be transferred in any manner otherwise than by will
or by the laws of descent or distribution or as permitted under the 2000 Plan,
and may be exercised during the Optionee's lifetime only be the Optionee. The
terms of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
10. TERM OF OPTION.
Subject to earlier termination as provided in the 2000 Plan, this
Option shall terminate ____________ years from the date of grant of this Option,
and may be exercised during such term only in accordance with the plan and the
terms of this Option.
11. TAXATION UPON EXERCISE OF OPTION.
Optionee understands that upon exercise of this Option, he or she will
generally recognize income for tax purposes in an amount equal to the excess of
the then fair market value of the Shares over the exercise price. The Company
will be required to withhold tax from Optionee's current compensation with
respect to such income; to the extent that Optionee's current compensation is
insufficient to satisfy the withholding tax liability, the Company may require
the Optionee to make a cash payment to cover such liability as a condition of
exercise of this Option. (The Optionee may elect to pay such tax by (i)
requesting the Company to withhold a sufficient number of shares from the shares
otherwise due upon exercise or (ii) by delivering a sufficient number of shares
of the Company's Common Stock which have been previously held by the Optionee
for such period of time as the Board of Directors or Committee may require. The
aggregate value of the shares withheld or delivered, as determined by the Board
of Directors or Committee, must be sufficient to satisfy all such applicable
taxes, except as otherwise permitted by the Board of Directors or Committee. If
the Optionee is subject to Section 16 of the
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<PAGE>
Securities Exchange Act of 1934, as amended, the Optionee's election must be
made in compliance with rules and procedures established by the Committee.)
AMERICAN RIVER HOLDINGS
By: /s/
--------------------------------
Optionee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Board of Directors or the Committee upon any
questions arising under the 2000 Plan.
OPTIONEE
Dated: -----------------------------------------
-----------------------
-----------------------------------------
[TYPE OR PRINT NAME]
F-16
<PAGE>
ANNEX G
TEXT OF PROPOSED AMENDMENTS TO THE AMERICAN RIVER HOLDINGS ARTICLES OF
INCORPORATION AND BYLAWS TO PROVIDE FOR THE CLASSIFICATION OF THE BOARD OF
DIRECTORS
The articles of incorporation of American River Holdings shall be
amended by adding thereto a new Article Seven which shall read as set forth
below:
Seven: CLASSIFIED BOARD OF DIRECTORS.
(a) The number of directors which shall constitute the whole board
of directors of this corporation shall be specified in the
bylaws of the corporation.
(b) In the event that the authorized number of directors shall be
fixed at nine (9) or more, the board of directors shall be
divided into three classes: Class I, Class II and Class III,
each consisting of a number of directors equal as nearly as
practicable to one-third the total number of directors.
Directors in Class I shall initially serve for a term expiring
at the 2001 annual meeting of shareholders, directors in Class
II shall initially serve for a term expiring at the 2002
annual meeting of shareholders, and directors in Class III
shall initially serve for a term expiring at the 2003 annual
meeting of shareholders. Thereafter, each director shall serve
for a term ending at the third annual shareholders meeting
following the annual meeting at which such director was
elected. In the event that the authorized number of directors
shall be fixed with at least six (6) but less than nine (9),
the board of directors shall be divided into two classes,
designated Class I and Class II, each consisting of one-half
of the directors or as close an approximation as possible. At
each annual meeting, each of the successors to the directors
of the class whose term shall have expired at such annual
meeting shall be elected for a term running until the second
annual meeting next succeeding his or her election and until
his or her successor shall have been duly elected and
qualified. The foregoing notwithstanding, each director shall
serve until his or her successor shall have been duly elected
and qualified, unless he or she shall resign, die, become
disqualified or disabled, or shall otherwise be removed.
(c) At each annual election, the directors chosen to succeed those
whose terms then expire shall be identified as being of the
same class as the directors they succeed, unless, by reason of
any intervening changes in the authorized number of directors,
the board of directors shall designate one or more
directorships whose term then expires as directorships of
another class in order more nearly to achieve equality in the
number of directors among the classes. When the board of
directors fills a vacancy resulting from the resignation,
death, disqualification or removal of a director, the director
chosen to fill that vacancy shall be of the same class as the
director he or she succeeds, unless, by reason of any previous
changes in the authorized number of directors, the board of
directors shall designate the vacant directorship as a
directorship of another class in order more nearly to achieve
equality in the number of directors among the classes.
(d) Notwithstanding the rule that the classes shall be as nearly
equal in number of directors as possible, in the event of any
change in the authorized number of directors, each director
then continuing to serve as such will nevertheless continue as
a director of the class of which he or she is a member, until
the expiration of his current term or his or her earlier
resignation, death, disqualification or removal. If any newly
created directorship or vacancy on the board of directors,
consistent with the rule that the three classes shall be as
nearly equal in number of directors as possible, may be
allocated to one or two or
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<PAGE>
more classes, the board of directors shall allocate it to that
of the available class whose term of office is due to expire
at the earliest date following such allocation.
Section 3.4 of Article III of the American River Holdings bylaws shall be
amended in its entirety to read as follows:
SECTION 3.4. ELECTION AND TERM OF OFFICE. The directors shall
be elected annually by the shareholders at the annual meeting of the
shareholders; provided, that if for any reason, the annual meeting or an
adjournment thereof is not held or the directors are not elected thereat, then
the directors may be elected at any special meeting of the shareholders called
and held for that purpose. The term of office of the directors shall, except as
provided in Section 3.5, begin immediately after their election and shall
continue until their respective successors are elected and qualified. In the
event that the authorized number of directors shall be fixed at nine (9) or
more, the board of directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist of one-third of the
directors or as close an approximation as possible. The initial term of office
of the directors of Class I shall expire at the annual meeting to be held during
fiscal year 2001, the initial term of office of the directors of Class II shall
expire at the annual meeting to be held during fiscal year 2002 and the initial
term of office of the directors of Class III shall expire at the annual meeting
to be held during fiscal year 2003. At each annual meeting, commencing with the
annual meeting to be held during fiscal year 2001, each of the successors to the
directors of the class whose term shall have expired at such annual meeting
shall be elected for a term running until the third annual meeting next
succeeding his or her election until his or her successor shall have been duly
elected and qualified. In the event that the authorized number of directors
shall be fixed with at least six (6) but less than nine (9), the board of
directors shall be divided into two classes, designated Class I and Class II.
Each class shall consist of one-half of the directors or as close an
approximation as possible. At each annual meeting, each of the successors to the
directors of the class whose term shall have expired at such annual meeting
shall be elected for a term running until the second annual meeting next
succeeding his or her election and until his or her successor shall have been
duly elected and qualified. Notwithstanding the rule that the classes shall be
as nearly equal in number of directors as possible, in the event of any change
in the authorized number of directors, each director then continuing to serve as
such shall nevertheless continue as a director of the class of which he or she
is a member until the expiration of his or her current term, or his or her prior
death, resignation or removal. At such annual election, the directors chosen to
succeed those whose terms then expire shall be of the same class as the
directors they succeed, unless, by reason of any intervening changes in the
authorized number of directors, the board of directors shall designate one or
more directorships whose term then expires as directorships of another class in
order more nearly to achieve equality of number of directors among the classes.
This Section 3.4 may be amended or repealed only by approval
of the board of directors and the outstanding shares (as defined in Section 152
of the California General Corporation Law) voting as a single class,
notwithstanding Section 903 of the California General Corporation Law.
G-2
<PAGE>
ANNEX H
TEXT OF PROPOSED AMENDMENTS TO AMERICAN RIVER HOLDINGS ARTICLES OF INCORPORATION
AND BYLAWS TO ELIMINATE CUMULATIVE VOTING IN THE ELECTION OF DIRECTORS
The articles of incorporation of American River Holdings shall
be amended by adding thereto a new Article Eight which shall read as set forth
below:
EIGHT: CUMULATIVE VOTING.
No holder of any class of stock of the corporation shall be
entitled to cumulative votes in connection with any election of directors of the
corporation.
Section 2.8 of Article II of the American River Holdings
bylaws shall be amended in its entirety to read as follows:
SECTION 2.8. VOTING. The shareholders entitled to notice of
any meeting or to vote at any such meeting shall be only persons in whose name
shares stand on the stock records of the corporation on the record date
determined in accordance with Section 2.9 of this Article II.
Voting of shares of the corporation shall in all cases be
subject to the provisions of Sections 700 through 711, inclusive, of the Code.
The shareholders' vote may be by voice or ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder before the voting has begun. On any matter other than election of
directors, any shareholder may vote part of the shares in favor of the proposal
and refrain from voting the remaining shares or vote them against the proposal
(other than the election of directors), but, if the shareholder fails to specify
the number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares that the shareholder is entitled to vote. If a quorum is present, the
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote on any matter (other than the election of directors) shall be
the act of the shareholders, unless the vote of a greater number or voting by
classes is required by the Code or by the articles of incorporation.
No holder of any class of stock of the corporation shall be
entitled to cumulate votes in connection with any election of directors of the
corporation.
In any election of directors, the candidates receiving the highest number of
affirmative votes of the shares entitled to be voted for them, up to the number
of directors to be elected, shall be elected. Votes against the director and
votes withheld shall have no legal effect.
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