UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-K
 
 x
                ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2009oro
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITUES EXCHANGE ACT OF
      1934For
      the transition period from __________________________ to
      ______________________________Commission
      File No. 0-31525
 AMERICAN
      RIVER BANKSHARES(Exact
      name of registrant as specified in its
charter)
  California
              
              68-0352144State
      or other jurisdiction of
              
              (IRS
      Employer Identification No.)incorporation
      or organization3100
      Zinfandel Drive, Rancho Cordova, California
              
              95670(Address
      of principal executive offices)
              
              (Zip
      code)
  Registrant’s
telephone number, including area code 916-851-0123
  Securities
registered pursuant to Section 12(b) of the Act:
 Title
      of Each Class
              
              Name
      of Each Exchange On Which RegisteredCommon
      Stock, no par value
              
              NASDAQ
      Global Select MarketSecurities
      registered pursuant to Section 12(g) of the Act:None
 
 Indicate
      by check mark if the registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act. Yes
      o No xIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or Section 15(d) of the Act. Yes
      o No xIndicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days. Yes x  No oIndicate by check mark whether the registrant has submitted
      electronically and posted on its corporate Website, if any, every
      Interactive Data File required to be submitted and posted pursuant to Rule
      405 of Regulation S-T(§232.405 of this chapter) during the preceding 12
      months (or for such shorter period that the registrant was required to
      submit and post such files). Yes o No oIndicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and
      will not be contained, to the best of the registrant’s knowledge, in
      definitive proxy or information statements incorporated by reference in
      Part III of this Form 10-K or any amendment to this Form 10-K.xIndicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company. See the definitions of “large accelerated filer,” “accelerated
      filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
      Act.
  Large
      accelerated filer o
              
              Accelerated
      filer oNon-accelerated
      filer x
              (Do
      not check if a smaller reporting company)
              Smaller
      reporting company o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).Yes
o No x
  State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. $54,833,000.
  Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
  As of
March 4, 2010, the registrant’s no par value Common Stock totaled
9,845,533 shares outstanding.
  DOCUMENTS
INCORPORATED BY REFERENCE
  The
following documents are incorporated by reference into this Form 10-K: Part III,
Items 10 through 14 from Registrant’s definitive proxy statement for the 2010
annual meeting of shareholders.
 
 AMERICAN
RIVER BANKSHARES
 
 INDEX
TO ANNUAL
REPORT ON FORM 10-K FOR
YEAR ENDED DECEMBER 31, 2009
  Part I.
              
              
              PageItem 1.
              Business
              
              3Item 1A.
              Risk Factors
              
              19Item 1B.
              Unresolved Staff Comments
              
              27Item 2.
              Properties
              
              27Item 3.
              Legal Proceedings
              
              28Item 4.
              [RESERVED]
              
              28Part II.Item 5.
              Market For Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
              
              29Item 6.
              Selected Financial Data
              
              31Item 7.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              
              32Item 7A.
              Quantitative and Qualitative Disclosures About Market
      Risk
              
              55Item 8.
              Financial Statements and Supplementary
    Data
              
              55Item 9.
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              
              96Item 9A.
              Controls and Procedures
              
              96Item 9A(T).
              Controls and Procedures
              
              96Item 9B.
              Other Information
              
              96Part III.Item 10.
              Directors, Executive Officers and Corporate
      Governance
              
              97Item 11.
              Executive Compensation
              
              97Item 12.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              
              97Item 13.
              Certain Relationships and Related Transactions, and Director
      Independence
              
              97Item 14.
              Principal Accounting Fees and Services
              
              97Part IV.Item 15.
              Exhibits and Financial Statement
Schedules
              
              97Signatures
              
              
              102Exhibit Index
              
              10323.1
              Consent
      of Independent Registered Public Accounting Firm
              
              10431.1
              Certifications
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
              
              10531.2
              Certifications
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
              
              10632.1
              Certifications
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002
              
              107
  2
 PART I
  Item 1. Business.
  Cautionary
Statements Regarding Forward-Looking Statements
  Certain
matters discussed or incorporated by reference in this Annual Report on Form
10-K including, but not limited to, matters described in “Item 7 - Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” are
“forward-looking statements” within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as
amended, and subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may contain words
related to future projections including, but not limited to, words such as
“believe,” “expect,” “anticipate,” “intend,” “may,” “will,” “should,” “could,”
“would,” and variations of those words and similar words that are subject to
risks, uncertainties and other factors that could cause actual results to differ
significantly from those projected. Factors that could cause or contribute to
such differences include, but are not limited to, the following:
  ●
              the
      duration of financial and economic volatility and decline and actions
      taken by the United States Congress and governmental agencies, including
      the United States Department of the Treasury, to deal with challenges to
      the U.S. financial system;●
              the
      risks presented by a continued economic recession, which could adversely
      affect credit quality, collateral values, including real estate
      collateral, investment values, liquidity and loan originations and loan
      portfolio delinquency rates;●
              variances
      in the actual versus projected growth in assets and return on
      assets;●
              potential
      continued or increasing loan and lease losses;●
              potential
      increasing levels of expenses associated with resolving non-performing
      assets as well as regulatory changes;●
              changes
      in the interest rate environment including interest rates charged on
      loans, earned on securities investments and paid on deposits and other
      borrowed funds;●
              competitive
      effects;●
              potential
      declines in fee and other noninterest income earned associated with
      economic factors as well as regulatory changes;●
              general
      economic conditions nationally, regionally, and within our operating
      markets could be less favorable than expected or could have a more direct
      and pronounced effect on us than expected and adversely affect our ability
      to continue internal growth at historical rates and maintain the quality
      of our earning assets;●
              changes
      in the regulatory environment including government intervention in the
      U.S. financial system;●
              changes
      in business conditions and inflation;●
              changes
      in securities markets, public debt markets, and other capital
      markets;●
              potential
      data processing and other operational systems failures or
      fraud;●
              potential
      continued decline in real estate values in our operating
      markets;●
              the
      effects of uncontrollable events such as terrorism, the threat of
      terrorism or the impact of the current military conflicts in Afghanistan
      and Iraq and the conduct of the war on terrorism by the United States and
      its allies, worsening financial and economic conditions, natural
      disasters, and disruption of power supplies and
      communications;●
              changes
      in accounting standards, tax laws or regulations and interpretations of
      such standards, laws or regulations;●
              projected
      business increases following any future strategic expansion could be lower
      than expected;●
              the
      goodwill we have recorded in connection with acquisitions could become
      impaired, which may have an adverse impact on our
  earnings;●
              the
      reputation of the financial services industry could experience further
      deterioration, which could adversely affect our ability to access markets
      for funding and to acquire and retain customers; and●
              the
      efficiencies we may expect to receive from any investments in personnel
      and infrastructure may not be
realized.
  3
 The
factors set forth under “Item 1A-Risk Factors” in this report and other
cautionary statements and information set forth in this report should be
carefully considered and understood as being applicable to all related
forward-looking statements contained in this report, when evaluating the
business prospects of the Company and its subsidiaries.
  Forward-looking
statements are not guarantees of performance. By their nature, they involve
risks, uncertainties and assumptions. The future results and shareholder values
may differ significantly from those expressed in these forward-looking
statements. You are cautioned not to put undue reliance on any forward-looking
statement. Any such statement speaks only as of the date of this report, and in
the case of any documents that may be incorporated by reference, as of the date
of those documents. We do not undertake any obligation to update or release any
revisions to any forward-looking statements, to report any new information,
future event or other circumstances after the date of this report or to reflect
the occurrence of unanticipated events, except as required by law. However, your
attention is directed to any further disclosures made on related subjects in our
subsequent reports filed with the Securities and Exchange Commission (the “SEC”)
on Forms 10-K, 10-Q and 8-K.
  Introduction
  American
River Bankshares (the “Company”) is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The Company was incorporated under
the laws of the State of California in 1995. As a bank holding company, the
Company is authorized to engage in the activities permitted under the Bank
Holding Company Act of 1956, as amended, and regulations thereunder.Its principal office is
located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and
its telephone number is (916) 851-0123.
  The
Company owns 100% of the issued and outstanding common shares of its banking
subsidiary, American River Bank, and American River Financial, a California
corporation which has been inactive since its incorporation in
2003.
  American
River Bank was incorporated and commenced business in Fair Oaks, California, in
1983 and thereafter moved its headquarters to Sacramento, California in 1985.
American River Bank operates five full service offices in Sacramento and Placer
Counties including the main office located at 1545 River Park Drive, Suite 107,
Sacramento and branch offices located at 520 Capitol Mall, Suite 100,
Sacramento; 9750 Business Park Drive, Sacramento; 10123 Fair Oaks Boulevard,
Fair Oaks and 2240 Douglas Boulevard, Roseville. American River Bank also
operates two full service offices in Sonoma County located at 412 Center Street,
Healdsburg and 90 South E Street, Suite 110, Santa Rosa, operated under the name
“North Coast Bank, a division of American River Bank.” North Coast Bank was
incorporated and commenced business in 1990 as Windsor Oaks National Bank in
Windsor, California. In 1997, the name was changed to North Coast Bank. In 2000,
North Coast Bank was acquired by the Company as a separate bank subsidiary.
Effective December 31, 2003, North Coast Bank was merged with and into American
River Bank.
  On
December 3, 2004, the Company acquired Bank of Amador located in Jackson,
California. Bank of Amador was merged with and into American River Bank and now
operates three full service banking offices as “Bank of Amador, a division of
American River Bank” within its primary service area of Amador County, in the
cities of Jackson, Pioneer and Ione.
  American
River Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to applicable legal limits. American River Bank is also
participating in the FDIC Transaction Account Guarantee Program (“TAGP”). Under
that program, through June 30, 2010, all noninterest-bearing transaction
accounts are fully guaranteed by the FDIC for the entire amount in the account.
Coverage under the TAGP is in addition to and separate from the coverage
available under the FDIC’s general deposit insurance rules. American River Bank
does not offer trust services or international banking services and does not
plan to do so in the near future. American River Bank’s primary business is
serving the commercial banking needs of small to mid-sized businesses within
those counties listed above. American River Bank accepts checking and savings
deposits, offers money market deposit accounts and certificates of deposit,
makes secured and unsecured commercial, secured real estate, and other
installment and term loans and offers other customary banking services. American
River Bank also conducts lease financing for most types of business equipment,
from computer software to heavy earth-moving equipment. American River Bank owns
100% of two inactive companies, ARBCO and American River Mortgage. ARBCO was
formed in 1984 to conduct real estate development and has been inactive since
1995. American River Mortgage has been inactive since its formation in
1994.
 4
 During
2009, the Company conducted no significant activities other than holding the
shares of its subsidiaries. However, it is authorized, with the prior approval
of the Board of Governors of the Federal Reserve System (the “Board of
Governors”), the Company’s principal regulator, to engage in a variety of
activities which are deemed closely related to the business of
banking.
  The
common stock of the Company is registered under the Securities Exchange Act of
1934, as amended, and is listed and traded on the Nasdaq Global Select Market
under the symbol “AMRB.”
  At
December 31, 2009, the Company had consolidated assets of $594 million, deposits
of $470 million and shareholders’ equity of $87 million.
  General
  The
Company is a community-oriented bank holding company headquartered in
Sacramento, California. The principal communities served are located in
Sacramento, Placer, Yolo, El Dorado, Sonoma, and Amador counties. The Company
generates most of its revenue by providing a wide range of products and services
to small and middle-market businesses and individuals. The Company’s principal
source of revenue comes from interest income. Interest income is derived from
interest and fees on loans and leases and interest on investments (principally
government securities) and Federal funds sold (funds loaned on a short-term
basis to other banks). For the year ended December 31, 2009, these sources
comprised 87.1% and 12.9%, respectively, of the Company’s interest
income.
  American
River Bank’s deposits are not received from a single depositor or group of
affiliated depositors, the loss of any one of which would have a materially
adverse effect on the business of the Company. A material portion of American
River Bank’s deposits are not concentrated within a single industry or group of
related industries.
  As of
December 31, 2009 and December 31, 2008, American River Bank held $29,000,000 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 $250,000, which were insured by the
FDIC.
  American
River Bank competes with approximately 35 other banking or savings institutions
in Sacramento County and 32 in Placer County. American River Bank’s market share
of FDIC insured deposits in the service areas of Sacramento County and Placer
County was approximately 0.7% and 0.9%, respectively (based upon the most recent
information made available by the FDIC through June 30, 2009). North Coast Bank,
a division of American River Bank, competes with approximately 21 other banking
or savings institutions in its service areas and its market share of FDIC
insured deposits in the service area of Sonoma County was approximately .6%
(based upon the most recent information made available by the FDIC through June
30, 2009). Bank of Amador, a division of American River Bank competes with
approximately 6 other banking or savings institutions in its service areas and
its market share of FDIC insured deposits in the service area of Amador County
was approximately 12.9% (based upon the most recent information made available
by the FDIC through June 30, 2009).
  Employees
  At
December 31, 2009, the Company and its subsidiaries employed 118 persons on a
full-time equivalent basis. The Company believes its employee relations are
good.
  Website
Access
  The
Company maintains a website where certain information about the Company is
posted. Through the website, its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments thereto, as well as
Section 16 Reports and amendments thereto, are available as soon as reasonably
practicable after such material is electronically filed with or furnished to the
SEC. These reports are free of charge and can be accessed through the address
www.amrb.com by
selecting the SEC
Filings link located at that address. Once you have selected the SEC Filings link you will
have the option to access the Section 16 Reports or the reports filed on Forms
10-K, 10-Q and 8-K by the Company by selecting the appropriate
link.
 5
 Supervision
and Regulation
  General
  The
common stock of the Company is subject to the registration requirements of the
Securities Act of 1933, as amended, and the qualification requirements of the
California Corporate Securities Law of 1968, as amended. The Company is also
subject to the periodic reporting requirements of Section 13 of the Securities
Exchange Act of 1934, as amended, which include, but are not limited to, annual,
quarterly and other current reports with the SEC.
  American
River Bank is licensed by the California Commissioner of Financial Institutions
(the “Commissioner”), its deposits are insured by the FDIC up to the applicable
legal limits, and, through June 30, 2010, American River Bank is participating
in the FDIC Transaction Account Guarantee Program which guarantees 100% of the
amount of all noninterest-bearing transaction accounts. American River Bank has
chosen not to become a member of the Federal Reserve System. Consequently,
American River Bank is subject to the supervision of, and is regularly examined
by, the Commissioner and the FDIC. The supervision and regulation includes
comprehensive reviews of all major aspects of American River Bank’s business and
condition, including its capital ratios, allowance for possible loan and lease
losses and other factors. However, no inference should be drawn that such
authorities have approved any such factors. American River Bankshares and
American River Bank are required to file reports with the Board of Governors,
the Commissioner, and the FDIC and provide the additional information that the
Board of Governors, the Commissioner, and the FDIC may require.
  American
River Bankshares is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), and is
registered as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the California law implementing certain provisions of prior federal
law.
  The
Company, and any subsidiaries which it may acquire or organize, are deemed to be
“affiliates” within the meaning of that term as defined in the Federal Reserve
Act. This means, for example, that there are limitations (a) on loans by
American River Bank to affiliates, and (b) on investments by American River Bank
in affiliates’ stock as collateral for loans to any borrower. The Company and
its subsidiaries are also subject to certain restrictions with respect to
engaging in the underwriting, public sale and distribution of
securities.
  In
addition, regulations of the Board of Governors under the Federal Reserve Act
require that reserves be maintained by American River Bank in conjunction with
any liability of the Company under any obligation (promissory note,
acknowledgement of advance, banker’s acceptance or similar obligation) with a
weighted average maturity of less than seven (7) years to the extent that the
proceeds of such obligations are used for the purpose of supplying funds to
American River Bank for use in its banking business, or to maintain the
availability of such funds.
  Capital
Standards
  The Board
of Governors and the FDIC have adopted risk-based capital guidelines for
evaluating the capital adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements sensitive to differences in
risk profiles among banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, American River Bankshares and American
River Bank are required to maintain capital equal to at least 8.0% of its assets
and commitments to extend credit, weighted by risk, of which at least 4.0% must
consist primarily of common equity (including retained earnings) and the
remainder may consist of subordinated debt, cumulative preferred stock, or a
limited amount of loan and lease loss reserves.
  Assets,
commitments to extend credit, and off-balance sheet items are categorized
according to risk and certain assets considered to present less risk than others
permit maintenance of capital at less than the 8% ratio. For example, most home
mortgage loans are placed in a 50% risk category and therefore require
maintenance of capital equal to 4% of those loans, while commercial loans are
placed in a 100% risk category and therefore require maintenance of capital
equal to 8% of those loans.
 6
 Under the
risk-based capital guidelines, assets reported on an institution’s balance sheet
and certain off-balance sheet items are assigned to risk categories, each of
which has an assigned risk weight. Capital ratios are calculated by dividing the
institution’s qualifying capital by its period-end risk-weighted assets. The
guidelines establish two categories of qualifying capital: Tier 1 capital
(defined to include common shareholders’ equity and noncumulative perpetual
preferred stock) and Tier 2 capital which includes, among other items, limited
life (and in the case of banks, cumulative) preferred stock, mandatory
convertible securities, subordinated debt and a limited amount of reserve for
credit losses. Tier 2 capital may also include up to 45% of the pretax net
unrealized gains on certain available-for-sale equity securities having readily
determinable fair values (i.e., the excess, if any, of fair market value over
the book value or historical cost of the investment security). The Federal
regulatory agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such as
bank premises and available-for-sale debt securities, are not included in Tier 2
capital, but may be taken into account in the evaluation of overall capital
adequacy and net unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against risk. Each
institution is required to maintain a minimum risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
  A
leverage capital standard was adopted as a supplement to the risk-weighted
capital guidelines. Under the leverage capital standard, an institution is
required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangible assets not included in Tier 1 capital. Period-end assets may be
used in place of quarterly average total assets on a case-by-case basis. The
Board of Governors and the FDIC have also adopted a minimum leverage ratio for
bank holding companies as a supplement to the risk-weighted capital guidelines.
The leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to
total assets) for the highest rated bank holding companies or those that have
implemented the risk-based capital market risk measure. All other bank holding
companies must maintain a minimum Tier 1 leverage ratio of 4% with higher
leverage capital ratios required for bank holding companies that have
significant financial and/or operational weakness, a high risk profile, or are
undergoing or anticipating rapid growth.
  page
34 for
  Prompt
Corrective Action
  The Board
of Governors and the FDIC have adopted regulations implementing a system of
prompt corrective action pursuant to Section 38 of the Federal Deposit Insurance
Act and Section 131 of the FDIC Improvement Act of 1991 (“FDICIA”). The
regulations establish five capital categories with the 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%.
 7
 The
regulations established procedures for classification of financial institutions
within the capital categories, filing and reviewing capital restoration plans
required under the regulations and procedures for issuance of directives by the
appropriate regulatory agency, among other matters. The regulations impose
restrictions upon all institutions to refrain from certain actions which would
cause an institution to be classified within any one of the three
“undercapitalized” categories, such as declaration of dividends or other capital
distributions or payment of management fees, if following the distribution or
payment the institution would be classified within one of the “undercapitalized”
categories. In addition, institutions which are classified in one of the three
“undercapitalized” categories are subject to certain mandatory and discretionary
supervisory actions. Mandatory supervisory actions include (1) increased
monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitations upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution’s capital. In addition, for a capital restoration plan to be
acceptable, the depository institution’s parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution’s total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
“significantly undercapitalized.” FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not “well capitalized.” An “undercapitalized”
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution’s normal market areas or in the market
areas in which such deposits would otherwise be accepted.
  Any
financial institution which is classified as “critically undercapitalized” must
be placed in conservatorship or receivership within 90 days of such
determination unless it is also determined that some other course of action
would better serve the purposes of the regulations. Critically undercapitalized
institutions are also prohibited from making (but not accruing) any payment of
principal or interest on subordinated debt without prior regulatory approval and
regulators must prohibit a critically undercapitalized institution from taking
certain other actions without prior approval, including (1) entering into any
material transaction other than in the usual course of business, including
investment expansion, acquisition, sale of assets or other similar actions; (2)
extending credit for any highly leveraged transaction; (3) amending articles or
bylaws unless required to do so to comply with any law, regulation or order; (4)
making any material change in accounting methods; (5) engaging in certain
affiliate transactions; (6) paying excessive compensation or bonuses; and (7)
paying interest on new or renewed liabilities at rates which would increase the
weighted average costs of funds beyond prevailing rates in the institution’s
normal market areas.
  Additional
Regulations
  Under the
FDICIA, the federal financial institution agencies have adopted regulations
which require institutions to establish and maintain comprehensive written real
estate policies which address certain lending considerations, including
loan-to-value limits, loan administrative policies, portfolio diversification
standards, and documentation, approval and reporting requirements. The FDICIA
further generally prohibits an insured state bank from engaging as a principal
in any activity that is impermissible for a national bank, absent FDIC
determination that the activity would not pose a significant risk to the Bank
Insurance Fund, and that the bank is, and will continue to be, within applicable
capital standards.
  The
Federal Financial Institution Examination Counsel (“FFIEC”) utilizes the Uniform
Financial Institutions Rating System (“UFIRS”) commonly referred to as “CAMELS”
to classify and evaluate the soundness of financial institutions. Bank examiners
use the CAMELS measurements to evaluate capital adequacy, asset quality,
management, earnings, liquidity and sensitivity to market risk. Effective
January 1, 2005, bank holding companies such as the Company, were subject to
evaluation and examination under a revised bank holding company rating system.
The so-called BOPEC rating system implemented in 1979 was primarily focused on
financial condition, consolidated capital and consolidated earnings. The rating
system reflects the change toward analysis of risk management (as reflected in
bank examination under the CAMELS measurements), in addition to financial
factors and the potential impact of nondepository subsidiaries upon depository
institution subsidiaries.
 8
 The
federal financial institution agencies have established bases for analysis and
standards for assessing a financial institution’s capital adequacy in
conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
  Community
Reinvestment Act (“CRA”) regulations evaluate banks’ lending to low and moderate
income individuals and businesses across a four-point scale from “outstanding”
to “substantial noncompliance,” and are a factor in regulatory review of
applications to merge, establish new branches or form bank holding companies. In
addition, any bank rated in “substantial noncompliance” with the CRA regulations
may be subject to enforcement proceedings. In its most recent exam for CRA
compliance, American River Bank has a rating of “satisfactory.”
  Limitations
on Dividends
  The
Company’s ability to pay cash dividends is subject to restrictions set forth in
the California General Corporation Law. Funds for payment of any cash dividends
by the Company would be obtained from its investments as well as dividends
and/or management fees from its subsidiaries. The payment of cash dividends
and/or management fees by American River Bank is subject to restrictions set
forth in the California Financial Code, as well as restrictions established by
the FDIC. On July 27, 2009, we announced that our Board of Directors had
temporarily suspended the payment of cash dividends, until such time that it was
prudent to reestablish the payment of cash dividends. The Company relies on
distributions from the Bank in the form of cash dividends in order to pay cash
dividends to our shareholders. As a result of an informal agreement entered into
by the Bank and its regulators any future cash dividends from the Bank will
require prior approval from its regulators. See “Recent Developments” under Item
7 on page
34 for more information. See Item 5. “Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities” for more information regarding cash dividends.
  Competition
  Competitive
Data
  American River Bank. At June
30, 2009, based on the most recent “Data Book Summary of Deposits in FDIC
Insured Commercial and Savings Banks” report at that date, the competing
commercial and savings banks had 204 offices in the cities of Fair Oaks, Rancho
Cordova, Roseville and Sacramento, California, where American River Bank has its
5 Sacramento area offices, 57 offices in the cities of Healdsburg and Santa
Rosa, California, where American River Bank has its 2 Sonoma County offices, and
3 offices in the cities of Jackson, Pioneer and Ione, California, where American
River Bank has its 3 Amador County offices. Additionally, American River Bank
competes with thrifts and, to a lesser extent, credit unions, finance companies
and other financial service providers for deposit and loan
customers.
  Larger
banks may have a competitive advantage because of higher lending limits and
major advertising and marketing campaigns. They also perform services, such as
trust services, international banking, discount brokerage and insurance
services, which American River Bank is not authorized nor prepared to offer
currently. American River Bank has made arrangements with its correspondent
banks and with others to provide some of these services for its customers. For
borrowers requiring loans in excess of American River Bank’s legal lending
limits, American River Bank has offered, and intends to offer in the future,
such loans on a participating basis with its correspondent banks and with other
community banks, retaining the portion of such loans which is within its lending
limits. As of December 31, 2009, American River Bank’s aggregate legal lending
limits to a single borrower and such borrower’s related parties were $13,587,000
on an unsecured basis and $22,645,000 on a fully secured basis based on capital
and allowable reserves of $90,581,000.
  American
River Bank’s business is concentrated in its service area, which primarily
encompasses Sacramento County, South Western Placer County, Sonoma County, and
Amador County. The economy of American River Bank’s service area is dependent
upon government, manufacturing, tourism, retail sales, agriculture, population
growth and smaller service oriented businesses.
 9
 Based
upon the most recent “Data Book Summary of Deposits in FDIC Insured Commercial
and Savings Banks” report dated June 30, 2009, there were 240 operating
commercial and savings bank offices in Sacramento County with total deposits of
$34,169,049,000. This was an increase of $14,617,865,000 over the June 30, 2008
balances. American River Bank held a total of $248,735,000 in deposits,
representing approximately 0.7% of total commercial and savings banks deposits
in Sacramento County as of June 30, 2009.
  Based
upon the most recent “Data Book Summary of Deposits in FDIC Insured Commercial
and Savings Banks” report dated June 30, 2009, there were 124 operating
commercial and savings bank offices in Placer County with total deposits of
$6,802,407,000. This was an increase of $873,532,000 over the June 30, 2008
balances. American River Bank held a total of $60,074,000 in deposits,
representing approximately 0.9% of total commercial and savings banks deposits
in Placer County as of June 30, 2009.
  Based
upon the most recent “Data Book Summary of Deposits in FDIC Insured Commercial
and Savings Banks” report dated June 30, 2009, there were 130 operating
commercial and savings bank offices in Sonoma County with total deposits of
$10,220,816,000. This was an increase of $438,696,000 over the June 30, 2008
balances. American River Bank held a total of $61,048,000 in deposits,
representing approximately 0.6% of total commercial and savings banks deposits
in Sonoma County as of June 30, 2009.
  Based
upon the most recent “Data Book Summary of Deposits in FDIC Insured Commercial
and Savings Banks” report dated June 30, 2009, there were 13 operating
commercial and savings bank offices in Amador County with total deposits of
$629,265,000. This was an increase of $10,983,000 over the June 30, 2008
balances. American River Bank held a total of $81,435,000 in deposits,
representing approximately 12.9% of total commercial and savings bank deposits
in Amador County as of June 30, 2009.
  FDIC
Insurance
  In 1996,
pursuant to Congressional mandate, the FDIC reduced bank deposit insurance
assessment rates to a range from $0 to $0.27 per $100 of deposits, dependent
upon a bank’s risk. In 2005, Congress adopted the Federal Deposit Insurance
Reform Act of 2005 (the “Reform Act”), which had the effect of merging the Bank
Insurance Fund and the Savings Association Insurance Fund into a new Deposit
Insurance Fund (“DIF”). The FDIC released final regulations under the Reform Act
on November 2, 2006 that established a revised risk-based deposit insurance
assessment rate system for members of the DIF to insure, among other matters,
that there will be sufficient assessment income for repayment of DIF obligations
and to further refine the differentiation of risk profiles among institutions as
a basis for assessments. Under the new assessment rate system, the FDIC set the
assessment rates that became effective January 1, 2007 for most institutions
from $0.05 to $0.07 per $100 of insured deposits and established a Designated
Reserve Ratio (“DRR”) for the DIF during 2007 of 1.25% of insured deposits. The
Reform Act required the FDIC to implement a restoration plan to restore the DRR
to not less than 1.15 percent of insured deposits within five years. The Reform
Act also provided a one-time assessment credit to be allocated among
institutions. American River Bank’s allocated portion of such credit was
$290,000, which was applied to reduce its insurance premium assessments. The
credit was exhausted as of September 30, 2008.
  The new
assessment rate system consolidates the nine categories of the prior assessment
system into four categories (Risk Categories I, II, III and IV) and three
Supervisory Groups (A, B and C) based upon institution’s capital levels and
supervisory ratings. Risk Category I includes all well capitalized institutions
with the highest supervisory ratings. Risk Category II includes adequately
capitalized institutions that are assigned to Supervisory Groups A and B. Risk
Category III includes all undercapitalized institutions that are assigned to
Supervisory Groups A and B and institutions assigned to Supervisory Group C that
are not undercapitalized but have a low supervisory rating. Risk Category IV
includes all undercapitalized institutions that are assigned to Supervisory
Group C.
  On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”)
was signed into law. The EESA temporarily raised the limit on federal deposit
insurance coverage provided by the FDIC from $100,000 to $250,000 per depositor.
The insured deposit limits are currently scheduled to return to $100,000 on
January 1, 2014, except for certain retirement accounts.
  On
October 14, 2008, the FDIC implemented the Temporary Liquidity Guarantee Program
(the “TLGP”) to strengthen confidence and encourage liquidity in the financial
system. The TLGP includes the Transaction Account Guarantee Program (the
“TAGP”). The TAGP offers full guarantee for noninterest-bearing transaction
accounts held at FDIC-insured depository institutions. The unlimited deposit
coverage was voluntary for eligible institutions and was in addition to the
$250,000 FDIC deposit insurance per account that was included as part of the
EESA. The TAGP coverage became effective on October 14, 2008 and is scheduled to
continue for participating institutions until June 30, 2010. In addition to the
existing risk-based deposit insurance premium assessed on such deposits, TAGP
participants will be assessed, on a quarterly basis, an annualized 25 basis
point fee on balances in noninterest-bearing transaction accounts that exceed
the existing deposit insurance limit of $250,000. American River Bank has opted
to participate in the TAGP.
 10
 On
December 16, 2008, the FDIC approved an earlier proposed seven basis point rate
increase for the first quarter 2009 assessment period effective January 1, 2009
as part of the DIF restoration plan to achieve a minimum DRR of 1.15 percent
within five years.
  In
addition, the FDIC adopted a final rule revising its risk-based assessment
system, effective April 1, 2009. The changes to the assessment system involve
adjustments to the risk-based calculation of an institution’s unsecured debt,
secured liabilities and brokered deposits. The revisions effectively result in a
range of possible assessments under the risk-based system of 7 to 77.5 basis
points. Depending on any future losses that the FDIC insurance fund may suffer
due to failed institutions, there can be no assurance that there will not be
additional significant premium increases in order to replenish the fund. The
FDIC also imposed a special assessment of 5 basis points on all insured
institutions. This emergency assessment was calculated based on the insured
institution’s assets at June 30, 2009 and paid on September 30, 2009. Based on
our June 30, 2009 assets subject to the FDIC assessment, the Company was
assessed approximately $253,000 for the special assessment. On November 12,
2009, the FDIC announced a final rule to require most banks to prepay their
estimated quarterly risk-based assessments for 2010, 2011 and 2012. This prepaid
amount for the Company was $3,886,000. In addition, the rule also includes an
increase of 3 basis points in the deposit assessment base rate, beginning
January 1, 2011.
  Based
upon the increase in assessments for insured financial institutions as described
above and the continuing adverse economic conditions impacting financial
institutions generally which may necessitate further increases in assessments,
the Company anticipates that such assessments will have a significantly greater
impact upon operating expenses in 2010 compared to 2009.
  General
Competitive Factors
  In order
to compete with the major financial institutions in its primary service areas,
American River Bank uses to the fullest extent possible the flexibility which is
accorded by their community bank status. This includes an emphasis on
specialized services, local promotional activity, and personal contacts by their
respective officers, directors and employees. American River Bank also seeks to
provide special services and programs for individuals in their primary service
area who are employed in the agricultural, professional and business fields,
such as loans for equipment, furniture, tools of the trade or expansion of
practices or businesses. In the event there are customers whose loan demands
exceed their respective lending limits, they seek to arrange for such loans on a
participation basis with other financial institutions. Furthermore, American
River Bank also assists those customers requiring services not offered by either
bank to obtain such services from correspondent banks.
  Commercial
banks compete with savings and loan associations, credit unions, other financial
institutions and other entities for funds. For instance, yields on corporate and
government debt securities and other commercial paper affect the ability of
commercial banks to attract and hold deposits. Commercial banks also compete for
loans with savings and loan associations, credit unions, consumer finance
companies, mortgage companies and other lending institutions.
  Banking
is a business that depends on interest rate differentials. In general, the
difference between the interest rate paid by a bank to obtain their deposits and
other borrowings and the interest rate received by a bank on loans extended to
customers and on securities held in a bank’s portfolio comprise the major
portion of a bank’s revenues.
  The
interest rate differentials of a bank, and therefore their revenues, are
affected not only by general economic conditions, both domestic and foreign, but
also by the monetary and fiscal policies of the United States as set by statutes
and as implemented by federal agencies, particularly the Federal Reserve Board.
The Federal Reserve Board can and does implement national monetary policy, such
as seeking to curb inflation and combat recession, by its open market operations
in United States government securities, adjustments in the amount of interest
free reserves that banks and other financial institutions are required to
maintain, and adjustments to the discount rates applicable to borrowing by banks
from the Federal Reserve Board. These activities influence the growth of bank
loans, investments and deposits and also affect interest rates charged on loans
and paid on deposits. The nature and timing of any future changes in monetary
policies and their impact on American River Bank is not
predictable.
 11
 Impact
of Legislative and Regulatory Proposals
  Since
1996, California law implementing certain provisions of prior federal law has
(1) permitted interstate merger transactions; (2) prohibited interstate
branching through the acquisition of a branch business unit located in
California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank which has been in existence for at least five years.
  The
federal financial institution agencies, especially the Board of Governors, have
taken steps to increase the types of activities in which bank holding companies
can engage, and to make it easier to engage in such activities.
  Gramm-Leach-Bliley Act. In
1999, the Gramm-Leach-Bliley Act (the “GLB Act”) was signed into law. The GLB
Act eliminates most of the remaining depression-era “firewalls” between banks,
securities firms and insurance companies which was established by The Banking
Act of 1933, also known as the Glass-Steagall Act (“Glass-Steagall”).
Glass-Steagall sought to insulate banks as depository institutions from the
perceived risks of securities dealing and underwriting, and related activities.
The GLB Act repealed Section 20 of Glass-Steagall which prohibited banks from
affiliating with securities firms. Bank holding companies that can qualify as
“financial holding companies” can now acquire securities firms or create them as
subsidiaries, and securities firms can now acquire banks or start banking
activities through a financial holding company. The GLB Act includes provisions
which permit national banks to conduct financial activities through a subsidiary
that are permissible for a national bank to engage in directly, as well as
certain activities authorized by statute, or that are financial in nature or
incidental to financial activities to the same extent as permitted to a
“financial holding company” or its affiliates. This liberalization of United
States banking and financial services regulation applies both to domestic
institutions and foreign institutions conducting business in the United States.
Consequently, the common ownership of banks, securities firms and insurance
firms is now possible, as is the conduct of commercial banking, merchant
banking, investment management, securities underwriting and insurance within a
single financial institution using a “financial holding company” structure
authorized by the GLB Act.
  Prior to
the GLB Act, significant restrictions existed on the affiliation of banks with
securities firms and on the direct conduct by banks of securities dealing and
underwriting and related securities activities. Banks were also (with minor
exceptions) prohibited from engaging in insurance activities or affiliating with
insurers. The GLB Act removed these restrictions and substantially eliminated
the prohibitions under the Bank Holding Company Act on affiliations between
banks and insurance companies. Bank holding companies which qualify as financial
holding companies can now insure, guarantee, or indemnify against loss, harm,
damage, illness, disability, or death; issue annuities; and act as a principal,
agent, or broker regarding such insurance services.
  In order
for a commercial bank to affiliate with a securities firm or an insurance
company pursuant to the GLB Act, its bank holding company must qualify as a
financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are “well capitalized” and “well managed” and (ii) it files
with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
“closely related to banking” which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company
Act.
  One
further effect of the GLB Act is to require that federal financial institution
and securities regulatory agencies prescribe regulations to implement the policy
that financial institutions must respect the privacy of their customers and
protect the security and confidentiality of customers’ non-public personal
information. These regulations require, in general, that financial institutions
(1) may not disclose non-public personal information of customers to
non-affiliated third parties without notice to their customers, who must have
the opportunity to direct that such information not be disclosed; (2) may not
disclose customer account numbers except to consumer reporting agencies; and (3)
must give prior disclosure of their privacy policies before establishing new
customer relationships.
  Neither
American River Bankshares or American River Bank have determined whether or when
they may seek to acquire and exercise powers or activities under the GLB
Act.
 12
 Patriot Act. On October 26,
2001, President Bush signed the USA Patriot Act (the “Patriot Act”), which
includes provisions pertaining to domestic security, surveillance procedures,
border protection, and terrorism laws to be administered by the Secretary of the
Treasury. Title III of the Patriot Act entitled, “International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001”includes amendments to
the Bank Secrecy Act which expand the responsibilities of financial institutions
in regard to anti-money laundering activities with particular emphasis upon
international money laundering and terrorism financing activities through
designated correspondent and private banking accounts.
  Effective
December 25, 2001, Section 313(a) of the Patriot Act prohibits any insured
financial institution such as American River Bank, from providing correspondent
accounts to foreign banks which do not have a physical presence in any country
(designated as “shell banks”), subject to certain exceptions for regulated
affiliates of foreign banks. Section 313(a) also requires financial institutions
to take reasonable steps to ensure that foreign bank correspondent accounts are
not being used to indirectly provide banking services to foreign shell banks,
and Section 319(b) requires financial institutions to maintain records of the
owners and agent for service of process of any such foreign banks with whom
correspondent accounts have been established.
  Effective
July 23, 2002, Section 312 of the Patriot Act created a requirement for special
due diligence for correspondent accounts and private banking accounts. Under
Section 312, each financial institution that establishes, maintains,
administers, or manages a private banking account or a correspondent account in
the United States for a non-United States person, including a foreign individual
visiting the United States, or a representative of a non-United States person
shall establish appropriate, specific, and, where necessary, enhanced, due
diligence policies, procedures, and controls that are reasonably designed to
detect and record instances of money laundering through those
accounts.
  The
Patriot Act contains various provisions in addition to Sections 313(a) and 312
that affect the operations of financial institutions by encouraging cooperation
among financial institutions, regulatory authorities and law enforcement
authorities with respect to individuals, entities and organizations engaged in,
or reasonably suspected of engaging in, terrorist acts or money laundering
activities. The Company and American River Bank are not currently aware of any
account relationships between American River Bank and any foreign bank or other
person or entity as described above under Sections 313(a) or 312 of the Patriot
Act.
  Certain
surveillance provisions of the Patriot Act were scheduled to expire on December
31, 2005, and actions to restrict the use of the Patriot Act surveillance
provisions were filed by the ACLU and other organizations. On March 9, 2006,
after temporary extensions of the Patriot Act, President Bush signed the “USA
Patriot Improvement and Reauthorization Act of 2005” and the “USA Patriot Act
Additional Reauthorizing Amendments Act of 2006,” which reauthorized all
expiring provisions of the Patriot Act and extended certain provisions related
to surveillance and production of business records until December 31, 2009. The
extended deadline for those provisions was subsequently further extended to
February 28, 2010. On February 24 and 25, 2010, the Senate and the House of
Representatives, respectively, voted to further extend the deadline until
December 31, 2010. President Obama signed the extension legislation on February
27, 2010.
  The
effects which the Patriot Act and any amendments to the Patriot Act or
additional legislation enacted by Congress may have upon financial institutions
is uncertain; however, such legislation could increase compliance costs and
thereby potentially may have an adverse effect upon the Company’s results of
operations.
  Sarbanes-Oxley Act. On July
30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of
2002 (the “Act”) which responded to issues in corporate governance and
accountability. Among other matters, key provisions of the Act and rules
promulgated by the SEC pursuant to the Act include the following:
  ●
                Expanded
      oversight of the accounting profession by creating a new independent
      public company oversight board to be monitored by the
  SEC.●
                Revised
      rules on auditor independence to restrict the nature of non-audit services
      provided to audit clients and to require such services to be pre-approved
      by the audit committee.●
                Improved
      corporate responsibility through mandatory listing standards relating to
      audit committees, certifications of periodic reports by the CEO and CFO
      and making issuer interference with an audit a crime.●
                Enhanced
      financial disclosures, including periodic reviews for largest issuers and
      real time disclosure of material company
  information.
  13
 ●
                Enhanced
      criminal penalties for a broad array of white collar crimes and increases
      in the statute of limitations for securities fraud
    lawsuits.●
                Disclosure
      of whether a company has adopted a code of ethics that applies to the
      company’s principal executive officer, principal financial officer,
      principal accounting officer or controller, or persons performing similar
      functions, and disclosure of any amendments or waivers to such code of
      ethics.●
                Disclosure
      of whether a company’s audit committee of its board of directors has a
      member of the audit committee who qualifies as an “audit committee
      financial expert.”●
                A
      prohibition on insider trading during pension plan black-out
      periods.●
                Disclosure
      of off-balance sheet transactions.●
                A
      prohibition on personal loans to directors and
officers.●
                Conditions
      on the use of non-GAAP (generally accepted accounting principles)
      financial measures.●
                Standards
      on professional conduct for attorneys requiring attorneys having an
      attorney-client relationship with a company, among other matters, to
      report “up the ladder” to the audit committee, another board committee or
      the entire board of directors certain material
  violations.●
                Expedited
      filing requirements for Form 4 reports of changes in beneficial ownership
      of securities reducing the filing deadline to within 2 business days of
      the date a transaction triggers an obligation to
report.●
                Accelerated
      filing requirements for Forms 10-K and 10-Q by public companies which
      qualify as “accelerated filers” to a phased-in reduction of the filing
      deadline for Form 10-K reports and Form 10-Q reports.●
                Disclosure
      concerning website access to reports on Forms 10-K, 10-Q and 8-K, and any
      amendments to those reports, by “accelerated filers” as soon as reasonably
      practicable after such reports and material are filed with or furnished to
      the SEC.●
                Rules
      requiring national securities exchanges and national securities
      associations to prohibit the listing of any security whose issuer does not
      meet audit committee standards established pursuant to the
      Act.
  The
Company’s securities are listed on the Nasdaq Global Select Market.
Consequently, in addition to the rules promulgated by the SEC pursuant to the
Act, the Company must also comply with the listing standards applicable to
Nasdaq listed companies. The Nasdaq listing standards applicable to the Company
include standards related to (i) director independence, (ii) executive session
meetings of the board, (iii) requirements for audit, nominating and compensation
committee charters, membership qualifications and procedures, (iv) shareholder
approval of equity compensation arrangements, and (v) code of conduct
requirements that comply with the code of ethics under the Act.
  The
effect of the Act upon the Company is uncertain; however, the Company has
incurred and it is anticipated that it will continue to incur increased costs to
comply with the Act and the rules and regulations promulgated pursuant to the
Act by the SEC, Nasdaq and other regulatory agencies having jurisdiction over
the Company or the issuance and listing of its securities. The Company does not
currently anticipate, however, that compliance with the Act and such rules and
regulations will have a material adverse effect upon its financial position or
results of its operations or its cash flows. The Company is required to report
on internal controls over financial reporting in accordance with Section 404 of
the Act.
  Corporate Disclosure Act.
Effective January 1, 2003, the California Corporate Disclosure Act (the “CCD
Act”) required publicly traded corporations incorporated or qualified to do
business in California to disclose information about their past history,
auditors, directors and officers. Effective September 28, 2004, the CCD Act, as
currently in effect and codified at California Corporations Code Section 1502.1,
requires the Company to file with the California Secretary of State and disclose
within 150 days after the end of its fiscal year certain information including
the following:
  ●
                The
      name of the a company’s independent auditor and a description of services,
      if any, performed for a company during the previous two fiscal years and
      the period from the end of the most recent fiscal year to the date of
      filing;●
                The
      annual compensation paid to each director and the five most highly
      compensated non-director executive officers (including the CEO) during the
      most recent fiscal year, including all plan and non-plan compensation for
      all services rendered to a company as specified in Item 402 of Regulation
      S-K such as grants, awards or issuance of stock, stock options and similar
      equity-based compensation;●
                A
      description of any loans made to a director at a “preferential” loan rate
      during the company’s two most recent fiscal years, including the amount
      and terms of the loans;
  14
  ●
                Whether
      any bankruptcy was filed by a company or any of its directors or executive
      officers within the previous 10 years;●
                Whether
      any director or executive officer of a company has been convicted of fraud
      during the previous 10 years; and●
                A
      description of any material pending legal proceedings other than ordinary
      routine litigation as specified in Item 103 of Regulation S-K and a
      description of such litigation where the company was found legally liable
      by a final judgment or order.
  The
Company does not currently anticipate that compliance with the CCD Act will have
a material adverse effect upon its financial position or results of its
operations or its cash flows.
  Check Clearing Act. The Check
Clearing for the 21st
Century Act (commonly referred to as “Check 21”) was signed into law in 2003 and
became effective on October 28, 2004. The law facilitates check truncation by
creating a new negotiable instrument called a “substitute check” which permits
banks to truncate original checks, to process check information electronically
and to deliver “substitute checks” to banks that want to continue receiving
paper checks. Check 21 is intended to reduce the dependence of the check payment
system on physical transportation networks (which can be disrupted by terrorist
attacks of the type which occurred on September 11, 2001) and to streamline the
collection and return process. The law does not require banks to accept checks
in electronic form nor does it require banks to use the new authority granted by
the Act to create “substitute checks.” Check 21 has not had a material effect
upon the Company’s financial position or results of its operations or its cash
flows.
  Fair and Accurate Credit
Transactions Act. The Board of Governors, the FDIC, the other federal
financial institution regulatory agencies, and the Federal Trade Commission
issued a joint press release on October 31, 2007 and final rules and guidelines
effective January 1, 2008, subject to mandatory compliance as of November 1,
2008, implementing sections 114 and 315 of the Fair and Accurate Credit
Transactions Act of 2003 to require financial institutions and other creditors
to develop and implement a written identity theft prevention program. The
program must include reasonable policies and procedures for detecting,
preventing, and mitigating identity theft in connection with certain new and
existing covered accounts. Covered accounts are defined as (i) an account
primarily for personal, family, or household purposes (i.e., consumer accounts),
or (ii) any other account for which there is a reasonably foreseeable risk to
customers or the safety and soundness of the financial institution or creditor
from identity theft. The program must be appropriate to the size and complexity
of the financial institution or creditor and the nature and scope of its
activities and should be designed to:
  ●
              identify
      relevant patterns, practices, and specific forms of activity that are “red
      flags” of possible identity theft and incorporate those red flags into the
      program;●
              detect
      the occurrence of red flags incorporated into the
  program;●
              respond
      appropriately to any red flags that are detected to prevent and mitigate
      identity theft; and●
              ensure
      that the program is updated periodically to reflect changes in risks to
      customers or to the safety and soundness of the financial institution or
      creditor from identity theft.
  The
regulations include guidelines that each financial institution must consider
and, to the extent appropriate, include in its program and steps that must be
taken to administer the program including (i) obtaining approval of the program
by the board of directors or a committee of the board, (ii) ensuring oversight
of the development, implementation and administration of the program, (iii)
training staff, and (iv) overseeing service provider arrangements. The
guidelines contemplate that existing fraud prevention procedures may be
incorporated into the program.
  In
response to global credit and liquidity issues involving a number of financial
institutions, the United States government, particularly the United States
Department of the Treasury (the “U.S. Treasury”) and the Federal financial
institution regulatory agencies, have taken a variety of extraordinary measures
designed to restore confidence in the financial markets and to strengthen
financial institutions, including capital injections, guarantees of bank
liabilities and the acquisition of illiquid assets from banks.
 15
 Emergency Economic Stabilization
Act. On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury was
granted the authority to take a range of actions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets and has implemented
several programs, including the purchase by the U.S. Treasury of certain
troubled assets from financial institutions under the Troubled Asset Relief
Program” (the “TARP”) and the direct purchase by the U.S. Treasury of equity
securities of financial institutions under the Capital Purchase Program (the
“CPP”). The EESA also temporarily raised the limit on federal deposit insurance
coverage provided by the FDIC from $100,000 to $250,000 per
depositor.
  Capital Purchase Program. On
October 24, 2008, the U.S. Treasury announced plans to direct $250 billion of
the TARP funding into the CPP to acquire preferred stock investments in bank
holding companies and banks. Requirements for bank holding companies and banks
eligible to participate as a Qualifying Financial Institution (“QFI”) in the CPP
include:
  ●
              Submission
      of an application prior to November 14, 2008 to the QFI’s Federal banking
      regulator to obtain preliminary approval to participate in the
      CPP;●
              If
      the QFI receives preliminary approval, it will have 30 days within which
      to submit final documentation and fulfill any outstanding
      requirements;●
              The
      minimum amount of capital eligible for purchase by the U.S. Treasury under
      the CPP is 1 percent of the Total Risk-Weighted Assets of the QFI and the
      maximum is the lesser of (i) an amount equal to 3 percent of the Total
      Risk-Weighted Assets of the QFI or (ii) $25 billion;●
              Capital
      acquired by a QFI under the CPP will be accorded Tier 1 capital
      treatment;●
              The
      preferred stock issued to the U.S. Treasury will be non-voting (except in
      the case of class votes), senior perpetual preferred stock that ranks
      senior to common stock and pari passu with existing preferred stock
      (except junior preferred stock);●
              In
      addition to the preferred stock, the U.S. Treasury will be issued warrants
      to acquire shares of the QFI’s common stock equal in value to 15 percent
      of the amount of capital purchased by the QFI;●
              Dividends
      are payable to the U.S. Treasury at the rate of 5% per annum for the first
      5 years and 9% per annum thereafter;●
              Subject
      to certain exceptions and other requirements, no redemption of the
      preferred stock is permitted during the first 3 years;●
              Certain
      restrictions on the payment of dividends to shareholders of the QFI shall
      remain in effect while the preferred stock purchased by the U.S. Treasury
      is outstanding;●
              Repurchase
      of the QFI’s stock requires consent of the U.S. Treasury, subject to
      certain exceptions;●
              The
      preferred shares are not subject to any contractual restrictions on
      transfer by the U.S. Treasury; and●
              The
      QFI must agree to be bound by certain executive compensation and corporate
      governance requirements and senior executive officers must agree to
      certain compensation restrictions.
  Temporary Liquidity Guarantee
Program. Among other programs and actions taken by the U.S. Treasury and
other regulatory agencies, the FDIC implemented the Temporary Liquidity
Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity
in the financial system. The TLGP is comprised of the Debt Guarantee Program
(the “DGP”) and the Transaction Account Guarantee Program (the “TAGP”). The DGP
guarantees all newly issued senior unsecured debt (e.g., promissory notes,
unsubordinated unsecured notes and commercial paper) up to prescribed limits
issued by participating entities beginning on October 14, 2008 and continuing
through April 30, 2010. For eligible debt issued by that date, the FDIC will
provide the guarantee coverage until the earlier of the maturity date of the
debt or June 30, 2012. The TAGP offers full guarantee for noninterest-bearing
transaction accounts held at FDIC-insured depository institutions. The unlimited
deposit coverage was voluntary for eligible institutions and was in addition to
the $250,000 FDIC deposit insurance per account that was included as part of the
EESA. The insured deposit limits are currently scheduled to return to $100,000
on January 1, 2014, except for certain retirement accounts. The TAGP coverage
became effective on October 14, 2008 and is scheduled to continue for
participating institutions until June 30, 2010. American River Bank opted to
participate in the TAGP.
 16
  Initially,
the TLGP programs, the DGP and TAGP, were provided at no cost for the first 30
days. On November 3, 2008, the FDIC extended the opt-out period to December 5,
2008 to provide eligible institutions additional time to consider the terms
before making a final decision regarding participation in the program.
Participants in the DGP are charged an annualized fee ranging from 50 basis
points to 100 basis points (depending on the maturity of the debt issued)
multiplied by the amount of debt issued, and calculated for the maturity period
of that debt, or through June 30, 2012, whichever is earlier. The DGP concluded
on October 31, 2009, for most insured depository institutions, including
American River Bank. As of December 31, 2009, American River Bank has no senior
unsecured debt outstanding. In addition to the existing risk-based deposit
insurance premium paid on such deposits, TAGP participants will be assessed, on
a quarterly basis, an annualized 25 basis points fee on balances in
noninterest-bearing transaction accounts that exceed the existing deposit
insurance limit of $250,000.
  Financial Stability Plan. On
February 10, 2009, the U.S. Treasury announced a Financial Stability Plan (the
“FSP”) as a comprehensive approach to strengthening the financial system and
credit crisis. The Plan includes a Capital Assistance Program (the “CAP”) that
is intended to serve as a bridge to raising private capital and to ensure
sufficient capital to preserve or increase lending in a worse-than-expected
economic deterioration. Eligibility to participate in the CAP will be consistent
with the criteria for QFI’s under the CPP. Eligible institutions with
consolidated assets in excess of $100 billion will be able to obtain capital
under the CAP, subject to a supervisory review process and comprehensive stress
test assessment of the losses that could occur over a two year period in the
future across a range of economic scenarios, including conditions more severe
than anticipated or as typically used in capital planning processes. Eligible
institutions with consolidated assets below $100 billion will be able to obtain
capital under the CAP after a supervisory review. As announced, the CAP includes
issuance of a convertible preferred security to the U.S. Treasury at a discount
to the participating institution’s stock price as of February 9, 2009, subject
to a dividend to be determined. The security instrument will be designed to
incentivize institutions to replace the CAP capital with private capital or
redeem it. Institutions participating in the CPP under TARP may also be
permitted to exchange their CPP preferred stock for the convertible preferred
CAP security.
  American Recovery and Reinvestment
Act. On February 17, 2009, the American Recovery and Reinvestment Act of
2009 (the “ARRA”) was signed into law. Section 7001 of the ARRA amended Section
111 of the EESA in its entirety. While the U.S. Treasury must promulgate
regulations to implement the restrictions and standards set forth in Section
7001, the ARRA, among other things, significantly expands the executive
compensation restrictions previously imposed by the EESA. Such restrictions
apply to any entity that has received or will receive financial assistance under
the TARP, and shall generally continue to apply for as long as any obligation
arising from financial assistance provided under the TARP, including preferred
stock issued under the CPP, remains outstanding. These ARRA restrictions do not
apply to any TARP recipient during such time when the federal government (i)
only holds any warrants to purchase common stock of such recipient or (ii) holds
no preferred stock or warrants to purchase common stock of such recipient. Since
the Company determined not to participate in the CPP, the restrictions and
standards set forth in Section 7001 of the ARRA are not applicable to the
Company.
  Term Asset-Backed Securities Loan
Facility. On March 3, 2009, the U.S, Treasury and the Board of Governors
announced the Term Asset-Backed Securities Loan Facility (the “TALF”). The TALF
is one of the programs under the Financial Stability Plan announced by the U.S.
Treasury on February 10, 2009. The TALF is intended to help stimulate the
economy by facilitating securitization activities which allow lenders to
increase the availability of credit to consumers and businesses. Under the TALF,
the Federal Reserve Bank of New York (“FRBNY”) will lend up to $200 billion to
provide financing to investors as support for purchases of certain AAA-rated
asset-backed securities (“ABS”) initially for newly and recently originated auto
loans, credit card loans, student loans, and SBA-guaranteed small business loans
anticipated to be funded on March 25, 2009, and rental, commercial, and
government vehicle fleet leases, small ticket equipment, heavy equipment, and
agricultural equipment loans and leases proposed to be funded in
April.
  ABS
fundings are held monthly. The loan asset classes include commercial mortgages,
non-Agency residential mortgages, and/or other asset classes. Credit extensions
under the TALF are non-recourse loans to eligible borrowers secured by eligible
collateral for a three-year term with interest paid monthly. Any U.S. company
that owns eligible collateral may borrow from the TALF, provided the company
maintains an account with a primary dealer who will act as agent for the
borrower and deliver eligible collateral to the FRBNY custodian in connection
with the loan funding. The FRBYN will create a special purpose vehicle (“SPV”)
to purchase and manage any assets received by the FRBYN in connection with the
TALF loans.
 17
 The U.S.
Treasury will provide $20 billion of credit protection to the FRBNY in
connection with the TALF through the Troubled Assets Relief Program (the “TARP”)
by purchasing subordinated debt issued by the SPV to finance the first $20
billion of asset purchases. If more than $20 billion in assets are purchased by
the SPV, the FRBNY will lend additional funds to the SPV to finance such
additional purchases. The FRBNY’s loan to the SPV will be senior to the TARP
subordinated loan and secured by all of the assets of the SPV. The FRBNY
indicated an intention to cease making new loans on June 30, 2010, but loans
collateralized by certain types of ABS will cease on March 31, 2010, unless the
Board of Governors extends the TALF.
  Future
Legislation
  In
addition to legislative changes, the various Federal and state financial
institution regulatory agencies frequently propose rules and regulations to
implement and enforce already existing legislation. It cannot be predicted
whether or in what form any such rules or regulations will be enacted or the
effect that such regulations may have on American River Bankshares or American
River Bank. However, in light of the current conditions in the U.S. financial
markets and economy, Congress and regulators have increased their focus on the
regulation of the financial services industry. The Company anticipates that
additional regulations will likely increase the Company’s expenses, which may
adversely impact the Company’s results of operations, financial condition,
future prospects, profitability, and stock price.
 18
 Item 1A. Risk Factors.
  The
Company and its subsidiary, American River Bank, conduct business in an
environment that includes certain risks described below which could have a
material adverse effect on the Company’s business, results of operations,
financial condition, future prospects and stock price. You are also referred to
the matters described under the heading “Cautionary Statements Regarding
Forward-Looking Statements,” in Part I, Item 1 and Part II, Item 7 of this
report on Form 10-K for additional information regarding factors that may affect
the Company’s business.
  ●
              Worsening
      economic conditions could adversely affect our
  business.
  The
economic conditions in the United States in general and within California and in
our operating markets may continue to deteriorate. Unemployment nationwide and
in California has increased significantly through this economic downturn and is
anticipated to increase or remain elevated for the foreseeable future.
Availability of credit and consumer spending, real estate values, and consumer
confidence have all declined markedly. The volatility of the capital markets and
the credit, capital and liquidity problems confronting the U.S. financial system
have not been resolved despite massive government expenditures and legislative
efforts to stabilize the U.S. financial system. There is no assurance that such
conditions will improve or be resolved in the foreseeable future.
  The Bank
conducts banking operations principally in Northern California. As a result, our
financial condition, results of operations and cash flows are subject to changes
in the economic conditions in Northern California. Our business results are
dependent in large part upon the business activity, population, income levels,
deposits and real estate activity in Northern California, and continued adverse
economic conditions could have a material adverse effect upon us. In addition,
the State of California is currently experiencing significant budgetary and
fiscal difficulties, which includes terminating and furloughing State employees.
The businesses operating in California and, in particular, Sacramento depend on
these State employees for business, and reduced spending activity by these State
employees could have a material impact on the success or failure of these
businesses, some of which are current or could become future customers of the
Bank.
  We can
provide no assurance that economic conditions in the United States in general
and in the State of California and within our operating markets will not further
deteriorate or that such deterioration will not materially and adversely affect
us. A further deterioration in economic conditions locally, regionally or
nationally could result in a further economic downturn in Northern California
with the following consequences, any of which could further adversely affect our
business:
  ■
              loan
      delinquencies and defaults may increase;■
              problem
      assets and foreclosures may increase;■
              demand
      for our products and services may decline;■
              low
      cost or noninterest bearing deposits may decrease;■
              collateral
      for loans may decline in value, in turn reducing customers’ borrowing
      power, and reducing the value of assets and collateral as sources of
      repayment of existing loans;■
              foreclosed
      assets may not be able to be sold;■
              volatile
      securities market conditions could adversely affect valuations of
      investment portfolio assets; and■
              reputational
      risk may increase due to public sentiment regarding the banking
      industry.
  ●
              Non-performing
      assets take significant time to resolve and adversely affect our results
      of operations and financial
condition.
  At
December 31, 2009, our non-performing loans and leases were 5.46% of total loans
and leases compared to 1.49% at December 31, 2008, and at December 31, 2009, our
non-performing assets (which include foreclosed real estate) were 3.95% of total
assets compared to 1.49% at December 31, 2008. The allowance for loan and lease
losses as a percentage of non-performing loans and leases was 37.7% as of
December 31, 2009 compared to 94.8% at December 31, 2008. Non-performing assets
adversely affect our net income in various ways. Until economic and market
conditions improve, we expect to continue to incur losses relating to an
increase in non-performing assets. We generally do not record interest income on
non-performing loans or other real estate owned, thereby adversely affecting our
income and increasing our loan administration costs. When we take collateral in
foreclosures and similar proceedings, we are required to mark the related asset
to the then fair market value of the collateral, which may ultimately result in
a loss. An increase in the level of non-performing assets increases our risk
profile and may impact the capital levels our regulators believe are appropriate
in light of the ensuing risk profile, which could result in a request to reduce
our level of non-performing assets. When we reduce problem assets through loan
sales, workouts, restructurings and otherwise, decreases in the value of the
underlying collateral, or in these borrowers’ performance or financial
condition, whether or not due to economic and market conditions beyond our
control, could adversely affect our business, results of operations and
financial condition. In addition, the resolution of non-performing assets
requires significant commitments of time from management and our directors,
which can be detrimental to the performance of their other responsibilities.
There can be no assurance that we will not experience future increases in
non-performing assets or that the disposition of such non-performing assets will
not adversely affect our profitability.
 19
 ●
              Tightening
      of credit markets and liquidity risk could adversely affect our business,
      financial condition and results of
operations.
  A
tightening of the credit markets or any inability to obtain adequate funds for
continued loan growth at an acceptable cost could adversely affect our asset
growth and liquidity position and, therefore, our earnings capability. In
addition to core deposit growth, maturity of investment securities and loan and
lease payments, we also rely on alternative funding sources including unsecured
borrowing lines with correspondent banks, secured borrowing lines with the
Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San
Francisco, and public time certificates of deposits. Our ability to access these
sources could be impaired by deterioration in our financial condition as well as
factors that are not specific to us, such as a disruption in the financial
markets or negative views and expectations for the financial services industry
or serious dislocation in the general credit markets. In the event such a
disruption should occur, our ability to access these sources could be adversely
affected, both as to price and availability, which would limit, or potentially
raise the cost of, the funds available to us.
  ●
              We
      have a concentration risk in real estate related
  loans.
  At
December 31, 2009, $286.6 million, or 74.5% of our total loan and lease
portfolio, consisted of real estate related loans. Of that amount, $223.7
million, or 78.1%, consisted of commercial real estate, $27.5 million, or 9.6%
consisted of commercial and residential construction loans (including land
acquisition and development) and $35.4 million, or 12.3%, consisted of
residential mortgages and residential multi-family real estate. Substantially
all of our real property collateral is located in our operating markets in
Northern California. The continuing trend of deteriorating economic conditions
in California and in our operating markets has contributed to an overall decline
in commercial and residential real estate values. A continuing substantial
decline in commercial and residential real estate values in our primary market
areas could occur as a result of worsening economic conditions or other events
including natural disasters such as earthquakes, fires, and floods. Such a
decline in values could have an adverse impact on us by limiting repayment of
defaulted loans through sale of commercial and residential real estate
collateral and by a likely increase in the number of defaulted loans to the
extent that the financial condition of our borrowers is adversely affected by
such a decline in values.
  At
December 31, 2009, our residential construction loans (including land
acquisition and development) were just $22.0 million, or 5.7% of our total loans
and leases, and these loans were comprised of 53.3% owner-occupied and 46.7%
non-owner-occupied. Construction, land acquisition and development lending
involves additional risks because funds are advanced on the security of the
project, which is of uncertain value prior to its completion. Because of the
uncertainties inherent in estimating construction costs, as well as the market
value of the completed project and the effects of governmental regulation on
real property, it is relatively difficult to evaluate accurately the total funds
required to complete a project and the related loan-to-value ratio. As a result,
non-owner-occupied construction loans often involve the disbursement of
substantial funds with repayment dependent, in part, on the completion of the
project and the ability of the borrower to sell the property, rather than the
ability of the borrower or the guarantor to repay the principal and interest. If
our appraisal of the value of the completed project proves to be overstated, we
may have inadequate security for the repayment of the loan upon completion of
construction of the project. If we are forced to foreclose on a project prior to
or at completion due to a default, there can be no assurance that we will be
able to recover all of the unpaid balance of, and accrued interest on, the loan,
as well as related foreclosure and holding costs. In addition, we may be
required to fund additional amounts to complete the project and may have to hold
the property for an unspecified period of time. The adverse effects of the
foregoing matters upon our real estate portfolio could necessitate a material
increase in the provision for loan and lease losses.
 20
 ●
              Our
      allowance for loan and lease losses may not be adequate to cover actual
      losses.
  Like all
financial institutions, the Bank maintains an allowance for loan and lease
losses to provide for loan defaults and non-performance, but its allowance for
loan and lease losses may not be adequate to cover actual loan and lease losses.
In addition, future provisions for loan and lease losses could materially and
adversely affect the Bank’s and therefore our operating results. The adequacy of
the Bank’s allowance for loan and lease losses is based on prior experience, as
well as an evaluation of the risks in the current portfolio. The amount of
realizable future losses is susceptible to changes in economic, operating and
other conditions, including changes in the local and general California real
estate market and operating environment as well as interest rates, employment
levels and other economic factors that may be beyond our control, and these
losses may exceed current estimates.
  Federal
regulatory agencies, as an integral part of the examination process, review the
Bank’s loans and leases and allowance for loan and lease losses as well as
management’s policies and procedures for determining the adequacy of the
allowance for loan and lease losses. We believe that our allowance for loan and
lease losses policies are effective and that our allowance for loan and lease
losses is adequate to cover current losses. However, we cannot assure you that
the Bank will not have to further increase the allowance for loan and lease
losses as a result of the effects of continued deterioration of economic
conditions nationally, in the operating markets in which the Bank conducts
business and, specifically, within the Bank’s loan and lease portfolio or that
regulatory agencies or changes in regulation or accounting methodologies will
not require an increase to this allowance.
  ●
              Our
      focus on lending to small to mid-sized community-based businesses may
      increase our credit risk.
  As of
December 31, 2009, our largest outstanding commercial business loan and largest
outstanding commercial real estate loan amounted to $2.7 million and $6.0
million, respectively. At such date, our commercial real estate loans amounted
to $223.7 million, or 58.1% of our total loan and lease portfolio, and our
commercial business loans amounted to $72.6 million, or 18.9% of our total loan
and lease portfolio. Commercial real estate and commercial business loans
generally are considered riskier than single-family residential loans because
they have larger balances to a single borrower or group of related borrowers.
Commercial real estate and commercial business loans involve risks because the
borrowers’ ability to repay the loans typically depends primarily on the
successful operation of the businesses or the properties securing the loans.
Most of the Bank’s commercial real estate and commercial business loans are made
to small business or middle market customers who may have a heightened
vulnerability to economic conditions. Moreover, a portion of these loans have
been made by us in recent years and the borrowers may not have experienced a
complete business or economic cycle. Furthermore, the deterioration of our
borrowers’ businesses may hinder their ability to repay their loans with us,
which could adversely affect our results of operations.
  ●
              We
      are subject to extensive regulation, which could adversely affect our
      business.
  Our
operations are subject to extensive regulation by Federal, state and local
governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of our operations. We believe that we are in substantial compliance in all
material respects with laws, rules and regulations applicable to the conduct of
our business. Because our business is highly regulated, the laws, rules and
regulations applicable to us are subject to regular modification and change.
There can be no assurance that these laws, rules and regulations will not be
modified, or that any other new laws, rules or regulations, will not be adopted
in the future, which could make compliance much more difficult or expensive, or
restrict our ability to originate, broker or sell loans, reduce service charge
income on deposits, or further limit or restrict the amount of commissions,
interest or other charges earned on loans originated or sold by the
Bank.
  ●
              The
      Company has entered into an informal agreement with regulators and
      noncompliance could have an adverse effect upon the
  Company.
  In
February 2010, in connection with the Bank’s regularly scheduled 2009 FDIC
examination, the Bank entered into a Memorandum of Understanding (the
“Memorandum”) with the FDIC and the California Commissioner of Financial
Institutions. The Memorandum requires compliance with certain actions specified
in the Memorandum. In the event of noncompliance, regulatory enforcement actions
could be imposed that could have a material adverse effect upon the Company. See
“Recent Developments” in Part II, Item 7 of this Annual Report on Form 10-K for
information regarding the Memorandum.
 21
 ●
              Our
      business is subject to interest rate risk, and variations in interest
      rates may negatively affect our financial
  performance.
  Changes
in the interest rate environment may reduce our net interest income. It is
expected that we will continue to realize income from the differential or
“margin” between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other
interest-bearing liabilities. Net interest margins are affected by the
difference between the maturities and repricing characteristics of
interest-earning assets and interest-bearing liabilities. In addition, loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with a lower volume of loan
originations. We cannot assure you that we can minimize our interest rate risk.
In addition, an increase in the general level of interest rates may adversely
affect the ability of certain borrowers to pay the interest on and principal of
their obligations. Accordingly, changes in levels of market interest rates could
materially and adversely affect our net interest margin, asset quality, and loan
origination volume.
  ●
              Governmental
      monetary policies and intervention to stabilize the U.S. financial system
      may affect our business and are beyond our
  control.
  The
business of banking is affected significantly by the fiscal and monetary
policies of the Federal government and its agencies. Such policies are beyond
our control. We are particularly affected by the policies established by the
Federal Reserve Board in relation to the supply of money and credit in the
United States. The instruments of monetary policy available to the Federal
Reserve Board can be used in varying degrees and combinations to directly affect
the availability of bank loans and deposits, as well as the interest rates
charged on loans and paid on deposits, and this can and does have a material
effect on our business.
  Recent
legislation including the Emergency Economic Stabilization Act of 2008 (the
“EESA”), signed into law by President Bush on October 3, 2008, and the American
Recovery and Reinvestment Act of 2009 (the “ARRA”), signed into law by President
Obama on February 17, 2009, each include programs that are intended to help
stabilize the U.S. financial system. However, it is uncertain whether such
legislation will sufficiently resolve the volatility of capital and credit
markets or improve capital and liquidity problems confronting the financial
system. The failure of the EESA or ARRA to mitigate or eliminate such volatility
and problems affecting the financial markets and a continuation or worsening of
current financial market conditions could limit our access to capital or sources
of liquidity in amounts and at times necessary to conduct operations in
compliance with applicable regulatory requirements.
  ●
              The
      Bank faces strong competition from banks, financial service companies and
      other companies that offer banking services, which could adversely affect
      our business.
  Increased
competition in our market may result in reduced loans and deposits or the rates
charged or paid on these instruments and adversely affect our net interest
margin. Ultimately, we may not be able to compete successfully against current
and future competitors. Many competitors offer similar banking services to those
that are offered by the Bank in its service area. These competitors include
national and super-regional banks, finance companies, investment banking and
brokerage firms, credit unions, government-assisted farm credit programs, other
community banks and technology-oriented financial institutions offering online
services. In particular, the Bank’s competitors include several major financial
companies whose greater resources may afford them a marketplace advantage by
enabling them to maintain numerous banking locations and mount extensive
promotional and advertising campaigns. Additionally, banks and other financial
institutions with larger capitalization and financial intermediaries not subject
to bank regulatory restrictions have larger lending limits than we do and are
thereby better able to serve the credit needs of larger customers. Areas of
competition include interest rates for loans and deposits, efforts to obtain
deposits, as well as the range and quality of products and services provided,
including new technology-driven products and services. Technological innovation
continues to contribute to greater competition in domestic and international
financial services markets as technological advances, such as Internet-based
banking services that cross traditional geographic bounds, enable more companies
to provide financial services. If the Bank is unable to attract and retain
banking customers, we may be unable to maintain our historical levels of loans
and leases and deposits or our net interest margin.
 22
  ●
              Our
      operations are dependent upon key
personnel.
  Our
future prospects are and will remain highly dependent on our directors,
executive officers and other key personnel. Our success will, to some extent,
depend on the continued service of our directors and continued employment of the
executive officers, in addition to our ability to attract and retain experienced
banking professionals to serve us and the Bank in other key positions. The
unexpected loss of the services of any of these individuals could have a
detrimental effect on our business.
  ●
              Technology
      implementation problems or computer system failures could adversely affect
      us.
  Our
future growth prospects will be highly dependent on the ability of the Bank to
implement changes in technology that affect the delivery of banking services
such as the increased demand for computer access to bank accounts and the
availability to perform banking transactions electronically. The Bank’s ability
to compete will depend upon its ability to continue to adapt technology on a
timely and cost-effective basis to meet such demands. In addition, our business
and operations and those of the Bank could be susceptible to adverse effects
from computer failures, communication and energy disruption, and activities such
as fraud of unethical individuals with the technological ability to cause
disruptions or failures of the Bank’s data processing system.
  ●
              Information
      security breaches or other technological difficulties could adversely
      affect us.
  We cannot
be certain that the continued implementation of safeguards will eliminate the
risk of vulnerability to technological difficulties or failures or ensure the
absence of a breach of information security. The Bank will continue to rely on
the services of various vendors who provide data processing and communication
services to the banking industry. Nonetheless, if information security is
compromised or other technology difficulties or failures occur at the Bank or
with one of our vendors, information may be lost or misappropriated, services
and operations may be interrupted and the Bank could be exposed to claims from
its customers as a result.
  ●
              Our
      controls over financial reporting and related governance procedures may
      fail or be circumvented.
  Management
regularly reviews and updates our internal control over financial reporting,
disclosure controls and procedures, and corporate governance policies and
procedures. We maintain controls and procedures to mitigate risks such as
processing system failures or errors and customer or employee fraud, and we
maintain insurance coverage for certain of these risks. Any system of controls
and procedures, however well designed and operated, is based in part on certain
assumptions and provides only reasonable, not absolute, assurances that the
objectives of the system are met. Events could occur which are not prevented or
detected by our internal controls, are not insured against, or are in excess of
our insurance limits. Any failure or circumvention of our controls and
procedures, or failure to comply with regulations related to controls and
procedures, could have an adverse effect on our business.
  ●
              We
      may not be successful in raising additional capital needed in the
      future.
  If
additional capital is needed in the future as a result of losses, our business
strategy or regulatory requirements, there is no assurance that our efforts to
raise such additional capital will be successful or that shares sold in the
future will be sold at prices or on terms equal to or better than the current
market price. The inability to raise additional capital when needed or at prices
and terms acceptable to us could adversely affect our ability to implement our
business strategies.
  ●
              The
      effects of legislation in response to current credit conditions may
      adversely affect us.
  Legislation
that has or may be passed at the Federal level and/or by the State of California
in response to current conditions affecting credit markets could cause us to
experience higher credit losses if such legislation reduces the amount that the
Bank’s borrowers are otherwise contractually required to pay under existing loan
contracts. Such legislation could also result in the imposition of limitations
upon the Bank’s ability to foreclose on property or other collateral or make
foreclosure less economically feasible. Such events could result in increased
loan and lease losses and require a material increase in the allowance for loan
and lease losses.
 23
 
 ●
              The
      effects of changes to FDIC insurance coverage limits are uncertain and
      increased premiums may adversely affect
us.
  The
Emergency Economic Stabilization Act of 2008 included a provision for an
increase in the amount of deposits insured by the FDIC to $250,000. On October
14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program, which
includes the Transaction Account Guarantee Program (the “TAGP”). The TAGP
provides unlimited deposit insurance on funds in noninterest bearing transaction
deposit accounts not otherwise covered by the existing deposit insurance limit
of $250,000. All eligible institutions were covered under the TAGP for the first
30 days without incurring any costs. After the initial period, participating
institutions were assessed a 10 basis point surcharge on the additional insured
deposits through the scheduled end of the program on December 31, 2009. The Bank
opted to participate in the TAGP. The FDIC extended the TAGP to June 30, 2010
and increased the annual assessment from 10 to 25 basis points for banks that do
not opt-out of the TAGP. Participating banks had until November 2, 2009 to
opt-out by in order to terminate coverage effective January 1, 2010. The Bank
did not opt out of the TAGP and as a result, increased premiums will impact our
earnings.
  It is not
clear how depositors will respond regarding the increase in insurance coverage.
Despite the increase, some depositors may reduce the amount of deposits held at
the Bank if concerns regarding bank failures persist, which could affect the
level and composition of the Bank’s deposit portfolio and thereby directly
impact the Bank’s funding costs and net interest margin. The Bank’s funding
costs may also be adversely affected in the event that the activities of the
Federal Reserve Board and the U.S. Treasury, intended to provide liquidity for
the banking system and improvement in capital markets, are curtailed or
unsuccessful. Such events could reduce liquidity in the markets, thereby
increasing funding costs to the Bank or reducing the availability of funds to
the Bank to finance its existing operations and thereby adversely affecting our
results of operations.
  In
addition, the FDIC adopted a final rule revising its risk-based assessment
system, effective April 1, 2009. The changes to the assessment system involve
adjustments to the risk-based calculation of an institution’s unsecured debt,
secured liabilities and brokered deposits. The revisions effectively result in a
range of possible assessments under the risk-based system of 7 to 77.5 basis
points. The increase in FDIC insurance premiums will add to our cost of
operations and could have a significant impact on us. Depending on any future
losses that the FDIC insurance fund may suffer due to failed institutions, there
can be no assurance that there will not be additional significant premium
increases in order to replenish the fund. The FDIC also imposed a special
assessment of 5 basis points on all insured institutions. This emergency
assessment was calculated based on the insured institution’s assets at June 30,
2009 and paid on September 30, 2009. Based on our June 30, 2009 assets subject
to the FDIC assessment, the Company was assessed approximately $253,000 for the
special assessment. In addition, on November 12, 2009, the FDIC announced a
final rule to require most banks to prepay their estimated quarterly risk-based
assessments for 2010, 2011 and 2012. This prepaid amount for the Company was
$3,886,000. In addition, the rule also includes an increase of 3 basis points in
the deposit assessment base rate, beginning January 1, 2011. Prepayments of
and/or an increase in premiums will impact our earnings adversely.
  ●
              In
      the future we may be required to recognize impairment with respect to
      investment securities, including the FHLB stock we
  hold.
  Our
securities portfolio contains whole loan private mortgage-backed securities and
currently includes securities with unrecognized losses. We may continue to
observe declines in the fair market value of these securities. We evaluate the
securities portfolio for any other than temporary impairment each reporting
period, as required by generally accepted accounting principles, and as of
December 31, 2009, we did not recognize any securities as other than temporarily
impaired. There can be no assurance, however, that future evaluations of the
securities portfolio will not require us to recognize an impairment charge with
respect to these and other holdings. In addition, as a condition to membership
in the Federal Home Loan Bank of San Francisco (the “FHLB”), we are required to
purchase and hold a certain amount of FHLB stock. Our stock purchase requirement
is based, in part, upon the outstanding principal balance of advances from the
FHLB. At December 31, 2009, we held stock in the FHLB totaling $3.9 million. The
FHLB stock held by us is carried at cost and is subject to recoverability
testing under applicable accounting standards. To date, the FHLB has not
discontinued the distribution of dividends on its shares. However, there can be
no assurance the FHLB’s dividend paying practices will continue. As of December
31, 2009, we did not recognize an impairment charge related to our FHLB stock
holdings. There can be no assurance, however, that future negative changes to
the financial condition of the FHLB may not require us to recognize an
impairment charge with respect to such holdings.
 24
  ●
              If
      the goodwill we have recorded in connection with our acquisition of Bank
      of Amador becomes impaired, it could have an adverse impact on our
      earnings and capital.
  At
December 31, 2009, we had approximately $16.3 million of goodwill on our balance
sheet attributable to our merger with Bank of Amador in December 2004. In
accordance with generally accepted accounting principles, our goodwill is not
amortized but rather evaluated for impairment on an annual basis or more
frequently if events or circumstances indicate that a potential impairment
exists. Such evaluation is based on a variety of factors, including the quoted
price of our common stock, market prices of the common stock of other banking
organizations, common stock trading multiples, discounted cash flows, and data
from comparable acquisitions. There can be no assurance that future evaluations
of goodwill will not result in findings of impairment and write-downs, which
could be material.
  ●
              The
      effects of terrorism and other events beyond our control may adversely
      affect our results of operations.
  The
terrorist actions on September 11, 2001 and thereafter, as well as the current
military conflicts in Afghanistan and Iraq, have had significant adverse effects
upon the United States economy. Whether terrorist activities in the future and
the actions of the United States and its allies in combating terrorism on a
worldwide basis will adversely impact us and the extent of such impact is
uncertain. Similar events beyond our control including, but not limited to,
financial and economic volatility and governmental actions in response, natural
disasters such as earthquakes, floods, fires, and similar adverse weather
occurrences, disruption of power supplies and communications equipment such as
telephones, cellular phones, computers, and other forms of electronic equipment
or media, and widespread, adverse public health occurrences, may adversely
affect our future results of operations by, among other things, disrupting the
conduct of our operations and those of our customers, which could result in a
reduction in the demand for loans and other products and services offered by the
Bank, increase non-performing loans and the amounts reserved for loan and lease
losses, or cause significant declines in our level of deposits.
  ●
              Future
      acquisitions and expansion activities may disrupt our business and
      adversely affect our operating
results.
  We
regularly evaluate potential acquisitions and expansion opportunities. To the
extent that we grow through acquisitions, we cannot ensure that we will be able
to adequately or profitably manage this growth. Acquiring other banks, branches
or other assets, as well as other expansion activities, involves various risks
including the risks of incorrectly assessing the credit quality of acquired
assets, encountering greater than expected costs of incorporating acquired banks
or branches into the Bank, executing cost savings measures, and being unable to
profitably deploy funds in an acquisition.
  ●
              We
      may raise additional capital, which could have a dilutive effect on the
      existing holders of our common stock and adversely affect the market price
      of our common stock.
  We are
not restricted from issuing additional shares of common stock or securities that
are convertible into or exchangeable for, or that represent the right to
receive, common stock. We frequently evaluate opportunities to access the
capital markets taking into account our regulatory capital ratios, financial
condition and other relevant considerations, and subject to market conditions,
we may take further capital actions. Such actions could include, among other
things, the issuance of additional shares of common stock in public or private
transactions in order to further increase our capital levels above the
requirements for a well-capitalized institution established by the Federal bank
regulatory agencies as well as other regulatory targets.
  The
issuance of any additional shares of common stock or securities convertible into
or exchangeable for common stock or that represent the right to receive common
stock, or the exercise of such securities including, without limitation,
securities issued upon exercise of outstanding stock options under our stock
option plans, could be substantially dilutive to shareholders of our common
stock. Holders of our shares of common stock have no preemptive rights that
entitle holders to purchase their pro rata share of any offering of shares of
any class or series and, therefore, such sales or offerings could result in
increased dilution to our shareholders. The market price of our common stock
could decline as a result of sales of shares of our common stock or the
perception that such sales could occur.
 25
  ●
              The
      price of our common stock may fluctuate significantly, and this may make
      it difficult for you to resell shares of common stock owned by you at
      times or at prices you find
attractive.
 The stock
market and, in particular, the market for financial institution stocks, has
experienced significant volatility, which, in recent quarters, has reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices for certain issuers without regard to those issuers’ underlying
financial strength. As a result, the trading volume in our common stock may
fluctuate more than usual and cause significant price variations to occur. This
may make it difficult for you to resell shares of common stock owned by you at
times or at prices you find attractive. The low trading volume in our common
shares on the NASDAQ Global Select Market means that our shares may have less
liquidity than other publicly traded companies. We cannot ensure that the volume
of trading in our common shares will be maintained or will increase in the
future.
 The
trading price of the shares of our common stock will depend on many factors,
which may change from time to time and which may be beyond our control,
including, without limitation, our financial condition, performance,
creditworthiness and prospects, future sales or offerings of our equity or
equity related securities, and other factors identified above in the
forward-looking statement discussion under the section titled “Cautionary
Statements Regarding Forward-Looking Statements” and below. These broad market
fluctuations have adversely affected and may continue to adversely affect the
market price of our common stock. Among the factors that could affect our stock
price are:
  ■
              actual
      or anticipated quarterly fluctuations in our operating results and
      financial condition;■
              changes
      in financial estimates or publication of research reports and
      recommendations by financial analysts or actions taken by rating agencies
      with respect to our common stock or those of other financial
      institutions;■
              failure
      to meet analysts’ revenue or earnings estimates;■
              speculation
      in the press or investment community generally or relating to our
      reputation, our market area, our competitors or the financial services
      industry in general;■
              strategic
      actions by us or our competitors, such as acquisitions, restructurings,
      dispositions or financings;■
              actions
      by our current shareholders, including sales of common stock by existing
      shareholders and/or directors and executive officers;■
              fluctuations
      in the stock price and operating results of our
    competitors;■
              future
      sales of our equity, equity-related or debt securities;■
              changes
      in the frequency or amount of dividends or share
    repurchases;■
              proposed
      or adopted regulatory changes or developments;■
              anticipated
      or pending investigations, proceedings, or litigation that involves or
      affects us;■
              trading
      activities in our common stock, including
short-selling;■
              domestic
      and international economic factors unrelated to our performance;
      and■
              general
      market conditions and, in particular, developments related to market
      conditions for the financial services
industry.
  A
significant decline in our stock price could result in substantial losses for
individual shareholders.
  ●
              We
      may be unable or choose not to pay cash dividends in the foreseeable
      future.
 Our
ability to pay dividends on our common stock depends on a variety of factors. On
July 27, 2009 we announced suspension of our quarterly dividends, as compared to
our quarterly dividends of $0.143 per share declared each quarter since the
fourth quarter of 2007. The Company relies on distributions from the Bank in the
form of cash dividends in order to pay cash dividends to our shareholders. As a
result of an informal agreement entered into by the Bank and its regulators any
future cash dividends from the Bank will require prior approval from its
regulators. See “Recent Developments” under Item 7 on page
34 for more information. There is no assurance that any cash dividends
will be paid in the future since they are subject to regulatory restrictions and
to evaluation by our Board of Directors of financial factors including, but not
limited to, our earnings, financial condition and capital
requirements.
 26
 ●
              Anti-takeover
      provisions in our articles of incorporation and bylaws and California law
      could make a third party acquisition of us
  difficult.
 Our
articles of incorporation and bylaws contain provisions that could make it more
difficult for a third party to acquire us (even if doing so would be beneficial
to our shareholders) and for holders of our common stock to receive any related
takeover premium for their common stock. We are also subject to certain
provisions of California law that would delay, deter or prevent a change in
control of American River Bankshares. These provisions could limit the price
that investors might be willing to pay in the future for shares of our common
stock.
 Item 1B. Unresolved Staff Comments.
 
 None.
  Item 2. Properties.
  The
Company and American River Bank lease nine and own two of their respective
premises. The Company’s headquarters is located at 3100 Zinfandel Drive, Suite
450, Rancho Cordova, California. The office space is located in a six-story
office building. The lease term is ninety-one (91) months and expires on May 6,
2013. The premises consist of 7,378 square feet on the fourth floor of the
building. The space is leased from PGOCC, LLC, successor to One Capital
Center.
  American
River Bank’s main office is located at 1545 River Park Drive, Suite 107,
Sacramento, California, in a modern, five-story building which has off-street
parking for its clients. American River Bank leases premises in the building
from EOP-Point West, LLC successor to Spieker Properties. The lease term is ten
(10) years and expires on July 31, 2010. The premises consist of 9,498 square
feet on the ground floor.
  American
River Bank leases premises at 9750 Business Park Drive, Sacramento, California.
The premises are leased from Bradshaw Plaza, Associates, Inc., which is owned in
part by Charles D. Fite, a director of the Company. The lease term is ten (10)
years and expires on November 30, 2016. The premises consist of 3,711 square
feet on the ground floor.
  American
River Bank leases premises at 10123 Fair Oaks Boulevard, Fair Oaks, California.
The premises are leased from Marjorie Wood-Taylor, Trustee of Marjorie
Wood-Taylor Trust Established by Declaration of Trust dated September 2, 1992
under the provisions of a Trust Agreement dated September 2, 1992. Marjorie
Wood-Taylor, is a former director of the Company. The most recent lease term was
twelve (12) years and expired on March 1, 2009. On May 14, 2009, the lease term
was extended for five (5) years, beginning on March 1, 2009 and expiring on
March 1, 2014. Beginning March 1, 2011, the Company has a unilateral right to
cancel the lease at any time by proving lessor with a six (6) month written
notice. The premises consist of 2,380 square feet on the ground
floor.
  American
River Bank leases premises at 2240 Douglas Boulevard, Roseville, California. The
premises are leased from LUM YIP KEE, LIMITED (doing business as Twin Tree Land
Company). The lease term is ten (10) years and expires on November 30, 2016. The
premises consist of 3,790 square feet on the ground floor.
  American
River Bank leases premises at 520 Capitol Mall, Sacramento, California. The
premises are leased from 520 Capitol Mall, Inc. The lease term is ten (10) years
and expires on June 1, 2014. The premises consist of 4,010 square feet on the
ground floor.
  North
Coast Bank, a division of American River Bank, owns premises at 412 Center
Street, Healdsburg, California. The premises were purchased June 1, 1993. The
purchase price for the land and building was $343,849. The building consists of
2,620 square feet. The land consists of 10,835 square feet.
  North
Coast Bank, a division of American River Bank, leases premises at 90 South E
Street, Santa Rosa, California. The premises are subleased leased from Chicago
Title Company until November 11, 2011 and then will be leased from 90 E Street,
LLC until January 31, 2019. The combined sublease and lease term is ten (10)
years and expires on January 31, 2019. The premises consist of 3,600 square feet
on the ground floor.
  Bank of
Amador, a division of American River Bank, leases premises at 422 Sutter Street,
Jackson, California. The premises are leased from the United States Postal
Service. The lease term is five (5) years and expires on May 31, 2011. The
premises consist of 6,400 square feet on the ground floor and second
floor.
 27
 Bank of
Amador, a division of American River Bank, leases land at 26395 Buckhorn Ridge
Road, Pioneer, California. The premises are leased from Joseph T. Bellamy,
Trustee of the Joseph T. Bellamy 2005 Trust. The lease term is ten (10) years
and expires on October 31, 2017. The premises consist of 1,757 square feet of
office space on the ground floor, an attached garage consisting of approximately
400 square feet and 1,223 feet of office space on the second floor.
  Bank of
Amador, a division of American River Bank, owns premises at 66 Main Street,
Ione, California. The premises were purchased April 1, 1995. The purchase price
for the land and building was $167,500. The building consists of 2,576 square
feet. The land consists of 9,700 square feet.
  The
leases on the premises located at 1545 River Park Drive, 9750 Business Park
Drive, 90 South E Street, 26395 Buckhorn Ridge Road, and 3100 Zinfandel Drive,
contain options to extend for five years. Included in the above are two
facilities leased from current or former directors of the Company at terms and
conditions which management believes are consistent with the commercial lease
market. The foregoing summary descriptions of leased premises are qualified in
their entirety by reference to the lease agreements listed as exhibits in Part
IV, Item 15 of this Form 10-K report.
  Item 3. Legal Proceedings.
  There are
no material legal proceedings adverse to the Company and its subsidiaries to
which any director, officer, affiliate of the Company, or 5% shareholder of the
Company or its subsidiaries, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company or its subsidiaries are a party, and
none of the above persons has a material interest adverse to the Company or its
subsidiaries.
  From time
to time, the Company and/or its subsidiaries may be a party to claims and legal
proceedings arising in the ordinary course of business. The Company’s management
is not aware of any pending legal proceedings to which either it or its
subsidiaries may be a party or has recently been a party, which will have a
material adverse effect on the financial condition or results of operations of
the Company or its subsidiaries.
  Item 4. [RESERVED]
 28
  PART II
  Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
  Market
Information
  The
Company’s common stock began trading on the NASDAQ National Stock Market
(“Nasdaq”) under the symbol “AMRB” on October 26, 2000. Effective July 3, 2006,
the Company’s common stock became listed and traded on the Nasdaq Global Select
Market. The following table shows the high and the low prices for the common
stock, for each quarter during 2009 and 2008, as reported by Nasdaq. The prices
have been adjusted to reflect a 5% stock dividend declared in 2008.
  2009
              
              High
              
              
              LowFirst
      quarter
              
              $
              10.97
              
              
              $
              7.02Second
      quarter
              
              
              12.15
              
              
              
              7.90Third
      quarter
              
              
              10.99
              
              
              
              7.45Fourth
      quarter
              
              
              7.98
              
              
              
              6.00
  2008
              
              High
              
              
              LowFirst
      quarter
              
              $
              17.34
              
              
              $
              14.29Second
      quarter
              
              
              15.67
              
              
              
              9.29Third
      quarter
              
              
              11.33
              
              
              
              7.17Fourth
      quarter
              
              
              13.33
              
              
              
              8.01
  The
closing price for the Company’s common stock on March 3, 2010 was
$7.75.
  Holders
  As of
March 1, 2010, there were approximately 2,653 shareholders of record of the
Company’s common stock.
  Dividends
  The
Company has paid quarterly cash dividends on its common stock since the first
quarter of 2004 and through the second quarter of 2009. Prior to that, the
Company paid cash dividends twice a year since 1992. On July 27, 2009, the
Company announced that the Board of Directors had temporarily suspended the
payment of cash dividends, until such time that it was prudent to reestablish
the payment of cash dividends. The Company relies on distributions from the Bank
in the form of cash dividends in order to pay cash dividends to our
shareholders. As a result of a regularly scheduled FDIC examination in 2009, the
Company entered into an informal agreement in February 2010 with the FDIC and
the DFI to take certain actions including restricting the payment of cash
dividends. As a result, any future cash dividends from the Bank will require
prior approval from its regulators. In 2009 and 2008, the Company declared cash
dividends in the amount of $0.29 and $0.57, respectively, per common share. The
amounts have been adjusted to reflect 5% stock dividends declared in 2008. There
is no assurance, however, that any dividends will be paid in the future since
they are subject to regulatory and statutory restrictions and regulatory
approvals and the evaluation by the Company’s Board of Directors of financial
factors including, but not limited to earnings, financial condition and capital
requirements of the Company and its subsidiaries.
  The
California General Corporation Law (the “Corporation Law”) provides that a
corporation may make a distribution to its shareholders if the corporation’s
retained earnings equal at least the amount of the proposed distribution. The
Corporation Law further provides that, in the event that sufficient retained
earnings are not available for the proposed distribution, a corporation may
nevertheless make a distribution to its shareholders if it meets two conditions,
which generally stated are as follows: (1) the corporation’s assets equal at
least 1-1/4 times its liabilities; and (2) the corporation’s current assets
equal at least its current liabilities or, if the average of the corporation’s
earnings before taxes on income and before interest expenses for the two
preceding fiscal years was less than the average of the corporation’s interest
expenses for such fiscal years, then the corporation’s current assets must equal
at least 1-1/4 times its current liabilities.
 29
 The Board
of Governors generally prohibits a bank holding company from declaring or paying
a cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company’s financial position. The Board of
Governors’ policy is that a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and overall
financial condition.
  The
payment of cash dividends by American River Bank is subject to restrictions set
forth in the California Financial Code (the “Financial Code”). The Financial
Code provides that a bank may not make a cash distribution to its shareholders
in excess of the lesser of (a) the bank’s retained earnings; or (b) the bank’s
net income for its last three fiscal years, less the amount of any distributions
made by the bank or by any majority-owned subsidiary of the bank to the
shareholders of the bank during such period. However, a bank may, with the
approval of the Commissioner, make a distribution to its shareholders in an
amount not exceeding the greater of (a) its retained earnings; (b) its net
income for its last fiscal year; or (c) its net income for its current fiscal
year. In the event that the Commissioner determines that the shareholders’
equity of a bank is inadequate or that the making of a distribution by the bank
would be unsafe or unsound, the Commissioner may order the bank to refrain from
making a proposed distribution.
  The FDIC
may also restrict the payment of dividends by a subsidiary bank if such payment
would be deemed unsafe or unsound or if after the payment of such dividends, the
bank would be included in one of the “undercapitalized” categories for capital
adequacy purposes pursuant to the FDIC Improvement Act of 1991.
  Stock
Repurchases
  On
January 16, 2008, the Board of Directors of the Company authorized a stock
repurchase program which allows for the repurchase of up to six and one half
percent (6.5%) annually of the Company’s outstanding shares of common stock.
Each year the Company may repurchase up to 6.5% of the shares outstanding
(adjusted for stock splits or stock dividends). The number of shares reported in
column (d) of the table as shares that may be repurchased under the plan
represent shares eligible for the calendar year 2009. The repurchases under this
plan can be made from time to time in the open market as conditions allow and
will be structured to comply with Commission Rule 10b-18. Management reports
monthly to the Board of Directors on the status of the repurchase program. The
Board of Directors has reserved the right to suspend, terminate, modify or
cancel the repurchase program at any time for any reason. As such, on July 27,
2009, the Company announced that the Board of Directors was temporarily
suspending the stock repurchase program. The Company relies on distributions
from the Bank in the form of cash dividends in order to fund its repurchase
program. As a result of a regularly scheduled FDIC examination in 2009, the
Company entered into an informal agreement in February 2010 with the FDIC and
the DFI to take certain actions including restricting the payment of cash
dividends. As a result, any future cash dividends from the Bank will require
prior approval from its regulators. The following table lists shares repurchased
during the quarter ended December 31, 2009 and the maximum amount available to
repurchase under the repurchase plan, which as a result on the suspension of the
repurchase program was zero.
  Period
              
              (a)
              
              (b)
              
              (c)
              
              (d)Total
      Number of Shares (or Units) Purchased
              
              Average
      Price Paid Per Share (or Unit)
              
              Total
      Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
      or Programs
              
              Maximum
      Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be
      Purchased Under the Plans or ProgramsMonth
      #1 October 1 through October 31, 2009
              
              None
              
              N/A
              
              None
              
              NoneMonth
      #2 November 1 through November 30, 2009
              
              None
              
              N/A
              
              None
              
              NoneMonth
      #3 December 1 through December 31, 2009
              
              None
              
              N/A
              
              None
              
              NoneTotal
              
              None
              
              N/A
              
              None
  The
Company did not repurchase any of its shares in 2009. The Company purchased
115,815 shares in 2008, 426,668 shares in 2007, 299,410 shares in 2006, 92,986
shares in 2005, 11,869 shares in 2004, 1,915 shares in 2003 and 83,747 shares in
2002. Share amounts have been adjusted for stock dividends and/or
splits.
 30
 Item 6. Selected Financial Data.
  FINANCIAL SUMMARY-The
following table presents certain consolidated financial information concerning
the business of the Company and its subsidiaries. This information should be
read in conjunction with the Consolidated Financial Statements, the notes
thereto, and Management’s Discussion and Analysis included in this report. All
per share data has been retroactively restated to reflect stock dividends and
stock splits.
  As
of and for the Years Ended December 31,
 (In
thousands, except per share amounts and ratios)
  2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005Operations
      Data:Net
      interest income
              
              $
              24,032
              
              
              $
              25,925
              
              
              $
              26,402
              
              
              $
              27,066
              
              
              $
              26,462Provision
      for loan and lease losses
              
              
              8,530
              
              
              
              1,743
              
              
              
              450
              
              
              
              320
              
              
              
              322Noninterest
      income
              
              
              2,269
              
              
              
              2,168
              
              
              
              2,599
              
              
              
              2,443
              
              
              
              2,329Noninterest
      expenses
              
              
              15,811
              
              
              
              14,201
              
              
              
              14,833
              
              
              
              14,388
              
              
              
              13,493Income
      before income taxes
              
              
              1,960
              
              
              
              12,149
              
              
              
              13,718
              
              
              
              14,801
              
              
              
              14,976Income
      taxes
              
              
              374
              
              
              
              4,578
              
              
              
              5,240
              
              
              
              5,739
              
              
              
              5,792Net
      income
              
              $
              1,586
              
              
              $
              7,571
              
              
              $
              8,478
              
              
              $
              9,062
              
              
              $
              9,184Share
      Data:Earnings
      per share – basic
              
              $
              0.26
              
              
              $
              1.30
              
              
              $
              1.40
              
              
              $
              1.42
              
              
              $
              1.41Earnings
      per share – diluted
              
              $
              0.26
              
              
              $
              1.30
              
              
              $
              1.39
              
              
              $
              1.39
              
              
              $
              1.38Cash
      dividends per share (1)
              
              $
              0.29
              
              
              $
              0.57
              
              
              $
              0.55
              
              
              $
              0.53
              
              
              $
              0.46Book
      value per share
              
              $
              8.87
              
              
              $
              10.95
              
              
              $
              10.22
              
              
              $
              10.00
              
              
              $
              9.67Tangible
      book value per share
              
              $
              7.15
              
              
              $
              7.98
              
              
              $
              7.23
              
              
              $
              7.14
              
              
              $
              6.89Balance
      Sheet Data:Assets
              
              $
              594,418
              
              
              $
              563,157
              
              
              $
              573,685
              
              
              $
              604,003
              
              
              $
              612,763Loans
      and leases, net
              
              
              376,322
              
              
              
              412,356
              
              
              
              394,975
              
              
              
              382,993
              
              
              
              365,571Deposits
              
              
              469,755
              
              
              
              437,061
              
              
              
              455,645
              
              
              
              493,875
              
              
              
              500,706Shareholders’
      equity
              
              
              87,345
              
              
              
              63,447
              
              
              
              59,973
              
              
              
              62,371
              
              
              
              62,746Financial
      Ratios:Return
      on average equity
              
              
              2.44
              %
              
              
              12.39
              %
              
              
              14.01
              %
              
              
              14.48
              %
              
              
              15.14
              %Return
      on average tangible equity
              
              
              3.31
              %
              
              
              17.32
              %
              
              
              19.78
              %
              
              
              20.33
              %
              
              
              21.64
              %Return
      on average assets
              
              
              0.28
              %
              
              
              1.32
              %
              
              
              1.47
              %
              
              
              1.50
              %
              
              
              1.54
              %Efficiency
      ratio (2)
              
              
              58.45
              %
              
              
              48.92
              %
              
              
              49.49
              %
              
              
              47.11
              %
              
              
              45.16
              %Net
      interest margin (2)
              
              
              4.90
              %
              
              
              5.03
              %
              
              
              5.10
              %
              
              
              5.03
              %
              
              
              4.98
              %Net
      loans and leases to deposits
              
              
              80.11
              %
              
              
              94.35
              %
              
              
              86.68
              %
              
              
              77.55
              %
              
              
              73.01
              %Net
      charge-offs to average loans & leases
              
              
              1.62
              %
              
              
              0.42
              %
              
              
              0.11
              %
              
              
              0.03
              %
              
              
              0.04
              %Nonperforming
      loans and leases to totalloans and leases (3)
              
              
              5.46
              %
              
              
              1.49
              %
              
              
              1.86
              %
              
              
              0.02
              %
              
              
              0.02
              %Allowance
      for loan and leases losses to totalloans and leases
              
              
              2.06
              %
              
              
              1.41
              %
              
              
              1.47
              %
              
              
              1.51
              %
              
              
              1.53
              %Average
      equity to average assets
              
              
              11.36
              %
              
              
              10.62
              %
              
              
              10.52
              %
              
              
              10.38
              %
              
              
              10.16
              %Capital
      Ratios:Leverage
      capital ratio
              
              
              12.45
              %
              
              
              8.32
              %
              
              
              7.72
              %
              
              
              7.81
              %
              
              
              7.66
              %Tier
      1 risk-based capital ratio
              
              
              17.13
              %
              
              
              11.50
              %
              
              
              10.70
              %
              
              
              11.59
              %
              
              
              11.82
              %Total
      risk-based capital ratio
              
              
              18.39
              %
              
              
              10.25
              %
              
              
              9.45
              %
              
              
              10.34
              %
              
              
              10.57
              %
 
 (1)
              On
      July 27, 2009, the Company announced that the Board of Directors
      temporarily suspended the payment of cash dividends, until such time that
      it was prudent to reestablish the payment of cash dividends. Regulatory
      approval will be required before the payment of cash dividends may be
      reestablished.(2)
              Fully
      taxable equivalent(3)
              Non-performing
      loans and leases consist of loans and leases past due 90 days or more and
      still accruing and nonaccrual loans and
leases.
  31
  Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
  The
following is American River Bankshares management’s discussion and analysis of
the significant changes in income and expense accounts for the years ended
December 31, 2009, 2008, and 2007.
  Cautionary
Statements Regarding Forward-Looking Statements
  Certain
matters discussed or incorporated by reference in this Annual Report on Form
10-K including, but not limited to, matters described in “Item 7 - Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” are
“forward-looking statements” within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as
amended, and subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may contain words
related to future projections including, but not limited to, words such as
“believe,” “expect,” “anticipate,” “intend,” “may,” “will,” “should,” “could,”
“would,” and variations of those words and similar words that are subject to
risks, uncertainties and other factors that could cause actual results to differ
materially from those projected. Factors that could cause or contribute to such
differences include, but are not limited to, the following: (1) the duration of
financial and economic volatility and decline and actions taken by the United
States Congress and governmental agencies, including the United States
Department of the Treasury, to deal with challenges to the U.S. financial
system; (2) the risks presented by a continued economic recession, which could
adversely affect credit quality, collateral values, including real estate
collateral, investment values, liquidity and loan originations and loan
portfolio delinquency rates; (3) variances in the actual versus projected growth
in assets and return on assets; (4) potential continued or increasing loan and
lease losses; (5) potential increasing levels of expenses associated with
resolving non-performing assets as well as regulatory changes; (6)changes in the
interest rate environment including interest rates charged on loans, earned on
securities investments and paid on deposits and other borrowed funds; (7)
competitive effects; (8) potential declines in fee and other noninterest income
earned associated with economic factors as well as regulatory changes; (9)
general economic conditions nationally, regionally, and within our operating
markets could be less favorable than expected or could have a more direct and
pronounced effect on us than expected and adversely affect our ability to
continue internal growth at historical rates and maintain the quality of our
earning assets; (10) changes in the regulatory environment including government
intervention in the U.S. financial system; (11) changes in business conditions
and inflation; (12) changes in securities markets, public debt markets, and
other capital markets; (13) potential data processing and other operational
systems failures or fraud; (14) potential continued decline in real estate
values in our operating markets; (15) the effects of uncontrollable events such
as terrorism, the threat of terrorism or the impact of the current military
conflicts in Afghanistan and Iraq and the conduct of the war on terrorism by the
United States and its allies, worsening financial and economic conditions,
natural disasters, and disruption of power supplies and communications; (16)
changes in accounting standards, tax laws or regulations and interpretations of
such standards, laws or regulations; (17) projected business increases following
any future strategic expansion could be lower than expected; (18) the goodwill
we have recorded in connection with acquisitions could become impaired, which
may have an adverse impact on our earnings; (19) the reputation of the financial
services industry could experience further deterioration, which could adversely
affect our ability to access markets for funding and to acquire and retain
customers; and (20) the efficiencies we may expect to receive from any
investments in personnel and infrastructure may not be realized. The factors set
forth under “Item 1A - Risk Factors” in this report and other cautionary
statements and information set forth in this report should be carefully
considered and understood as being applicable to all related forward-looking
statements contained in this report, when evaluating the business prospects of
the Company and its subsidiaries.
  Forward-looking
statements are not guarantees of performance. By their nature, they involve
risks, uncertainties and assumptions. The future results and shareholder values
may differ significantly from those expressed in these forward-looking
statements. You are cautioned not to put undue reliance on any forward-looking
statement. Any such statement speaks only as of the date of this report, and in
the case of any documents that may be incorporated by reference, as of the date
of those documents. We do not undertake any obligation to update or release any
revisions to any forward-looking statements, to report any new information,
future event or other circumstances after the date of this report or to reflect
the occurrence of unanticipated events, except as required by law. However, your
attention is directed to any further disclosures made on related subjects in our
subsequent reports filed with the Securities and Exchange Commission (the “SEC”)
on Forms 10-K, 10-Q and 8-K.
 32
 Critical
Accounting Policies
  General
  The
Company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). The
financial information contained within our statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. We use historical loss
data, peer group experience and the economic environment as factors, among
others, in determining the inherent loss that may be present in our loan and
lease portfolio. Actual losses could differ significantly from the historical
factors that we use. Other estimates that we use are related to the expected
useful lives of our depreciable assets. In addition, GAAP itself may change from
one previously acceptable method to another method. Although the economics of
our transactions would be the same, the timing of events that would impact our
transactions could change.
  Allowance
for Loan and Lease Losses
  The
allowance for loan and lease losses is an estimate of the credit loss risk in
our loan and lease portfolio. The allowance is based on two basic principles of
accounting: (1) “Accounting for Contingencies,” which requires that losses be
accrued when it is probable that a loss has occurred at the balance sheet date
and such loss can be reasonably estimated; and (2) “Accounting by Creditors for
Impairment of a Loan,” which requires that losses be accrued on impaired loans
based on the differences between the value of collateral, present value of
future cash flows or values that are observable in the secondary market and the
loan balance.
  The
allowance for loan and lease losses is determined based upon estimates that can
and do change when the actual risk, loss events, or changes in other factors,
occur. The analysis of the allowance uses a historical loss view as one
indicator of future losses and as a result could differ from the loss incurred
in the future. If the allowance for loan and lease losses falls below that
deemed adequate (by reason of loan and lease growth, actual losses, the effect
of changes in risk ratings, or some combination of these factors), the Company
has a strategy for supplementing the allowance for loan and lease losses, over
the short term. For further information regarding our allowance for loan and
lease losses, see “Allowance for Loan and Lease Losses Activity” discussion
later in this Item 7.
  Stock-Based
Compensation
  The
Company recognizes compensation expense in an amount equal to the fair value of
all share-based payments which consist of stock options granted to directors and
employees. The fair value of each option is estimated on the date of grant and
amortized over the service period using a Black-Scholes-Merton based option
valuation model that requires the use of assumptions. Critical assumptions that
affect the estimated fair value of each option include expected stock price
volatility, dividend yields, option life and the risk-free interest
rate.
  Goodwill
  Business
combinations involving the Company’s acquisition of the equity interests or net
assets of another enterprise or the assumption of net liabilities in an
acquisition of branches constituting a business may give rise to goodwill.
Goodwill represents the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed in transactions
accounted for under the purchase method of accounting. The value of goodwill is
ultimately derived from the Company’s ability to generate net earnings after the
acquisition. A decline in net earnings could be indicative of a decline in the
fair value of goodwill and result in impairment. For that reason, goodwill is
assessed for impairment at a reporting unit level at least annually following
the year of acquisition. The Company performed an evaluation of the goodwill,
recorded as a result of the Bank of Amador acquisition, during the fourth
quarter of 2009 and determined that there was no impairment. While the Company
believes all assumptions utilized in its assessment of goodwill for impairment
are reasonable and appropriate, changes in earnings, the effective tax rate,
historical earnings multiples and the cost of capital could all cause different
results for the calculation of the present value of future cash
flows.
  Income
Taxes
  The
Company files its income taxes on a consolidated basis with its subsidiaries.
The allocation of income tax expense (benefit) represents each entity’s
proportionate share of the consolidated provision for income taxes.
 33
 The
Company accounts for income taxes using the balance sheet method, under which
deferred tax assets and liabilities are recognized for the tax consequences of
temporary differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. On the
consolidated balance sheet, net deferred tax assets are included in accrued
interest receivable and other assets.
  Since
January 1, 2007 the Company has accounted for uncertainty in income taxes under
“Accounting for Uncertainty in Income Taxes”. Under the provisions of Accounting
for Uncertainty in Income Taxes, only tax positions that met the
more-likely-than-not recognition threshold on January 1, 2007 were recognized or
continue to be recognized. The benefit of a tax position is recognized in the
financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheet along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination. The election has been made to record interest
expense related to tax exposures in tax expense, if applicable, and the exposure
for penalties related to tax exposures in tax expense, if
applicable.
  Subsequent
Events
  In May
2009, the FASB issued ASC 855 (formerly Statement No. 165), “Subsequent Events.” ASC 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued. ASC 855 was effective for interim or annual periods
ending after June 15, 2009. The adoption of ASC 855 did not impact the Company’s
financial position or results of operations. The Company evaluated all events or
transactions that occurred from December 31, 2009
to March 4, 2010 (the filing date), the date the Company issued these financial
statements.
  Recent
Developments
  In
February 2010, in connection with the Bank’s regularly scheduled 2009 FDIC
examination, the Bank entered into a Memorandum of Understanding (the
“Memorandum”) with the FDIC and the California Commissioner of Financial
Institutions. The Memorandum covers actions to be taken by the Board of
Directors and management to enhance BSA compliance; reduce the Bank’s level of
classified assets and further strengthen and improve the Bank’s asset quality;
requesting regulatory approval prior to paying any cash dividends; and
maintaining the Bank’s Tier 1 Leverage capital ratio at not less than 8% and a
Total Risk-Based capital ratio of not less than 11%. As of December 31, 2009,
the foregoing ratios for the Bank were 11.7% and 17.3%, respectively. The
Company believes that the Bank is currently in compliance in all material
respects with the actions described in the Memorandum. Consequently, the Company
does not expect these actions to significantly change its business strategy in
any material respect; however, noncompliance with provisions of the Memorandum
could result in regulatory enforcement actions that could have a material
adverse effect upon the Company.
  Overview
  The
Company recorded net income in 2009 of $1,586,000, down from $7,571,000 in 2008.
Diluted earnings per share for 2009 were $0.26, a decrease of $1.04 from the
$1.30 recorded in 2008. For 2009, the Company realized a return on average
equity of 2.44% and a return on average assets of 0.28%, as compared to 12.39%
and 1.32% for 2008.
 34
 Net
income for 2008 was $907,000 (10.7%) lower than the $8,478,000 recorded in 2007.
Diluted earnings per share in 2007 were $1.39, return on average assets was
1.47% and return on average equity was 14.01%. Table One below provides a
summary of the components of net income for the years indicated:
  Table One:  Components of Net
      Income
 
 For the years ended:(dollars in thousands)
                
                2009
                
                
                2008
                
                
                2007Net
      interest income*
                
                $
                24,331
                
                
                $
                26,277
                
                
                $
                26,749Provision
      for loan and lease losses
                
                
                (8,530
                )
                
                
                (1,743
                )
                
                
                (450
                )Noninterest
      income
                
                
                2,269
                
                
                
                2,168
                
                
                
                2,599Noninterest
      expense
                
                
                (15,811
                )
                
                
                (14,201
                )
                
                
                (14,833
                )Provision
      for income taxes
                
                
                (374
                )
                
                
                (4,578
                )
                
                
                (5,240
                )Tax
      equivalent adjustment
                
                
                (299
                )
                
                
                (352
                )
                
                
                (347
                )Net
      income
                
                $
                1,586
                
                
                $
                7,571
                
                
                $
                8,478Average
      total assets
                
                $
                572,473
                
                
                $
                575,046
                
                
                $
                575,225Net
      income as a percentage of average total assets
                
                
                0.28
                %
                
                
                1.32
                %
                
                
                1.47
                %
  *Fully
taxable equivalent basis (FTE)
 
 All share and per share data for 2008
and 2007 have been adjusted for 5% stock dividends distributed on December 18,
2008 and December 20, 2007.  There were no stock dividends distributed
in 2009.
  During 2009, total assets of the
Company increased $31,261,000 (5.6%) to a total of $594,418,000 at
year-end.  At December 31, 2009, net loans totaled $376,322,000, down
$36,034,000 (8.7%) from the ending balances on December 31,
2008.  Deposits increased 7.5% during 2009 resulting in ending deposit
balances of $469,755,000.  Shareholders’ equity increased 37.7% during
2009, increasing by $23,898,000 to end the year at $87,345,000.  The
Company ended 2009 with a Tier 1 capital ratio of 12.4% and a total risk-based
capital ratio of 18.4%.
 
 Results
of Operations
  Net
Interest Income and Net Interest Margin
  Net
interest income represents the excess of interest and fees earned on interest
earning assets (loans, securities, Federal funds sold and interest-bearing
deposits in other banks) over the interest paid on deposits and borrowed
funds.  Net interest margin is net interest income expressed as a
percentage of average earning assets.
  The
Company’s fully taxable equivalent net interest margin was 4.90% in 2009 and
5.03% in 2008.  The fully taxable equivalent net interest income was
down $1,946,000 (7.4%) in 2009 compared to 2008.
 
 The fully
taxable equivalent interest income component decreased from $33,905,000 in 2008
to $29,421,000 in 2009, representing a 13.2% decrease.  The decrease
in the fully taxable equivalent interest income for 2009 compared to the same
period in 2008 is comprised of two components - rate (down $3,100,000) and
volume (down $1,384,000).  The decline in rates can be attributed to
decreases implemented by the Company on the loans and leases during 2007 and
2008 in response to the Federal Reserve Board (the “FRB”) decreases in the
Federal funds and discount rates.  Decreases by the FRB have resulted
in ten rate reductions totaling 500 basis points since September
2007.  In addition, interest forgone on nonaccrual loans in 2009
increased when compared to 2008.  Net interest income forgone on
nonaccrual loans was approximately $1,281,000 during 2009 compared to $647,000
during 2008.  The overall decreasing interest rate environment and the
negative effect of the higher nonaccrual loans resulted in a 54 basis point
decrease in the yield on average earning assets from 6.47% for 2008 to 5.93% for
2009.  The volume decrease occurred due to a 5.0% decrease in average
earning assets.  The overall decrease in the average assets balance
during that time period is mainly related to a decrease in loans and leases and
investment securities balances.  Loan and lease balances are down as
the overall production for new loans is down.  The investment
securities balances are lower as the Company implemented a strategy to use the
proceeds from principal reductions and maturing investment securities to provide
funding for a decrease in average borrowings and to increase average
noninterest-bearing cash balances.  The increase in cash balances was
used to bolster liquidity during an unsettling time in the banking
environment.
 35
 This
strategy to reduce the balances in investment securities resulted in a 15.8%
decrease in average investment securities from $106,949,000 during 2008 to
$90,049,000 during 2009, while average noninterest-bearing cash balances
increased $21,804,000 or 113.2% from $19,260,000 during 2008 to $41,064,000
during 2009.
  The fully
taxable equivalent interest income component decreased from $37,825,000 in 2007
to $33,905,000 in 2008, representing a 10.4% decrease.  The decrease
in the fully taxable equivalent interest income for 2008 compared to the same
period in 2007 is comprised of two components - rate (down $4,523,000) and
volume (up $603,000).  The decline in rates can be attributed to
decreases implemented by the Company on the loans and leases during the latter
part of 2007 and 2008 in response to the FRB decreases in the Federal funds and
discount rates.  In addition, an increased level of nonaccrual loans
resulted in foregone interest income of approximately $647,000 during 2008 as
compared to $305,000 in 2007.  The overall decreasing interest rate
environment and the negative effect of the nonaccrual loans resulted in a 74
basis point decrease in the yield on average earning assets from 7.21% for 2007
to 6.47% for 2008.  The volume increase occurred despite a slight
$1,799,000 (0.3%) decrease in average earning assets from $524,365,000 during
2007 to $522,566,000 during 2008 as a result of a shift in balances from lower
earning investments to higher earning loans.  The change in the mix of
average earning assets resulted from the Company’s decision to use the proceeds
from principal reductions and maturing investment securities to provide funding
for loan growth.  This strategy has reduced the average balances on
investment securities by $21,289,000 or 16.6% from $128,238,000 during 2007 to
$106,949,000 during 2008, while average loan balances increased $19,805,000 or
5.1% from $390,488,000 during 2007 to $410,293,000 during 2008.  The
Company’s ability to increase its average loans is the result of its continued
concentrated focus on business lending and the purchase of a $7,255,000 pool of
loans secured by properties located in the Company’s market area from another
bank.
 
 Interest
expense decreased $2,538,000 (33.3%) in 2009 compared to 2008.  The
average balances of interest-bearing liabilities were $3,276,000 (0.9%) higher
in 2009 compared to 2008.  The higher balances, especially in the
level of average time deposits accounted for a $168,000 increase in interest
expense.  This increase was offset by lower rates, which accounted for
a $2,706,000 decrease in interest expense in 2009.  Rates paid on
interest-bearing liabilities decreased 67 basis points from 2008 to 2009 from
1.99% to 1.32%.
  Interest
expense decreased $3,448,000 (31.1%) in 2008 compared to 2007.  The
average balances of interest-bearing liabilities were $17,366,000 (4.8%) higher
in the 2008 compared to 2007.  The higher balances accounted for a
$1,224,000 increase in interest expense.  Average borrowings were up
$29,880,000 (100.7%) as the Company used borrowings as a funding source for the
increased loan balances as average deposit balances declined.  Average
deposit balances decreased $31,176,000 (6.5%) from $479,344,000 during 2007 to
$448,168,000 during 2008.  Although the number of deposit
relationships and accounts remains relatively stable, the average balances in
those accounts have experienced a decrease over the past twelve
months.  As a result of the lower overall interest rate environment,
the decrease in rates accounted for a $4,672,000 reduction in interest expense
in 2008.  Rates paid on interest-bearing liabilities decreased 105
basis points from 2007 to 2008 from 3.04% to 1.99%.  The rate on
average borrowings dropped 221 basis points during that same time period from
5.11% to 2.90%.
 
 Table
Two, Analysis of Net Interest Margin on Earning Assets, and Table Three,
Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are
provided to enable the reader to understand the components and past trends of
the Company’s interest income and expenses.  Table Two provides an
analysis of net interest margin on earning assets setting forth average assets,
liabilities and shareholders’ equity; interest income earned and interest
expense paid and average rates earned and paid; and the net interest margin on
earning assets.  Table Three sets forth a summary of the changes in
interest income and interest expense from changes in average asset and liability
balances (volume), computed on a daily average basis, and changes in average
interest rates.
 36
  Table
      Two:  Analysis of Net Interest Margin on Earning
      Assets
 
 Year
      Ended December 31,
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007(Taxable
      Equivalent Basis)
                    (dollars
      in thousands)
                  
                  Avg
                    Balance
                  
                  
                  Interest
                  
                  
                  Avg
                    Yield
                  
                  
                  Avg
                    Balance
                  
                  
                  Interest
                  
                  
                  Avg
                    Yield
                  
                  
                  Avg
                    Balance
                  
                  
                  Interest
                  
                  
                  Avg
                    YieldAssets:Earning
      assetsLoans
      and leases (1)
                  
                  $
                  404,539
                  
                  
                  $
                  25,378
                  
                  
                  
                  6.27
                  %
                  
                  $
                  410,293
                  
                  
                  $
                  28,512
                  
                  
                  
                  6.95
                  %
                  
                  $
                  390,488
                  
                  
                  $
                  31,508
                  
                  
                  
                  8.07
                  %Taxable
      investment securities
                  
                  
                  67,480
                  
                  
                  
                  2,763
                  
                  
                  
                  4.09
                  %
                  
                  
                  79,675
                  
                  
                  
                  3,711
                  
                  
                  
                  4.66
                  %
                  
                  
                  100,086
                  
                  
                  
                  4,544
                  
                  
                  
                  4.54
                  %Tax-exempt
      investment securities (2)
                  
                  
                  22,541
                  
                  
                  
                  1,215
                  
                  
                  
                  5.39
                  %
                  
                  
                  27,102
                  
                  
                  
                  1,428
                  
                  
                  
                  5.27
                  %
                  
                  
                  27,745
                  
                  
                  
                  1,436
                  
                  
                  
                  5.18
                  %Corporate
      stock
                  
                  
                  28
                  
                  
                  
                  6
                  
                  
                  
                  21.43
                  %
                  
                  
                  172
                  
                  
                  
                  22
                  
                  
                  
                  12.79
                  %
                  
                  
                  407
                  
                  
                  
                  32
                  
                  
                  
                  7.86
                  %Federal
      funds sold
                  
                  
                  11
                  
                  
                  
                  —
                  
                  
                  
                  0.00
                  %
                  
                  
                  486
                  
                  
                  
                  10
                  
                  
                  
                  2.06
                  %
                  
                  
                  690
                  
                  
                  
                  34
                  
                  
                  
                  4.93
                  %Interest
      bearing deposits in other banks
                  
                  
                  1,603
                  
                  
                  
                  59
                  
                  
                  
                  3.68
                  %
                  
                  
                  4,838
                  
                  
                  
                  222
                  
                  
                  
                  4.59
                  %
                  
                  
                  4,949
                  
                  
                  
                  271
                  
                  
                  
                  5.48
                  %Total
      earning assets
                  
                  
                  496,202
                  
                  
                  
                  29,421
                  
                  
                  
                  5.93
                  %
                  
                  
                  522,566
                  
                  
                  
                  33,905
                  
                  
                  
                  6.47
                  %
                  
                  
                  524,365
                  
                  
                  
                  37,825
                  
                  
                  
                  7.21
                  %Cash
      & due from banks
                  
                  
                  41,064
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  19,260
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  17,263Other
      assets
                  
                  
                  42,208
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  39,330
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  39,529Allowance
      for loan & lease losses
                  
                  
                  (7,001
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (6,110
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,932
                  )$
                  572,473
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  575,046
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  575,225Liabilities
      & Shareholders’ Equity:Interest
      bearing liabilities:NOW
      & MMDA
                  
                  $
                  163,141
                  
                  
                  
                  1,375
                  
                  
                  
                  0.84
                  %
                  
                  $
                  164,531
                  
                  
                  
                  1,929
                  
                  
                  
                  1.17
                  %
                  
                  $
                  173,382
                  
                  
                  
                  3,781
                  
                  
                  
                  2.18
                  %Savings
                  
                  
                  34,392
                  
                  
                  
                  229
                  
                  
                  
                  0.67
                  %
                  
                  
                  36,033
                  
                  
                  
                  324
                  
                  
                  
                  0.90
                  %
                  
                  
                  37,690
                  
                  
                  
                  546
                  
                  
                  
                  1.45
                  %Time
      deposits
                  
                  
                  137,601
                  
                  
                  
                  2,399
                  
                  
                  
                  1.74
                  %
                  
                  
                  121,479
                  
                  
                  
                  3,648
                  
                  
                  
                  3.00
                  %
                  
                  
                  123,485
                  
                  
                  
                  5,233
                  
                  
                  
                  4.24
                  %Other
      borrowings
                  
                  
                  49,745
                  
                  
                  
                  1,087
                  
                  
                  
                  2.19
                  %
                  
                  
                  59,560
                  
                  
                  
                  1,727
                  
                  
                  
                  2.90
                  %
                  
                  
                  29,680
                  
                  
                  
                  1,516
                  
                  
                  
                  5.11
                  %Total
      interest bearing liabilities
                  
                  
                  384,879
                  
                  
                  
                  5,090
                  
                  
                  
                  1.32
                  %
                  
                  
                  381,603
                  
                  
                  
                  7,628
                  
                  
                  
                  1.99
                  %
                  
                  
                  364,237
                  
                  
                  
                  11,076
                  
                  
                  
                  3.04
                  %Demand
      deposits
                  
                  
                  117,594
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  126,125
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  144,787Other
      liabilities
                  
                  
                  4,993
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,234
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,668Total
      liabilities
                  
                  
                  507,466
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  513,962
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  514,692Shareholders’
      equity
                  
                  
                  65,007
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  61,084
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  60,533$
                  572,473
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  575,046
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  575,225Net
      interest income & margin (3)
                  
                  
                  
                  
                  
                  $
                  24,331
                  
                  
                  
                  4.90
                  %
                  
                  
                  
                  
                  
                  $
                  26,277
                  
                  
                  
                  5.03
                  %
                  
                  
                  
                  
                  
                  $
                  26,749
                  
                  
                  
                  5.10
                  %
 (1)
                Loan
      and lease interest includes loan and lease fees of $46,000, $250,000 and
      $529,000 in 2009, 2008 and 2007, respectively.(2)
                Includes
      taxable-equivalent adjustments that primarily relate to income on certain
      securities that is exempt from Federal income taxes.  The
      effective Federal statutory tax rate was 34% in 2009 and 35% in 2008 and
      2007.(3)
                Net
      interest margin is computed by dividing net interest income by total
      average earning assets.
 
 37
 
 Table
      Three:  Analysis of Volume and Rate Changes on Net Interest
      Income and Expenses  Year
      ended December 31, 2009 over 2008 (dollars in thousands)Increase
      (decrease) due to change in:Volume
                  
                  
                  Rate (4)
                  
                  
                  Net ChangeInterest-earning
      assets:Net
      loans and leases (1)(2)
                  
                  $
                  (400
                  )
                  
                  $
                  (2,734
                  )
                  
                  $
                  (3,134
                  )Taxable
      investment securities
                  
                  
                  (568
                  )
                  
                  
                  (380
                  )
                  
                  
                  (948
                  )Tax-exempt
      investment securities (3)
                  
                  
                  (240
                  )
                  
                  
                  27
                  
                  
                  
                  (213
                  )Corporate
      stock
                  
                  
                  (18
                  )
                  
                  
                  2
                  
                  
                  
                  (16
                  )Federal
      funds sold & other
                  
                  
                  (10
                  )
                  
                  
                  —
                  
                  
                  
                  (10
                  )Interest
      bearing deposits in other banks
                  
                  
                  (148
                  )
                  
                  
                  (15
                  )
                  
                  
                  (163
                  )Total
                  
                  
                  (1,384
                  )
                  
                  
                  (3,100
                  )
                  
                  
                  (4,484
                  )Interest-bearing
      liabilities:Demand
      deposits
                  
                  
                  (16
                  )
                  
                  
                  (538
                  )
                  
                  
                  (554
                  )Savings
      deposits
                  
                  
                  (15
                  )
                  
                  
                  (80
                  )
                  
                  
                  (95
                  )Time
      deposits
                  
                  
                  484
                  
                  
                  
                  (1,733
                  )
                  
                  
                  (1,249
                  )Other
      borrowings
                  
                  
                  (285
                  )
                  
                  
                  (355
                  )
                  
                  
                  (640
                  )Total
                  
                  
                  168
                  
                  
                  
                  (2,706
                  )
                  
                  
                  (2,538
                  )Interest
      differential
                  
                  $
                  (1,552
                  )
                  
                  $
                  (394
                  )
                  
                  $
                  (1,946
                  )
  Year
      Ended December 31, 2008 over 2007 (dollars in thousands)
                    Increase
      (decrease) due to change in:Volume
                  
                  
                  Rate (4)
                  
                  
                  Net ChangeInterest-earning
      assets:Net
      loans and leases (1)(2)
                  
                  $
                  1,597
                  
                  
                  $
                  (4,593
                  )
                  
                  $
                  (2,996
                  )Taxable
      investment securities
                  
                  
                  (927
                  )
                  
                  
                  94
                  
                  
                  
                  (833
                  )Tax-exempt
      investment securities (3)
                  
                  
                  (33
                  )
                  
                  
                  25
                  
                  
                  
                  (8
                  )Corporate
      stock
                  
                  
                  (18
                  )
                  
                  
                  8
                  
                  
                  
                  (10
                  )Federal
      funds sold & other
                  
                  
                  (10
                  )
                  
                  
                  (14
                  )
                  
                  
                  (24
                  )Interest
      bearing deposits in other banks
                  
                  
                  (6
                  )
                  
                  
                  (43
                  )
                  
                  
                  (49
                  )Total
                  
                  
                  603
                  
                  
                  
                  (4,523
                  )
                  
                  
                  (3,920
                  )Interest-bearing
      liabilities:Demand
      deposits
                  
                  
                  (193
                  )
                  
                  
                  (1,659
                  )
                  
                  
                  (1,852
                  )Savings
      deposits
                  
                  
                  (24
                  )
                  
                  
                  (198
                  )
                  
                  
                  (222
                  )Time
      deposits
                  
                  
                  (85
                  )
                  
                  
                  (1,500
                  )
                  
                  
                  (1,585
                  )Other
      borrowings
                  
                  
                  1,526
                  
                  
                  
                  (1,315
                  )
                  
                  
                  211Total
                  
                  
                  1,224
                  
                  
                  
                  (4,672
                  )
                  
                  
                  (3,448
                  )Interest
      differential
                  
                  $
                  (621
                  )
                  
                  $
                  149
                  
                  
                  $
                  (472
                  )
  (1)
                The
      average balance of non-accruing loans and leases is immaterial as a
      percentage of total loans and leases and, as such, has been included in
      net loans and leases.(2)
                Loan
      and lease fees of $46,000, $250,000 and $529,000 for the years ended
      December 31, 2009, 2008 and 2007, respectively, have been included in the
      interest income computation.(3)
                Includes
      taxable-equivalent adjustments that primarily relate to income on certain
      securities that is exempt from Federal income taxes.  The
      effective Federal statutory tax rate was 34% in 2009 and 35% in 2008 and
      2007.(4)
                The
      rate/volume variance has been included in the rate
    variance.
  Provision
for Loan and Lease Losses
  The
Company provided $8,530,000 for loan and lease losses in 2009 as compared to
$1,743,000 for 2008.  Net loan and lease losses for 2009 were
$6,539,000 as compared to $1,708,000 in 2008.  In 2009, net loan and
lease losses as a percentage of average loans outstanding were 1.62% compared to
..42% in 2008.  In 2007, the Company provided $450,000 for loan and
lease losses and net charge-offs were $441,000.  The increase in the
provision for loan and lease losses for 2009 results from a higher level of loan
and lease losses and nonperforming loans and leases, due mainly to the overall
challenging economy in the Company’s market areas and the United States,
overall.  For further information please see “Allowance for Loan and
Lease Losses Activity.”
 38
 Service
Charges and Fees and Other Income
  Table
Four below provides a summary of the components of noninterest income for the
periods indicated (dollars in thousands):
  Table Four:  Components of Noninterest
      Income
 
 Year
      Ended December 31,2009
                
                
                2008
                
                
                2007Service
      charges on deposit accounts
                
                $
                1,018
                
                
                $
                741
                
                
                $
                743Merchant
      fee income
                
                
                437
                
                
                
                482
                
                
                
                544Earnings
      on Bank owned life insurance
                
                
                246
                
                
                
                395
                
                
                
                404Income
      from residential lending division
                
                
                7
                
                
                
                283
                
                
                
                401Accounts
      receivable servicing fees
                
                
                35
                
                
                
                170
                
                
                
                244Gain
      (loss) on sale, call and impairment of securities
                
                
                270
                
                
                
                (119
                )
                
                
                11Other
                
                
                256
                
                
                
                216
                
                
                
                252$
                2,269
                
                
                $
                2,168
                
                
                $
                2,599
  Noninterest
income was up $101,000 (4.7%) to $2,269,000 in 2009 from the 2008 level. The
increase from 2008 to 2009 was primarily related to higher service charges on
deposit accounts (up $277,000 or 37.4%) and gain on sale of
securities.  The higher service charges on deposit accounts results
from increased fees from overdrawn checking accounts (up $183,000 or 43.3%) and
higher service fees in checking accounts (up $86,000 or 34.1%).  The
difference in the gain on sale of securities results from a loss in 2008 related
to an impairment charge of $245,000 on the Company’s investment in Federal
National Mortgage Association (“FNMA”) preferred stock.  During 2009,
the Company also experienced lower income from fees from accounts receivable
servicing, which resulted from lower overall volume (down $135,000 or 79.4%);
lower fees from residential lending, which resulted from lower volume (down
$276,000); and lower income from bank owned life insurance, which resulted from
lower yields on the bank owned life insurance investments (down $149,000 or
37.7%).
  Noninterest
income was down $431,000 (16.6%) to $2,168,000 in 2008 from the 2007 level. The
decrease from 2007 to 2008 was primarily related to lower income from fees on
residential lending (down $118,000 or 29.4%), lower fees on accounts receivable
servicing (down $74,000 or 32.5%), lower merchant fees (down $62,000 or 11.4%)
and an impairment charge of $245,000 on the Company’s investment in FNMA
preferred stock.  On September 7, 2008, the U.S. Government placed
FNMA into conservatorship and as a result the market value of the shares
experienced a significant decline.  The par value of the shares is
$250,000 and the Company has written down the balance by $245,000 to
$5,000.  The decrease in fees from residential lending resulted from
the lower number of loan closings due to the slowdown in the residential real
estate market.  The decrease in fees on accounts receivable servicing
and merchant fees is due to lower activity levels in 2008 compared to
2007.
  Salaries
and Benefits
  Salaries
and benefits, which include commissions, were $7,279,000 (down $408,000 or 5.3%)
for 2009 as compared to $7,687,000 in 2008.  The decrease in salary
and benefit expense is primarily related to a decrease in the average full time
equivalent employees (“FTE”).  The average FTE’s decreased from 123 in
2008 to 117 during 2009 and, at the end of 2009, the full-time equivalent staff
was 118, down 4 from 122 at the end of 2008.
 
 Salaries
and benefits, which include commissions, were $7,687,000 (down $709,000 or 8.4%)
for 2008 as compared to $8,396,000 in 2007.  The decrease in salary
and benefit expense is primarily related to a decrease in the average FTE and
lower incentive compensation.  The average FTE’s decreased from 129 in
2007 to 123 during 2008 and, at the end of 2008, the full-time equivalent staff
was 122, down 2 from 124 at the end of 2007.  The incentive
compensation expense decreased $474,000 (79.0%) from $600,000 in 2007 to
$126,000 in 2008 because the Company did not reach its performance
goals.
 39
 Occupancy,
Furniture and Equipment
  Occupancy
expense decreased $106,000 (7.1%) during 2009 to $1,389,000, compared to
$1,495,000 in 2008. The majority of the decrease relates to lower rent
associated with the Company’s decision to relocate its banking office in Santa
Rosa.  Furniture and equipment expense was $759,000 in 2009 compared
to $774,000 in 2008, representing a $15,000 (1.9%) decrease.  The
decrease in furniture and equipment expense relates primarily to lower
technology related maintenance.
  Occupancy
expense increased $97,000 (6.9%) during 2008 to $1,495,000, up from $1,398,000
in 2007. The majority of the increase relates to normal rent increases and
higher utilities in the Company’s leased facilities as well as depreciation
expense related to recent branch remodels.  Furniture and equipment
expense was $774,000 in 2008 compared to $691,000 in 2007, representing an
$83,000 (12.0%) increase.  The increase in furniture and equipment
expense relates primarily to higher technology related maintenance.
 
 Other
Real Estate Owned
 
 The
Company experienced a significant increase in costs associated with maintaining
the Company’s other real estate owned (“OREO”).   OREO expense
increased from $1,000 in 2008 to $1,441,000 due to an increase in the number of
foreclosed properties.
 
 Federal
Deposit Insurance Corporation (the “FDIC”)
 
 FDIC
assessments increased $619,000 (409.9%) during 2009 to $770,000, up from
$151,000 in 2008. The increase relates to increased assessments from the FDIC to
cover losses suffered by the FDIC due to an increased number of bank
failures.
 
 FDIC
assessments increased $94,000 (164.9%) during 2008 to $151,000, up from $57,000
in 2007. The increase relates to increased assessments from the FDIC to cover
losses suffered by the FDIC due to an increased number of bank
failures.
 
 Other
Expenses
  Table
Five below provides a summary of the components of the other noninterest
expenses for the periods indicated (dollars in thousands):
  Year
      Ended December 31,2009
                
                
                2008
                
                
                2007Professional
      fees
                
                $
                1,061
                
                
                $
                936
                
                
                $
                832Telephone
      and postage
                
                
                375
                
                
                
                403
                
                
                
                420Directors’
      expense
                
                
                390
                
                
                
                321
                
                
                
                378Outsourced
      item processing
                
                
                369
                
                
                
                391
                
                
                
                374Advertising
      and promotion
                
                
                232
                
                
                
                339
                
                
                
                338Stationery
      and supplies
                
                
                205
                
                
                
                274
                
                
                
                322Amortization
      of intangible assets
                
                
                264
                
                
                
                286
                
                
                
                308Other
      operating expenses
                
                
                1,277
                
                
                
                1,143
                
                
                
                1,318$
                4,173
                
                
                $
                4,093
                
                
                $
                4,290
  Other
expenses were $4,173,000 (up $80,000 or 2.0%) for 2009 as compared to $4,093,000
for 2008. Professional fees increased $125,000 (13.4%) due in part to higher
legal, accounting, and other professional services to comply with changes in the
regulatory environment and to resolve problem loans.  This increase
was offset by reductions in several other expense related items as the Company
continued to focus on reducing expenses and services.  The overhead
efficiency ratio on a taxable equivalent basis for 2009 was 58.5% as compared to
48.9% in 2008.
  Other
expenses were $4,093,000 (down $197,000 or 4.6%) for 2008 as compared to
$4,290,000 for 2007. Professional fees increased $104,000 (12.5%) due in part to
higher legal, accounting, and other professional services to comply with changes
in the regulatory environment and to resolve problem loans.  The
overhead efficiency ratio on a taxable equivalent basis for 2008 was 48.9% as
compared to 49.5% in 2007.
 40
 Provision
for Taxes
 
 The
effective tax rate on income was 19.1%, 37.7% and 38.2% in 2009, 2008 and 2007,
respectively.  The effective tax rate differs from the Federal
statutory tax rate due to state tax expense (net of Federal tax effect) of
$59,000, $802,000 and $919,000 in these years.  Tax-exempt income of
$1,099,000, $1,415,000 and $1,410,000 from investment securities and bank owned
life insurance in these years helped to reduce the effective tax
rate.  The lower effective tax rate in 2009 results from the Company
realizing the benefits of tax-free income related to such items as municipal
bonds and bank owned life insurance against an overall lower amount of taxable
income.
 
 Balance
Sheet Analysis
 
 The
Company’s total assets were $594,418,000 at December 31, 2009 as compared to
$563,157,000 at December 31, 2008, representing an increase of $31,261,000
(5.6%).  The average balances of total assets during 2009 were
$572,473,000 which is consistent with the 2008 total of
$575,046,000.
  Investment
Securities
  The
Company classifies its investment securities as trading, held-to-maturity or
available-for-sale. The Company’s intent is to hold all securities classified as
held-to-maturity until maturity and management believes that it has the ability
to do so. Securities available-for-sale may be sold to implement asset/liability
management strategies; as part of our contingency funding plan; and in response
to changes in interest rates, prepayment rates and similar
factors.  Table Six below summarizes the values of the Company’s
investment securities held on December 31 of the years indicated.
  Table
      Six: Investment Securities Composition(dollars
      in thousands)
 
 2009
                
                
                2008
                
                
                2007Available-for-sale (at fair
      value)Debt
      securities:U.S.
      Government agencies
                
                $
                —
                
                
                $
                —
                
                
                $
                16,506Mortgage-backed
      securities
                
                
                76,009
                
                
                
                32,232
                
                
                
                31,066Obligations
      of states and political subdivisions
                
                
                20,587
                
                
                
                31,012
                
                
                
                31,111Equity
      securities:Corporate
      stock
                
                
                86
                
                
                
                90
                
                
                
                287Total
      available-for-sale investment securities
                
                $
                96,682
                
                
                $
                63,334
                
                
                $
                78,970
 Held-to-maturity
      (at amortized cost)Debt
      securities:Mortgage-backed
      securities
                
                $
                12,331
                
                
                $
                24,365
                
                
                $
                34,754Total
      held-to-maturity investment securities
                
                $
                12,331
                
                
                $
                24,365
                
                
                $
                34,754
 
 See Table
Fifteen for a breakdown of the investment securities by maturity and the
corresponding weighted average yields.
 
 Loans
and Leases
  The
Company concentrates its lending activities in the following principal areas:
(1) commercial; (2) commercial real estate; (3) multi-family real estate; (4)
real estate construction (both commercial and residential); (5) residential real
estate; (6) lease financing receivable; (7) agriculture; and (8) consumer
loans.  At December 31, 2009, these categories accounted for
approximately 19%, 58%, 2%, 7%, 7%, 1%, 2% and 4%, respectively, of the
Company’s loan portfolio.  This mix was relatively unchanged compared
to 22%, 52%, 2%, 12%, 6%, 1%, 2% and 3% at December 31,
2008.  Continuing focus in the Company’s market area, new borrowers
developed through the Company’s marketing efforts, and credit extensions
expanded to existing borrowers resulted in the Company originating approximately
$69 million in new loans in 2009.  The Company reported net increases
in balances for commercial real estate ($5,059,000 or 2.3%) and residential real
estate ($2,216,000 or 9.0%) and the Company experienced a decrease in commercial
($18,004,000 or 19.9%), multi-family real estate ($462,000 or 5.2%), real estate
construction ($21,182,000 or 43.5%), lease financing receivable ($555,000 or
12.4%), agriculture ($543,000 or 6.8%), and consumer loans ($543,000 or 3.7%)
primarily as a result of pay downs.  Table Seven below summarizes the
composition of the loan and lease portfolio for the past five years as of
December 31.
 41
 
 Table Seven:  Loan and Lease Portfolio
      Composition
 December 31,(dollars
      in thousands)
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Commercial
                
                $
                72,621
                
                
                $
                90,625
                
                
                $
                94,632
                
                
                $
                85,859
                
                
                $
                77,971Real
      estate:Commercial
                
                
                223,685
                
                
                
                218,626
                
                
                
                191,774
                
                
                
                175,643
                
                
                
                154,500Multi-family
                
                
                8,476
                
                
                
                8,938
                
                
                
                5,830
                
                
                
                3,618
                
                
                
                3,767Construction
                
                
                27,482
                
                
                
                48,664
                
                
                
                66,022
                
                
                
                90,314
                
                
                
                103,048Residential
                
                
                26,922
                
                
                
                24,706
                
                
                
                20,120
                
                
                
                8,689
                
                
                
                4,680Lease
      financing receivable
                
                
                3,920
                
                
                
                4,475
                
                
                
                4,070
                
                
                
                6,375
                
                
                
                7,967Agriculture
                
                
                7,472
                
                
                
                8,015
                
                
                
                8,177
                
                
                
                7,362
                
                
                
                8,129Consumer
                
                
                14,253
                
                
                
                14,796
                
                
                
                10,750
                
                
                
                11,712
                
                
                
                11,900384,831
                
                
                
                418,845
                
                
                
                401,375
                
                
                
                389,572
                
                
                
                371,962Deferred
      loan fees, net
                
                
                (600
                )
                
                
                (571
                )
                
                
                (517
                )
                
                
                (705
                )
                
                
                (712
                )Allowance
      for loan andlease
      losses
                
                
                (7,909
                )
                
                
                (5,918
                )
                
                
                (5,883
                )
                
                
                (5,874
                )
                
                
                (5,679
                )Total
      net loans and leases
                
                $
                376,322
                
                
                $
                412,356
                
                
                $
                394,975
                
                
                $
                382,993
                
                
                $
                365,571
 
 A
significant portion of the Company’s loans and leases are direct loans and
leases made to individuals and local businesses.  The Company relies
substantially on local promotional activity and personal contacts by American
River Bank officers, directors and employees to compete with other financial
institutions.  The Company makes loans and leases to borrowers whose
applications include a sound purpose and a viable primary repayment source,
generally supported by a secondary source of repayment.
 
 Commercial
loans consist of credit lines for operating needs, loans for equipment
purchases, working capital, and various other business loan
products.  Consumer loans include a range of traditional consumer loan
products such as personal lines of credit and loans to finance purchases of
autos, boats, recreational vehicles, mobile homes and various other consumer
items.  Construction loans are generally comprised of commitments to
customers within the Company’s service area for construction of commercial
properties, multi-family properties and custom and semi-custom single-family
residences.  Other real estate loans consist primarily of loans
secured by first trust deeds on commercial and residential properties typically
with maturities from 3 to 10 years and original loan-to-value ratios generally
from 55% to 75%.  Agriculture loans consist primarily of vineyard
loans and development loans to plant vineyards.  In general, except in
the case of loans under SBA programs or Farm Services Agency guarantees, the
Company does not make long-term mortgage loans.  Up until 2008,
American River Bank had a residential lending division to assist customers in
securing most forms of longer term single-family mortgage
financing.  American River Bank acted as a broker between American
River Bank's clients and the loan wholesalers.  American River Bank
received an origination fee for loans closed.  Due to a slow down in
the funding of residential loans in 2008 the Company reduced the number of
employees it had dedicated to residential lending.
  “Subprime”
loans generally refer to residential mortgages made to higher-risk borrowers
with lower credit and/or income histories.  Within the industry, many
of these “subprime” loans were made with adjustable interest rates that reset
upward after an introductory period.  These “subprime” loans coupled
with declines in housing prices have led to an increase in foreclosure rates as
the adjustable interest rates reset to higher levels.  The Company did
not have any “subprime” loans on its books at December 31, 2009 and December 31,
2008.
 
 Average
loans and leases in 2009 were $404,539,000 which represents a decrease of
$5,754,000 (1.4%) compared to the average in 2008.  Average loans and
leases in 2008 were $410,293,000 which represents an increase of $19,805,000
(5.1%) over the average in 2007.  Loan balance reductions in 2009
resulted from pay downs and charge offs that were partially offset by the
continued concentrated effort to increase commercial relationships, the addition
of new borrowers developed through the Company’s marketing efforts, and credit
extensions expanded to existing borrowers.
 42
 Risk
Elements
  The
Company assesses and manages credit risk on an ongoing basis through a total
credit culture that emphasizes excellent credit quality, extensive internal
monitoring and established formal lending policies.  Additionally, the
Company contracts with an outside loan review consultant to periodically review
the existing loan and lease portfolio.  Management believes its
ability to identify and assess risk and return characteristics of the Company’s
loan and lease portfolio is critical for profitability and
growth.  Management strives to continue its emphasis on credit quality
in the loan and lease approval process, through active credit administration and
regular monitoring.  With this in mind, management has designed and
implemented a comprehensive loan and lease review and grading system that
functions to continually assess the credit risk inherent in the loan and lease
portfolio.  In addition, the Company has taken actions to further
strengthen its lending compliance management system in accordance with
recommendations in connection with its 2008 compliance examination including,
among other matters, enhancement of existing procedures for internal control of
loan compliance functions such as maintenance of required levels of compliance
training, increased monitoring of the compliance program, and identification of
any compliance weaknesses. The Company is also taking actions to further
strengthen and improve its asset quality in accordance with an informal
agreement arising out of its 2009 regulatory examination including, among other
matters, enhancement of existing procedures for appraisals and re-appraisals on
secured loans and other real estate owned, and problem loan identification,
including identification of impaired loans and leases and identification of
troubled debt restructured loans.
 
 Ultimately,
underlying trends in economic and business cycles may influence credit
quality.  American River Bank’s business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy but
with a large State of California government presence and employment
base.  In Sonoma County, through North Coast Bank, a division of
American River Bank, whose business is focused on businesses within the two
communities in which it has offices (Santa Rosa and Healdsburg) and in Amador
County, through Bank of Amador, a division of American River Bank, whose
business is focused on businesses and consumers within the three communities in
which it has offices (Jackson, Pioneer, and Ione) as well as a diversified
residential construction loan business in numerous Northern California
counties.  The economy of Sonoma County is diversified with
professional services, manufacturing, agriculture and real estate investment and
construction, while the economy of Amador County is reliant upon government,
services, retail trade, manufacturing industries and Indian gaming.
 
 The
Company has significant extensions of credit and commitments to extend credit
that are secured by real estate.  The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate.  The Company monitors the effects of
current and expected market conditions and other factors on the collectability
of real estate loans.  The more significant factors management
considers involve the following:  lease rate and terms, vacancy rates,
absorption and sale rates; real estate values, supply and demand factors, and
rates of return; operating expenses; inflation; and sufficiency of repayment
sources independent of the real estate including, in some instances, personal
guarantees.  In extending credit and commitments to borrowers, the
Company generally requires collateral and/or guarantees as
security.  The repayment of such loans is expected to come from cash
flow or from proceeds from the sale of selected assets of the
borrowers.  The Company’s requirement for collateral and/or guarantees
is determined on a case-by-case basis in connection with management’s evaluation
of the creditworthiness of the borrower.  Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property.  The
Company secures its collateral by perfecting its security interest in business
assets, obtaining deeds of trust, or outright possession among other
means.
  In
management's judgment, a concentration exists in real estate loans which
represented approximately 74.5% of the Company's loan and lease portfolio at
December 31, 2009, up from 71.8% at December 31, 2008.  Management
believes that the residential land and residential construction portion of the
Company’s loan portfolio carries more than the normal credit risk it has seen in
the past several years due primarily to severely curtailed demand for new and
resale residential property, a large supply of unsold residential land and new
and resale homes, and observed reductions in values throughout the Company’s
market area.  Management has responded by evaluating loans that it
considers to carry any significant risk above the normal risk of collectability
and taking actions where possible to reduce credit risk exposure by methods that
include, but are not limited to, seeking liquidation of the loan by the
borrower, seeking additional tangible collateral or other repayment support,
converting the property through judicial or non-judicial foreclosure
proceedings, and other collection techniques.
 43
 Management
currently believes that it maintains its allowance for loan and lease loss at
levels adequate to reflect the loss risk inherent in its total loan portfolio;
however, a continued substantial further decline in the economy in general, or a
continued additional decline in real estate values in the Company's primary
market areas in particular, could have an adverse impact on the collectability
of these loans and require an increase in the provision for loan and lease
losses, which could adversely affect the Company's future prospects, results of
operations, profitability and stock price.  Management believes that
its lending policies and underwriting standards will tend to minimize losses in
an economic downturn; however, there is no assurance that losses will not occur
under such circumstances.  The Company’s loan policies and
underwriting standards include, but are not limited to, the following: (1)
maintaining a thorough understanding of the Company’s service area and
originating a significant majority of its loans within that area, (2)
maintaining a thorough understanding of borrowers' knowledge, capacity, and
market position in their field of expertise, (3) basing real estate loan
approvals not only on market demand for the project, but also on the borrowers'
capacity to support the project financially in the event it does not perform to
expectations (whether sale or income performance), and (4) maintaining
conforming and prudent loan-to-value and loan-to-cost ratios based on
independent outside appraisals and ongoing inspection and analysis by the
Company’s lending officers or contracted third-party professionals.
 
 Nonaccrual,
Past Due and Restructured Loans and Leases
  Management
generally places loans and leases on nonaccrual status when they become 90 days
past due unless the loan or lease is well secured and in the process of
collection.  Loans and leases are partially or fully charged off when,
in the opinion of management, collection appears unlikely.
  The
recorded investments in nonaccrual loans and leases and loans and leases that
were 90 days or more past due and on accrual totaled $20,964,000 and $6,241,000
at December 31, 2009 and 2008, respectively.  Of the $20,964,000 in
non-performing loans and leases at December 31, 2009, there were twenty-seven
real estate loans totaling $14,048,000; thirteen commercial loans totaling
$6,143,000; seven consumer loan totaling $718,000; and five leases totaling
$55,000.  At December 31, 2008, the $6,241,000 in non-performing loans
consisted of sixteen real estate loans totaling $5,931,000; three commercial
loans totaling $261,000; three leases totaling $41,000; and one consumer loan
totaling $8,000.
 
 The net
interest due on nonaccrual loans and leases but excluded from interest income
was approximately $1,281,000 during 2009, $647,000 during 2008, and $305,000
during 2007.  In 2009, interest income recognized from payments
received on nonaccrual loans and leases was approximately $79,000 and in 2008
and 2007 it was not significant.
 
 Table
Eight below sets forth nonaccrual loans and leases and loans and leases past due
90 days or more and on accrual as of year-end for the past five
years.
  Table
      Eight:  Non-Performing Loans and
  Leases  December 31,(dollars
      in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Past
      due 90 days or more and still accruing:Commercial
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  24Real
      estate
                  
                  
                  —
                  
                  
                  
                  444
                  
                  
                  
                  455
                  
                  
                  
                  13
                  
                  
                  
                  —Lease
      financing receivable
                  
                  
                  —
                  
                  
                  
                  22
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Consumer
      and other
                  
                  
                  —
                  
                  
                  
                  8
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Nonaccrual:Commercial
                  
                  
                  6,143
                  
                  
                  
                  261
                  
                  
                  
                  148
                  
                  
                  
                  —
                  
                  
                  
                  —Real
      estate
                  
                  
                  14,048
                  
                  
                  
                  5,487
                  
                  
                  
                  6,787
                  
                  
                  
                  12
                  
                  
                  
                  15Lease
      financing receivable
                  
                  
                  55
                  
                  
                  
                  19
                  
                  
                  
                  50
                  
                  
                  
                  53
                  
                  
                  
                  52Consumer
      and other
                  
                  
                  718
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      non-performing loans and leases
                  
                  $
                  20,964
                  
                  
                  $
                  6,241
                  
                  
                  $
                  7,440
                  
                  
                  $
                  78
                  
                  
                  $
                  91
 
 Management
monitors the Company’s performance metrics including those ratios related to
non-performing loans and leases.  In 2009, the Company experienced an
increase in the non-performing loan and lease ratios.  However, these
increases do not directly impact the Company’s allowance for loan and lease
losses as management monitors each of the loans and leases on an individual
basis using the accounting principles, “Accounting by Creditors for Impairment
of a Loan.”
 44
 There
were no loan or lease concentrations in excess of 10% of total loans and leases
not otherwise disclosed as a category of loans and leases as of December 31,
2009.  Management is not aware of any potential problem loans, which
were accruing and current at December 31, 2009, where serious doubt exists as to
the ability of the borrower to comply with the present repayment terms and that
would result in a significant loss to the Company.
  Impaired Loans
  The
Company considers a loan to be impaired when, based on current information and
events, it is probable that it will be unable to collect all amounts due
(principal and interest) according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present
value of the expected cash flows of the impaired loan discounted at the loan’s
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The Company generally does not apply this definition
to smaller-balance loans that are collectively evaluated for credit risk. In
assessing impairment, the Company reviews all loans graded substandard or lower
with outstanding principal balances in excess of $250,000, except in the
instance where management believes it is prudent to do otherwise.  The
recorded investment in loans and leases that were considered to be impaired
totaled $41,937,000 at December 31, 2009 and had a related valuation allowance
of $3,810,000.  The average recorded investment in impaired loans and
leases during 2009 was approximately $29,947,000.  As of December 31,
2008, the recorded investment in loans and leases that were considered to be
impaired totaled $6,083,000 and had a related valuation allowance of
$788,000.  The average recorded investment in impaired loans and
leases during 2008 was approximately $8,291,000.  As of December 31,
2007, the recorded investment in loans and leases that were considered to be
impaired totaled $6,637,000 and had a related valuation allowance of
$764,000.  The average recorded investment in impaired loans and
leases during 2007 was approximately $407,000.
 
 Allowance
for Loan and Lease Losses Activity
  The
Company maintains an allowance for loan and lease losses (“ALLL”) to cover
probable losses inherent in the loan and lease portfolio, which is based upon
management’s estimated range of those losses.  The ALLL is established
through a provision for loan and lease losses and is increased by provisions
charged against current earnings and recoveries and reduced by
charge-offs.  Actual losses for loans and leases can vary
significantly from this estimate.  The methodology and assumptions
used to calculate the allowance are continually reviewed as to their
appropriateness given the most recent losses realized and other factors that
influence the estimation process. The model assumptions and resulting allowance
level are adjusted accordingly as these factors change.
 
 The
adequacy of the ALLL and the level of the related provision for loan and lease
losses is determined based on management’s judgment after consideration of
numerous factors including but not limited to: (i) local and regional
economic conditions, (ii) the financial condition of the borrowers,
(iii) loan impairment and the related level of expected charge-offs,
(iv) evaluation of industry trends, (v) industry and other
concentrations, (vi) loans and leases which are contractually current as to
payment terms but demonstrate a higher degree of risk as identified by
management, (vii) continuing evaluations of the performing loan portfolio,
(viii) ongoing review and evaluation of problem loans identified as having
loss potential, (ix) quarterly review by the Board of Directors, and
(x)  assessments by banking regulators and other third parties. Management
and the Board of Directors evaluate the ALLL and determine its appropriate level
considering objective and subjective measures, such as knowledge of the
borrowers' business, valuation of collateral, the determination of impaired
loans or leases and exposure to potential losses.
  The
allowance for loan and lease losses totaled $7,909,000 or 2.06% of total loans
and leases at December 31, 2009, $5,918,000 or 1.41% of total loans and
leases at December 31, 2008, and $5,883,000 or 1.47% at December 31, 2007. The
Company establishes general reserves in accordance with the accounting
principles, “Accounting for Contingencies,” and specific reserves in accordance
with the accounting principles, “Accounting by Creditors for Impairment of a
Loan.”  The ALLL is maintained by categories of the loan and lease
portfolio based on loan type and loan rating; however, the entire allowance is
available to cover actual loan and lease losses. While management uses available
information to recognize possible losses on loans and leases, future additions
to the allowance may be necessary, based on changes in economic conditions and
other matters. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's
ALLL.  Such agencies may require the Company to provide additions to
the allowance based on their judgment of information available to them at the
time of their examination.
 45
 It is the
policy of management to maintain the allowance for loan and lease losses at a
level believed to be adequate for known and inherent risks in the
portfolio.  Our methodology incorporates a variety of risk
considerations, both quantitative and qualitative, in establishing an allowance
for loan and lease losses that management believes is appropriate at each
reporting date.  Based on information currently available to analyze
inherent credit risk, including economic factors, overall credit quality,
historical delinquencies and a history of actual charge-offs, management
believes that the provision for loan and lease losses and the allowance for loan
and lease losses are prudent and adequate. Adjustments may be made based on
differences from estimated loan and lease growth, the types of loans
constituting this growth, changes in risk ratings within the portfolio, and
general economic conditions.  However, no prediction of the ultimate
level of loans and leases charged off in future periods can be made with any
certainty.
  Table
Nine below summarizes, for the periods indicated, the activity in the
ALLL.
  Table
      Nine: Allowance for Loan and Lease
Losses
  Year Ended December 31,(dollars
      in thousands)
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Average
      loans and leases outstanding
                
                $
                404,539
                
                
                $
                410,293
                
                
                $
                390,488
                
                
                $
                381,465
                
                
                $
                360,319Allowance
      for loan & lease lossesat
      beginning of period
                
                $
                5,918
                
                
                $
                5,883
                
                
                $
                5,874
                
                
                $
                5,679
                
                
                $
                5,496Loans
      and leases charged off:Commercial
                
                
                2,944
                
                
                
                422
                
                
                
                301
                
                
                
                71
                
                
                
                72Real
      estate
                
                
                3,257
                
                
                
                1,114
                
                
                
                72
                
                
                
                —
                
                
                
                —Consumer
                
                
                216
                
                
                
                139
                
                
                
                105
                
                
                
                1
                
                
                
                —Lease
      financing receivable
                
                
                171
                
                
                
                59
                
                
                
                70
                
                
                
                78
                
                
                
                134Total
                
                
                6,588
                
                
                
                1,734
                
                
                
                548
                
                
                
                150
                
                
                
                206Recoveries
      of loans and leases previously charged off:Commercial
                
                
                33
                
                
                
                12
                
                
                
                41
                
                
                
                6
                
                
                
                9Real
      estate
                
                
                1
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Consumer
                
                
                8
                
                
                
                —
                
                
                
                —
                
                
                
                9
                
                
                
                2Lease
      financing receivable
                
                
                7
                
                
                
                14
                
                
                
                66
                
                
                
                10
                
                
                
                56Total
                
                
                49
                
                
                
                26
                
                
                
                107
                
                
                
                25
                
                
                
                67Net
      loans and leases charged off
                
                
                6,539
                
                
                
                1,708
                
                
                
                441
                
                
                
                125
                
                
                
                139Additions
      to allowance charged to operating expenses
                
                
                8,530
                
                
                
                1,743
                
                
                
                450
                
                
                
                320
                
                
                
                322Allowance
      for loan and lease losses at end of period
                
                $
                7,909
                
                
                $
                5,918
                
                
                $
                5,883
                
                
                $
                5,874
                
                
                $
                5,679Ratio
      of net charge-offs to average loans and leases outstanding
                
                
                1.62
                %
                
                
                .42
                %
                
                
                .11
                %
                
                
                .03
                %
                
                
                .04
                %Provision
      for loan and lease losses to average loans and leases
      outstanding
                
                
                2.11
                %
                
                
                .42
                %
                
                
                .12
                %
                
                
                .08
                %
                
                
                .09
                %Allowance
      for loan and lease losses to loans and leases, net of deferred fees, at
      end of period
                
                
                2.06
                %
                
                
                1.41
                %
                
                
                1.47
                %
                
                
                1.51
                %
                
                
                1.53
                %
  As part
of its loan review process, management has allocated the overall allowance based
on specific identified problem loans and leases, qualitative factors,
uncertainty inherent in the estimation process and historical loss
data.  A risk exists that future losses cannot be precisely quantified
or attributed to particular loans or leases or classes of loans and
leases.  Management continues to evaluate the loan and lease portfolio
and assesses current economic conditions that will affect management’s
conclusion as to future allowance levels.   Table Ten below
summarizes the allocation of the allowance for loan and lease losses for the
five years ended December 31, 2009.
 46
  Table
      Ten:  Allowance for Loan and Lease Losses by Loan
      Category  (dollars
      in thousands)
                  
                  December
      31, 2009
                  
                  
                  December
      31, 2008
                  
                  
                  December
      31, 2007Amount
                  
                  
                  Percent
      of loans in each category to total loans
                  
                  
                  Amount
                  
                  
                  Percent
      of loans in each category to total loans
                  
                  
                  Amount
                  
                  
                  Percent
      of loans in each category to total loansCommercial
                  
                  $
                  2,178
                  
                  
                  
                  18.9
                  %
                  
                  $
                  1,644
                  
                  
                  
                  21.6
                  %
                  
                  $
                  1,369
                  
                  
                  
                  23.6
                  %Real
      estate
                  
                  
                  5,009
                  
                  
                  
                  74.5
                  %
                  
                  
                  4,030
                  
                  
                  
                  71.8
                  %
                  
                  
                  4,314
                  
                  
                  
                  70.7
                  %Agriculture
                  
                  
                  203
                  
                  
                  
                  1.9
                  %
                  
                  
                  8
                  
                  
                  
                  1.9
                  %
                  
                  
                  8
                  
                  
                  
                  2.0
                  %Consumer
                  
                  
                  426
                  
                  
                  
                  3.7
                  %
                  
                  
                  170
                  
                  
                  
                  3.5
                  %
                  
                  
                  108
                  
                  
                  
                  2.7
                  %Lease
      financing receivable
                  
                  
                  93
                  
                  
                  
                  1.0
                  %
                  
                  
                  66
                  
                  
                  
                  1.2
                  %
                  
                  
                  84
                  
                  
                  
                  1.0
                  %Total
      allocated
                  
                  $
                  7,909
                  
                  
                  
                  100.0
                  %
                  
                  $
                  5,918
                  
                  
                  
                  100.0
                  %
                  
                  $
                  5,883
                  
                  
                  
                  100.0
                  %
  December
      31, 2006
                  
                  
                  December
      31, 2005Amount
                  
                  
                  Percent
      of loans in each category to total loans
                  
                  
                  Amount
                  
                  
                  Percent
      of loans in each category to total loansCommercial
                  
                  $
                  1,269
                  
                  
                  
                  22.1
                  %
                  
                  $
                  1,056
                  
                  
                  
                  21.0
                  %Real
      estate
                  
                  
                  4,332
                  
                  
                  
                  71.4
                  %
                  
                  
                  3,948
                  
                  
                  
                  71.5
                  %Agriculture
                  
                  
                  7
                  
                  
                  
                  1.9
                  %
                  
                  
                  213
                  
                  
                  
                  2.2
                  %Consumer
                  
                  
                  131
                  
                  
                  
                  3.0
                  %
                  
                  
                  246
                  
                  
                  
                  3.2
                  %Lease
      financing receivable
                  
                  
                  135
                  
                  
                  
                  1.6
                  %
                  
                  
                  216
                  
                  
                  
                  2.1
                  %Total
      allocated
                  
                  $
                  5,874
                  
                  
                  
                  100.0
                  %
                  
                  $
                  5,679
                  
                  
                  
                  100.0
                  %
  The
allocation presented should not be interpreted as an indication that charges to
the allowance for loan and lease losses will be incurred in these amounts or
proportions, or that the portion of the allowance allocated to each loan and
lease category represents the total amounts available for charge-offs that may
occur within these categories.
  Other
Real Estate
  During
2009, the Company received $2,808,000 from the net proceeds of the sale of seven
pieces of other real estate owned (“OREO”) with net losses of $17,000 recognized
on these sales.  There was $2,523,000 in other real estate owned at
December 31, 2009 with a valuation allowance of $15,000 and $2,158,000 in other
real estate owned at December 31, 2008 with no valuation allowance.
 
 The
balance in OREO at December 31, 2009 consisted of thirteen properties acquired
through foreclosure.  The balance in OREO at December 31, 2008
consisted of three properties.  During 2009, the Company acquired
seventeen properties through foreclosure totaling $4,793,000.  During
2009 the Company capitalized approximately $27,000 in costs in order to complete
construction on a single property.  The Company periodically obtains
property valuations to determine whether the recorded book value is considered
fair value.  During 2009, this valuation process resulted in the
Company reducing the book value of the properties by
$1,074,000.  During 2008, the valuation process resulted in $143,000
in write-downs.
  Deposits
  At
December 31, 2009, total deposits were $469,755,000 representing an increase of
$32,694,000 (7.5%) from the December 31, 2008 balance of
$437,061,000.  The Company’s deposit growth plan for 2009 was to
concentrate its efforts on increasing noninterest-bearing demand,
interest-bearing money market and NOW accounts, and savings
accounts.  Due to theses efforts, the Company experienced increases
during 2009 in money market ($25,695,000 or 24.3%), savings ($2,796,000 or
8.4%), interest-bearing checking ($4,573,000 or 10.0%) and time deposits
($445,000 or 0.3%) and a decrease in noninterest-bearing demand ($815,000 or
0.7%).
 47
 Other
Borrowed Funds
 
 Other
borrowings outstanding as of December 31, 2009 consist of advances from the
Federal Home Loan Bank (the “FHLB”).  The following table summarizes
these borrowings (dollars in thousands):
  2009
                
                
                2008
                
                
                2007Amount
                
                
                Rate
                
                
                Amount
                
                
                Rate
                
                
                Amount
                
                
                RateShort-term
      borrowings:FHLB
      advances
                
                $
                14,500
                
                
                
                2.84
                %
                
                $
                43,231
                
                
                
                1.83
                %
                
                $
                51,603
                
                
                
                3.61
                %Long-term
      borrowings:FHLB
      advances
                
                $
                17,000
                
                
                
                2.40
                %
                
                $
                14,000
                
                
                
                3.19
                %
                
                $
 
 The maximum amount of short-term
borrowings at any month-end during 2009, 2008 and 2007, was $69,448,000,
$59,000,000, and $51,603,000, respectively.  The FHLB advances are
collateralized by loans and securities pledged to the FHLB. The following is a
breakdown of rates and maturities on FHLB advances (dollars in
thousands):
  Short
      Term
                
                Long
      TermAmount
                
                $
                14,500
                
                
                $
                17,000Maturity
                
                
                2010
                
                2011
      to 2014Average
      rates
                
                
                2.84
                %
                
                
                2.40
                %
 
 The
Company has also been issued a total of $8,000,000 as of December 31, 2009 and
$2,500,000 as of December 31, 2008 in letters of credit by the FHLB which have
been pledged to secure Local Agency Deposits.  The letters of credit
act as a guarantee of payment to certain third parties in accordance with
specified terms and conditions.  The letters of credit were not drawn
upon in 2009 or 2008 and management does not expect to draw upon these lines in
the foreseeable future.
  Capital
Resources
  The
current and projected capital position of the Company and the impact of capital
plans and long-term strategies are reviewed regularly by
management.  The Company’s capital position represents the level of
capital available to support continuing operations and expansion.
  The
Company, through a Board of Directors authorized plan, may repurchase, as
conditions warrant, up to 6.5% annually of the Company's common
stock.  The repurchases are to be made from time to time in the open
market as conditions allow and will be structured to comply with SEC Rule
10b-18.  Management reports monthly to the Board of Directors on the
status of the repurchase program.  The Board of Directors has reserved
the right to suspend, terminate, modify or cancel the repurchase program at any
time for any reason.  Effective July 27, 2009, the Company temporarily
suspended the stock repurchases.  The Company relies on distributions
from the Bank in the form of cash dividends in order to fund its repurchase
program.  As a result of a regularly scheduled FDIC examination in
2009, the Company entered into an informal agreement in February 2010 with the
FDIC and the DFI to take certain actions including restricting the payment of
cash dividends.  As a result, any future cash dividends from the Bank
will require prior approval from its regulators.  The Company did not
repurchase any shares in 2009, repurchased 115,815 shares in 2008, 426,668
shares in 2007, 299,410 shares in 2006, 92,986 shares in 2005, 11,869 shares in
2004, 1,915 shares in 2003 and 83,747 shares in 2002.  Share amounts
have been adjusted for stock dividends and/or splits.  See Part II,
Item 5, “Stock Repurchases” more information regarding the stock repurchase
plan.
 48
 The
Company and American River Bank are subject to certain regulatory capital
requirements administered by the Board of Governors of the Federal Reserve
System and the Federal Deposit Insurance Corporation.  Failure to meet
these minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial
statements.  Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, banks must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices.  The Company’s and American
River Bank’s
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other
factors.  As a result of a regularly scheduled 2009 FDIC examination,
the Company entered into an informal agreement with the FDIC and the DFI to take
certain actions including maintaining the Bank’s Tier 1 Leverage capital ratio
at not less than 8% and a Total Risk-Based capital ratio of not less than
11%.  As of December 31, 2009, the foregoing capital ratios for the
Bank were 11.7% and 17.3%, respectively.  We believe that we are
currently in compliance in all material respects with the actions described in
the agreement, including the capital ratios as described above.  See
“Recent Developments” under Item 7 herein on page
34 for more information regarding the informal agreement.
  At
December 31, 2009, shareholders’ equity was $87,345,000, representing an
increase of $23,898,000 (37.7%) from $63,447,000 at December 31,
2008.  This increase was attributable principally to the public
offering the Company undertook in the fourth quarter of 2009.  On
December 17, 2009, the Company filed a Current Report with the SEC on Form 8-K
announcing the completion of an offering of approximately $24 million of its
common stock.  In 2008, shareholders’ equity increased $3,474,000
(5.8%) from 2007.  The ratio of total risk-based capital to risk
adjusted assets was 18.4% at December 31, 2009 compared to 11.5% at December 31,
2008.  Tier 1 risk-based capital to risk-adjusted assets was 17.1% at
December 31, 2009 and 10.2% at December 31, 2008.
  Table
Eleven below lists the Company’s actual capital ratios at December 31, 2009 and
2008 as well as the minimum capital ratios for capital adequacy.
  Table
      Eleven:  Capital Ratios
 
 At
      December 31,
                
                
                Minimum
      RegulatoryCapital RequirementsCapital
      to Risk-Adjusted Assets
                
                2009
                
                
                2008Leverage
      ratio
                
                12.4
                %
                
                
                8.3
                %
                
                
                4.00
                %Tier
      1 Risk-Based Capital
                
                17.1
                %
                
                
                10.2
                %
                
                
                4.00
                %Total
      Risk-Based Capital
                
                18.4
                %
                
                
                11.5
                %
                
                
                8.00
                %
  Capital
ratios are reviewed on a regular basis to ensure that capital exceeds the
prescribed regulatory minimums and is adequate to meet future
needs.  American River Bank’s ratios are in excess of the regulatory
definition of “well capitalized.”
  The
Company filed an application with the U.S. Treasury to preserve its opportunity
to participate in the Capital Purchase Program (“CPP”) and received approval of
its application on November 21, 2008.  However, the Board of Directors
subsequently determined that participation in the CPP was not in the best
interests of the Company and its shareholders after evaluation of the CPP and
due diligence reviews of the CPP agreements and documentation including
restrictions imposed upon the Company under the investment agreement and related
documentation which could reduce investment returns to shareholders of
participating bank holding companies and banks by restricting dividends to
common shareholders, diluting existing shareholders' interests, and restricting
capital management practices, and consideration of various other factors
including, but not limited to, capital raising alternatives and the condition of
capital markets, the current and projected economic conditions in the Company’s
market areas and the United States generally, the condition of the Company’s
loan and investment portfolios and other financial factors, and with advice of
such advisors as the Company’s Board of Directors deemed
appropriate.  The Company gave notice to the U.S. Treasury on January
20, 2009 of its intention not to participate in the CPP.  See “Capital
Purchase Program” at
page 16 for more information about the CPP.
  Management
believes that the Company’s capital is adequate to support current operations
and anticipated growth and currently foreseeable future capital requirements of
the Company and its subsidiaries.
  Market
Risk Management
  Overview.  Market
risk is the risk of loss from adverse changes in market prices and
rates.  The Company’s market risk arises primarily from interest rate
risk inherent in its loan and deposit functions.  The goal for
managing the assets and liabilities of the Company is to maximize shareholder
value and earnings while maintaining a high quality balance sheet without
exposing the Company to undue interest rate risk.  The Board of
Directors has overall responsibility for the interest rate risk management
policies.  The Company has a Risk Management Committee that
establishes and monitors guidelines to control the sensitivity of earnings to
changes in interest rates.
 49
 Asset/Liability
Management.  Activities involved in asset/liability management
include, but are not limited to, lending, accepting and placing deposits and
investing in securities.  Interest rate risk is the primary market
risk associated with asset/liability management.  Sensitivity of
earnings to interest rate changes arises when yields on assets change in a
different time period or in a different amount from that of interest costs on
liabilities.  To mitigate interest rate risk, the structure of the
consolidated balance sheet is managed with the goal that movements of interest
rates on assets and liabilities are correlated and contribute to earnings even
in periods of volatile interest rates.  The asset/liability management
policy sets limits on the acceptable amount of variance in net interest margin
and market value of equity under changing interest environments.  The
Company uses simulation models to forecast earnings, net interest margin and
market value of equity.
  Simulation
of earnings is the primary tool used to measure the sensitivity of earnings to
interest rate changes.  Using computer-modeling techniques, the
Company is able to estimate the potential impact of changing interest rates on
earnings.  A balance sheet forecast is prepared quarterly using inputs
of actual loans and leases, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base.  The forecast
balance sheet is processed against three interest rate scenarios.  The
scenarios include a 200 basis point rising rate forecast, a flat rate forecast
and a 200 basis point falling rate forecast which take place within a one year
time frame.  The net interest income is measured during the year
assuming a gradual change in rates over the twelve-month horizon.  The
simulation modeling indicated below attempts to estimate changes in the
Company's net interest income utilizing a forecast balance sheet projected from
year-end balances.  Table Twelve below summarizes the effect on net
interest income (NII) of a ±200 basis point change in interest rates as measured
against a constant rate (no change) scenario.
  Table
      Twelve:  Interest Rate Risk Simulation of Net Interest as of
      December 31, 2009
 
 (dollars
      in thousands)
                
                
                $
      Change in NII
                  from
      Current
                  12 Month HorizonVariation
      from a constant rate scenario+200bp
                
                
                $
                (10
                )-200bp
                
                
                $
                (432
                )
  The
simulations of earnings do not incorporate any management actions, which might
moderate the negative consequences of interest rate
deviations.  Therefore, they do not reflect likely actual results, but
serve as reasonable estimates of interest rate risk.
  Interest
Rate Sensitivity Analysis
 
 Interest
rate sensitivity is a function of the repricing characteristics of the portfolio
of assets and liabilities.  These repricing characteristics are the
time frames within which the interest-bearing assets and liabilities are subject
to change in interest rates either at replacement, repricing or
maturity.  Interest rate sensitivity management focuses on the
maturity of assets and liabilities and their repricing during periods of changes
in market interest rates.  Interest rate sensitivity is measured as
the difference between the volumes of assets and liabilities in the current
portfolio that are subject to repricing at various time horizons.  The
differences are known as interest sensitivity gaps. A positive cumulative gap
may be equated to an asset sensitive position.  An asset sensitive
position in a rising interest rate environment will cause a bank’s interest rate
margin to expand.  This results as floating or variable rate loans
reprice more rapidly than fixed rate certificates of deposit that reprice as
they mature over time.  Conversely, a declining interest rate
environment will cause the opposite effect.   A negative
cumulative gap may be equated to a liability sensitive position.  A
liability sensitive position in a rising interest rate environment will cause a
bank’s interest rate margin to contract, while a declining interest rate
environment will have the opposite effect.
 
 Inflation
 
 The
impact of inflation on a financial institution differs significantly from that
exerted on manufacturing, or other commercial concerns, primarily because its
assets and liabilities are largely monetary.  In general, inflation
primarily affects the Company through its effect on market rates of interest,
which affects the Company’s ability to attract loan
customers.  Inflation affects the growth of total assets by increasing
the level of loan demand, and potentially adversely affects capital adequacy
because loan growth in inflationary periods can increase at rates higher than
the rate that capital grows through retention of earnings which may be generated
in the future.  In addition to its effects on interest rates,
inflation increases overall operating expenses.  Inflation has not had
a material effect upon the results of operations of the Company during the years
ended December 31, 2009, 2008 and 2007.
 50
 Liquidity
  Liquidity
management refers to the Company’s ability to provide funds on an ongoing basis
to meet fluctuations in deposit levels as well as the credit needs and
requirements of its clients.  Both assets and liabilities contribute
to the Company’s liquidity position.  Federal funds lines, short-term
investments and securities, and loan and lease repayments contribute to
liquidity, along with deposit increases, while loan and lease funding and
deposit withdrawals decrease liquidity.  The Company assesses the
likelihood of projected funding requirements by reviewing historical funding
patterns, current and forecasted economic conditions and individual client
funding needs.  Commitments to fund loans and outstanding standby
letters of credit at December 31, 2009 were approximately $67,825,000 and
$10,190,000, respectively.  Such loan commitments relate primarily to
revolving lines of credit and other commercial loans and to real estate
construction loans.  Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
  The
Company’s sources of liquidity consist of cash and due from correspondent banks,
overnight funds sold to correspondent banks, unpledged marketable investments
and loans held for sale.  On December 31, 2009, consolidated liquid
assets totaled $79.8 million or 13.4% of total assets compared to $41.3 million
or 7.3% of total assets on December 31, 2008.  In addition to liquid
assets, the Company maintains short-term lines of credit in the amount of
$20,000,000 with correspondent banks.  At December 31, 2009, the
Company had $20,000,000 available under these credit
lines.  Additionally, American River Bank is a member of the
FHLB.  At December 31, 2009, American River Bank could have arranged
for up to $93,547,000 in secured borrowings from the FHLB.  These
borrowings are secured by pledged mortgage loans and investment
securities.  At December 31, 2009, the Company had $54,047,000
available under these secured borrowing arrangements.  American River
Bank also has a secured borrowing arrangement with the Federal Reserve
Bank.  The borrowing can be secured by pledging selected loans and
investment securities.  At December 31, 2009, the Company’s borrowing
capacity at the Federal Reserve Bank was $36,353,000.
  The
Company serves primarily a business and professional customer base and, as such,
its deposit base is susceptible to economic
fluctuations.  Accordingly, management strives to maintain a balanced
position of liquid assets to volatile and cyclical deposits.
  Liquidity
is also affected by portfolio maturities and the effect of interest rate
fluctuations on the marketability of both assets and liabilities.  The
Company can sell any of its unpledged securities held in the available-for-sale
category to meet liquidity needs.  These securities are also available
to pledge as collateral for borrowings if the need should
arise.  American River Bank can also pledge additional securities to
borrow from the Federal Reserve Bank and the FHLB.
  The
maturity distribution of certificates of deposit is set forth in Table Thirteen
below for the periods presented.  These deposits are generally more
rate sensitive than other deposits and, therefore, are more likely to be
withdrawn to obtain higher yields elsewhere if available.
  Table
      Thirteen: Certificates of Deposit Maturities
                  December
      31, 2009  (dollars
      in thousands)
                  
                  Less
      than $100,000
                  
                  
                  Over
      $100,000Three
      months or less
                  
                  $
                  11,305
                  
                  
                  $
                  59,363Over
      three months through six months
                  
                  
                  7,970
                  
                  
                  
                  16,252Over
      six months through twelve months
                  
                  
                  9,393
                  
                  
                  
                  12,785Over
      twelve months
                  
                  
                  6,696
                  
                  
                  
                  9,661Total
                  
                  $
                  35,364
                  
                  
                  $
                  98,061
 
 Loan and
lease demand also affects the Company’s liquidity position.  Table
Fourteen below presents the maturities of loans and leases for the period
indicated.
 51
  Table
      Fourteen:  Loan and Lease Maturities (Gross Loans and
      Leases)December
      31, 2009  (dollars
      in thousands)
                  
                  One
      yearor less
                  
                  
                  One
      year throughFive years
                  
                  
                  Overfive
      years
                  
                  
                  TotalCommercial
                  
                  $
                  34,153
                  
                  
                  $
                  29,967
                  
                  
                  $
                  8,501
                  
                  
                  $
                  72,621Real
      estate
                  
                  
                  51,543
                  
                  
                  
                  90,356
                  
                  
                  
                  144,666
                  
                  
                  
                  286,565Agriculture
                  
                  
                  817
                  
                  
                  
                  6,655
                  
                  
                  
                  —
                  
                  
                  
                  7,472Consumer
                  
                  
                  871
                  
                  
                  
                  4,292
                  
                  
                  
                  9,090
                  
                  
                  
                  14,253Leases
                  
                  
                  164
                  
                  
                  
                  3,197
                  
                  
                  
                  559
                  
                  
                  
                  3,920Total
                  
                  $
                  87,548
                  
                  
                  $
                  134,467
                  
                  
                  $
                  162,816
                  
                  
                  $
                  384,831
 
 Loans and
leases shown above with maturities greater than one year include $207,155,000 of
floating interest rate loans and $90,128,000 of fixed rate loans and
leases.
  The
carrying amount, maturity distribution and weighted average yield of the
Company’s investment securities available-for-sale and held-to-maturity
portfolios are presented in Table Fifteen below.  The yields on
tax-exempt obligations have been computed on a tax equivalent
basis.  Table Fifteen does not include FHLB Stock, which does not have
stated maturity dates or readily available market values.  The balance
in FHLB Stock at December 31, 2009, 2008 and 2007 was $3,922,000, $3,922,000 and
$2,800,000, respectively.
  Table
      Fifteen:  Securities Maturities and Weighted Average
      YieldsDecember
    31,
 (Taxable
Equivalent Basis)
 2009
                  
                  
                  2008
                  
                  
                  2007(dollars
      in thousands)
                  
                  Carrying
                    Amount
                  
                  
                  Weighted
                    Average
                    Yield
                  
                  
                  Carrying
                    Amount
                  
                  
                  Weighted
                    Average
                    Yield
                  
                  
                  Carrying
                    Amount
                  
                  
                  Weighted
                    Average
                    YieldAvailable-for-sale
      securities:U.S.
      Treasury and agency securitiesMaturing
      within 1 year
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  13,072
                  
                  
                  
                  3.77
                  %Maturing after 1 year but within 5 years
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,434
                  
                  
                  
                  3.84
                  %State
      & political subdivisionsMaturing within 1 year
                  
                  $
                  3,749
                  
                  
                  
                  4.40
                  %
                  
                  $
                  2,055
                  
                  
                  
                  4.42
                  %
                  
                  
                  2,363
                  
                  
                  
                  4.15
                  %Maturing after 1 year but within 5 years
                  
                  
                  7,397
                  
                  
                  
                  6.10
                  %
                  
                  
                  12,228
                  
                  
                  
                  5.42
                  %
                  
                  
                  11,561
                  
                  
                  
                  5.17
                  %Maturing after 5 years but within 10 years
                  
                  
                  4,473
                  
                  
                  
                  6.21
                  %
                  
                  
                  11,782
                  
                  
                  
                  6.08
                  %
                  
                  
                  9,810
                  
                  
                  
                  6.38
                  %Maturing after 10 years
                  
                  
                  4,968
                  
                  
                  
                  5.77
                  %
                  
                  
                  4,948
                  
                  
                  
                  5.77
                  %
                  
                  
                  7,377
                  
                  
                  
                  6.28
                  %Mortgage-backed
      securities
                  
                  
                  76,009
                  
                  
                  
                  3.50
                  %
                  
                  
                  32,232
                  
                  
                  
                  4.89
                  %
                  
                  
                  31,066
                  
                  
                  
                  4.30
                  %OtherMaturing within 1 year
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Non-maturing
                  
                  
                  86
                  
                  
                  
                  0.00
                  %
                  
                  
                  89
                  
                  
                  
                  0.00
                  %
                  
                  
                  287
                  
                  
                  
                  4.44
                  %Total
      investment securities
                  
                  $
                  96,682
                  
                  
                  
                  3.97
                  %
                  
                  $
                  63,334
                  
                  
                  
                  5.26
                  %
                  
                  $
                  78,970
                  
                  
                  
                  4.76
                  %Held-to-maturity
      securities:Mortgage-backed
      securities
                  
                  $
                  12,331
                  
                  
                  
                  4.48
                  %
                  
                  $
                  24,365
                  
                  
                  
                  4.89
                  %
                  
                  $
                  34,754
                  
                  
                  
                  4.69
                  %Total
      investment securities
                  
                  $
                  12,331
                  
                  
                  
                  4.48
                  %
                  
                  $
                  24,365
                  
                  
                  
                  4.89
                  %
                  
                  $
                  34,754
                  
                  
                  
                  4.69
                  %
 
 The
carrying values of available-for-sale securities include net unrealized gains of
$377,000, $673,000 and $171,000 at December 31, 2009, 2008 and 2007,
respectively.  The carrying values of held-to-maturity securities do
not include unrealized gains or losses; however, the net unrealized gains at
December 31, 2009, 2008 and 2007 were $558,000, $524,000 and $101,000,
respectively.
 52
 Off-Balance
Sheet Arrangements
  The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business in order to meet the financing needs of its customers
and to reduce its exposure to fluctuations in interest rates.  These
financial instruments consist of commitments to extend credit and letters of
credit.  These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized on the balance
sheet.
  As of
December 31, 2009, commitments to extend credit and letters of credit were the
only financial instruments with off-balance sheet risk. The Company has not
entered into any contracts for financial derivative instruments such as futures,
swaps, options or similar instruments.  Real estate commitments are
generally secured by property with a loan-to-value ratio of 55% to
75%.  In addition, the majority of the Company's commitments have
variable interest rates.
 
 The
Company’s
exposure to credit loss in the event of nonperformance by the other party for
commitments to extend credit and letters of credit is represented by the
contractual amount of those instruments.  The Company uses the same
credit policies in making commitments and letters of credit as it does for loans
included on the consolidated balance sheet.  The following financial
instruments represent off-balance-sheet credit:
  December 31,2009
                
                
                2008Commitments
      to extend credit (dollars in thousands):Revolving
      lines of credit secured by 1-4 family residences
                
                $
                6,615
                
                
                $
                7,396Commercial
      real estate, construction and land  development commitments
      secured by real estate
                
                
                18,202
                
                
                
                17,076Other
      unused commitments, principally commercial loans
                
                
                43,008
                
                
                
                52,465$
                67,825
                
                
                $
                76,937Letters
      of credit
                
                $
                10,190
                
                
                $
                3,798
 
 Certain
financial institutions have elected to use special purpose vehicles (“SPV”) to
dispose of problem assets.  The SPV is typically a subsidiary company
with an asset and liability structure and legal status that makes its
obligations secure even if the parent corporation goes
bankrupt.  Under certain circumstances, these financial institutions
may exclude the problem assets from their reported impaired and non-performing
assets.  The Company does not use those vehicles or any other
structures to dispose of problem assets.
  Contractual
Obligations
  The
Company leases certain facilities at which it conducts its
operations.  Future minimum lease commitments under non-cancelable
operating leases are noted in Table Sixteen below.  Table Sixteen
below presents certain of the Company’s contractual obligations as of December
31, 2009.  Included in the table are amounts payable under the
Company’s Deferred Compensation and Deferred Fees Plans and are listed in the
“Other Long-Term Liabilities...” category.  At December 31, 2009, these
amounts represented $2,167,000 and are anticipated to be primarily payable at
least five years in the future.
  Table
      Sixteen: Contractual Obligations
 
 Payments
      due by period(dollars
      in thousands)
                
                Total
                
                
                Less
      than 1 year
                
                
                1-3
      years
                
                
                3-5
      years
                
                
                More
      than 5 yearsLong-Term
      Debt
                
                $
                17,000
                
                
                $
                —
                
                
                $
                12,000
                
                
                $
                5,000
                
                
                $
                —Capital
      Lease Obligations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Operating
      Leases
                
                
                4,212
                
                
                
                863
                
                
                
                1,284
                
                
                
                1,023
                
                
                
                1,042Purchase
      Obligations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Other
      Long-Term Liabilities Reflected on the Company’s Balance Sheet under
      GAAP
                
                
                2,167
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,167Total
                
                $
                23,379
                
                
                $
                863
                
                
                $
                13,284
                
                
                $
                6,023
                
                
                $
                3,209
  53
 Accounting
Pronouncements
  In June
2009, the Financial Accounting Standards Board (the “FASB”) issued new
accounting standards ASC 105-10 (previously SFAS No. 168), “The FASB Accounting
Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles.”  With the
issuance of ASC 105-10, the FASB Accounting Standards Codification (“the
Codification” or “ASC”) becomes the single source of authoritative U.S.
accounting and reporting standards applicable for all nongovernmental
entities.  Rules and interpretive releases of the SEC under the
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants.  This change was effective for financial statements
issued for interim or annual periods ended after September 15,
2009.  Accordingly, all specific references to generally accepted
accounting principles (“GAAP”) refer to the Codification and not to the
pre-Codification literature.
 
 In April
2009, the FASB issued ASC No. 320-10-35 (previously FSP 115-2 and 124-2 and EITF
99-20-2), “Recognition and Presentation of
Other-Than-Temporary-Impairment.”This standard
(i) changes previously existing guidance for determining whether an
impairment to debt securities is other than temporary and (ii) replaces the
previously existing requirement that the entity's management assert it has both
the intent and ability to hold an impaired security until recovery with a
requirement that management assert: (a) it does not have the intent to sell the
security; and (b) it is more likely than not it will not have to sell the
security before recovery of its cost basis.  Under this standard,
declines in fair value below cost that are deemed to be other than temporary are
reflected in earnings as realized losses to the extent the impairment is related
to credit losses for both held-to-maturity and available-for-sale
securities.  The amount of impairment related to other factors is
recognized in other comprehensive income.  The Company adopted the
provisions of this standard on April 1, 2009 and they did not have a material
impact on its financial condition or results of operations.
  In April
2009, the FASB issued ASC 820-10 (previously FSP FAS 157-4), “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly.”This standard affirms
the objective of fair value when a market is not active, clarifies and includes
additional factors for determining whether there has been a significant decrease
in market activity, eliminates the presumption that all transactions are
distressed unless proven otherwise, and requires an entity to disclose a change
in valuation technique.  The Company adopted the provisions of this
standard on April 1, 2009 and they did not have a material impact on its
financial condition or results of operations.
  In August
2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures
(ASC Topic 820) — Measuring Liabilities at Fair Value.”  This update
provides amendments for the fair value measurement of liabilities. It provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more techniques.  It also clarifies
that when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents the transfer of the
liability.  The Companyadopted the provisions
of this update on October 1, 2009 and they did not have a material impact on its
financial condition or results of operations.
  In
December 2007, the FASB issued ASC Topic 805 (previously SFAS 141(R)), Business Combinations.This
standard broadens the guidance for business combinations and extends its
applicability to all transactions and other events in which one entity obtains
control over one or more other businesses.  It broadens the fair value
measurement and recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations.  The
acquirer is no longer permitted to recognize a separate valuation allowance as
of the acquisition date for loans and other assets acquired in a business
combination.  It also requires acquisition-related costs and
restructuring costs that the acquirer expected but was not obligated to incur to
be expensed separately from the business combination.  It also expands
on required disclosures to improve the ability of the users of the financial
statements to evaluate the nature and financial effects of business
combinations.  This standard was effective January 1, 2009 for the
Company.
  In May
2009, the FASB issued ASC 855-10 (previously SFAS No. 165), “Subsequent Events,”
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued.  The adoption of this standard
on July 1, 2009 required the Company to disclose the date through which
subsequent events were evaluated and had no effect on the financial position or
results of operations.
 54
 Item 7A.  Quantitative and Qualitative Disclosures About
Market Risk.
  The
information required by Item 7A of Form 10-K is contained in the “Market Risk
Management” section of Item 7-“Management's Discussion and Analysis of Financial
Condition and Results of Operations” on pages
49-50.
 
 Item 8.  Financial Statements and Supplementary
Data.
 
 INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting
      Firm
                56Consolidated Balance Sheet, December 31, 2009 and
      2008
                57Consolidated
      Statement of Income for the Years EndedDecember 31, 2009, 2008 and
      2007
                58Consolidated
      Statement of Changes in Shareholders' Equityfor the Years Ended
      December 31, 2009, 2008 and 2007
                59Consolidated
      Statement of Cash Flows for the Years EndedDecember 31, 2009, 2008
      and 2007
                60-61Notes to Consolidated Financial
Statements
                62-94
 
 All
schedules have been omitted since the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the Consolidated Financial Statements or
notes thereto.
 55
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM




The
Shareholders and Board of Directors


American
River Bankshares




We have
audited the accompanying consolidated balance sheet of American River Bankshares
and subsidiaries (the “Company”) as of December 31, 2009 and 2008 and the
related consolidated statements of income, changes in shareholders’ equity and
cash flows for each of the years in the three-year period ended December 31,
2009. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American River
Bankshares and subsidiaries as of December 31, 2009 and 2008, and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three-year period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.




/s/ Perry-Smith
      LLPMarch 4,
      2010


56




AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEET




December
31, 2009 and 2008


(Dollars
in thousands)




2009
            
            
            2008ASSETSCash
      and due from banks
            
            $
            58,493
            
            
            $
            15,170Interest-bearing
      deposits in banks
            
            
            
            
            
            
            4,248Investment
      securities (Note 5):Available
      for sale, at fair value
            
            
            96,682
            
            
            
            63,334Held
      to maturity, at amortized cost
            
            
            12,331
            
            
            
            24,365Loans
      and leases, less allowance for loan and lease losses of $7,909 in
      2009 and $5,918 in 2008 (Notes 6, 11 and 16)
            
            
            376,322
            
            
            
            412,356Premises
      and equipment, net (Note 7)
            
            
            2,094
            
            
            
            2,115Federal
      Home Loan Bank stock
            
            
            3,922
            
            
            
            3,922Other
      real estate owned, net
            
            
            2,508
            
            
            
            2,158Goodwill
      (Note 4)
            
            
            16,321
            
            
            
            16,321Intangible
      assets (Note 4)
            
            
            644
            
            
            
            907Accrued
      interest receivable and other assets (Notes 10 and 15)
            
            
            25,101
            
            
            
            18,261$
            594,418
            
            
            $
            563,157LIABILITIES
      AND

                SHAREHOLDERS’
      EQUITYDeposits:Noninterest
      bearing
            
            $
            118,328
            
            
            $
            119,143Interest-bearing
      (Note 8)
            
            
            351,427
            
            
            
            317,918Total
      deposits
            
            
            469,755
            
            
            
            437,061Short-term
      borrowings (Note 9)
            
            
            14,500
            
            
            
            43,231Long-term
      borrowings (Note 9)
            
            
            17,000
            
            
            
            14,000Accrued
      interest payable and other liabilities (Note 15)
            
            
            5,818
            
            
            
            5,418Total
      liabilities
            
            
            507,073
            
            
            
            499,710Commitments
      and contingencies (Note 11)Shareholders’
      equity (Notes 12 and 13):Common
      stock - no par value; 20,000,000 shares authorized;
                  issued
      and outstanding – 9,845,533 shares in 2009 and 5,792,283 shares in
      2008
            
            
            71,578
            
            
            
            47,433Retained
      earnings
            
            
            15,545
            
            
            
            15,617Accumulated
      other comprehensive income, net of taxes(Notes 5 and
      17)
            
            
            222
            
            
            
            397Total
      shareholders’ equity
            
            
            87,345
            
            
            
            63,447$
            594,418
            
            
            $
            563,157




The
accompanying notes are an integral part of
these consolidated financial statements.




57





AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF INCOME




For
the Years Ended December 31, 2009, 2008 and 2007


(Dollars
in thousands, except per share data)


2009
              
              
              2008
              
              
              2007Interest
      income:Interest
      and fees on loans and leases
              
              $
              25,378
              
              
              $
              28,512
              
              
              $
              31,508Interest
      on Federal funds sold
              
              
              
              
              
              
              10
              
              
              
              34Interest
      on deposits in banks
              
              
              59
              
              
              
              222
              
              
              
              271Interest
      and dividends on investment securities:Taxable
              
              
              2,763
              
              
              
              3,711
              
              
              
              4,544Exempt
      from Federal income taxes
              
              
              917
              
              
              
              1,080
              
              
              
              1,095Dividends
              
              
              5
              
              
              
              18
              
              
              
              26Total
      interest income
              
              
              29,122
              
              
              
              33,553
              
              
              
              37,478Interest
      expense:Interest
      on deposits (Note 8)
              
              
              4,003
              
              
              
              5,901
              
              
              
              9,560Interest
      on borrowings (Note 9)
              
              
              1,087
              
              
              
              1,727
              
              
              
              1,516Total
      interest expense
              
              
              5,090
              
              
              
              7,628
              
              
              
              11,076Net
      interest income
              
              
              24,032
              
              
              
              25,925
              
              
              
              26,402Provision
      for loan and lease losses (Note 6)
              
              
              8,530
              
              
              
              1,743
              
              
              
              450Net
      interest income after provision for loan and lease losses
              
              
              15,502
              
              
              
              24,182
              
              
              
              25,952Noninterest
      income:Service
      charges
              
              
              1,018
              
              
              
              741
              
              
              
              743Gain
      (loss) on sale, call and impairment of investment securities (Note
      5)
              
              
              270
              
              
              
              (119
              )
              
              
              11Other
      income (Note 14)
              
              
              981
              
              
              
              1,546
              
              
              
              1,845Total
      noninterest income
              
              
              2,269
              
              
              
              2,168
              
              
              
              2,599Noninterest
      expense:Salaries
      and employee benefits (Notes 6 and 15)
              
              
              7,279
              
              
              
              7,687
              
              
              
              8,396Other
      real estate expense
              
              
              1,441
              
              
              
              1
              
              
              
              1Occupancy
      (Notes 7, 11 and 16)
              
              
              1,389
              
              
              
              1,495
              
              
              
              1,398FDIC
      assessments
              
              
              770
              
              
              
              151
              
              
              
              57Furniture
      and equipment (Notes 7 and 11)
              
              
              759
              
              
              
              774
              
              
              
              691Other
      expense (Notes 4 and 14)
              
              
              4,173
              
              
              
              4,093
              
              
              
              4,290Total
      noninterest expense
              
              
              15,811
              
              
              
              14,201
              
              
              
              14,833Income
      before provision for income taxes
              
              
              1,960
              
              
              
              12,149
              
              
              
              13,718Provision
      for income taxes (Note 10)
              
              
              374
              
              
              
              4,578
              
              
              
              5,240Net
      income
              
              $
              1,586
              
              
              $
              7,571
              
              
              $
              8,478Basic
      earnings per share (Note 12)
              
              $
              .26
              
              
              $
              1.30
              
              
              $
              1.40Diluted
      earnings per share (Note 12)
              
              $
              .26
              
              
              $
              1.30
              
              
              $
              1.39Cash
      dividends per share of issued and outstanding common stock, adjusted for
      stock dividends
              
              $
              .29
              
              
              $
              0.57
              
              
              $
              0.55




The
accompanying notes are an integral part of these consolidated financial
statements.




58




AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’
EQUITY




For
the Years Ended December 31, 2009, 2008 and 2007


(Dollars
in thousands)




Common
      Stock
              
              
              Retained
              
              
              Accumulated
                Other
                Comprehensive
                Income
      (Loss)
              
              
              Total
                Shareholders’
              
              
              Total
                ComprehensiveShares
              
              
              Amount
              
              
              Earnings
              
              
              (Net
      ofTaxes)
              
              
              Equity
              
              
              IncomeBalance,
      January 1, 2007
              
              
              5,657,346
              
              
              $
              48,246
              
              
              $
              14,690
              
              
              $
              (565
              )
              
              $
              62,371Comprehensive
      income (Note 17):Net
      income
              
              
              
              
              
              
              
              
              
              
              8,478
              
              
              
              
              
              
              
              8,478
              
              
              $
              8,478Other
      comprehensive income, net of tax:Net
      change in unrealized gains on available-for-sale investment
      securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              666
              
              
              
              666
              
              
              
              666Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              9,144Cash
      dividend ($0.55 per share) (Note 13)
              
              
              
              
              
              
              
              
              
              
              (3,319
              )
              
              
              
              
              
              
              (3,319
              )Fractional
      shares redeemed for stock dividend
              
              
              (6
              )
              
              
              (9
              )
              
              
              
              
              
              
              
              
              
              
              (9
              )5%
      stock dividend (Note 12)
              
              
              265,683
              
              
              
              5,645
              
              
              
              (5,645
              )Stock
      options exercised (Note 12)
              
              
              54,569
              
              
              
              679
              
              
              
              
              
              
              
              
              
              
              
              679Stock
      option compensation (Note 12)
              
              
              
              
              
              
              301
              
              
              
              
              
              
              
              
              
              
              
              301Retirement
      of common stock (Note 12)
              
              
              (387,315
              )
              
              
              (9,194
              )
              
              
              
              
              
              
              
              
              
              
              (9,194
              )Balance,
      December 31, 2007
              
              
              5,590,277
              
              
              
              45,668
              
              
              
              14,204
              
              
              
              101
              
              
              
              59,973Comprehensive
      income (Note 17):Net
      income
              
              
              
              
              
              
              
              
              
              
              7,571
              
              
              
              
              
              
              
              7,571
              
              
              $
              7,571Other
      comprehensive income, net of tax:Net
      change in unrealized gains on available-for-sale investment
      securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              296
              
              
              
              296
              
              
              
              296Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              7,867Cash
      dividend ($0.57 per share) (Note 13)
              
              
              
              
              
              
              
              
              
              
              (3,317
              )
              
              
              
              
              
              
              (3,317
              )Fractional
      shares redeemed for stock dividend
              
              
              
              
              
              
              (10
              )
              
              
              
              
              
              
              
              
              
              
              (10
              )5%
      stock dividend (Note 12)
              
              
              275,048
              
              
              
              2,841
              
              
              
              (2,841
              )Stock
      options exercised (Note 12)
              
              
              37,258
              
              
              
              354
              
              
              
              
              
              
              
              
              
              
              
              354Stock
      option compensation (Note 12)
              
              
              
              
              
              
              290
              
              
              
              
              
              
              
              
              
              
              
              290Retirement
      of common stock (Note 12)
              
              
              (110,300
              )
              
              
              (1,710
              )
              
              
              
              
              
              
              
              
              
              
              (1,710
              )Balance,
      December 31, 2008
              
              
              5,792,283
              
              
              
              47,433
              
              
              
              15,617
              
              
              
              397
              
              
              
              63,447Comprehensive
      income (Note 17):Net
      income
              
              
              
              
              
              
              
              
              
              
              1,586
              
              
              
              
              
              
              
              1,586
              
              
              $
              1,586Other
      comprehensive loss, net of tax:Net
      change in unrealized gains on available-for-sale investment securities
      (Note 5)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (175
              )
              
              
              (175
              )
              
              
              (175
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,411Cash
      dividend ($0.29 per share) (Note 13)
              
              
              
              
              
              
              
              
              
              
              (1,658
              )
              
              
              
              
              
              
              (1,658
              )Issuance
      of new shares, net of issuance costs ($6.25 per share)
              
              
              4,048,000
              
              
              
              23,901
              
              
              
              
              
              
              
              
              
              
              
              23,901Stock
      options exercised (Note 12)
              
              
              5,250
              
              
              
              34
              
              
              
              
              
              
              
              
              
              
              
              34Stock
      option compensation (Note 12)
              
              
              
              
              
              
              210
              
              
              
              
              
              
              
              
              
              
              
              210Balance,
      December 31, 2009
              
              
              9,845,533
              
              
              $
              71,578
              
              
              $
              15,545
              
              
              $
              222
              
              
              $
              87,345




The
accompanying notes are an integral part of these
consolidated financial statements.




59




AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF CASH FLOWS





For
the Years Ended December 31, 2009, 2008 and 2007


(Dollars
in thousands)




2009
              
              
              2008
              
              
              2007Cash
      flows from operating activities:Net
      income
              
              $
              1,586
              
              
              $
              7,571
              
              
              $
              8,478Adjustments
      to reconcile net income to net cashprovided by operating
      activities:Provision
      for loan and lease losses
              
              
              8,530
              
              
              
              1,743
              
              
              
              450Increase
      (decrease) in deferred loan and lease origination fees,
net
              
              
              29
              
              
              
              54
              
              
              
              (188
              )Depreciation
      and amortization
              
              
              832
              
              
              
              822
              
              
              
              840Amortization
      of investment security premiums and discounts, net
              
              
              399
              
              
              
              137
              
              
              
              254Provision
      for accounts receivable servicing receivable allowance for
      losses
              
              
              171
              
              
              
              
              
              
              
              (3
              )(Gain)
      loss on sale, call and impairment of investment securities
              
              
              (270
              )
              
              
              119
              
              
              
              (11
              )Increase
      in cash surrender value of life insurance policies
              
              
              (246
              )
              
              
              (395
              )
              
              
              (404
              )Provision
      for deferred income taxes
              
              
              (374
              )
              
              
              (446
              )
              
              
              (240
              )Stock
      option compensation expense
              
              
              210
              
              
              
              290
              
              
              
              301Tax
      benefit from exercise of stock options
              
              
              (12
              )
              
              
              (85
              )
              
              
              (236
              )Loss
      on sale/write-down of other real estate owed
              
              
              1,106(Increase)
      decrease in accrued interest receivable and other
    assets
              
              
              (7,288
              )
              
              
              1,762
              
              
              
              (501
              )Increase
      (decrease) in accrued interest payable and other
    liabilities
              
              
              1,228
              
              
              
              (1,035
              )
              
              
              986Net
      cash provided by operating activities
              
              
              5,901
              
              
              
              10,537
              
              
              
              9,726Cash
      flows from investing activities:Proceeds
      from the sale of investment securities
              
              
              9,995
              
              
              
              24,225
              
              
              
              6,506Proceeds
      from called available-for-sale investment securities
              
              
              1,080
              
              
              
              1,455
              
              
              
              1,170Proceeds
      from matured available-for-sale investment securities
              
              
              2,954
              
              
              
              11,615
              
              
              
              17,485Purchases
      of available-for-sale investment securities
              
              
              (61,448
              )
              
              
              (29,629
              )Purchases
      of held-to-maturity investment securities
              
              
              
              
              
              
              
              
              
              
              (967
              )Proceeds
      from principal repayments for available-for-sale mortgage-backed
      securities
              
              
              13,517
              
              
              
              8,137
              
              
              
              2,711Proceeds
      from principal repayments for held-to-maturity mortgage-backed
      securities
              
              
              12,163
              
              
              
              10,469
              
              
              
              8,496Net
      decrease in interest-bearing deposits in banks
              
              
              4,248
              
              
              
              703Net
      decrease (increase) in loans and leases
              
              
              23,238
              
              
              
              (21,335
              )
              
              
              (12,302
              )Net
      decrease in accounts receivable servicing receivables
              
              
              1,029
              
              
              
              430
              
              
              
              918Proceeds
      from sale of other real estate
              
              
              2,808
              
              
              
              61Purchases
      of equipment
              
              
              (548
              )
              
              
              (670
              )
              
              
              (672
              )Capitalized
      additions to other real estate owned
              
              
              (26
              )Net
      (increase) decrease in FHLB stock
              
              
              
              
              
              
              (1,122
              )
              
              
              271Net
      cash provided by investing activities
              
              
              9,010
              
              
              
              4,339
              
              
              
              23,616


(Continued)




60




AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES




CONSOLIDATED
STATEMENT OF CASH FLOWS


(Continued)


For
the Years Ended December 31, 2009, 2008 and 2007


(Dollars
in thousands)




2009
              
              
              2008
              
              
              2007Cash
      flows from financing activities:Net
      increase (decrease) in demand, interest-bearing and savings
      deposits
              
              $
              32,249
              
              
              $
              (35,198
              )
              
              $
              (22,767
              )Net
      increase (decrease) in time deposits
              
              
              445
              
              
              
              16,614
              
              
              
              (15,463
              )Increase
      (decrease) in long-term borrowings
              
              
              3,000
              
              
              
              14,000
              
              
              
              (5,000
              )(Decrease)
      increase in short-term borrowings
              
              
              (28,731
              )
              
              
              (8,372
              )
              
              
              14,333Exercise
      of stock options
              
              
              22
              
              
              
              269
              
              
              
              443Tax
      benefit from exercise of stock options
              
              
              12
              
              
              
              85
              
              
              
              236Cash
      paid to repurchase common stock
              
              
              
              
              
              
              (1,710
              )
              
              
              (9,194
              )Payment
      of cash dividends
              
              
              (2,486
              )
              
              
              (3,329
              )
              
              
              (3,328
              )Cash
      paid for fractional shares
              
              
              
              
              
              
              (10
              )
              
              
              (9
              )Net
      proceeds from stock issuance
              
              
              23,901Net
      cash provided by (used) in financing activities
              
              
              28,412
              
              
              
              (17,651
              )
              
              
              (40,749
              )Increase
      (decrease) in cash and cash equivalents
              
              
              43,323
              
              
              
              (2,775
              )
              
              
              (7,407
              )Cash
      and cash equivalents at beginning of year
              
              
              15,170
              
              
              
              17,945
              
              
              
              25,352Cash
      and cash equivalents at end of year
              
              $
              58,493
              
              
              $
              15,170
              
              
              $
              17,945Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Interest
      expense
              
              $
              5,208
              
              
              $
              7,913
              
              
              $
              11,197Income
      taxes
              
              $
              2,452
              
              
              $
              5,010
              
              
              $
              5,403Non-cash
      investing activities:Real
      estate acquired through foreclosure
              
              $
              4,793
              
              
              $
              2,158
              
              
              $
              61Net
      change in unrealized gain on available-for-sale investment
      securities
              
              $
              (297
              )
              
              $
              502
              
              
              $
              1,128Non-cash
      financing activities:Dividends
      declared and unpaid
              
              
              
              
              
              $
              828
              
              
              $
              840Tax
      benefit from exercise of stock options
              
              $
              12
              
              
              $
              85
              
              
              $
              236





The
accompanying notes are an integral part of
these consolidated financial statements.





61




AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.
            THE
      BUSINESS OF THE COMPANY




American
River Bankshares (the “Company”) was incorporated under the laws of the State of
California in 1995 under the name of American River Holdings and changed its
name in 2004 to American River Bankshares. As a bank holding company, the
Company is authorized to engage in the activities permitted under the Bank
Holding Company Act of 1956, as amended, and regulations thereunder. As a
community oriented bank holding company, the principal communities served are
located in Sacramento, Placer, Yolo, El Dorado, Amador, and Sonoma
counties.




The
Company owns 100% of the issued and outstanding common shares of its banking
subsidiary, American River Bank (“ARB”). ARB was incorporated in 1983. ARB
accepts checking and savings deposits, offers money market deposit accounts and
certificates of deposit, makes secured and unsecured commercial, secured real
estate, and other installment and term loans and offers other customary banking
services. ARB operates five banking offices in Sacramento and Placer counties,
two banking offices in Sonoma County under the name North Coast Bank, a division
of ARB, and three banking offices in Amador County under the name Bank of
Amador, a division of ARB.




The
Company also owns one inactive subsidiary, American River
Financial.




ARB does
not offer trust services or international banking services and does not plan to
do so in the near future. The deposits of ARB are insured by the Federal Deposit
Insurance Corporation (the “FDIC”) up to applicable legal limits.




ARB is
participating in the FDIC Transaction Account Guarantee Program. Under that
program, through June 30, 2010, all noninterest-bearing transaction accounts are
fully guaranteed by the FDIC for the entire amount in the account. Coverage
under the Transaction Account Guarantee Program is in addition to and separate
from the coverage available under the FDIC’s general deposit insurance
rules.




In
February 2010, in connection with the Bank’s regularly scheduled 2009 FDIC
examination, the Bank entered into a Memorandum of Understanding (Memorandum)
with the FDIC and the California DFI. The Memorandum covers actions to be taken
by the Board of Directors and management to enhance BSA compliance; reduce the
Bank’s level of classified assets and further strengthen and improve the Bank’s
asset quality; requesting regulatory approval prior to paying any cash
dividends; and maintaining the Bank’s Tier 1 leverage capital ratio at not less
than 8% and a total risk-based capital ratio of not less than 11%. As of
December 31, 2009, the foregoing capital ratios for the Bank were 11.7% and
17.3%, respectively. The Company believes that it is currently in compliance in
all material respects with the actions described in the Memorandum.
Consequently, the Company does not expect these actions to significantly change
its business strategy in any material respect.




2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




General




The
accounting and reporting policies of the Company and its subsidiaries conform
with accounting principles generally accepted in the United States of America
and prevailing practices within the financial services industry.




Reclassifications




Certain
reclassifications have been made to prior years’ balances to conform to
classifications used in 2009.




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.





62


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Use of
Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.




Cash and Cash
Equivalents




For the
purpose of the statement of cash flows, cash and due from banks and Federal
funds sold are considered to be cash equivalents. Generally, Federal funds are
sold for one-day periods.




Investment
Securities




Investments
are classified into the following categories:




●
            Available-for-sale
      securities, reported at fair value, with unrealized gains and losses
      excluded from earnings and reported, net of taxes, as accumulated other
      comprehensive income (loss) within shareholders’
equity.●
            Held-to-maturity
      securities, which management has the positive intent and ability to hold
      to maturity, reported at amortized cost, adjusted for the accretion of
      discounts and amortization of
premiums.




Management
determines the appropriate classification of its investments at the time of
purchase and may only change the classification in certain limited
circumstances. All transfers between categories are accounted for at fair value.
There were no transfers in the years ended December 31, 2009 and 2008. As of
December 31, 2009 and 2008, the Company did not have any trading
securities.




Gains or
losses on the sale of investment securities are computed on the specific
identification method. Interest earned on investment securities is reported in
interest income, net of applicable adjustments for accretion of discounts and
amortization of premiums.




Investment
securities are evaluated for impairment on at least a quarterly basis and more
frequently when economic or market conditions warrant such an evaluation to
determine whether a decline in their value is other than temporary. Management
utilizes criteria such as the magnitude and duration of the decline and the
intent and ability of the Company to retain its investment in the securities for
a period of time sufficient to allow for an anticipated recovery in fair value,
in addition to the reasons underlying the decline, to determine whether the loss
in value is other than temporary. The term “other than temporary” is not
intended to indicate that the decline is permanent, but indicates that the
prospects for a near-term recovery of value is not necessarily favorable, or
that there is a lack of evidence to support a realizable value equal to or
greater than the carrying value of the investment. Once a decline in value is
determined to be other than temporary and management does not intend to sell the
security or it is more likely than not that management will not be required to
sell the security before recovery, only the portion of the impairment loss
representing credit exposure is recognized as a charge to earnings, with the
balance recognized as a charge to other comprehensive income. If management
intends to sell the security or it is more likely than not that management will
be required to sell the security before recovering its forecasted cost, the
entire impairment loss is recognized as a charge to earnings.




63





AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


2.           
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)




Federal Home Loan Bank
Stock




Investments
in Federal Home Loan Bank (the “FHLB”) stock are carried at cost and are
redeemable at par with certain restrictions. Investments in FHLB stock are
necessary to participate in FHLB programs.




Loans and
Leases




Loans and
leases are reported at the principal amounts outstanding, adjusted for unearned
income, deferred loan origination fees and costs, purchase premiums and
discounts, write-downs and the allowance for loan and lease losses. Loan and
lease origination fees, net of certain deferred origination costs, and purchase
premiums and discounts are recognized as an adjustment to the yield of the
related loans and leases.




The
accrual of interest on loans and leases is discontinued when, in the opinion of
management, there is an indication that the borrower may be unable to meet
payment requirements within an acceptable time frame relative to the terms
stated in the loan agreement. Upon such discontinuance, all unpaid accrued
interest is reversed against current income unless the loan or lease is well
secured and in the process of collection. Interest received on nonaccrual loans
and leases is either applied against principal or reported as interest income,
according to management’s judgment as to the collectibility of principal.
Generally, loans and leases are restored to accrual status when the obligation
is brought current and has performed in accordance with the contractual terms
for a reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.




Direct
financing leases are carried net of unearned income. Income from leases is
recognized by a method that approximates a level yield on the outstanding net
investment in the lease.




Loan Sales and
Servicing




Included
in the loan and lease portfolio are Small Business Administration (SBA) loans
and Farmer Mac guaranteed loans that may be sold in the secondary market. At the
time the loan is sold, the related right to service the loan is either retained,
with the Company earning future servicing income, or released in exchange for a
one-time servicing-released premium. A portion of this premium may be required
to be refunded if the borrower defaults or the loan prepays within ninety days
of the settlement date. There were no sales of loans subject to these recourse
provisions at December 31, 2009, 2008 and 2007. Loans subsequently transferred
to the loan portfolio are transferred at the lower of cost or market value at
the date of transfer. Any difference between the carrying amount of the loan and
its outstanding principal balance is recognized as an adjustment to yield by the
interest method. There were no loans held for sale at December 31, 2009 and
2008.




SBA and
Farmer Mac loans with unpaid balances of $433,000 and $567,000 were being
serviced for others as of December 31, 2009 and 2008, respectively. The Company
also serviced loans that are participated with other financial institutions
totaling $6,835,000 and $6,858,000 as of December 31, 2009 and 2008,
respectively.




Servicing
rights acquired through 1) a purchase or 2) the origination of loans which are
sold or securitized with servicing rights retained are recognized as separate
assets or liabilities. Servicing assets or liabilities are recorded at the
difference between the contractual servicing fees and adequate compensation for
performing the servicing, and are subsequently amortized in proportion to and
over the period of the related net servicing income or expense. Servicing assets
are periodically evaluated for impairment. Servicing assets were not considered
material for disclosure purposes at December 31, 2009 and 2008.




64


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




2.           
 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)




Allowance for Loan and Lease
Losses




The
allowance for loan and lease losses is maintained to provide for probable losses
related to impaired loans and leases and other probable losses on loans and
leases identified by management as doubtful, substandard and special mention, as
well as losses that can be expected to occur in the normal course of business
related to currently performing loans and leases. The determination of the
allowance is based on estimates made by management, to include consideration of
the character of the loan and lease portfolio including concentrations, types of
lending, specifically identified problem loans and leases, inherent risk of loss
in the portfolio taken as a whole and economic conditions in the Company’s
service areas.




The
methodology for evaluating the adequacy of the allowance for loan and lease
losses has two basic elements: first, the identification of impaired loans and
the measurement of impairment for each individual loan identified; and second, a
method for estimating a general allowance for loan and lease
losses.




A loan or
lease is considered impaired when it is probable that all contractual principal
and interest payments due will not be collected in accordance with the terms of
the loan or lease agreement. Impairment on individually identified loans or
leases that are not collateral dependent is measured based on the present value
of expected future cash flows discounted at each loan or lease’s original
effective interest rate. For loans that are collateral dependent, impairment is
measured based on the fair value of the collateral less estimated selling
costs.




In
estimating the general allowance for loan and lease losses, the balance of the
loan portfolio is grouped into segments that have common characteristics, such
as loan type, collateral type or risk rating. Loans typically segregated by risk
rating are those that have been assigned ratings (using regulatory definitions)
of special mention, substandard and doubtful. Loans graded loss are generally
charged off immediately.




For each
general allowance portfolio segment, loss factors are applied to calculate the
required allowance. These loss factors are based upon historical loss rates
adjusted for qualitative factors representing other significant factors
affecting loan portfolio including economic factors, credit policy and
underwriting, management and staff effectiveness, trends in delinquencies and
losses, and concentrations.




The
Director’s Loan Committee reviews the adequacy of the allowance for loan and
lease losses at least quarterly, to include consideration of the relative risks
in the portfolio and current economic conditions. The allowance is adjusted
based on that review if, in the judgment of the Director’s Loan Committee and
management, changes are warranted.




The
allowance is established through a provision for loan and lease losses which is
charged to expense. Additions to the allowance are expected to maintain the
adequacy of the total allowance after credit losses and loan and lease growth.
Although management believes the allowance for loan and lease losses to be
adequate, ultimate losses may vary from their estimates. In addition, the FDIC
and California Department of Financial Institutions, as an integral part of
their examination process, review the allowance for loan and lease losses. These
agencies may require additions to the allowance for loan and lease losses based
on their judgment about information available at the time of their
examinations.





65


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




2.            
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)




Other Real
Estate




Other
real estate includes real estate acquired in full or partial settlement of loan
obligations. When property is acquired, any excess of the recorded investment in
the loan balance and accrued interest income over the estimated fair market
value of the property less estimated selling costs is charged against the
allowance for loan and lease losses. A valuation allowance for losses on other
real estate is maintained to provide for temporary declines in value. The
allowance is established through a provision for losses on other real estate
which is included in other expenses. Subsequent gains or losses on sales or
writedowns resulting from permanent impairments are recorded in other income or
expense as incurred. During 2009, the Company received $2,808,000 in net
proceeds from the sale of other real estate with net losses of $17,000
recognized on the sale. During 2008, the Company received $61,000 from the
proceeds from the sale of other real estate with no gain or loss recognized on
the sale. There was $2,508,000 and $2,158,000 in other real estate at December
31, 2009 and 2008, respectively.




Premises and
Equipment




Premises
and equipment are carried at cost. Depreciation is determined using the
straight-line method over the estimated useful lives of the related assets. The
useful life of the building and improvements is forty years. The useful lives of
furniture, fixtures and equipment are estimated to be three to ten years.
Leasehold improvements are amortized over the life of the asset or the term of
the related lease, whichever is shorter. When assets are sold or otherwise
disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is recognized in
income for the period. The cost of maintenance and repairs is charged to expense
as incurred. Impairment of long-lived assets is evaluated by management based
upon an event or changes in circumstances surrounding the underlying assets
which indicate long-lived assets may be impaired.




Goodwill and Intangible
Assets




Business
combinations involving the Company’s acquisition of equity interests or net
assets of another enterprise or the assumption of net liabilities in an
acquisition of branches constituting a business may give rise to goodwill.
Goodwill represents the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed in transactions
accounted for under the purchase method of accounting. The value of goodwill is
ultimately derived from the Company’s ability to generate net earnings after the
acquisition and is not deductible for tax purposes. A decline in net earnings
could be indicative of a decline in the fair value of goodwill and result in
impairment. For that reason, goodwill is assessed for impairment at least
annually.




Intangible
assets are comprised of core deposit intangibles which represent the estimated
fair value of the long-term deposit relationships that were assumed when the
Company acquired Bank of Amador in December 2004. Core deposit intangibles are
amortized using a method that approximates the expected run-off of the deposit
base, which, in this case, is eight years. Management evaluates the
recoverability and remaining useful life annually to determine whether events or
circumstances warrant a revision to the intangible assets or the remaining
amortization period.




Income
Taxes




The
Company files its income taxes on a consolidated basis with its subsidiaries.
The allocation of income tax expense (benefit) represents each entity’s
proportionate share of the consolidated provision for income taxes.




The
Company accounts for income taxes using the balance sheet method, under which
deferred tax assets and liabilities are recognized for the tax consequences of
temporary differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. On the
consolidated balance sheet, net deferred tax assets are included in accrued
interest receivable and other assets.




66


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




2.       
     SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)




Income Taxes
(Continued)




The
determination of the amount of deferred income tax assets which are more likely
than not to be realized is primarily dependent on projections of future
earnings, which are subject to uncertainty and estimates that may change given
economic conditions and other factors. The realization of deferred income tax
assets is assessed and a valuation allowance is recorded if it is “more likely
than not” that all or a portion of the deferred tax asset will not be realized.
“More likely than not” is defined as greater than a 50% chance. All available
evidence, both positive and negative is considered to determine whether, based
on the weight of that evidence, a valuation allowance is needed. Based upon the
Company’s analysis of available evidence, the Company determined that it is
“more likely than not” that all of the deferred income tax assets as of December
31, 2009 and 2008 will be fully realized and therefore no valuation allowance
was recorded.




The
Company uses a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to be
taken on a tax return. A tax position is recognized as a benefit only if it is
“more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded.




The
Company uses a simplified method to determine the expected term of its stock
options due to the lack of sufficient historical data.




Interest
expense and penalties associated with unrecognized tax benefits, if any, are
classified as income tax expense in the consolidated statement of
income.




Comprehensive
Income




Comprehensive
income is reported in addition to net income for all periods presented.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of other comprehensive income (loss) that historically has
not been recognized in the calculation of net income. Unrealized gains and
losses on the Company’s available-for-sale investment securities are included in
other comprehensive income (loss), adjusted for realized gains or losses
included in net income. Total comprehensive income and the components of
accumulated other comprehensive income (loss) are presented in the consolidated
statement of changes in shareholders’ equity.




Earnings Per
Share




Basic
earnings per share (“EPS”), which excludes dilution, is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock, such as
stock options, result in the issuance of common stock that shares in the
earnings of the Company. The treasury stock method has been applied to determine
the dilutive effect of stock options in computing diluted EPS. EPS is
retroactively adjusted for stock splits and stock dividends for all periods
presented.




Stock-Based
Compensation




At
December 31, 2009, the Company has one stock-based compensation plan, which is
described more fully in Note 12. Compensation expense, net of related tax
benefits, recorded in 2009, 2008 and 2007 totaled $155,000, $254,000 and
$251,000, or $0.03, $0.04 and $0.04 per diluted share, respectively.
Compensation expense is recognized over the vesting period on a straight line
accounting basis.




67


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




2.  
          SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)




Stock-Based
Compensation (Continued)




The fair
value of each option award is estimated on the date of grant using a
Black-Scholes-Merton based option valuation model that uses the assumptions
noted in the following table. Because Black-Scholes-Merton based option
valuation models incorporate ranges of assumptions for inputs, those ranges are
disclosed. Expected volatilities are based on historical volatility of the
Company’s stock and other factors. The Company uses historical data to estimate
option exercise and employee termination within the valuation model. The
expected term of options granted represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within
the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.




2009
              
              2008
              
              2007Dividend
      yield
              
              6.74%
              
              3.53%
      to 4.62%
              
              2.33%Expected
      volatility
              
              24.6%
              
              21.3%
      to 24.3%
              
              21.6%Risk-free
      interest rate
              
              2.18%
              
              3.38%
      to 3.45%
              
              4.68%Expected
      option life in years
              
              7
              
              7
              
              7Weighted
      average fair value of options granted during the year
              
              $0.69
              
              $2.75
              
              $5.78


The
following is a summary of stock option information as of or for the years ended
December 31, 2009, 2008 and 2007:


2009
              
              
              2008
              
              
              2007(Dollars
      in thousands)Total
      intrinsic value of options exercised
              
              $
              28
              
              
              $
              285
              
              
              $
              832Aggregate
      cash received for option exercises
              
              $
              22
              
              
              $
              269
              
              
              $
              444Total
      fair value of options vested
              
              $
              298
              
              
              $
              254
              
              
              $
              263Total
      compensation cost
              
              $
              210
              
              
              $
              290
              
              
              $
              301Tax
      benefit recognized
              
              $
              55
              
              
              $
              36
              
              
              $
              50Net
      compensation cost
              
              $
              155
              
              
              $
              254
              
              
              $
              251Total
      compensation cost for nonvested awards not yet recognized
              
              $
              377
              
              
              $
              717
              
              
              $
              894Weighted
      average years to be recognized
              
              
              1.5
              
              
              
              2.9
              
              
              
              2.2


Subsequent
Events




The
Company has reviewed all events occurring from December 31, 2009 through March
4, 2010, the date the consolidated financial statements were issued and no
subsequent events occurred requiring accrual or disclosure.




68


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




2.  
          SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)




Adoption of New Financial
Accounting Standards




FASB
Accounting Standards CodificationTM (ASC or Codification)




In June
2009, the Financial Accounting Standards Board (FASB) issued new accounting
standards ASC 105-10 (previously SFAS No. 168), The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles. With the issuance of ASC 105-10, the FASB
Accounting Standards Codification (“the Codification” or “ASC”) becomes the
single source of authoritative U.S. accounting and reporting standards
applicable for all nongovernmental entities. Rules and interpretive releases of
the SEC under the authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. This change was effective for financial
statements issued for interim or annual periods ended after September 15, 2009.
Accordingly, all specific references to generally accepted accounting principles
(GAAP) refer to the Codification and not to the pre-Codification
literature.




FASB
Clarifies Other-Than-Temporary Impairment




In April
2009, the FASB issued ASC No. 320-10-35 (previously FSP 115-2 and 124-2 and EITF
99-20-2), Recognition and Presentation of
Other-Than-Temporary-Impairment.This standard (i) changes previously
existing guidance for determining whether an impairment to debt securities is
other than temporary and (ii) replaces the previously existing requirement that
the entity’s management assert it has both the intent and ability to hold an
impaired security until recovery with a requirement that management assert: (a)
it does not have the intent to sell the security; and (b) it is more likely than
not it will not have to sell the security before recovery of its cost basis.
Under this standard, declines in fair value below cost that are deemed to be
other than temporary are reflected in earnings as realized losses to the extent
the impairment is related to credit losses for both held-to-maturity and
available-for-sale securities. The amount of impairment related to other factors
is recognized in other comprehensive income. The Company adopted the provisions
of this standard on April 1, 2009 and they did not have a material impact on its
financial condition or results of operations.




FASB
Clarifies Application of Fair Value Accounting




In April
2009, the FASB issued ASC 820-10 (previously FSP FAS 157-4), Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.This
standard affirms the objective of fair value when a market is not active,
clarifies and includes additional factors for determining whether there has been
a significant decrease in market activity, eliminates the presumption that all
transactions are distressed unless proven otherwise, and requires an entity to
disclose a change in valuation technique. The Company adopted the provisions of
this standard on April 1, 2009 and they did not have a material impact on its
financial condition or results of operations.




Measuring
Liabilities at Fair Value




In August
2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and
Disclosures (ASC Topic 820) — Measuring Liabilities at Fair Value. This
update provides amendments for the fair value measurement of liabilities. It
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more techniques. It also
clarifies that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. The Companyadopted the provisions
of this update on October 1, 2009 and they did not have a material impact on its
financial condition or results of operations.




69


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




2.  
          SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)




Adoption of New Financial
Accounting Standards (Continued)




Business
Combinations




In
December 2007, the FASB issued ASC Topic 805 (previously SFAS 141(R)), Business Combinations.This
standard broadens the guidance for business combinations and extends its
applicability to all transactions and other events in which one entity obtains
control over one or more other businesses. It broadens the fair value
measurement and recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations. The acquirer is no
longer permitted to recognize a separate valuation allowance as of the
acquisition date for loans and other assets acquired in a business combination.
It also requires acquisition-related costs and restructuring costs that the
acquirer expected but was not obligated to incur to be expensed separately from
the business combination. It also expands on required disclosures to improve the
ability of the users of the financial statements to evaluate the nature and
financial effects of business combinations. This standard was effective January
1, 2009 for the Company.




Subsequent
Events




In May
2009, the FASB issued ASC 855-10 (previously SFAS No. 165), Subsequent Events, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. The adoption of this standard on July 1, 2009
required the Company to disclose the date through which subsequent events were
evaluated and had no effect on the financial position or results of
operations.




3.
            FAIR
      VALUE MEASUREMENTS




The
carrying amounts and estimated fair values of the Company’s financial
instruments are as follows (dollars in thousands):




December
      31, 2009
              
              December
      31, 2008Carrying
                Amount
              
              Estimated
                Fair
                Value
              
              Carrying
                Amount
              
              Estimated
                Fair
                ValueFinancial
      assets:Cash
      and due from banks
              
              $
              58,493
              
              $
              58,493
              
              $
              15,170
              
              $
              15,170Interest-bearing
      deposits in banks
              
              
              
              
              
              
              
              
              4,248
              
              
              4,249Investment
      securities
              
              
              109,013
              
              
              109,571
              
              
              87,699
              
              
              88,223Loans
      and leases, net
              
              
              376,322
              
              
              370,057
              
              
              412,356
              
              
              407,725FHLB
      stock
              
              
              3,922
              
              
              3,922
              
              
              3,922
              
              
              3,922Accounts
      receivable servicing receivables
              
              
              35
              
              
              35
              
              
              1,236
              
              
              1,236Accrued
      interest receivable
              
              
              1,941
              
              
              1,941
              
              
              2,265
              
              
              2,265Cash
      surrender value of life insurance policies
              
              
              10,742
              
              
              10,742
              
              
              10,496
              
              
              10,496Financial
      liabilities:Deposits
              
              $
              469,755
              
              $
              470,530
              
              $
              437,061
              
              $
              438,160Short-term
      borrowings
              
              
              14,500
              
              
              14,500
              
              
              43,231
              
              
              43,231Long-term
      borrowings
              
              
              17,000
              
              
              17,816
              
              
              14,000
              
              
              14,599Accrued
      interest payable
              
              
              344
              
              
              344
              
              
              462
              
              
              462




70


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




3.
            FAIR VALUE MEASUREMENTS(Continued)




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, 2009 and 2008:




Cash and due from
banks: For cash and due from banks, the carrying amount is estimated to
be fair value.




Interest-bearing deposits in
banks: The fair values of interest-bearing deposits in banks are
estimated by discounting their future cash flows using rates at each reporting
date for instruments with similar remaining maturities offered by comparable
financial institutions.




Investment
securities: For investment securities, fair values are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are estimated using quoted market prices for similar securities and
indications of value provided by brokers.




Loans and leases: For
variable-rate loans and leases that reprice frequently with no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans and leases are estimated using discounted cash flow analyses,
using interest rates being offered at each reporting date for loans and leases
with similar terms to borrowers of comparable creditworthiness. The carrying
amount of accrued interest receivable approximates its fair value.




FHLB stock: The
carrying amount of FHLB stock approximates its fair value. This investment is
carried at cost and is redeemable at par with certain restrictions.




Accounts receivable
servicing receivables: The carrying amount of accounts receivable
servicing receivables approximates their fair value because of the relatively
short period of time between the origination of the receivables and their
expected collection.




Cash surrender value of life
insurance policies: The fair value of life insurance policies are based
on cash surrender values at each reporting date as provided by
insurers.




Deposits: The fair
values for non-maturing deposits are, by definition, equal to the amount payable
on demand at the reporting date represented by their carrying amount. Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow analysis using interest rates offered at each reporting date for
certificates with similar remaining maturities. The carrying amount of accrued
interest payable approximates its fair value.




Short-term and long-term
borrowings: The fair value of short-term borrowings is estimated to be
the carrying amount. The fair value of long-term borrowings is estimated using a
discounted cash flow analysis using interest rates currently available for
similar debt instruments.




71


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




3.
            FAIR VALUE MEASUREMENTS(Continued)




Commitments to extend
credit: The fair value of commitments are based on fees currently charged
to enter into similar agreements, net of origination fees. These fees were not
material at December 31, 2009 and 2008.




The
following tables present information about the Company’s assets and liabilities
measured at fair value on a recurring and nonrecurring basis as of December 31,
2009. They indicate the fair value hierarchy of the valuation techniques
utilized by the Company to determine such fair value. In general, fair values
determined by Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has the ability to
access. Fair values determined by Level 2 inputs utilize inputs other than
quoted prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly. Level 2 inputs include quoted prices
for similar assets and liabilities in active markets, and inputs other than
quoted prices that are observable for the asset or liability, such as interest
rates and yield curves that are observable at commonly quoted intervals. Level 3
inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any, market activity for the asset or
liability. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, the level in the
fair value hierarchy within which the fair value measurement in its entirety
falls has been determined based on the lowest level input that is significant to
the fair value measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or
liability.


(dollars
      in thousands)Fair
      Value
              
              
              Quoted
      Prices
                in
      Active
                Markets
      for
                Identical
                Assets
                (Level
      1)
              
              
              Significant
                Other
                Observable
                Inputs
                (Level
      2)
              
              
              Significant
                Unobservable
                Inputs
                (Level
      3)
              
              
              Total
                LossesDecember 31, 2009Assets
      and liabilities measured ona
      recurring basis:Available-for-sale
      securities
              
              $
              96,682
              
              
              $
              78
              
              
              $
              96,604
              
              
              $
              —
              
              
              
              N/AAssets
      and liabilities measured on anonrecurring
      basis:Impaired
      loans
              
              $
              18,461
              
              
              
              
              
              
              $
              16,081
              
              
              $
              2,380
              
              
              $
              (3,633
              )Other
      real estate
              
              
              2,508
              
              
              
              
              
              
              
              2,508
              
              
              
              
              
              
              
              (1,089
              )$
              20,969
              
              
              $
              —
              
              
              $
              18,589
              
              
              $
              2,380
              
              
              $
              (4,722
              )December 31, 2008Assets
      and liabilities measured on a recurring basis:Available-for-sale
      securities
              
              $
              63,334
              
              
              $
              84
              
              
              $
              61,201
              
              
              $
              2,049
              
              
              
              N/A






Impaired
loans with a carrying value of $22,094,000 at December 31, 2009 were written
down to a fair value of $18,461,000, resulting in an impairment charge of
$3,633,000, which was included in earnings for the period.




Other
real estate with a carrying value of $3,597,000 at December 31, 2009 was written
down to a fair value of $2,508,000, resulting in an impairment charge of
$1,089,000, which was included in earnings for the period.




72


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




3.
            FAIR VALUE MEASUREMENTS(Continued)




Changes
in balances of recurring items valued using significant unobservable inputs
(Level 3) are as follows:




(dollars
      in thousands)Balance
                as
      of
                January
      1,
                2009
              
              
              Transfers
                In
      (Out)
              
              
              Unrealized
                Gains
                (Losses)
              
              
              Realized
                Gains
                (Losses)
              
              
              Balance
                as
      of
                December
      31,
                2009Level
      3 available-for-salesecurities
              
              $
              2,049
              
              
              $
              (2,049
              )
              
              $
              —
              
              
              $
              —
              
              
              $
              —





There
were no changes in the valuation techniques used during 2009. The following
methods were used to estimate the fair value of each class of financial
instrument above:




Available-for-sale
securities–Fair values for investment securities are based on quoted market prices,
if available, or evaluated pricing models that vary by asset class and
incorporate available trade, bid and other market information. Pricing
applications apply available information, as applicable, through processes such
as benchmark curves, benchmarking to like securities, sector groupings and
matrix pricing.




Impaired
loans – The fair value of impaired loans is based on the fair value of
the collateral for all collateral dependent loans and for other impairment loans
is estimated using a discounted cash flow model.




Other real
estate – Other real estate represents real estate which the Company has
taken control of in partial or full satisfaction of loans. The fair value of
other real estate is based on the fair value of the real estate less costs to
sell.




4.
            GOODWILL
      AND OTHER INTANGIBLE ASSETS




At
December 31, 2009 and 2008, goodwill totaled $16,321,000. Goodwill is evaluated
annually for impairment under the provisions of the codification Topic 350,
Goodwill and Other
Intangibles. Management determined that no impairment recognition was
required for the years ended December 31, 2009, 2008 and 2007. Goodwill is not
deductible for tax purposes.




Other
intangible assets are comprised of core deposit intangibles totaling $644,000
and $907,000 at December 31, 2009 and 2008, respectively. Amortization of the
intangible included in other expense totaled $263,000, $286,000 and $308,000 for
the years ended December 31, 2009, 2008 and 2007, respectively. The remaining
balance will be amortized over the next 2.9 years and is estimated as follows
(dollars in thousands):




Year
      Ending
                December
      31,2010
              
              
              $
              2422011
              
              
              
              2192012
              
              
              
              183$
              644




73


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


5.
            INVESTMENT
      SECURITIES




The
amortized cost and estimated fair value of investment securities at December 31,
2009 and 2008 consisted of the following (dollars in thousands):




Available-for-Sale




2009Amortized
                Cost
              
              
              Gross
                Unrealized
                Gains
              
              
              Gross
                Unrealized
                Losses
              
              
              Estimated
                Fair
                ValueDebt
      securities:Mortgage-backed
      securities
              
              $
              75,823
              
              
              $
              772
              
              
              $
              (586
              )
              
              $
              76,009Obligations
      of states and political subdivisions
              
              
              20,400
              
              
              
              347
              
              
              
              (160
              )
              
              
              20,587Equity
      securities:Corporate
      stock
              
              
              82
              
              
              
              11
              
              
              
              (7
              )
              
              
              86$
              96,305
              
              
              $
              1,130
              
              
              $
              (753
              )
              
              $
              96,682




2008Amortized
                Cost
              
              
              Gross
                Unrealized
                Gains
              
              
              GrossUnrealized
                Losses
              
              
              EstimatedFair
                ValueDebt
      securities:Mortgage-backed
      securities
              
              $
              32,073
              
              
              $
              392
              
              
              $
              (233
              )
              
              $
              32,232Obligations
      of states and political subdivisions
              
              
              30,506
              
              
              
              666
              
              
              
              (160
              )
              
              
              31,012Equity
      securities:Corporate
      stock
              
              
              82
              
              
              
              11
              
              
              
              (3
              )
              
              
              90$
              62,661
              
              
              $
              1,069
              
              
              $
              (396
              )
              
              $
              63,334




Net
unrealized gains on available-for-sale investment securities totaling $377,000
were recorded, net of $155,000 in tax liabilities, as accumulated other
comprehensive income within shareholders’ equity at December 31, 2009. Proceeds
and gross realized gains from the sale and call of available-for-sale investment
securities for the year ended December 31, 2009 totaled $11,075,000 and
$270,000, respectively. There were no transfers of available-for-sale investment
securities during the year ended December 31, 2009.




Net
unrealized gains on available-for-sale investment securities totaling $673,000
were recorded, net of $276,000 in tax liabilities, as accumulated other
comprehensive income within shareholders’ equity at December 31, 2008. Proceeds
and gross realized gains from the sale and call of available-for-sale investment
securities for the year ended December 31, 2008 totaled $25,680,000 and
$126,000, respectively. There were no transfers of available-for-sale investment
securities during the year ended December 31, 2008.




During
2008, management determined that one equity security (FNMA Preferred Stock) had
a loss considered to be other-than-temporary. The Company recorded an impairment
charge of $245,000 in 2008. At December 31, 2009 and 2008, the remaining balance
was $5,000.




Proceeds
and gross realized gains from the sale and call of available-for-sale investment
securities for the year ended December 31, 2007 totaled $5,896,000 and $25,000,
respectively.




74


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


5.
            INVESTMENT SECURITIES(Continued)




Held-to-Maturity




2009Amortized
              Cost
            
            Gross
              Unrealized
              Gains
            
            Gross
              Unrealized
              Losses
            
            Estimated
              Fair
              ValueDebt
      securities:Mortgage-backed
      securities
            
            $
            12,331
            
            
            $
            558
            
            
            $
            —
            
            
            $
            12,889





2008Amortized
                Cost
              
              Gross
                Unrealized
                Gains
              
              Gross
                Unrealized
                Losses
              
              Estimated
                Fair
                ValueDebt
      securities:Mortgage-backed
      securities
              
              $
              24,365
              
              
              $
              532
              
              
              $
              (8
              )
              
              $
              24,889


Proceeds
and gross realized losses from the sale of held-to-maturity investment
securities for the year ended December 31, 2007 totaled $1,780,000 and $14,000,
respectively. There were no sales of held-to-maturity investment securities for
the years ended December 31, 2009 and 2008. There were no transfers of
held-to-maturity investment securities for the years ended December 31, 2009,
2008 and 2007.




The
amortized cost and estimated fair value of investment securities at December 31,
2009 by contractual maturity are shown below (dollars in
thousands).




Available-for-Sale
              
              
              Held-to-MaturityAmortized
                Cost
              
              
              Estimated
                Fair
                Value
              
              
              Amortized
                Cost
              
              
              Estimated
                Fair
                ValueWithin
      one year
              
              $
              3,760
              
              
              $
              3,749After
      one year through five years
              
              
              7,204
              
              
              
              7,397After
      five years through ten years
              
              
              4,419
              
              
              
              4,473After
      ten years
              
              
              5,017
              
              
              
              4,96820,400
              
              
              
              20,587Investment
      securities not due at a single maturity date:Mortgage-backed
      securities
              
              
              75,823
              
              
              
              76,009
              
              
              $
              12,331
              
              
              $
              12,889Corporate
      stock
              
              
              82
              
              
              
              86$
              96,305
              
              
              $
              96,682
              
              
              $
              12,331
              
              
              $
              12,889
  Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to call or prepay obligations with or without call
or prepayment penalties.




Investment
securities with amortized costs totaling $58,510,000 and $54,838,000 and
estimated fair values totaling $59,816,000 and $55,659,000 were pledged to
secure treasury tax and loan accounts, State Treasury funds on deposit, public
agency and bankruptcy trustee deposits and borrowing arrangements (see Note 9)
at December 31, 2009 and 2008, respectively.





75




AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




5.
            INVESTMENT SECURITIES(Continued)




Investment
securities with unrealized losses at December 31, 2009 and 2008 are summarized
and classified according to the duration of the loss period as follows (dollars
in thousands):




2009Less
      than 12 Months
              
              
              12
      Months or More
              
              
              TotalFair
                Value
              
              
              Unrealized
                Losses
              
              
              Fair
                Value
              
              
              Unrealized
                Losses
              
              
              Fair
                Value
              
              
              Unrealized
                LossesAvailable-for-SaleDebt
      securities:Mortgage-backed
      securities
              
              $
              41,046
              
              
              $
              (527
              )
              
              $
              2,752
              
              
              $
              (59
              )
              
              $
              43,798
              
              
              $
              (586
              )Obligations
      of states and political sub-divisions
              
              
              4,081
              
              
              
              (80
              )
              
              
              2,641
              
              
              
              (80
              )
              
              
              6,722
              
              
              
              (160
              )Corporate
      stock
              
              
              5
              
              
              
              (3
              )
              
              
              3
              
              
              
              (4
              )
              
              
              8
              
              
              
              (7
              )$
              45,132
              
              
              $
              (610
              )
              
              $
              5,396
              
              
              $
              (143
              )
              
              $
              50,528
              
              
              $
              (753
              )
 
 2008Less
      than 12 Months
              
              
              12
      Months or More
              
              
              TotalFair
                Value
              
              
              Unrealized
                Losses
              
              
              Fair
                Value
              
              
              Unrealized
                Losses
              
              
              Fair
                Value
              
              
              Unrealized
                LossesAvailable-for-SaleDebt
      securities:Mortgage-backed
      securities
              
              $
              8,810
              
              
              $
              (233
              )
              
              $
              2,049
              
              
              
              
              
              
              $
              10,859
              
              $
              (233
              )Obligations
      of states and political sub-divisions
              
              
              5,628
              
              
              
              (118
              )
              
              
              724
              
              
              $
              (42
              )
              
              
              6,352
              
              
              
              (160
              )Corporate
      stock
              
              
              5
              
              
              
              (3
              )
              
              
              
              
              
              
              
              
              
              
              5
              
              
              
              (3
              )$
              14,443
              
              
              $
              (354
              )
              
              $
              2,773
              
              
              $
              (42
              )
              
              $
              17,216
              
              
              $
              (396
              )Held-to-MaturityDebt
      securities:Mortgage-backed
      securities
              
              $
              633
              
              
              $
              (1
              )
              
              $
              489
              
              
              $
              (7
              )
              
              $
              1,122
              
              
              $
              (8
              )


At
December 31, 2009, the Company held 155 securities of which 32 were in a loss
position for less than twelve months and 10 were in a loss position for twelve
months or more. Of the 42 securities 23 are mortgage backed securities, 10 are
obligations of states and political sub-divisions and 9 are corporate
stocks.




The
unrealized loss on the Company’s investments in mortgage-backed securities and
obligations of states and political sub-divisions is primarily driven by
interest rates. Because the decline in market value is attributable to a change
in interest rates and not credit quality, and because the Company has the
ability and intent to hold these investments until recovery of fair value, which
may be maturity, management does not consider these investments to be
other-than-temporarily impaired.




76


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




6.
            LOANS
      AND LEASES




Outstanding
loans and leases are summarized as follows (dollars in thousands):


December
      31,2009
              
              
              2008Real
      estate – commercial
              
              $
              223,685
              
              
              $
              218,626Real
      estate – construction
              
              
              27,482
              
              
              
              48,664Real
      estate – multi-family
              
              
              8,476
              
              
              
              8,938Real
      estate – residential
              
              
              26,922
              
              
              
              24,706Commercial
              
              
              72,621
              
              
              
              90,625Lease
      financing receivable
              
              
              3,920
              
              
              
              4,475Agriculture
              
              
              7,472
              
              
              
              8,015Consumer
              
              
              14,253
              
              
              
              14,796384,831
              
              
              
              418,845Deferred
      loan and lease origination fees, net
              
              
              (600
              )
              
              
              (571
              )Allowance
      for loan and lease losses
              
              
              (7,909
              )
              
              
              (5,918
              )$
              376,322
              
              
              $
              412,356




Certain
loans are pledged as collateral for available borrowings with the FHLB and FRB.
Pledged loans totaled $222,923,000 and $202,419,000 at December 31, 2009 and
2008, respectively (see Note 9).




The
components of the Company’s lease financing receivable are summarized as follows
(dollars in thousands):




December
      31,2009
              
              
              2008Future
      lease payments receivable
              
              $
              4,246
              
              
              $
              4,985Residual
      interests
              
              
              85
              
              
              
              67Unearned
      income
              
              
              (411
              )
              
              
              (577
              )Net
      lease financing receivable
              
              $
              3,920
              
              
              $
              4,475




Future
lease payments receivable are as follows (dollars in thousands):




Year
      Ending
                December
      31,2010
              
              
              $
              1,3652011
              
              
              
              1,1612012
              
              
              
              9582013
              
              
              
              5502014
              
              
              
              140Thereafter
              
              
              
              72Total
      lease payments receivable
              
              
              $
              4,246


77


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




6.
            LOANS AND LEASES(Continued)




Changes
in the allowance for loan and lease losses were as follows (dollars in
thousands):




Year
      Ended December 31,2009
              
              2008
              
              2007Balance,
      beginning of year
              
              $
              5,918
              
              
              $
              5,883
              
              
              $
              5,874Provision
      charged to operations
              
              
              8,530
              
              
              
              1,743
              
              
              
              450Losses
      charged to allowance
              
              
              (6,588
              )
              
              
              (1,734
              )
              
              
              (548
              )Recoveries
              
              
              49
              
              
              
              26
              
              
              
              107Balance,
      end of year
              
              $
              7,909
              
              
              $
              5,918
              
              
              $
              5,883




The
recorded investment in loans and leases that were considered to be impaired
totaled $41,937,000 at December 31, 2009 and had a related valuation allowance
of $3,810,000. The average recorded investment in impaired loans and leases
during 2009 was approximately $29,947,000.




The
recorded investment in loans and leases that were considered to be impaired
totaled $6,083,000 at December 31, 2008 and had a related valuation allowance of
$788,000. The average recorded investment in impaired loans and leases during
2008 was approximately $8,291,000.




Non-accrual
loans and leases totaled approximately $20,964,000 and $5,767,000 at December
31, 2009 and 2008, respectively. There were no loans and leases past due 90 days
or more and still accruing interest at December 31, 2009. Loans and leases past
due 90 days or more and still accruing interest at December 31, 2008 were
$474,000. Interest income on non-accrual loans is generally recognized on a cash
basis and was approximately $79,000 for the year ended December 31, 2009, and
not significant for 2008 and 2007. Interest foregone on non-accrual loans was
approximately $1,281,000, $647,000 and $305,000 for the years ended December 31,
2009, 2008 and 2007, respectively.




Salaries
and employee benefits totaling $674,000, $910,000 and $1,030,000 have been
deferred as loan and lease origination costs for the years ended December 31,
2009, 2008 and 2007, respectively.




7.
            PREMISES
      AND EQUIPMENT




Premises
and equipment consisted of the following (dollars in thousands):




December
      31,2009
              
              
              2008Land
              
              $
              206
              
              
              $
              206Building
      and improvements
              
              
              730
              
              
              
              740Furniture,
      fixtures and equipment
              
              
              7,017
              
              
              
              7,013Leasehold
      improvements
              
              
              1,758
              
              
              
              1,5669,711
              
              
              
              9,525Less
      accumulated depreciation and amortization
              
              
              (7,617
              )
              
              
              (7,410
              )$
              2,094
              
              
              $
              2,115
 Depreciation
and amortization included in occupancy and furniture and equipment expense
totaled $569,000, $539,000 and $535,000 for the years ended December 31, 2009,
2008 and 2007, respectively.
  78
 
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


8.
            INTEREST-BEARING
      DEPOSITS




Interest-bearing
deposits consisted of the following (dollars in thousands):





December
      31,2009
            
            
            2008Savings
            
            $
            36,234
            
            
            $
            33,438Money
      market
            
            
            131,614
            
            
            
            105,919NOW
      accounts
            
            
            50,154
            
            
            
            45,581Time,
      $100,000 or more
            
            
            98,061
            
            
            
            95,161Other
      time
            
            
            35,364
            
            
            
            37,819$
            351,427
            
            
            $
            317,918




The
Company held $29,000,000 in certificates of deposit for the State of California
as of December 31, 2009 and 2008. This amount represents 6.2% and 6.6% of total
deposit balances for December 31, 2009 and 2008, respectively.




Aggregate
annual maturities of time deposits are as follows (dollars in
thousands):




Year
      Ending
                December
      31,2010
              
              $
              117,0682011
              
              
              9,8432012
              
              
              3,5602013
              
              
              1,9322014
              
              
              1,005Thereafter
              
              
              17$
              133,425




Interest
expense recognized on interest-bearing deposits consisted of the following
(dollars in thousands):




Year
      Ended December 31,2009
              
              
              2008
              
              
              2007Savings
              
              $
              229
              
              
              $
              324
              
              
              $
              546Money
      market
              
              
              1,304
              
              
              
              1,861
              
              
              
              3,668NOW
      accounts
              
              
              71
              
              
              
              68
              
              
              
              113Time,
      $100,000 or more
              
              
              1,481
              
              
              
              2,249
              
              
              
              3,167Other
      time
              
              
              918
              
              
              
              1,399
              
              
              
              2,066$
              4,003
              
              
              $
              5,901
              
              
              $
              9,560




9.          
  BORROWING ARRANGEMENTS




The
Company has a total of $20,000,000 in unsecured short-term borrowing
arrangements to purchase Federal funds with two of its correspondent banks.
There were no advances under the borrowing arrangements as of December 31, 2009
and 2008.




79




AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


9.        
   BORROWING
ARRANGEMENTS (Continued)




In
addition, the Company has a line of credit available with the Federal Home Loan
Bank of San Francisco which is secured by pledged mortgage loans (see Note 6)
and investment securities (see Note 5). Borrowings may include overnight
advances as well as loans with a term of up to thirty years. Advances totaling
$31,500,000 were outstanding from the Federal Home Loan Bank at December 31,
2009, bearing fixed interest rates ranging from 1.60% to 3.78% and maturing
between January 19, 2010 and January 13, 2014. Advances totaling $57,231,000
were outstanding from the Federal Home Loan Bank at December 31, 2008, bearing
fixed interest rates ranging from 0.05% to 3.78% and maturing between January 2,
2009 and August 22, 2011. Amounts available under the borrowing arrangement with
the Federal Home Loan Bank at December 31, 2009 and 2008 totaled $54,047,000 and
$60,012,000, respectively.




In
addition, the Company entered into a secured borrowing agreement with the
Federal Reserve Bank of San Francisco in 2008. The borrowing is secured by
pledging selected loans (see Note 6) and investment securities (see Note 5).
There were no advances outstanding as of December 31, 2009 and 2008. Amounts
available under the borrowing arrangement with the Federal Reserve Bank at
December 31, 2009 and 2008 totaled $36,353,000 and $935,000,
respectively.




The
following table summarizes these borrowings (in thousands):




December
      31,2009
                
                2008Amount
                
                Weighted

                  Average
                  Rate
                
                Amount
                
                Weighted

                  Average
                  RateShort-term
      portion of borrowings
                
                $
                14,500
                
                2.84
                %
                
                $
                43,231
                
                1.83
                %Long-term
      borrowings
                
                
                17,000
                
                2.40
                %
                
                
                14,000
                
                3.19
                %$
                31,500
                
                2.60
                %
                
                $
                57,231
                
                2.16
                %




The
Company has also been issued $8,000,000 in letters of credit by the Federal Home
Loan Bank which have been pledged to secure Local Agency Deposits. The letters
of credit act as a guarantee of payment to certain third parties in accordance
with specified terms and conditions. The letters of credit were not drawn upon
in 2009 and management does not expect these lines to be drawn in the
future.






80


AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 10. INCOME TAXES
 The
provision for income taxes for the years ended December 31, 2009, 2008, and 2007
consisted of the following (dollars in thousands):
 Federal
                
                
                State
                
                
                Total2009Current
                
                $
                824
                
                
                $
                507
                
                
                $
                1,331Deferred
                
                
                (540
                )
                
                
                (417
                )
                
                
                (957
                )Provision
      for income taxes
                
                $
                284
                
                
                $
                90
                
                
                $
                3742008Current
                
                $
                3,617
                
                
                $
                1,407
                
                
                $
                5,024Deferred
                
                
                (263
                )
                
                
                (183
                )
                
                
                (446
                )Provision
      for income taxes
                
                $
                3,354
                
                
                $
                1,224
                
                
                $
                4,5782007Current
                
                $
                3,986
                
                
                $
                1,494
                
                
                $
                5,480Deferred
                
                
                (163
                )
                
                
                (77
                )
                
                
                (240
                )Provision
      for income taxes
                
                $
                3,823
                
                
                $
                1,417
                
                
                $
                5,240
  Deferred
tax assets (liabilities) consisted of the following (dollars in
thousands):
  December
      31,2009
                
                
                2008Deferred
      tax assets:Allowance
      for loan and lease losses
                
                $
                3,546
                
                
                $
                2,641Future
      benefit of state tax deduction
                
                
                123
                
                
                
                443Other
      real estate owned
                
                
                280Deferred
      compensation
                
                
                1,715
                
                
                
                1,591Other
                
                
                218
                
                
                
                414Total
      deferred tax assets
                
                
                5,882
                
                
                
                5,089Deferred
      tax liabilities:Core
      deposit intangible
                
                
                (289
                )
                
                
                (416
                )Unrealized
      gains on available-for-sale investment securities
                
                
                (155
                )
                
                
                (276
                )Investment
      market to market
                
                
                (24
                )
                
                
                (58
                )Future
      liability of state deferred tax assets
                
                
                (372
                )
                
                
                (291
                )Deferred
      loan costs
                
                
                (355
                )
                
                
                (433
                )Federal
      Home Loan Bank stock dividends
                
                
                (268
                )
                
                
                (274
                )Total
      deferred tax liabilities
                
                
                (1,463
                )
                
                
                (1,748
                )Net
      deferred tax assets
                
                $
                4,419
                
                
                $
                3,341
  The
Company and its subsidiaries file income tax returns in the United States and
California jurisdictions. There are currently no pending federal, state or local
income tax examinations by tax authorities. With few exceptions, the Company is
no longer subject to the examination by federal taxing authorities for the years
ended before December 31, 2006 and by state and local taxing authorities for
years before December 31, 2005. The unrecognized tax benefits and changes
therein and the interest and penalties accrued by the Company as of December 31,
2009 were not significant.
  81
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 10.
                INCOME TAXES
      (Continued)
  The
provision for income taxes differs from amounts computed by applying the
statutory Federal income tax rate of 34.0% in 2009 and 35.0% for 2008 and 2007
to income before income taxes. The significant items comprising these
differences consisted of the following:
 
 Year
      Ended December 31,2009
                
                2008
                
                2007Federal
      income tax statutory rate
                
                
                34.0
                %
                35.0
                %
                35.0
                %State
      franchise tax, net of Federal tax effect
                
                
                3.0
                %
                6.6
                %
                6.7
                %Tax
      benefit of interest on obligations of states and political
      subdivisions
                
                
                (15.2
                )%
                (2.9
                )%
                (2.5
                )%Tax-exempt
      income from life insurance policies
                
                
                (4.3
                )%
                (1.1
                )%
                (1.0
                )%Stock
      option compensation expense
                
                
                1.3
                %
                0.5
                %
                0.4
                %Other
                
                
                0.3
                %
                (0.4
                )%
                (0.4
                )%Effective
      tax rate
                
                
                19.1
                %
                37.7
                %
                38.2
                %
  11.
                COMMITMENTS
      AND CONTINGENCIES
  Leases
  The
Company leases branch facilities, administrative offices and various equipment
under noncancelable operating leases which expire on various dates through the
year 2019. Certain of the leases have five year renewal options. One of the
branch facilities is leased from a current member of the Company’s Board of
Directors (see Note 16).
  Future
minimum lease payments are as follows (dollars in thousands):
  Year
      Ending
                  December
      31,2010
                
                
                $
                8632011
                
                
                
                6572012
                
                
                
                6272013
                
                
                
                5822014
                
                
                
                441Thereafter
                
                
                
                1,042$
                4,212
 
 Rental
expense included in occupancy, furniture and equipment expense totaled
$1,050,000, $1,110,000 and $1,061,000 for the years ended December 31, 2009,
2008 and 2007, respectively.
  Financial Instruments With
Off-Balance-Sheet Risk
  The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business in order to meet the financing needs of its customers
and to reduce its exposure to fluctuations in interest rates. These financial
instruments consist of commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the consolidated
balance sheet.
  82
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 11.
                COMMITMENTS AND
      CONTINGENCIES (Continued)
  Financial Instruments With
Off-Balance-Sheet Risk (Continued)
  The
Company’s exposure to credit loss in the event of nonperformance by the other
party for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and standby letters of credit as it
does for loans included on the consolidated balance sheet.
  The
following financial instruments represent off-balance-sheet credit risk (dollars
in thousands):
  December
      31,2009
                
                2008Commitments
      to extend credit:Revolving
      lines of credit secured by 1-4 family residences
                
                $
                6,615
                
                $
                7,396Commercial
      real estate, construction and land development commitments secured by real
      estate
                
                
                18,202
                
                
                17,076Other
      unused commitments, principally commercial loans
                
                
                43,008
                
                
                52,465$
                67,825
                
                $
                76,937Standby
      letters of credit
                
                $
                10,190
                
                $
                3,798
  At
inception, real estate commitments are generally secured by property with a loan
to value ratio of 55% to 75%. In addition, the majority of the Company’s
commitments have variable interest rates.
  Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any conditions established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Each client’s creditworthiness is evaluated on a case-by-case
basis. The amount of collateral obtained, if deemed necessary upon extension of
credit, is based on management’s credit evaluation of the borrower. Collateral
held varies but may include accounts receivable, inventory, equipment and deeds
of trust on residential real estate and income-producing commercial
properties.
  Standby
letters of credit are conditional commitments issued to guarantee the
performance or financial obligation of a client to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to clients. The fair value of the liability related
to these standby letters of credit, which represents the fees received for
issuing the guarantees, was not significant at December 31, 2009 and 2008. The
Company recognizes these fees as revenue over the term of the commitment or when
the commitment is used.
  Significant Concentrations
of Credit Risk
  The
Company grants real estate mortgage, real estate construction, commercial,
agricultural and consumer loans to clients throughout Sacramento, Placer, Yolo,
Amador, El Dorado, and Sonoma counties.
  In
management’s judgment, a concentration exists in real estate-related loans which
represented approximately 74% and 72% of the Company’s loan portfolio at
December 31, 2009 and 2008, respectively. A continued substantial decline in the
economy in general, or a continued decline in real estate values in the
Company’s primary market areas in particular, could have an adverse impact on
collectibility of these loans. However, personal and business income represent
the primary source of repayment for a majority of these loans.
  83
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  11.
                COMMITMENTS AND
      CONTINGENCIES (Continued)
  Correspondent Banking
Agreements
  The
Company maintains funds on deposit with other federally insured financial
institutions under correspondent banking agreements. The Company did not have
any uninsured deposits at December 31, 2009.
  Contingencies
  The
Company is subject to legal proceedings and claims which arise in the ordinary
course of business. In the opinion of management, the amount of ultimate
liability with respect to such actions will not materially affect the
consolidated financial position or results of operations of the
Company.
  12.          SHAREHOLDERS’
EQUITY
  Earnings Per
Share
  A
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations is as follows (dollars and shares in thousands,
except per share data):
 For
      the Year Ended
                
                Net
                  Income
                
                Weighted
                  Average
                  Number
      of
                  Shares
                  Outstanding
                
                Per-Share
                  AmountDecember
      31, 2009Basic
      earnings per share
                
                $
                1,586
                
                
                6,031
                
                $
                .26Effect
      of dilutive stock options
                
                
                
                
                
                7Diluted
      earnings per share
                
                $
                1,586
                
                
                6,038
                
                $
                .26December
      31, 2008Basic
      earnings per share
                
                $
                7,571
                
                
                5,811
                
                $
                1.30Effect
      of dilutive stock options
                
                
                
                
                
                14Diluted
      earnings per share
                
                $
                7,571
                
                
                5,825
                
                $
                1.30December
      31, 2007Basic
      earnings per share
                
                $
                8,478
                
                
                6,053
                
                $
                1.40Effect
      of dilutive stock options
                
                
                
                
                
                63Diluted
      earnings per share
                
                $
                8,478
                
                
                6,116
                
                $
                1.39
  84
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  12.          SHAREHOLDERS’ EQUITY
(Continued)
  Stock Option
Plan
  In 2000,
the Board of Directors adopted a stock option plan under which options may be
granted to employees and directors under incentive and nonstatutory agreements.
The stock option plan was approved by the Company’s shareholders. At December
31, 2009, grants outstanding combined with shares available for future grants
totaled 598,000 shares under this plan. The plan requires that the option price
may not be less than the fair market value of the stock at the date the option
is granted. The purchase price of exercised options is payable in full in cash
or shares of the Company’s common stock owned by the optionee at the time the
option is exercised. The options expire on dates determined by the Board of
Directors, but not later than ten years from the date of grant. Options vest
ratably over a five year period. The Plan does not provide for the settlement of
awards in cash and new shares are issued upon the exercise of
options.
  A summary
of the outstanding and vested stock option activity for the year ended December
31, 2009 is as follows:
 Outstanding
                
                
                NonvestedShares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                  Per
      Share
                
                
                Shares
                
                
                Weighted
                  Average
                  Fair
      Value
                  Per
      ShareBalance,
      January 1, 2009
                
                
                338,324
                
                
                $
                18.67
                
                
                
                185,461
                
                
                $
                4.92Options
      granted
                
                
                62,003
                
                
                $
                8.50
                
                
                
                62,003
                
                
                $
                0.69Options
      vested
                
                
                
                
                
                
                
                
                
                
                (59,886
                )
                
                $
                4.97Options
      exercised
                
                
                (5,250
                )
                
                $
                4.10Options
      expired or canceled
                
                
                (14,056
                )
                
                $
                19.22
                
                
                
                (6,981
                )
                
                $
                7.51Balance,
      December 31, 2009
                
                
                381,021
                
                
                $
                17.20
                
                
                
                180,597
                
                
                $
                3.19
  A summary
of exercisable options as of December 31, 2009 is as follows:
  Number
      of vested stock options
                
                
                200,424Weighted
      average exercise price per share
                
                $
                18.24Aggregate
      intrinsic value
                
                $
                —Weighted
      average remaining contractual term in years
                
                
                5.28
  85
  AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 12.          SHAREHOLDERS’ EQUITY
(Continued)
  Stock Option Plan
(Continued)
  A summary
of options outstanding at December 31, 2009 follows:
 Range
      of Exercise Prices
                
                Number
      of
                  Options
                  Outstanding
                  December
      31,2009
                
                Weighted
                  Average
                  Remaining
                  ContractualLife
                
                Number
      of
                  Options
                  Exercisable
                  December
      31,2009$
                8.50-11.66
                
                
                
                62,003
                
                
                9.14
      years$
                11.67-12.37
                
                
                
                33,562
                
                
                3.22
      years
                
                
                33,562$
                12.38-12.65
                
                
                
                1,575
                
                
                8.39
      years
                
                
                315$
                12.66-16.18
                
                
                
                927
                
                
                3.39
      years
                
                
                927$
                16.19-16.77
                
                
                
                59,047
                
                
                8.15
      years
                
                
                11,891$
                16.78-18.10
                
                
                
                48,399
                
                
                4.31
      years
                
                
                48,399$
                18.11-18.23
                
                
                
                36,174
                
                
                5.27
      years
                
                
                28,189$
                18.24-24.07
                
                
                
                139,334
                
                
                6.50
      years
                
                
                77,141381,021
                
                
                
                
                
                200,424
  Common Stock Repurchase
Program
  On
January 16, 2008, the Board of Directors of the Company authorized a stock
repurchase program that allows for the repurchase of up to six and one half
percent (6.5%) annually of the Company’s outstanding shares of common stock. The
repurchases under this plan can be made from time to time in the open market as
conditions allow. Management reports monthly to the Board of Directors on the
status of the repurchase program. The Board of Directors has reserved the right
to suspend, terminate, modify or cancel the repurchase programs at any time for
any reason. The 6.5% percent program announced in 2008, replaced a program
announced in 2001 whereby the Company had the ability to repurchase up to five
percent (5.0%) annually of the Company’s outstanding shares of common stock. On
July 24, 2009, the Board of Directors temporarily suspended the Company’s stock
repurchase program.
  Stock
Dividend
  The Board
of Directors declared a 5% stock dividend November 19, 2008 and November 21,
2007. As appropriate, per share and relevant data in the consolidated financial
statements have been retroactively restated to reflect the stock
dividends.
  13.
                REGULATORY
      MATTERS
  Dividends
  Upon
declaration by the Board of Directors of the Company, all shareholders of record
will be entitled to receive dividends. The California Financial Code restricts
the total dividend payment of any state banking association in any calendar year
to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income
for its last three fiscal years, less distributions made to shareholders during
the same three-year period. In addition, subject to prior regulatory approval,
any state banking association may request an exception to this restriction. In
May, September and December 2008, and in March and June of 2009, ARB requested,
and received approval for, equal payments of $1,000,000. The effect of the
payments is such that ARB could continue to provide dividends to the
Company.
  86
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  13.
                REGULATORY MATTERS
      (Continued)
  Dividends
(Continued)
  In 2009,
2008 and 2007, the Company declared cash dividends in the amount of $0.29, $0.57
and $0.55, respectively, per common share. The amounts have been adjusted to
reflect 5% stock dividends declared in 2008 and in 2007. There is no assurance,
however, that any dividends will be paid in the future since they are subject to
regulatory restrictions, and dependent upon earnings, financial condition and
capital requirements of the Company and its subsidiaries. On July 24, 2009, the
Board of Directors temporarily suspended the payment of cash dividends until
such time as it is prudent to reestablish payment of cash dividend. Currently,
any future cash dividends from the Bank will require prior regulatory
approval.
  Regulatory
Capital
  The
Company and ARB are subject to certain regulatory capital requirements
administered by the Board of Governors of the Federal Reserve System and the
FDIC. Failure to meet these minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company’s consolidated
financial statements. As a result of our regularly scheduled 2009 FDIC
examination, management entered into a Memorandum of Understanding with its
regulators to take certain actions, including maintenance of certain capital
ratios as described in “Note 1, The Business of the Company”
herein.
  Under
capital adequacy guidelines, the Company and ARB must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. These quantitative measures are established by regulation and require
that minimum amounts and ratios of total and Tier 1 capital to risk-weighted
assets and of Tier 1 capital to average assets be maintained. Capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
  ARB is
also subject to additional capital guidelines under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, ARB must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table below.
  Management
believes that the Company and ARB met all their capital adequacy requirements as
of December 31, 2009 and 2008.
  December
      31,2009
                  
                  2008Amount
                  
                  Ratio
                  
                  Amount
                  
                  Ratio(dollars
      in thousands)Leverage
      RatioAmerican
      River Bankshares and Subsidiaries
                  
                  $
                  70,158
                  
                  12.4
                  %
                  
                  $
                  45,822
                  
                  8.3
                  %Minimum
      regulatory requirement
                  
                  $
                  22,535
                  
                  4.0
                  %
                  
                  $
                  22,038
                  
                  4.0
                  %American
      River Bank
                  
                  $
                  65,385
                  
                  11.7
                  %
                  
                  $
                  46,134
                  
                  8.4
                  %Minimum
      requirement for “Well-Capitalized” institution under prompt corrective
      action provisions
                  
                  $
                  28,059
                  
                  5.0
                  %
                  
                  $
                  27,451
                  
                  5.0
                  %Minimum
      regulatory requirement
                  
                  $
                  22,447
                  
                  4.0
                  %
                  
                  $
                  21,961
                  
                  4.0
                  %
  87
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  13.
                REGULATORY MATTERS(Continued)
  Regulatory Capital
(Continued)
  December
      31,2009
                  
                  2008Amount
                  
                  Ratio
                  
                  Amount
                  
                  Ratio(dollars
      in thousands)Tier
      1 Risk-Based Capital RatioAmerican
      River Bankshares and Subsidiaries
                  
                  $
                  70,158
                  
                  17.1
                  %
                  
                  $
                  45,822
                  
                  10.2
                  %Minimum
      regulatory requirement
                  
                  $
                  16,384
                  
                  4.0
                  %
                  
                  $
                  17,889
                  
                  4.0
                  %American
      River Bank
                  
                  $
                  65,385
                  
                  16.0
                  %
                  
                  $
                  46,134
                  
                  10.4
                  %Minimum
      requirement for “Well-Capitalized”
      institution under prompt corrective action provisions
                  
                  $
                  24,463
                  
                  6.0
                  %
                  
                  $
                  26,736
                  
                  6.0
                  %Minimum
      regulatory requirement
                  
                  $
                  16,309
                  
                  4.0
                  %
                  
                  $
                  17,824
                  
                  4.0
                  %Total
      Risk-Based Capital RatioAmerican
      River Bankshares and Subsidiaries
                  
                  $
                  75,313
                  
                  18.4
                  %
                  
                  $
                  51,416
                  
                  11.5
                  %Minimum
      regulatory requirement
                  
                  $
                  32,989
                  
                  8.0
                  %
                  
                  $
                  35,805
                  
                  8.0
                  %American
      River Bank
                  
                  $
                  70,516
                  
                  17.3
                  %
                  
                  $
                  51,708
                  
                  11.6
                  %Minimum
      requirement for “Well-Capitalized” institution
      under prompt corrective action provisions
                  
                  $
                  41,050
                  
                  10.0
                  %
                  
                  $
                  44,594
                  
                  10.0
                  %Minimum
      regulatory requirement
                  
                  $
                  32,840
                  
                  8.0
                  %
                  
                  $
                  35,676
                  
                  8.0
                  %
  14.
                OTHER
      NONINTEREST INCOME AND EXPENSE
  Other
noninterest income consisted of the following (dollars in
thousands):
 
 Year
      Ended December 31,2009
                
                
                2008
                
                
                2007Merchant
      fee income
                
                $
                437
                
                
                $
                482
                
                
                $
                544Accounts
      receivable servicing fees
                
                
                35
                
                
                
                170
                
                
                
                244Income
      from residential lending division
                
                
                7
                
                
                
                283
                
                
                
                401Bank
      owned life insurance (Note 15)
                
                
                246
                
                
                
                395
                
                
                
                404Other
                
                
                256
                
                
                
                216
                
                
                
                252$
                981
                
                
                $
                1,546
                
                
                $
                1,845
  88
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  14.
                OTHER NONINTEREST INCOME AND
      EXPENSE (Continued)
  Other
noninterest expense consisted of the following (dollars in
thousands):
 Year
      Ended December 31,2009
                
                
                2008
                
                
                2007Professional
      fees
                
                $
                1,061
                
                
                $
                936
                
                
                $
                832Telephone
      and postage
                
                
                375
                
                
                
                403
                
                
                
                420Outsourced
      item processing
                
                
                369
                
                
                
                391
                
                
                
                374Advertising
      and promotion
                
                
                232
                
                
                
                339
                
                
                
                338Directors’
      expense
                
                
                390
                
                
                
                321
                
                
                
                378Amortization
      of intangible assets
                
                
                264
                
                
                
                286
                
                
                
                308Stationery
      and supplies
                
                
                205
                
                
                
                274
                
                
                
                322Other
      operating expenses
                
                
                1,277
                
                
                
                1,143
                
                
                
                1,318$
                4,173
                
                
                $
                4,093
                
                
                $
                4,290
  15.
                EMPLOYEE
      BENEFIT PLANS
  American River Bankshares
401(k) Plan
  The
American River Bankshares 401(k) Plan has been in place since January 1, 1993
and is available to all employees. Under the plan, the Company will match 100%
of each participants’ contribution up to 3% of annual compensation plus 50% of
the next 2% of annual compensation. Employer Safe Harbor matching contributions
are 100% vested upon entering the plan. The Company’s contributions totaled
$176,000, $200,000 and $227,000 for the years ended December 31, 2009, 2008 and
2007, respectively.
  Employee Stock Purchase
Plan
  The
Company contracts with an administrator for an Employee Stock Purchase Plan
which allows employees to purchase the Company’s stock at fair market value as
of the date of purchase. The Company bears all costs of administering the Plan,
including broker’s fees, commissions, postage and other costs actually
incurred.
  American River Bankshares
Deferred Compensation Plan
  The
Company has established a Deferred Compensation Plan for certain members of the
management team and a Deferred Fee Agreement for Non-Employee Directors for the
purpose of providing the opportunity for participants to defer compensation.
Participants of the management team, who are selected by a committee designated
by the Board of Directors, may elect to defer annually a minimum of $5,000 or a
maximum of eighty percent of their base salary and all of their cash bonus.
Directors may also elect to defer up to one hundred percent of their monthly
fees. The Company bears all administration costs and accrues interest on the
participants’ deferred balances at a rate based on U.S. Government Treasury
rates plus 4.0%. This rate was 5.55% at December 31, 2009. Deferred
compensation, including interest earned, totaled $2,167,000, $2,023,000 and
$1,769,000 at December 31, 2009, 2008 and 2007, respectively. The expense
recognized under this plan totaled $116,000, $142,000 and $142,000 for the years
ended December 31, 2009, 2008 and 2007, respectively.
  89
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  15.
                EMPLOYEE BENEFIT PLANS(Continued)
  Salary Continuation
Plan
  The
Company has agreements to provide certain current executives, or their
designated beneficiaries, with annual benefits for up to 15 years after
retirement or death. These benefits are substantially equivalent to those
available under life insurance policies purchased by the Company on the lives of
the executives. The Company accrues for these future benefits from the effective
date of the agreements until the executives’ expected final payment dates in a
systematic and rational manner. As of December 31, 2009 and 2008, the Company
had accrued $764,000 and $672,000, respectively, for potential benefits payable.
This payable approximates the then present value of the benefits expected to be
provided at retirement. The expense recognized under this plan totaled $141,000,
$188,000 and $169,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
  Under
these plans, the Company invested in single premium life insurance policies with
cash surrender values totaling $10,742,000 and $10,496,000 at December 31, 2009
and 2008, respectively. On the consolidated balance sheet, the cash surrender
value of life insurance policies is included in accrued interest receivable and
other assets. Tax-exempt income on these policies, net of expense, totaled
approximately $246,000, $395,000 and $404,000 for the years ended December 31,
2009, 2008 and 2007, respectively.
  16.
                RELATED
      PARTY TRANSACTIONS
  During
the normal course of business, the Company enters into transactions with related
parties, including Directors and affiliates. These transactions include
borrowings from the Company with substantially the same terms, including rates
and collateral, as loans to unrelated parties. The following is a summary of the
aggregate activity involving related party borrowers during 2009 (dollars in
thousands):
  Balance,
      January 1, 2009
                
                $
                3,283Disbursements
                
                
                888Amounts
      repaid
                
                
                (120
                )Balance,
      December 31, 2009
                
                $
                4,051Undisbursed
      commitments to related parties, December 31, 2009
                
                $
                15
  The
Company also leases one of its branch facilities from a current member of the
Company’s Board of Directors. Rental payments to the Director totaled $87,000,
$85,000 and $83,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
  90
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  17.
                OTHER
      COMPREHENSIVE INCOME (LOSS)
  At
December 31, 2009, 2008 and 2007, the Company had other comprehensive income
(loss) as follows (dollars in thousands):
  Before
                  Tax
                
                
                Tax
                  Expense
                
                
                After
                  TaxFor
      the Year Ended December 31, 2009Other
      comprehensive loss:Unrealized
      holding loss
                
                $
                (26
                )
                
                $
                10
                
                
                $
                (16
                )Less
      reclassification adjustment for realized gains included in net
      income
                
                
                270
                
                
                
                (111
                )
                
                
                159$
                (296
                )
                
                $
                121
                
                
                $
                (175
                )For
      the Year Ended December 31, 2008Other
      comprehensive income:Unrealized
      holding gains
                
                $
                628
                
                
                $
                (258
                )
                
                $
                370Less
      reclassification adjustment for realized gains included in net
      income
                
                
                126
                
                
                
                (52
                )
                
                
                74$
                502
                
                
                $
                (206
                )
                
                $
                296For
      the Year Ended December 31, 2007Other
      comprehensive income:Unrealized
      holding gains
                
                $
                1,153
                
                
                $
                (472
                )
                
                $
                681Less
      reclassification adjustment for realized gains included in net
      income
                
                
                25
                
                
                
                (10
                )
                
                
                15$
                1,128
                
                
                $
                (462
                )
                
                $
                666
  91
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  18.           PARENT
ONLY CONDENSED FINANCIAL STATEMENTS
  CONDENSED
BALANCE SHEET
  December 31, 2009 and 2008
 (Dollars
in thousands)
  2009
                
                2008ASSETSCash
      and due from banks
                
                $
                6,067
                
                $
                1,596Investment
      in subsidiaries
                
                
                82,572
                
                
                63,759Other
      assets
                
                
                2,165
                
                
                1,884$
                90,804
                
                $
                67,239LIABILITIES
      AND
                  SHAREHOLDERS’
      EQUITYLiabilities:Dividends
      payable to shareholders
                
                
                
                
                $
                828Other
      liabilities
                
                $
                3,459
                
                
                2,964Total
      liabilities
                
                
                3,459
                
                
                3,792Shareholders’
      equity:Common
      stock
                
                
                71,578
                
                
                47,433Retained
      earnings
                
                
                15,545
                
                
                15,617Accumulated
      other comprehensive income, net of taxes
                
                
                222
                
                
                397Total
      shareholders’
      equity
                
                
                87,345
                
                
                63,447$
                90,804
                
                $
                67,239
  92
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
 18.           PARENT ONLY CONDENSED FINANCIAL
STATEMENTS (Continued)
  CONDENSED
STATEMENT OF INCOME
  For
the Years Ended December 31, 2009, 2008 and 2007
 (Dollars
in thousands)
  2009
                
                
                2008
                
                
                2007Income:Dividends
      declared by subsidiaries – eliminated in consolidation
                
                $
                1,655
                
                
                $
                4,560
                
                
                $
                12,575Management
      fee from subsidiaries – eliminated in consolidation
                
                
                4,057
                
                
                
                3,706
                
                
                
                3,332Other
      income
                
                
                26
                
                
                
                39
                
                
                
                39Total
      income
                
                
                5,738
                
                
                
                8,305
                
                
                
                15,946Expenses:Salaries
      and employee benefits
                
                
                2,696
                
                
                
                2,582
                
                
                
                2,766Professional
      fees
                
                
                404
                
                
                
                390
                
                
                
                384Directors’
      expense
                
                
                325
                
                
                
                248
                
                
                
                288Other
      expenses
                
                
                684
                
                
                
                668
                
                
                
                696Total
      expenses
                
                
                4,109
                
                
                
                3,888
                
                
                
                4,134Income
      before equity in undistributed income of subsidiaries
                
                
                1,629
                
                
                
                4,417
                
                
                
                11,812Equity
      in (distributed) undistributed income of subsidiaries
                
                
                (49
                )
                
                
                3,113
                
                
                
                (3,637
                )Income
      before income taxes
                
                
                1,580
                
                
                
                7,530
                
                
                
                8,175Income
      tax benefit
                
                
                6
                
                
                
                41
                
                
                
                303Net
      income
                
                $
                1,586
                
                
                $
                7,571
                
                
                $
                8,478
  93
 AMERICAN
RIVER BANKSHARES AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  18.           PARENT ONLY CONDENSED FINANCIAL
STATEMENTS (Continued)
  CONSOLIDATED
STATEMENT OF CASH FLOWS
  For
the Years Ended December 31, 2009, 2008 and 2007
 (Dollars
in thousands)
 
 2009
                
                
                2008
                
                
                2007Cash
      flows from operating activities:Net
      income
                
                $
                1,586
                
                
                $
                7,571
                
                
                $
                8,478Adjustments
      to reconcile net income to net cash provided by operating
      activities:Undistributed
      (distributed) earnings of subsidiaries
                
                
                49
                
                
                
                (3,113
                )
                
                
                3,637Decrease
      (increase) in dividends receivable from subsidiaries
                
                
                
                
                
                
                840
                
                
                
                (540
                )Stock
      option compensation expense
                
                
                210
                
                
                
                291
                
                
                
                301Increase
      in other assets
                
                
                (267
                )
                
                
                (104
                )
                
                
                (500
                )(Decrease)
      increase in other liabilities
                
                
                (333
                )
                
                
                220
                
                
                
                820Net
      cash provided by operating activities
                
                
                1,245
                
                
                
                5,705
                
                
                
                12,196Cash
      flows from investing activities:Purchase
      of equipment
                
                
                (50
                )
                
                
                (26
                )
                
                
                (41
                )Investment
      in subsidiary
                
                
                (19,000
                )Net
      cash used in investing activities
                
                
                (19,050
                )
                
                
                (26
                )
                
                
                (41
                )Cash
      flows from financing activities:Cash
      dividends paid
                
                
                (1,658
                )
                
                
                (3,328
                )
                
                
                (3,328
                )Exercise
      of stock options, including tax benefit
                
                
                33
                
                
                
                354
                
                
                
                679Cash
      paid to repurchase common stock
                
                
                
                
                
                
                (1,710
                )
                
                
                (9,194
                )Cash
      paid for fractional shares
                
                
                
                
                
                
                (10
                )
                
                
                (9
                )Net
      proceeds from stock issuance
                
                
                23,901Net
      cash provided by (used in) financing activities
                
                
                22,276
                
                
                
                (4,694
                )
                
                
                (11,852
                )Net
      increase in cash and cash equivalents
                
                
                4,471
                
                
                
                985
                
                
                
                303Cash
      and cash equivalents at beginning of year
                
                
                1,596
                
                
                
                611
                
                
                
                308Cash
      and cash equivalents at end of year
                
                $
                6,067
                
                
                $
                1,596
                
                
                $
                611




94





Selected
Quarterly Information (Unaudited)


(In
      thousands, except per share and price range of common
    stock)  March
      31,
              
              
              June
      30,
              
              
              September
      30,
              
              
              December
      31,2009Interest
      income
              
              $
              7,751
              
              
              $
              7,321
              
              
              $
              7,163
              
              
              $
              6,887Net
      interest income
              
              
              6,339
              
              
              
              6,018
              
              
              
              5,928
              
              
              
              5,747Provision
      for loan and lease losses
              
              
              1,229
              
              
              
              3,800
              
              
              
              1,001
              
              
              
              2,500Noninterest
      income
              
              
              510
              
              
              
              649
              
              
              
              597
              
              
              
              513Noninterest
      expense
              
              
              3,601
              
              
              
              4,239
              
              
              
              4,268
              
              
              
              3,703Income
      (loss) before taxes
              
              
              2,019
              
              
              
              (1,372
              )
              
              
              1,256
              
              
              
              57Net
      income (loss)
              
              
              1,283
              
              
              
              (704
              )
              
              
              827
              
              
              
              180Basic
      earnings (loss) per share
              
              $
              .22
              
              
              $
              (0.12
              )
              
              $
              .14
              
              
              $
              .03Diluted
      earnings (loss) per share
              
              
              .22
              
              
              
              (0.12
              )
              
              
              .14
              
              
              
              .03Cash
      dividends per share
              
              
              .143
              
              
              
              .143
              
              
              
              —
              
              
              
              —Price
      range, common stock
              
              $
              7.02-10.97
              
              
              $
              7.90-12.15
              
              
              $
              7.45-10.99
              
              
              $
              6.00-7.98


2008Interest
      income
            
            $
            8,578
            
            
            $
            8,252
            
            
            $
            8,604
            
            
            $
            8,119Net
      interest income
            
            
            6,342
            
            
            
            6,395
            
            
            
            6,742
            
            
            
            6,446Provision
      for loan and lease losses
            
            
            337
            
            
            
            190
            
            
            
            381
            
            
            
            835Noninterest
      income
            
            
            585
            
            
            
            639
            
            
            
            446
            
            
            
            498Noninterest
      expense
            
            
            3,629
            
            
            
            3,642
            
            
            
            3,694
            
            
            
            3,236Income
      before taxes
            
            
            2,961
            
            
            
            3,202
            
            
            
            3,113
            
            
            
            2,873Net
      income
            
            
            1,833
            
            
            
            1,981
            
            
            
            1,931
            
            
            
            1,826Basic
      earnings per share
            
            $
            .31
            
            
            $
            .34
            
            
            $
            .33
            
            
            $
            .32Diluted
      earnings per share
            
            
            .31
            
            
            
            .34
            
            
            
            .33
            
            
            
            .32Cash
      dividends per share
            
            
            .143
            
            
            
            .143
            
            
            
            .143
            
            
            
            .143Price
      range, common stock
            
            $
            14.29-17.34
            
            
            $
            9.29-15.67
            
            
            $
            7.17-11.33
            
            
            $
            8.01-13.33





The
earnings per share, cash dividends, and price range have been adjusted for a 5%
stock dividend in 2008. There were no stock dividends in 2009.


95


Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.





There has
been no change in the independent accountants engaged to audit the financial
statements of the Company and its subsidiaries during the last two fiscal years
ended December 31, 2009. There have been no disagreements with such independent
accountants during the last two fiscal years ended December 31, 2009, on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.




Item 9A. Controls and Procedures.




Effectiveness
of Disclosure Controls and Procedures





The
Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the design and operation of the Company’s “disclosure
controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of December 31, 2009. Based on
that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective in
timely making known to them material information relating to the Company and the
Company’s consolidated subsidiaries required to be disclosed in the Company’s
reports filed or submitted under the Exchange Act.





During
the quarter ended December 31, 2009, there have been no changes in the Company’s
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, these controls.





Report
of Management on Internal Control Over Financial Reporting





Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company (as defined in Rule 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934, as
amended).





The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, has assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009, presented in conformity with
accounting principles generally accepted in the United States of America. In
making this assessment, management used the criteria applicable to the Company
as set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal
Control—Integrated Framework.Based upon such assessment, management
believes that, as of December 31, 2009, the Company’s internal control over
financial reporting is effective based upon those criteria.





This
annual report on Form 10-K does not include an attestation report of the
Company’s independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to the rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual report.





/s/ DAVID T. TABER
            
            /s/ MITCHELL A. DERENZODavid
      T. Taber
            
            Mitchell
      A. DerenzoPresident
      and Chief Executive Officer
            
            Executive
      Vice President and Chief Financial
Officer




Item 9A(T). Controls and Procedures.




The information required is listed in
Item 9A above.




Item 9B. Other Information.





None.


96


PART III





Item 10. Directors, Executive Officers and Corporate
Governance.





The
information required by Item 10 of Form 10-K is incorporated by reference to the
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting of Shareholders which will be filed pursuant to Regulation
14A.





Item 11. Executive Compensation.





The
information required by Item 11 of Form 10-K is incorporated by reference to the
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting of Shareholders which will be filed pursuant to Regulation
14A.





Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.





The
information required by Item 12 of Form 10-K is incorporated by reference to the
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting of Shareholders which will be filed pursuant to Regulation
14A.





Item 13. Certain Relationships and Related Transactions, and Director
Independence.





The
information required by Item 13 of Form 10-K is incorporated by reference to the
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting of Shareholders which will be filed pursuant to Regulation
14A.




Item 14. Principal Accounting Fees and Services.





The
information required by Item 14 of Form 10-K is incorporated by reference to the
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting of Shareholders which will be filed pursuant to Regulation
14A.





PART IV




Item 15. Exhibits and Financial Statement Schedules.




(a)(1)
            
            Financial
      Statements. Listed and included in Part II, Item 8.(2)
            
            Financial Statement
      Schedules. Not applicable.(3)
            
            Exhibits.





ExhibitNumber
            
            Document Description(2.1)
            
            Agreement
      and Plan of Reorganization and Merger by and among the Registrant, ARH
      Interim National Bank and North Coast Bank, N.A., dated as of March 1,
      2000 (included as Annex A). **(2.2)
            
            Agreement
      and Plan of Reorganization and Merger by and among the Registrant,
      American River Bank and Bank of Amador, dated as of July 8, 2004 (included
      as Annex A). ***(3.1)
            
            Articles
      of Incorporation, as amended, incorporated by reference from Exhibit 3.1
      to the Registrant’s Quarterly Report on Form 10-Q for the period ended
      June 30, 2009, filed with the Commission on August 13,
    2009.  97
  (3.2)
            
            Bylaws,
      as amended, incorporated by reference from Exhibit 3.2 to the Registrant’s
      Quarterly Report on Form 10-Q for the period ended June 30, 2008, filed
      with the Commission on August 8, 2008.(4.1)
            
            Specimen
      of the Registrant’s common stock certificate, incorporated by reference
      from Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the
      period ended June 30, 2004, filed with the Commission on August 11,
      2004.(10.1)
            
            Lease
      agreement between American River Bank and Spieker Properties, L.P., a
      California limited partnership, dated April 1, 2000, related to 1545 River
      Park Drive, Suite 107, Sacramento, California. **(10.2)
            
            Lease
      agreement between American River Bank and Bradshaw Plaza, Associates, Inc.
      dated November 27, 2006, related to 9750 Business Park Drive, Sacramento,
      California incorporated by reference from Exhibit 99.1 to the Registrant’s
      Report on Form 8-K, filed with the Commission on November 28,
      2006.(10.3)
            
            Lease
      agreement between American River Bank and Marjorie Wood Taylor, Trustee of
      the Marjorie Wood-Taylor Trust, dated April 5, 1984, and addendum thereto
      dated July 16, 1997, related to 10123 Fair Oaks Boulevard, Fair Oaks,
      California (**) and Amendment No. 2 thereto dated May 14, 2009,
      incorporated by reference from Exhibit 99.1 to the Registrant’s Report on
      Form 8-K, filed with the Commission on May 15, 2009.(10.4)
            
            Lease
      agreement between American River Bank and LUM YIP KEE, Limited (formerly
      Sandalwood Land Company) dated August 28, 1996, related to 2240 Douglas
      Boulevard, Suite 100, Roseville, California (**) and Amendment No. 1
      thereto dated July 28, 2006, incorporated by reference from Exhibit 99.1
      to the Registrant’s Report on Form 8-K, filed with the Commission on July
      31, 2006.*(10.5)
            
            Registrant’s
      Deferred Compensation Plan, incorporated by reference from Exhibit 99.2 to
      the Registrant’s Report on Form 8-K, filed with the Commission on May 30,
      2006.*(10.6)
            
            Registrant’s
      Deferred Fee Plan, incorporated by reference from Exhibit 99.1 to the
      Registrant’s Report on Form 8-K, filed with the Commission on May 30,
      2006.(10.7)
            
            Lease
      agreement between American River Bank and 520 Capitol Mall, Inc., dated
      August 19, 2003, related to 520 Capitol Mall, Suite 100, Sacramento,
      California, incorporated by reference from Exhibit 10.29 to the
      Registrant’s Quarterly Report on Form 10-Q for the period ended September
      30, 2003, filed with the Commission on November 7, 2003 and the First
      Amendment thereto dated April 21, 2004, incorporated by reference from
      Exhibit 10.37 to the Registrant’s Quarterly Report on Form 10-Q for the
      period ended June 30, 2004, filed with the Commission on August 11,
      2004.*(10.8)
            
            Employment
      Agreement between Registrant and David T. Taber dated June 2, 2006,
      incorporated by reference from Exhibit 99.3 to the Registrant’s Report on
      Form 8-K, filed with the Commission on May 30, 2006.(10.9)
            
            Lease
      agreement between R & R Partners, a California General Partnership and
      North Coast Bank, dated July 1, 2003, related to 8733 Lakewood Drive,
      Suite A, Windsor, California, incorporated by reference from Exhibit 10.32
      to the Registrant’s Quarterly Report on Form 10-Q for the period ended
      September 30, 2003, filed with the Commission on November 7, 2003; the
      First Amendment thereto, dated January 2, 2006, incorporated by reference
      from Exhibit 99.1 to the Registrant’s Report on Form 8-K, filed with the
      Commission on January 3, 2006; and the Second Amendment thereto, dated
      December 8, 2006, incorporated by reference from Exhibit 10.39 to the
      Registrant’s Quarterly Report on Form 10-Q for the period ended March 31,
      2007, filed with the Commission on May 7, 2007; and the Third Amendment
      thereto, dated December 31, 2008, incorporated by reference from Exhibit
      99.1 to the Registrant’s Report on Form 8-K, filed with the Commission on
      January 2, 2009.  98
  *(10.10)
            
            Salary
      Continuation Agreement, as amended on February 21, 2008, between American
      River Bank and Mitchell A. Derenzo, incorporated by reference from Exhibit
      99.3 to the Registrant’s Report on Form 8-K, filed with the Commission on
      February 22, 2008.*(10.11)
            
            Salary
      Continuation Agreement, as amended on February 21, 2008, between the
      Registrant and David T. Taber, incorporated by reference from Exhibit 99.1
      to the Registrant’s Report on Form 8-K, filed with the Commission on
      February 22, 2008.*(10.12)
            
            Salary
      Continuation Agreement, as amended on February 21, 2008, between American
      River Bank and Douglas E. Tow, incorporated by reference from Exhibit 99.2
      to the Registrant’s Report on Form 8-K, filed with the Commission on
      February 22, 2008.*(10.13)
            
            Registrant’s
      2000 Stock Option Plan with forms of Nonqualified Stock Option Agreement
      and Incentive Stock Option Agreement. ***(10.14)
            
            Registrant’s
      401(k) Plan dated December 23, 2008, incorporated by reference from
      Exhibit 99.1 to the Report on Form 8-K, filed with the Commission on
      December 24, 2008.(10.15)
            
            Lease
      agreement between Bank of Amador and the United States Postal Service,
      dated April 24, 2001, related to 424 Sutter Street, Jackson, California
      (***) and the First Amendment thereto, dated June 5, 2006, incorporated by
      reference from Exhibit 99.1 to the Registrant’s Report on Form 8-K, filed
      with the Commission on June 6, 2006.*(10.16)
            
            Salary
      Continuation Agreement, as amended on February 21, 2008, between Bank of
      Amador, a division of American River Bank, and Larry D. Standing and
      related Endorsement Split Dollar Agreement, incorporated by reference from
      Exhibit 99.4 to the Registrant’s Report on Form 8-K, filed with the
      Commission on February 22, 2008.*(10.17)
            
            Director
      Retirement Agreement, as amended on February 21, 2008, between Bank of
      Amador, a division of American River Bank, and Larry D. Standing,
      incorporated by reference from Exhibit 99.5 to the Registrant’s Report on
      Form 8-K, filed with the Commission on February 22,
  2008.(10.18)
            
            Item
      Processing Agreement between American River Bank and Fidelity Information
      Services, Inc., dated April 22, 2005, incorporated by reference from
      Exhibit 99.1 to the Registrant’s Report on Form 8-K, filed with the
      Commission on April 27, 2005.(10.19)
            
            Lease
      agreement between Registrant and One Capital Center, a California limited
      partnership, dated May 17, 2005, related to 3100 Zinfandel Drive, Rancho
      Cordova, California, incorporated by reference from Exhibit 99.1 to the
      Registrant’s Report on Form 8-K, filed with the Commission on May 18,
      2005.(10.20)
            
            Managed
      Services Agreement between American River Bankshares and ProNet Solutions,
      Inc., dated June 16, 2009, incorporated by reference from Exhibit 99.1 to
      the Registrant’s Report on Form 8-K, filed with the Commission on June 18,
      2009.*(10.21)
            
            American
      River Bankshares 2005 Executive Incentive Plan, incorporated by reference
      from Exhibit 99.1 to the Registrant’s Report on Form 8-K, filed with the
      Commission on October 27, 2005; the First Amendment thereto, incorporated
      by reference from Exhibit 99.1 to the Registrant’s Report on Form 8-K,
      filed with the Commission on March 17, 2006; the Second Amendment thereto,
      incorporated by reference from Exhibit 99.1 to the Registrant’s Report on
      Form 8-K, filed with the Commission on March 23, 2007; the Third Amendment
      thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s
      Report on Form 8-K, filed with the Commission on February 22, 2008, and
      the Fourth Amendment thereto, incorporated by reference from the
      Registrant’s Report on Form 8-K, filed with the Commission on March 20,
      2009.  99
  *(10.22)
            
            American
      River Bankshares Director Emeritus Program, incorporated by reference from
      Exhibit 10.33 to the Registrant’s Quarterly Report on Form 10-Q for the
      period ended June 30, 2006, filed with the Commission on August 8,
      2006.*(10.23)
            
            Employment
      Agreement dated September 20, 2006 between American River Bankshares and
      Mitchell A. Derenzo, incorporated by reference from Exhibit 99.1 to the
      Registrant’s Report on Form 8-K, filed with the Commission on September
      20, 2006.*(10.24)
            
            Employment
      Agreement dated September 20, 2006 between American River Bankshares and
      Douglas E. Tow, incorporated by reference from Exhibit 99.2 to the
      Registrant’s Report on Form 8-K, filed with the Commission on September
      20, 2006.*(10.25)
            
            Employment
      Agreement dated September 20, 2006 between American River Bankshares and
      Kevin B. Bender, incorporated by reference from Exhibit 99.3 to the
      Registrant’s Report on Form 8-K, filed with the Commission on September
      20, 2006.*(10.26)
            
            Employment
      Agreement dated September 20, 2006 between American River Bank and Raymond
      F. Byrne, incorporated by reference from Exhibit 99.5 to the Registrant’s
      Report on Form 8-K, filed with the Commission on September 20,
      2006.*(10.27)
            
            Salary
      Continuation Agreement, as amended on February 21, 2008, between American
      River Bank and Kevin B. Bender, incorporated by reference from Exhibit
      99.6 to the Registrant’s Report on Form 8-K, filed with the Commission on
      February 22, 2008.*(10.28)
            
            Salary
      Continuation Agreement, as amended on February 21, 2008, between American
      River Bank and Raymond F. Byrne, incorporated by reference from Exhibit
      99.7 to the Registrant’s Report on Form 8-K, filed with the Commission on
      February 22, 2008.(10.29)
            
            Lease
      agreement dated May 23, 2007 between Bank of Amador, a division of
      American River Bank, and Joseph Bellamy, Trustee of the Joseph T. Bellamy
      2005 Trust, related to 26395 Buckhorn Ridge Road, Pioneer, California,
      incorporated by reference from Exhibit 99.1 to the Registrant’s Report on
      Form 8-K, filed with the Commission on May 24, 2007 and the First
      Amendment thereto, dated October 15, 2007, incorporated by reference from
      Exhibit 99.1 to the Registrant’s Report on Form 8-K, filed with the
      Commission on October 16, 2007.(10.30)
            
            Sublease
      agreement dated December 23, 2008 between North Coast Bank, a division of
      American River Bank, and Chicago Title Company, a California Corporation;
      and lease agreement dated December 23, 2008 between North Coast Bank, a
      division of American River Bank, and 90 E Street LLC, related to 90 E
      Street, Santa Rosa, California, incorporated by reference from Exhibit
      99.2 and 99.3 to the Registrant’s Report on Form 8-K, filed with the
      Commission on December 24, 2008.(10.31)
            
            Customer
      Service Agreement dated January 4, 2010 between American River Bankshares
      and TriNet HR Corporation, incorporated by reference from Exhibit 99.1 to
      the Registrant’s Report on Form 8-K, filed with the Commission on January
      5, 2010.*(10.32)
            
            Form
      of Indemnification Agreement entered into on January 20, 2010, between
      American River Bankshares and its Directors and certain named executive
      officers, incorporated by reference from Exhibit 99.1 to the Registrant’s
      Report on Form 8-K, filed with the Commission on January 22,
      2010.*(10.33)
            
            Form
      of Indemnification Agreement entered into on January 20, 2010, between
      American River Bank and its Directors and certain named executive
      officers, incorporated by reference from Exhibit 99.2 to the Registrant’s
      Report on Form 8-K, filed with the Commission on January 22,
      2010.  100
  (14.1)
            
            Registrant’s
      Code of Ethics, incorporated by reference from Exhibit 14.1 to the
      Registrant’s Annual Report on Form 10-K for the period ended December 31,
      2003, filed with the Commission on March 19, 2004.(21.1)
            
            The
      Registrant’s only subsidiaries are American River Bank, a California
      banking corporation, and American River Financial, a California
      corporation.(23.1)
            
            Consent
      of Perry-Smith LLP.(31.1)
            
            Certifications
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.(31.2)
            
            Certifications
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.(32.1)
            
            Certification
      of Registrant by its Chief Executive Officer and Chief Financial Officer
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*Denotes
      management contracts, compensatory plans or
  arrangements.**Incorporated
      by reference to Registrant’s Registration Statement on Form S-4 (No.
      333-36326) filed with the Commission on May 5, 2000.***Incorporated
      by reference to Registrant’s Registration Statement on Form S-4 (No.
      333-119085) filed with the Commission on September 17,
    2004.





An Annual
Report for the fiscal year ended December 31, 2009 and Notice of Annual Meeting
and Proxy Statement for the Company’s 2010 Annual Meeting will be mailed to
security holders subsequent to the date of filing this Report. Copies of said
materials will be furnished to the Commission in accordance with the
Commission’s Rules and Regulations.


101


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




AMERICAN
      RIVER BANKSHARESMarch
      4, 2010
            By:
            /s/
      DAVID T. TABERDavid
      T. TaberChief
      Executive Officer(Principal
      Executive Officer)March
      4, 2010
            By:
            /s/
      MITCHELL A. DERENZOMitchell
      A. DerenzoChief
      Financial Officer(Principal
      Financial and Accounting Officer)




Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.




Signature
            
            Title
            
            Date/s/
      CHARLES D. FITE
            
            Director,
      Chairman
            
            3/04/10Charles
      D. Fite/s/
      ROGER J. TAYLOR
            
            Director,
      Vice Chairman
            
            3/04/10Roger
      J. Taylor/s/
      AMADOR S. BUSTOS
            
            Director
            
            3/04/10Amador
      S. Bustos/s/
      DORENE C. DOMINGUEZ
            
            Director
            
            3/04/10Dorene
      C. Dominguez/s/
      ROBERT J. FOX
            
            Director
            
            3/04/10Robert
      J. Fox/s/
      WILLIAM A. ROBOTHAM
            
            Director
            
            3/04/10William
      A. Robotham/s/
      DAVID T. TABER
            
            Director
            
            3/04/10David
      T. Taber/s/
      STEPHEN H. WAKS
            
            Director
            
            3/04/10Stephen
      H. Waks/s/
      PHILIP A. WRIGHT
            
            Director
            
            3/04/10Philip
      A. Wright/s/
      MICHAEL A. ZIEGLER
            
            Director
            
            3/04/10Michael
      A. Ziegler





102


EXHIBIT INDEX




Exhibit
      Number
            
            Description
            
            Page23.1
            
            Consent
      of Perry-Smith LLP
            
            10431.1
            
            Certifications
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
            
            10531.2
            
            Certifications
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
            
            10632.1
            
            Certification
      of American River Bankshares Chief Executive Officer and Chief Financial
      Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
            
            107





103