Item 1. Financial Statements.
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
BALANCE SHEET
(Unaudited)
(dollars in thousands)
|
|
June
30,
2016
|
|
|
December
31,
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
22,671
|
|
|
$
|
23,727
|
|
Interest-bearing deposits in banks
|
|
|
999
|
|
|
|
750
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
254,483
|
|
|
|
273,819
|
|
Held-to-maturity, at amortized cost
|
|
|
540
|
|
|
|
623
|
|
Loans and leases, less allowance for loan and lease losses of $5,132
at June 30, 2016 and $4,975 at December 31, 2015
|
|
|
305,088
|
|
|
|
289,102
|
|
Premises and equipment, net
|
|
|
1,305
|
|
|
|
1,407
|
|
Federal Home Loan Bank stock
|
|
|
3,779
|
|
|
|
3,779
|
|
Goodwill and other intangible assets
|
|
|
16,321
|
|
|
|
16,321
|
|
Other real estate owned
|
|
|
896
|
|
|
|
3,551
|
|
Bank owned life insurance
|
|
|
14,643
|
|
|
|
14,483
|
|
Accrued interest receivable and other assets
|
|
|
5,086
|
|
|
|
7,078
|
|
|
|
$
|
625,811
|
|
|
$
|
634,640
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
195,903
|
|
|
$
|
190,548
|
|
Interest-bearing
|
|
|
330,030
|
|
|
|
340,142
|
|
Total deposits
|
|
|
525,933
|
|
|
|
530,690
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
5,000
|
|
|
|
3,500
|
|
Long-term borrowings
|
|
|
6,000
|
|
|
|
7,500
|
|
Accrued interest payable and other liabilities
|
|
|
5,312
|
|
|
|
6,875
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
542,245
|
|
|
|
548,565
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; 20,000,000 shares authorized; none
outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value; 20,000,000 shares authorized; issued and
outstanding – 6,655,980 shares at June 30, 2016 and 7,343,649 shares at December 31, 2015
|
|
|
42,311
|
|
|
|
49,554
|
|
Retained earnings
|
|
|
37,094
|
|
|
|
34,418
|
|
Accumulated other comprehensive income, net of taxes
|
|
|
4,161
|
|
|
|
2,103
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
83,566
|
|
|
|
86,075
|
|
|
|
$
|
625,811
|
|
|
$
|
634,640
|
|
See
Notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF INCOME
(Unaudited)
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the periods ended June 30,
|
|
Three months
|
|
|
Six months
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
3,445
|
|
|
$
|
3,339
|
|
|
$
|
6,807
|
|
|
$
|
6,719
|
|
Exempt from Federal income taxes
|
|
|
173
|
|
|
|
85
|
|
|
|
345
|
|
|
|
123
|
|
Interest on deposits in banks
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
|
2
|
|
Interest and dividends on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,441
|
|
|
|
1,657
|
|
|
|
2,993
|
|
|
|
3,073
|
|
Exempt from Federal income taxes
|
|
|
162
|
|
|
|
191
|
|
|
|
346
|
|
|
|
381
|
|
Dividends
|
|
|
6
|
|
|
|
10
|
|
|
|
11
|
|
|
|
10
|
|
Total interest income
|
|
|
5,229
|
|
|
|
5,283
|
|
|
|
10,505
|
|
|
|
10,185
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
182
|
|
|
|
208
|
|
|
|
366
|
|
|
|
422
|
|
Interest on borrowings
|
|
|
39
|
|
|
|
36
|
|
|
|
89
|
|
|
|
70
|
|
Total interest expense
|
|
|
221
|
|
|
|
244
|
|
|
|
455
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,008
|
|
|
|
5,039
|
|
|
|
10,050
|
|
|
|
9,693
|
|
Provision for loan and lease losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and
lease losses
|
|
|
5,008
|
|
|
|
5,039
|
|
|
|
10,050
|
|
|
|
9,693
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
127
|
|
|
|
127
|
|
|
|
256
|
|
|
|
244
|
|
(Loss) gain on sale, call, or impairment of securities
|
|
|
(1
|
)
|
|
|
51
|
|
|
|
281
|
|
|
|
218
|
|
Rental income from other real estate owned
|
|
|
—
|
|
|
|
90
|
|
|
|
106
|
|
|
|
161
|
|
Other noninterest income
|
|
|
237
|
|
|
|
239
|
|
|
|
474
|
|
|
|
469
|
|
Total noninterest income
|
|
|
363
|
|
|
|
507
|
|
|
|
1,117
|
|
|
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,101
|
|
|
|
2,045
|
|
|
|
4,261
|
|
|
|
4,315
|
|
Occupancy
|
|
|
292
|
|
|
|
301
|
|
|
|
590
|
|
|
|
594
|
|
Furniture and equipment
|
|
|
163
|
|
|
|
179
|
|
|
|
328
|
|
|
|
356
|
|
Federal Deposit Insurance Corporation assessments
|
|
|
76
|
|
|
|
76
|
|
|
|
156
|
|
|
|
156
|
|
Expenses related to other real estate owned
|
|
|
20
|
|
|
|
55
|
|
|
|
360
|
|
|
|
202
|
|
Other expense
|
|
|
763
|
|
|
|
759
|
|
|
|
1,511
|
|
|
|
1,605
|
|
Total noninterest expense
|
|
|
3,415
|
|
|
|
3,415
|
|
|
|
7,206
|
|
|
|
7,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
1,956
|
|
|
|
2,131
|
|
|
|
3,961
|
|
|
|
3,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
652
|
|
|
|
745
|
|
|
|
1,285
|
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,304
|
|
|
$
|
1,386
|
|
|
$
|
2,676
|
|
|
$
|
2,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.39
|
|
|
$
|
0.30
|
|
Diluted earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.18
|
|
|
$
|
0.39
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
See
notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the periods ended June 30,
|
|
Three months
|
|
|
Six months
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,304
|
|
|
$
|
1,386
|
|
|
$
|
2,676
|
|
|
$
|
2,342
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net unrealized gains on investment securities
|
|
|
810
|
|
|
|
(1,847
|
)
|
|
|
3,712
|
|
|
|
254
|
|
Deferred tax (expense) benefit
|
|
|
(324
|
)
|
|
|
739
|
|
|
|
(1,485
|
)
|
|
|
(102
|
)
|
Increase (decrease) in net unrealized gains on investment securities, net of tax
|
|
|
486
|
|
|
|
(1,108
|
)
|
|
|
2,227
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses (gains) included in net income
|
|
|
1
|
|
|
|
(51
|
)
|
|
|
(281
|
)
|
|
|
(218
|
)
|
Tax effect
|
|
|
—
|
|
|
|
20
|
|
|
|
112
|
|
|
|
87
|
|
Realized losses (gains), net of tax
|
|
|
1
|
|
|
|
(31
|
)
|
|
|
(169
|
)
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive gain (loss) income
|
|
|
487
|
|
|
|
(1,139
|
)
|
|
|
2,058
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,791
|
|
|
$
|
247
|
|
|
$
|
4,734
|
|
|
$
|
2,363
|
|
See
Notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
(dollars in thousands)
|
|
Common Stock
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
Balance, January 1, 2015
|
|
|
8,089,615
|
|
|
|
57,126
|
|
|
|
29,150
|
|
|
|
3,371
|
|
|
|
89,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
2,342
|
|
|
|
|
|
|
|
2,342
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains on available-for-sale
investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net restricted stock award activity and related
compensation expense
|
|
|
45,023
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation expense
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Retirement of common stock
|
|
|
(404,481
|
)
|
|
|
(3,945
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2015
|
|
|
7,730,157
|
|
|
$
|
53,307
|
|
|
$
|
31,492
|
|
|
$
|
3,392
|
|
|
$
|
88,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
|
7,343,649
|
|
|
|
49,554
|
|
|
|
34,418
|
|
|
|
2,103
|
|
|
|
86,075
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
2,676
|
|
|
|
|
|
|
|
2,676
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains on available-for-sale
investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,058
|
|
|
|
2,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net restricted stock award activity and related
compensation expense
|
|
|
28,728
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Stocks option exercised and compensation expense
|
|
|
500
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Retirement of common stock
|
|
|
(716,897
|
)
|
|
|
(7,414
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2016
|
|
|
6,655,980
|
|
|
$
|
42,311
|
|
|
$
|
37,094
|
|
|
$
|
4,161
|
|
|
$
|
83,566
|
|
See
Notes to Unaudited Consolidated Financial Statements
AMERICAN RIVER
BANKSHARES
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,676
|
|
|
$
|
2,342
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses
|
|
|
—
|
|
|
|
—
|
|
Increase (decrease) in deferred loan origination fees, net
|
|
|
26
|
|
|
|
(29
|
)
|
Depreciation and amortization
|
|
|
220
|
|
|
|
212
|
|
Gain on sale, call, and impairment of investment
securities, net
|
|
|
(281
|
)
|
|
|
(218
|
)
|
Amortization of investment security premiums and
discounts, net
|
|
|
1,422
|
|
|
|
1,798
|
|
Increase in cash surrender values of life insurance policies
|
|
|
(160
|
)
|
|
|
(159
|
)
|
Stock based compensation expense
|
|
|
167
|
|
|
|
126
|
|
Loss/gain on sale/write-down of other real estate owned
|
|
|
259
|
|
|
|
68
|
|
Decrease in accrued interest receivable and other
assets
|
|
|
621
|
|
|
|
162
|
|
Decrease in accrued interest payable and other
liabilities
|
|
|
(1,563
|
)
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,387
|
|
|
|
3,503
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of available-for-sale
investment securities
|
|
|
8,287
|
|
|
|
15,383
|
|
Proceeds from matured available-for-sale investment securities
|
|
|
600
|
|
|
|
—
|
|
Purchases of available-for-sale investment securities
|
|
|
(8,875
|
)
|
|
|
(28,393
|
)
|
Proceeds from principal repayments for available-for-sale investment securities
|
|
|
21,612
|
|
|
|
24,317
|
|
Proceeds from principal repayments for held-to-maturity investment securities
|
|
|
83
|
|
|
|
122
|
|
Net increase in interest-bearing deposits in banks
|
|
|
(249
|
)
|
|
|
—
|
|
Net increase in loans
|
|
|
(14,326
|
)
|
|
|
(17,267
|
)
|
Proceeds from sale of other real estate
|
|
|
710
|
|
|
|
924
|
|
Capitalized additions to other real estate
|
|
|
—
|
|
|
|
(126
|
)
|
Net increase in FHLB stock
|
|
|
—
|
|
|
|
(93
|
)
|
Purchases of equipment
|
|
|
(118
|
)
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
7,724
|
|
|
|
(5,288
|
)
|
AMERICAN RIVER
BANKSHARES
CONSOLIDATED STATEMENT
OF CASH FLOWS (Continued)
(Unaudited)
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in demand, interest-bearing and
savings deposits
|
|
$
|
(2,785
|
)
|
|
$
|
1,343
|
|
Net decrease in time deposits
|
|
|
(1,972
|
)
|
|
|
(53
|
)
|
Net increase in short-term borrowings
|
|
|
1,500
|
|
|
|
—
|
|
Net decrease in long-term borrowings
|
|
|
(1,500
|
)
|
|
|
—
|
|
Proceeds from stock option exercise
|
|
|
4
|
|
|
|
—
|
|
Cash paid to repurchase common stock
|
|
|
(7,414
|
)
|
|
|
(3,945
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
$
|
(12,167
|
)
|
|
$
|
(2,655
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(1,056
|
)
|
|
|
(4,440
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
23,727
|
|
|
|
22,449
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
22,671
|
|
|
$
|
18,009
|
|
See Notes to Unaudited
Consolidated Financial Statements
AMERICAN RIVER
BANKSHARES
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion
of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of American River Bankshares (the “Company:”) at June
30, 2016 and December 31, 2015, the results of its operations and statement of comprehensive income for the three-month and six-month
periods ended June 30, 2016 and 2015, its cash flows for the six-month periods ended June 30, 2016 and 2015 and its statement
of changes in shareholders’ equity for the six months ended June 30, 2016 and 2015 in conformity with accounting principles
generally accepted in the United States of America.
Certain disclosures
normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted. The Company believes that the disclosures are adequate to
make the information not misleading. These interim consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2015.
The results of operations for the three-month and six-month periods ended June 30, 2016 may not necessarily be indicative of the
operating results for the full year.
In preparing
such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly
from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the
determination of the allowance for loan and lease losses, the provision for taxes, the valuation of goodwill and the estimated
fair value of investment securities, impaired loans and other real estate owned.
Management has
determined that since all of the banking products and services offered by the Company are available in each branch office of American
River Bank, all branch offices are located within the same economic environment and management does not allocate resources based
on the performance of different lending or transaction activities, it is appropriate to aggregate all of the branch offices and
report them as a single operating segment. No client accounts for more than ten percent (10%) of revenues for the Company or American
River Bank.
2. STOCK-BASED
COMPENSATION
Equity
Plans
On
March 17, 2010, the Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan was
approved by the Company’s shareholders on May 20, 2010. In 2000, the Board of Directors adopted and the Company’s
shareholders approved a stock option plan (the “2000 Plan”), under which 119,237 options remain outstanding at June
30, 2016. At June 30, 2016, under the 2010 Plan, there were 76,461 stock options and 68,025 restricted shares outstanding and
the total number of authorized shares that remain available for issuance was 1,377,766. The 2010 Plan provides for the following
types of stock-based awards: incentive stock options; nonqualified stock options; stock appreciation rights; restricted stock;
restricted performance stock; unrestricted Company stock; and performance units. Awards under the 2000 Plan were either incentive
stock options or nonqualified stock options. Under the 2010 Plan, the awards may be granted to employees and directors under incentive
and nonqualified option agreements, restricted stock agreements, and other awards agreements. The 2010 Plan and the 2000 Plan
(collectively the “Plans”) require that the option price may not be less than the fair market value of the stock at
the date the option is awarded. The option awards under the Plans expire on dates determined by the Board of Directors, but not
later than ten years from the date of award. The vesting period is generally five years; however, the vesting period can be modified
at the discretion of the Company’s Board of Directors. Outstanding option awards under the Plans are exercisable until their
expiration, however, no new options will be awarded under the 2000 Plan. New shares are issued upon exercise of an option.
The
award date fair value of awards is determined by the market price of the Company’s common stock on the date of award and is recognized
ratably as compensation expense or director expense over the vesting periods. The shares of common stock awarded pursuant to such
agreements vest in increments over one to five years from the date of award. The shares awarded to employees and directors under
the restricted stock agreements vest on the applicable vesting dates only to the extent the recipient of the shares is then an
employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have
not vested on the date his or her employment or service is terminated.
Equity
Compensation
For the three-month
periods ended June 30, 2016 and 2015, the compensation cost recognized for equity compensation was $85,000 and $71,000, respectively.
The recognized tax benefit for equity compensation expense was $30,000 and $25,000, respectively, for the three-month periods
ended June 30, 2016 and 2015. For the six-month periods ended June 30, 2016 and 2015, the compensation cost recognized for equity
compensation was $167,000 and $126,000, respectively. The recognized tax benefit for equity compensation expense was $59,000 and
$45,000, respectively, for the six-month periods ended June 30, 2016 and 2015.
At
June 30, 2016, the total compensation cost related to nonvested stock option awards not yet recorded was $119,000. This amount
will be recognized over the next 4.0 years and the weighted average period of recognizing these costs is expected to be 2.1 years.
At June 30, 2016, the total compensation cost related to restricted stock awards not yet recorded was $520,000. This amount will
be recognized over the next 5.0 years and the weighted average period of recognizing these costs is expected to be 1.8 years.
Equity
Plans Activity
Stock
Options
There
were no stock options awarded during the three-month and six-month periods ended June 30, 2016. There were 26,427 stock options
awarded during the three-month and six-month periods ended June 30, 2015 at an average exercise price of $9.56. The weighted average
award date fair value of options awarded for the three-month and six-month periods ended June 30, 2015 was $3.24. A summary of
option activity under the Plans as of June 30, 2016 and changes during the period then ended is presented below:
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value ($000)
|
|
Outstanding at January 1, 2016
|
|
|
248,411
|
|
|
$
|
15.19
|
|
|
|
3.7 years
|
|
|
$
|
232
|
|
Awarded
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
500
|
|
|
|
8.50
|
|
|
|
—
|
|
|
|
—
|
|
Expired, forfeited or cancelled
|
|
|
52,213
|
|
|
|
23.09
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at June 30, 2016
|
|
|
195,698
|
|
|
$
|
13.09
|
|
|
|
4.1 years
|
|
|
$
|
190
|
|
Vested at June 30, 2016
|
|
|
151,454
|
|
|
$
|
14.28
|
|
|
|
2.8 years
|
|
|
$
|
136
|
|
Non-vested at June 30, 2016
|
|
|
44,244
|
|
|
$
|
9.05
|
|
|
|
8.2 years
|
|
|
$
|
54
|
|
Restricted
Stock
There
were 11,923 and 29,756 shares of restricted stock awarded during the three-month and six-month periods ended June 30, 2016, respectively.
There were 24,491 and 45,023 shares of restricted stock awarded during the three-month and six-month periods ended June 30, 2015,
respectively.
Restricted Stock
|
|
Shares
|
|
|
Weighted
Average Award
Date Fair Value
|
|
Nonvested at January 1, 2016
|
|
|
57,516
|
|
|
$
|
9.21
|
|
Awarded
|
|
|
29,756
|
|
|
|
10.26
|
|
Less: Vested
|
|
|
18,219
|
|
|
|
9.30
|
|
Less: Expired, forfeited or cancelled
|
|
|
1,028
|
|
|
|
9.23
|
|
Nonvested at June 30, 2016
|
|
|
68,025
|
|
|
$
|
9.65
|
|
Other
Equity Awards
There
were no stock appreciation rights; restricted performance stock; unrestricted Company stock; or performance units awarded during
the three-month or six-month month periods ended June 30, 2016 or 2015 or outstanding at June 30, 2016 or December 31, 2015.
The
intrinsic value used for stock options and restricted stock awards was derived from the market price of the Company’s common
stock of $10.26 as of June 30, 2016.
3. COMMITMENTS AND CONTINGENCIES
In the normal
course of business there are outstanding various commitments to extend credit which are not reflected in the financial statements,
including loan commitments of approximately $25,804,000 and standby letters of credit of approximately $238,000 at June 30, 2016
and loan commitments of approximately $26,730,000 and standby letters of credit of approximately $238,000 at December 31, 2015.
Such commitments relate primarily to real estate construction loans, revolving lines of credit and other commercial loans. However,
all such commitments will not necessarily culminate in actual extensions of credit by the Company during 2016 as some of these
are expected to expire without being fully drawn upon.
Standby letters
of credit are commitments issued to guarantee the performance or financial obligation of a client to a third party. These guarantees
are issued primarily relating to purchases of inventory, insurance programs, performance obligations to government agencies, or
as security for real estate rents by commercial clients and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to clients and accordingly, evaluation and collateral requirements similar to those for
loan commitments are used. The majority of all such commitments are collateralized. 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 June 30,
2016 or December 31, 2015.
4. EARNINGS PER SHARE COMPUTATION
Basic
earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period (6,717,456
and 6,906,620 shares for the three-month and six-month periods ended June 30, 2016, and (7,659,883 and 7,740,320 shares for the
three-month and six-month periods ended June 30, 2015). Diluted earnings per share reflect the potential dilution that could occur
if securities or other contracts to issue common stock, such as stock options or restricted stock, result in the issuance of common
stock. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding for the
period plus the dilutive effect of stock based awards. There were 28,643 and 26,815, respectively, dilutive shares for the three-month
and six-month periods ended June 30, 2016 and 14,828 and 13,999, respectively, dilutive shares for the three-month and six-month
periods ended June 30, 2015. For the three-month periods ended June 30, 2016 and 2015, there were 105,844 and 214,066 stock options,
respectively, that were excluded from the calculation as they were considered antidilutive. For the six-month periods ended June
30, 2016 and 2015, there were 138,549 and 214,066 stock options, respectively, that were excluded from the calculation as they
were considered antidilutive. Earnings per share is retroactively adjusted for stock dividends and stock splits, if applicable,
for all periods presented.
5.
INVESTMENT SECURITIES
The amortized
cost and estimated fair values of Available-for-Sale and Held-to-Maturity investment securities at June 30, 2016 and December
31, 2015 consisted of the following (dollars in thousands):
Available-for-Sale
|
|
June 30, 2016
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
223,053
|
|
|
$
|
5,769
|
|
|
$
|
(100
|
)
|
|
$
|
228,722
|
|
Obligations of states and political subdivisions
|
|
|
22,945
|
|
|
|
1,204
|
|
|
|
(6
|
)
|
|
|
24,143
|
|
Corporate bonds
|
|
|
1,501
|
|
|
|
36
|
|
|
|
—
|
|
|
|
1,537
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate stock
|
|
|
49
|
|
|
|
32
|
|
|
|
—
|
|
|
|
81
|
|
|
|
$
|
247,548
|
|
|
$
|
7,041
|
|
|
$
|
(106
|
)
|
|
$
|
254,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
244,056
|
|
|
$
|
3,059
|
|
|
$
|
(930
|
)
|
|
$
|
246,185
|
|
Obligations of states and political subdivisions
|
|
|
24,706
|
|
|
|
1,307
|
|
|
|
—
|
|
|
|
26,013
|
|
Corporate bonds
|
|
|
1,502
|
|
|
|
49
|
|
|
|
—
|
|
|
|
1,551
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate stock
|
|
|
51
|
|
|
|
19
|
|
|
|
—
|
|
|
|
70
|
|
|
|
$
|
270,315
|
|
|
$
|
4,434
|
|
|
$
|
(930
|
)
|
|
$
|
273,819
|
|
Net
unrealized gains on available-for-sale investment securities totaling $6,935,000 were recorded, net of $2,774,000 in tax liabilities,
as accumulated other comprehensive income within shareholders’ equity at June 30, 2016. There were no sales or calls of available-for-sale
investment securities for the three-month period ended June 30, 2016, however, there was an impairment loss of one security resulting
in the write-down of the remaining balance of $1,000, and for the six-month period ended June 30, 2016 proceeds and gross realized
gains from the sale, call, and impairment of available-for-sale investment securities totaled $8,287,000 and $281,000, respectively.
There were no transfers of available-for-sale investment securities for the three-month and six-month periods ended June 30, 2016.
Net
unrealized gains on available-for-sale investment securities totaling $3,504,000 were recorded, net of $1,401,000 in tax liabilities,
as accumulated other comprehensive income within shareholders’ equity at December 31, 2015. Proceeds and gross realized
gains from the sale and call of available-for-sale investment securities for the three-month period ended June 30, 2015 totaled
$5,473,000 and $51,000, respectively, and for the six-month period ended June 30, 2015 totaled $15,383,000 and $218,000, respectively.
There were no transfers of available-for-sale investment securities for the three-month and six-month periods ended June 30, 2015.
Held-to-Maturity
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
540
|
|
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
623
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
669
|
|
There
were no sales or transfers of held-to-maturity investment securities for the periods ended June 30, 2016 and June 30, 2015. Investment
securities with unrealized losses at June 30, 2016 and December 31, 2015 are summarized and classified according to the duration
of the loss period as follows (dollars in thousands):
June 30, 2016
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
2,058
|
|
|
$
|
(18
|
)
|
|
|
9,822
|
|
|
|
(82
|
)
|
|
$
|
11,880
|
|
|
$
|
(100
|
)
|
Obligations of states and political subdivisions
|
|
|
1,433
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,433
|
|
|
|
(6
|
)
|
|
|
$
|
3,491
|
|
|
$
|
(24
|
)
|
|
$
|
9,822
|
|
|
$
|
(82
|
)
|
|
$
|
13,313
|
|
|
$
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
93,265
|
|
|
$
|
(813
|
)
|
|
$
|
5,251
|
|
|
$
|
(117
|
)
|
|
$
|
98,516
|
|
|
$
|
(930
|
))
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
93,265
|
|
|
$
|
(813
|
)
|
|
$
|
5,251
|
|
|
$
|
(117
|
)
|
|
$
|
98,516
|
|
|
$
|
(930
|
)
|
There
were no held-to-maturity investment securities with unrealized losses as of June 30, 2016 or December 31, 2015. At June 30, 2016,
the Company held 213 securities of which four were in a loss position for less than twelve months and six were in a loss position
for twelve months or more. Of the four securities in a loss position for less than twelve months, two were U.S. Government
Agencies and Sponsored Agencies securities and two were obligations of states or political subdivisions and of the six securities
that were in a loss position for greater than twelve months, all six were U.S. Government Agencies and Sponsored Agencies securities.
At
December 31, 2015, the Company held 223 securities of which 45 were in a loss position for less than twelve months and three were
in a loss position for twelve months or more. Of the 45 securities in a loss position for less than twelve months, all were
US Government Agencies and Sponsored Agencies securities and of the three securities that were in a loss position for greater
than twelve months, all were US Government Agencies and Sponsored Agencies.
The
unrealized loss on the Company’s investment securities 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 until maturity, management does not consider these investments
to be other-than-temporarily impaired.
The
amortized cost and estimated fair values of investment securities at June 30, 2016 by contractual maturity are shown below (dollars
in thousands).
|
|
Available-for-Sale
|
|
|
Held-to-Maturity
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
2,430
|
|
|
$
|
2,479
|
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
3,697
|
|
|
|
3,806
|
|
|
|
|
|
|
|
|
|
After five years through ten years
|
|
|
11,662
|
|
|
|
12,563
|
|
|
|
|
|
|
|
|
|
After ten years
|
|
|
6,657
|
|
|
|
6,832
|
|
|
|
|
|
|
|
|
|
|
|
|
24,446
|
|
|
|
25,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities not due at a single maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
|
223,053
|
|
|
|
228,722
|
|
|
$
|
540
|
|
|
$
|
584
|
|
Corporate stock
|
|
|
49
|
|
|
|
81
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
247,548
|
|
|
$
|
254,483
|
|
|
$
|
540
|
|
|
$
|
584
|
|
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.
6.
IMPAIRED AND NONPERFORMING LOANS AND LEASES AND OTHER REAL ESTATE OWNED
At
June 30, 2016 and December 31, 2015, the recorded investment in nonperforming loans and leases was approximately $1,055,000 and
$1,643,000, respectively. Nonperforming loans and leases include all such loans and leases that are either placed on nonaccrual
status or are 90 days past due as to principal or interest but still accrue interest because such loans are well-secured and in
the process of collection. 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 original
loan agreement. At June 30, 2016, the recorded investment in loans and leases that were considered to be impaired totaled $20,832,000,
which includes $1,029,000 in nonaccrual loans and leases and $19,803,000 in performing loans and leases. Of the total impaired
loans of $20,832,000, loans totaling $11,980,000 were deemed to require no specific reserve and loans totaling $8,852,000 were
deemed to require a related valuation allowance of $904,000. At December 31, 2015, the recorded investment in loans and leases
that were considered to be impaired totaled $21,365,000 and had a related valuation allowance of $899,000.
At
June 30, 2016 and December 31, 2015, the balance in other real estate owned (“OREO”) was $896,000 and $3,551,000,
respectively. At June 30, 2016, the Company did not own any residential OREO properties nor was there any residential properties
in the process of foreclosure. During the first quarter of 2016, the Company sold a single commercial property in El Dorado County
for a gain of $117,000. Also, during the first quarter the Company obtained an updated appraisal on existing commercial land in
Sacramento County, which resulted in a charge to expense of $376,000. The Company did not add any properties to OREO during the
first quarter of 2016. During the second quarter of 2016, the Company did not add any properties to OREO or sell any OREO property.
The
June 30, 2016 OREO balance of $896,000 consists of two properties, one of which is commercial real estate in the amount of $243,000
and the other is commercial land in the amount of $653,000.
Nonperforming
assets at June 30, 2016 and December 31, 2015 are summarized as follows:
(dollars in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Nonaccrual loans and leases that are current to terms (less than 30 days past due)
|
|
$
|
643
|
|
|
$
|
379
|
|
Nonaccrual loans and leases that are past due
|
|
|
412
|
|
|
|
1,264
|
|
Loans and leases past due 90 days and accruing interest
|
|
|
—
|
|
|
|
—
|
|
Other assets
|
|
|
878
|
|
|
|
878
|
|
Other real estate owned
|
|
|
896
|
|
|
|
3,551
|
|
Total nonperforming assets
|
|
$
|
2,829
|
|
|
$
|
6,072
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans and leases to total loans and leases
|
|
|
0.34
|
%
|
|
|
0.56
|
%
|
Total nonperforming assets to total assets
|
|
|
0.45
|
%
|
|
|
0.96
|
%
|
Impaired
loans and leases as of and for the periods ended June 30, 2016 and December 31, 2015 are summarized as follows:
(dollars in thousands)
|
|
As of June 30, 2016
|
|
|
As of December 31, 2015
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate-commercial
|
|
|
11,643
|
|
|
|
12,276
|
|
|
|
—
|
|
|
|
12,269
|
|
|
|
12,902
|
|
|
|
—
|
|
Real estate-residential
|
|
|
337
|
|
|
|
424
|
|
|
|
—
|
|
|
|
338
|
|
|
|
338
|
|
|
|
—
|
|
Subtotal
|
|
$
|
11,980
|
|
|
$
|
12,700
|
|
|
$
|
—
|
|
|
$
|
12,607
|
|
|
$
|
13,240
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
91
|
|
|
$
|
91
|
|
|
$
|
11
|
|
|
$
|
121
|
|
|
$
|
121
|
|
|
$
|
25
|
|
Real estate-commercial
|
|
|
6,013
|
|
|
|
6,107
|
|
|
|
675
|
|
|
|
5,597
|
|
|
|
5,693
|
|
|
|
598
|
|
Real estate-multi-family
|
|
|
485
|
|
|
|
485
|
|
|
|
4
|
|
|
|
488
|
|
|
|
488
|
|
|
|
5
|
|
Real estate-residential
|
|
|
1,838
|
|
|
|
1,838
|
|
|
|
151
|
|
|
|
2,114
|
|
|
|
2,201
|
|
|
|
204
|
|
Agriculture
|
|
|
364
|
|
|
|
364
|
|
|
|
37
|
|
|
|
370
|
|
|
|
370
|
|
|
|
38
|
|
Consumer
|
|
|
61
|
|
|
|
61
|
|
|
|
26
|
|
|
|
68
|
|
|
|
68
|
|
|
|
29
|
|
Subtotal
|
|
$
|
8,852
|
|
|
$
|
8,946
|
|
|
$
|
904
|
|
|
$
|
8,758
|
|
|
$
|
8,941
|
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
91
|
|
|
$
|
91
|
|
|
$
|
11
|
|
|
$
|
121
|
|
|
$
|
121
|
|
|
$
|
25
|
|
Real estate-commercial
|
|
|
17,656
|
|
|
|
18,383
|
|
|
|
675
|
|
|
|
17,866
|
|
|
|
18,595
|
|
|
|
598
|
|
Real estate-multi-family
|
|
|
485
|
|
|
|
485
|
|
|
|
4
|
|
|
|
488
|
|
|
|
488
|
|
|
|
5
|
|
Real estate-residential
|
|
|
2,175
|
|
|
|
2,262
|
|
|
|
151
|
|
|
|
2,452
|
|
|
|
2,539
|
|
|
|
204
|
|
Agriculture
|
|
|
364
|
|
|
|
364
|
|
|
|
37
|
|
|
|
370
|
|
|
|
370
|
|
|
|
38
|
|
Consumer
|
|
|
61
|
|
|
|
61
|
|
|
|
26
|
|
|
|
68
|
|
|
|
68
|
|
|
|
29
|
|
|
|
$
|
20,832
|
|
|
$
|
21,646
|
|
|
$
|
904
|
|
|
$
|
21,365
|
|
|
$
|
22,181
|
|
|
$
|
899
|
|
The
following table presents the average balance related to impaired loans and leases for the periods indicated (dollars in thousands):
|
|
Average Recorded Investments
for the three months ended
|
|
|
Average Recorded Investments
for the six months ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
80
|
|
|
$
|
757
|
|
|
$
|
100
|
|
|
$
|
794
|
|
Real estate-commercial
|
|
|
16,878
|
|
|
|
19,796
|
|
|
|
17,021
|
|
|
|
19,383
|
|
Real estate-multi-family
|
|
|
491
|
|
|
|
492
|
|
|
|
495
|
|
|
|
494
|
|
Real estate-residential
|
|
|
2,216
|
|
|
|
2,840
|
|
|
|
2,236
|
|
|
|
2,848
|
|
Agriculture
|
|
|
373
|
|
|
|
377
|
|
|
|
378
|
|
|
|
378
|
|
Consumer
|
|
|
76
|
|
|
|
132
|
|
|
|
77
|
|
|
|
115
|
|
Total
|
|
$
|
20,114
|
|
|
$
|
24,394
|
|
|
$
|
20,307
|
|
|
$
|
24,012
|
|
The
following table presents the interest income recognized on impaired loans and leases for the periods indicated (dollars in thousands):
|
|
Interest Income Recognized
for the three months ended
|
|
|
Interest Income Recognized
for the six months ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
5
|
|
Real estate-commercial
|
|
|
259
|
|
|
|
216
|
|
|
|
444
|
|
|
|
472
|
|
Real estate-multi-family
|
|
|
2
|
|
|
|
7
|
|
|
|
10
|
|
|
|
12
|
|
Real estate-construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Real estate-residential
|
|
|
31
|
|
|
|
32
|
|
|
|
52
|
|
|
|
63
|
|
Agriculture
|
|
|
5
|
|
|
|
5
|
|
|
|
10
|
|
|
|
8
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Total
|
|
$
|
299
|
|
|
$
|
263
|
|
|
$
|
519
|
|
|
$
|
561
|
|
7.
TROUBLED DEBT RESTRUCTURINGS
During
the three and six-month periods ended June 30, 2016, there were no loans that were modified as troubled debt restructurings.
The
following table presents loans by class modified as troubled debt restructurings during the three months ended June 30, 2015 (dollars
in thousands):
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
of Loans
|
|
|
Investment
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1
|
|
|
$
|
47
|
|
|
$
|
47
|
|
Real estate – commercial
|
|
|
2
|
|
|
|
1,650
|
|
|
|
1,650
|
|
Real estate – residential
|
|
|
1
|
|
|
|
255
|
|
|
|
255
|
|
Consumer
|
|
|
1
|
|
|
|
23
|
|
|
|
23
|
|
Total
|
|
|
5
|
|
|
$
|
1,975
|
|
|
$
|
1,975
|
|
The
following table presents loans by class modified as troubled debt restructurings during the six months ended June 30, 2015 (dollars
in thousands):
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
of Loans
|
|
|
Investment
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1
|
|
|
$
|
47
|
|
|
$
|
47
|
|
Real estate – commercial
|
|
|
4
|
|
|
|
2,167
|
|
|
|
2,167
|
|
Real estate – residential
|
|
|
1
|
|
|
|
255
|
|
|
|
255
|
|
Consumer
|
|
|
1
|
|
|
|
23
|
|
|
|
23
|
|
Total
|
|
|
7
|
|
|
$
|
2,492
|
|
|
$
|
2,492
|
|
The
troubled debt restructurings described above increased the allowance for loan and lease losses by $170,000 and resulted in no
charge-offs during the six months ended June 30, 2015.
There
were no payment defaults on troubled debt restructurings within 12 months following the modification for the three-month and six-month
periods ended June 30, 2015 and June 30, 2016.
8.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The
Company’s loan and lease portfolio allocated by management’s internal risk ratings as of June 30, 2016 and December 31,
2015 are summarized below:
June 30, 2016
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
32,574
|
|
|
$
|
175,479
|
|
|
$
|
35,038
|
|
|
$
|
3,917
|
|
|
$
|
13,361
|
|
Watch
|
|
|
782
|
|
|
|
21,160
|
|
|
|
487
|
|
|
|
9,878
|
|
|
|
1,810
|
|
Special mention
|
|
|
—
|
|
|
|
6,169
|
|
|
|
—
|
|
|
|
—
|
|
|
|
385
|
|
Substandard
|
|
|
2,837
|
|
|
|
631
|
|
|
|
—
|
|
|
|
—
|
|
|
|
804
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
36,193
|
|
|
$
|
203,439
|
|
|
$
|
35,525
|
|
|
$
|
13,795
|
|
|
$
|
16,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
|
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
534
|
|
|
$
|
1,953
|
|
|
$
|
1,455
|
|
|
|
|
|
|
$
|
264,311
|
|
Watch
|
|
|
—
|
|
|
|
364
|
|
|
|
296
|
|
|
|
|
|
|
|
34,777
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
433
|
|
|
|
|
|
|
|
6,987
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
120
|
|
|
|
|
|
|
|
4,392
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
534
|
|
|
$
|
2,317
|
|
|
$
|
2,304
|
|
|
|
|
|
|
$
|
310,467
|
|
December 31, 2015
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
32,216
|
|
|
$
|
172,755
|
|
|
$
|
23,001
|
|
|
$
|
6,371
|
|
|
$
|
10,593
|
|
Watch
|
|
|
1,073
|
|
|
|
17,318
|
|
|
|
493
|
|
|
|
8,162
|
|
|
|
2,099
|
|
Special mention
|
|
|
—
|
|
|
|
8,363
|
|
|
|
—
|
|
|
|
—
|
|
|
|
697
|
|
Substandard
|
|
|
2,906
|
|
|
|
1,155
|
|
|
|
—
|
|
|
|
—
|
|
|
|
811
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
36,195
|
|
|
$
|
199,591
|
|
|
$
|
23,494
|
|
|
$
|
14,533
|
|
|
$
|
14,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
|
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
732
|
|
|
$
|
2,061
|
|
|
$
|
2,136
|
|
|
|
|
|
|
$
|
249,865
|
|
Watch
|
|
|
—
|
|
|
|
370
|
|
|
|
378
|
|
|
|
|
|
|
|
29,893
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
433
|
|
|
|
|
|
|
|
9,493
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
175
|
|
|
|
|
|
|
|
5,047
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
732
|
|
|
$
|
2,431
|
|
|
$
|
3,122
|
|
|
|
|
|
|
$
|
294,298
|
|
The
allocation of the Company’s allowance for loan and lease losses and by portfolio segment and by impairment methodology are
summarized below:
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-Family
|
|
|
Construction
|
|
|
Residential
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan
and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January
1, 2016
|
|
$
|
860
|
|
|
$
|
2,369
|
|
|
$
|
228
|
|
|
$
|
813
|
|
|
$
|
319
|
|
|
$
|
1
|
|
|
$
|
77
|
|
|
$
|
78
|
|
|
$
|
230
|
|
|
$
|
4,975
|
|
Provision for loan losses
|
|
|
(125
|
)
|
|
|
266
|
|
|
|
101
|
|
|
|
(88
|
)
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(90
|
)
|
|
|
(24
|
)
|
|
|
—
|
|
Loans charged-off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recoveries
|
|
|
73
|
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
|
|
—
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, June 30, 2016
|
|
$
|
808
|
|
|
$
|
2,647
|
|
|
$
|
329
|
|
|
$
|
725
|
|
|
$
|
283
|
|
|
$
|
1
|
|
|
$
|
73
|
|
|
$
|
60
|
|
|
$
|
206
|
|
|
$
|
5,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
for impairment
|
|
$
|
11
|
|
|
$
|
675
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
151
|
|
|
$
|
—
|
|
|
$
|
37
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated
for impairment
|
|
$
|
797
|
|
|
$
|
1,972
|
|
|
$
|
325
|
|
|
$
|
725
|
|
|
$
|
132
|
|
|
$
|
1
|
|
|
$
|
36
|
|
|
$
|
34
|
|
|
$
|
206
|
|
|
$
|
4,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
36,193
|
|
|
$
|
203,439
|
|
|
$
|
35,525
|
|
|
$
|
13,795
|
|
|
$
|
16,360
|
|
|
$
|
534
|
|
|
$
|
2,317
|
|
|
$
|
2,304
|
|
|
$
|
—
|
|
|
$
|
310,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
for impairment
|
|
$
|
91
|
|
|
$
|
17,656
|
|
|
$
|
485
|
|
|
$
|
—
|
|
|
$
|
2,175
|
|
|
$
|
—
|
|
|
$
|
364
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
20,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated
for impairment
|
|
$
|
36,102
|
|
|
$
|
185,783
|
|
|
$
|
35,040
|
|
|
$
|
13,795
|
|
|
$
|
14,185
|
|
|
$
|
534
|
|
|
$
|
1,953
|
|
|
$
|
2,243
|
|
|
$
|
—
|
|
|
$
|
289,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan
and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, March 31, 2016
|
|
$
|
813
|
|
|
$
|
2,513
|
|
|
$
|
270
|
|
|
$
|
625
|
|
|
$
|
298
|
|
|
$
|
2
|
|
|
$
|
77
|
|
|
$
|
65
|
|
|
$
|
419
|
|
|
$
|
5,082
|
|
Provision for loan losses
|
|
|
(44
|
)
|
|
|
123
|
|
|
|
59
|
|
|
|
100
|
|
|
|
(15
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
(213
|
)
|
|
|
—
|
|
Loans charged off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recoveries
|
|
|
39
|
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, June 30, 2016
|
|
$
|
808
|
|
|
$
|
2,647
|
|
|
$
|
329
|
|
|
$
|
725
|
|
|
$
|
283
|
|
|
$
|
1
|
|
|
$
|
73
|
|
|
$
|
60
|
|
|
$
|
206
|
|
|
$
|
5,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-Family
|
|
|
Construction
|
|
|
Residential
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
25
|
|
|
$
|
598
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
204
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
835
|
|
|
$
|
1,771
|
|
|
$
|
223
|
|
|
$
|
813
|
|
|
$
|
115
|
|
|
$
|
1
|
|
|
$
|
39
|
|
|
$
|
49
|
|
|
$
|
230
|
|
|
$
|
4,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
36,195
|
|
|
$
|
199,591
|
|
|
$
|
23,494
|
|
|
$
|
14,533
|
|
|
$
|
14,200
|
|
|
$
|
732
|
|
|
$
|
2,431
|
|
|
$
|
3,122
|
|
|
$
|
—
|
|
|
$
|
294,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
121
|
|
|
$
|
17,866
|
|
|
$
|
488
|
|
|
$
|
—
|
|
|
$
|
2,452
|
|
|
$
|
—
|
|
|
$
|
370
|
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
21,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
36,074
|
|
|
$
|
181,725
|
|
|
$
|
23,006
|
|
|
$
|
14,533
|
|
|
$
|
11,748
|
|
|
$
|
732
|
|
|
$
|
2,061
|
|
|
$
|
3,054
|
|
|
$
|
—
|
|
|
$
|
272,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-Family
|
|
|
Construction
|
|
|
Residential
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance
for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2015
|
|
$
|
1,430
|
|
|
$
|
2,317
|
|
|
$
|
130
|
|
|
$
|
583
|
|
|
$
|
399
|
|
|
$
|
2
|
|
|
$
|
62
|
|
|
$
|
124
|
|
|
$
|
254
|
|
|
$
|
5,301
|
|
Provision
for loan losses
|
|
|
199
|
|
|
|
(389
|
)
|
|
|
(23
|
)
|
|
|
224
|
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
2
|
|
|
|
13
|
|
|
|
—
|
|
Loans
charged off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
Recoveries
|
|
|
23
|
|
|
|
40
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
65
|
|
Ending
balance, June 30, 2015
|
|
$
|
1,652
|
|
|
$
|
1,968
|
|
|
$
|
107
|
|
|
$
|
807
|
|
|
$
|
385
|
|
|
$
|
1
|
|
|
$
|
50
|
|
|
$
|
122
|
|
|
$
|
267
|
|
|
$
|
5,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, March 31, 2015
|
|
$
|
1,403
|
|
|
$
|
2,284
|
|
|
$
|
120
|
|
|
$
|
680
|
|
|
$
|
392
|
|
|
$
|
1
|
|
|
$
|
55
|
|
|
$
|
132
|
|
|
$
|
241
|
|
|
$
|
5,308
|
|
Provision
for loan losses
|
|
|
232
|
|
|
|
(355
|
)
|
|
|
(13
|
)
|
|
|
127
|
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
26
|
|
|
|
—
|
|
Loans
charged off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
Recoveries
|
|
|
17
|
|
|
|
39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance, June 30, 2015
|
|
$
|
1,652
|
|
|
$
|
1,968
|
|
|
$
|
107
|
|
|
$
|
807
|
|
|
$
|
385
|
|
|
$
|
1
|
|
|
$
|
50
|
|
|
$
|
122
|
|
|
$
|
267
|
|
|
$
|
5,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company’s aging analysis of the loan and lease portfolio at June 30, 2016 and December 31, 2015 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
(dollars in thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Past Due
Greater Than
90 Days
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
Past Due
Greater Than
90 Days and
Accruing
|
|
|
Nonaccrual
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,193
|
|
|
$
|
36,193
|
|
|
|
—
|
|
|
$
|
22
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
982
|
|
|
|
351
|
|
|
|
—
|
|
|
|
1,333
|
|
|
|
202,106
|
|
|
|
203,439
|
|
|
|
—
|
|
|
|
631
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,525
|
|
|
|
35,525
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,795
|
|
|
|
13,795
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,360
|
|
|
|
16,360
|
|
|
|
—
|
|
|
|
337
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
534
|
|
|
|
534
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,317
|
|
|
|
2,317
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
300
|
|
|
|
36
|
|
|
|
—
|
|
|
|
336
|
|
|
|
1,968
|
|
|
|
2,304
|
|
|
|
—
|
|
|
|
65
|
|
Total
|
|
$
|
1,282
|
|
|
$
|
387
|
|
|
$
|
—
|
|
|
$
|
1,669
|
|
|
$
|
308,798
|
|
|
$
|
310,467
|
|
|
$
|
—
|
|
|
$
|
1,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
(dollars in thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Past Due
Greater Than
90 Days
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
Past Due
Greater Than
90 Days and
Accruing
|
|
|
Nonaccrual
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
30
|
|
|
$
|
36,165
|
|
|
$
|
36,195
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
359
|
|
|
|
499
|
|
|
|
858
|
|
|
|
198,733
|
|
|
|
199,591
|
|
|
|
—
|
|
|
|
1,155
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,494
|
|
|
|
23,494
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,533
|
|
|
|
14,533
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
338
|
|
|
|
338
|
|
|
|
13,862
|
|
|
|
14,200
|
|
|
|
—
|
|
|
|
338
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
732
|
|
|
|
732
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,431
|
|
|
|
2,431
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
367
|
|
|
|
—
|
|
|
|
—
|
|
|
|
367
|
|
|
|
2,755
|
|
|
|
3,122
|
|
|
|
—
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
367
|
|
|
$
|
359
|
|
|
$
|
867
|
|
|
$
|
1,593
|
|
|
$
|
292,705
|
|
|
$
|
294,298
|
|
|
$
|
—
|
|
|
$
|
1,643
|
|
9. BORROWING ARRANGEMENTS
At
June 30, 2016, the Company had $17,000,000 of unsecured short-term borrowing arrangements with two of its correspondent banks.
There were no advances under the borrowing arrangements as of June 30, 2016 or December 31, 2015.
The
Company has a line of credit available with the Federal Home Loan Bank of San Francisco (the “FHLB”) which is secured
by pledged mortgage loans and investment securities. Borrowings may include overnight advances as well as loans with terms of
up to thirty years. Advances (both short-term and long-term) totaling $11,000,000 were outstanding from the FHLB at June 30, 2016,
bearing interest rates ranging from 0.75% to 1.91% and maturing between July 20, 2016 and July 12, 2019. Advances totaling $11,000,000
were outstanding from the FHLB at December 31, 2015, bearing interest rates ranging from 0.45% to 1.91% and maturing between January
19, 2016 and July 12, 2019. Remaining amounts available under the borrowing arrangement with the FHLB at June 30, 2016 and December
31, 2015 totaled $83,483,000 and $78,326,000, respectively. In addition, the Company has a secured borrowing agreement with the
Federal Reserve Bank of San Francisco. The borrowing can be secured by pledging selected loans and investment securities. Borrowings
generally are short-term including overnight advances as well as loans with terms up to ninety days. Amounts available under this
borrowing arrangement at June 30, 2016 and December 31, 2015 were $12,399,000 and $11,371,000, respectively. There were no advances
outstanding under this borrowing arrangement as of June 30, 2016 and December 31, 2015.
10. 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 (benefit from) 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 respective
tax basis. 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.
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 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, if applicable, 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 Company recognizes accrued
interest and penalties related to unrecognized tax benefits, if applicable, as a component of interest expense in the consolidated
statement of income. There have been no unrecognized tax benefits or accrued interest and penalties for the three-month and six-month
periods ended June 30, 2016 and 2015.
Federal
and state income taxes for the quarter ended June 30, 2016 decreased $93,000 (12.5%) from $745,000 in the second quarter of 2015
to $652,000 in the second quarter of 2016 and increased $70,000 (5.8%) from $1,215,000 in the six months ended June 30, 2015 to
$1,285,000 for the six months ended June 30, 2016. The combined federal and state effective tax rate for the quarter ended June
30, 2016 was 33.3%, compared to 35.0% for the second quarter of 2015. For the six months ended June 30, 2016, the combined federal
and state effective tax rate was 32.4% compared to 34.2% for the six months ended June 30, 2015. The lower effective tax rate
for both periods in 2016 compared to 2015 resulted from an increase in tax exempt loan interest. Tax exempt loan interest was
$173,000 in the second quarter of 2016 compared to $85,000 in the second quarter of 2015 and tax exempt loan interest was $345,000
in the first six months of 2016 compared to $123,000 in the first six months of 2015.
11.
FAIR VALUE MEASUREMENTS
The
following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and
nonrecurring basis as of June 30, 2016 and December 31, 2015. 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.
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.
The
carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
June 30, 2016
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
22,671
|
|
|
$
|
22,671
|
|
|
|
|
|
|
|
|
|
|
$
|
22,671
|
|
Interest-bearing deposits in banks
|
|
|
999
|
|
|
|
|
|
|
$
|
999
|
|
|
|
|
|
|
|
999
|
|
Available-for-sale securities
|
|
|
254,483
|
|
|
|
36
|
|
|
|
254,447
|
|
|
|
|
|
|
|
254,483
|
|
Held-to-maturity securities
|
|
|
540
|
|
|
|
|
|
|
|
584
|
|
|
|
|
|
|
|
584
|
|
FHLB stock
|
|
|
3,779
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net loans and leases:
|
|
|
305,088
|
|
|
|
|
|
|
|
|
|
|
$
|
310,957
|
|
|
|
310,957
|
|
Accrued interest receivable
|
|
|
1,728
|
|
|
|
|
|
|
|
954
|
|
|
|
774
|
|
|
|
1,728
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
195,903
|
|
|
$
|
195,903
|
|
|
|
|
|
|
|
|
|
|
$
|
195,903
|
|
Savings
|
|
|
59,686
|
|
|
|
59,686
|
|
|
|
|
|
|
|
|
|
|
|
59,686
|
|
Money market
|
|
|
127,864
|
|
|
|
127,864
|
|
|
|
|
|
|
|
|
|
|
|
127,864
|
|
NOW accounts
|
|
|
59,686
|
|
|
|
59,686
|
|
|
|
|
|
|
|
|
|
|
|
59,686
|
|
Time Deposits
|
|
|
82,599
|
|
|
|
|
|
|
$
|
83,034
|
|
|
|
|
|
|
|
83,034
|
|
Short-term borrowings
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Long-term borrowings
|
|
|
6,000
|
|
|
|
|
|
|
|
6,049
|
|
|
|
|
|
|
|
6,049
|
|
Accrued interest payable
|
|
|
40
|
|
|
|
1
|
|
|
|
39
|
|
|
|
|
|
|
|
40
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
December 31, 2015
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
23,727
|
|
|
$
|
23,727
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,727
|
|
Interest-bearing deposits in banks
|
|
|
750
|
|
|
|
—
|
|
|
|
752
|
|
|
|
—
|
|
|
|
752
|
|
Available-for-sale securities
|
|
|
273,819
|
|
|
|
24
|
|
|
|
273,795
|
|
|
|
—
|
|
|
|
273,819
|
|
Held-to-maturity securities
|
|
|
623
|
|
|
|
—
|
|
|
|
669
|
|
|
|
—
|
|
|
|
669
|
|
FHLB stock
|
|
|
3,779
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net loans and leases:
|
|
|
289,102
|
|
|
|
—
|
|
|
|
—
|
|
|
|
292,444
|
|
|
|
292,444
|
|
Accrued interest receivable
|
|
|
1,885
|
|
|
|
—
|
|
|
|
1,077
|
|
|
|
808
|
|
|
|
1,885
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
190,548
|
|
|
$
|
190,548
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190,548
|
|
Savings
|
|
|
59,061
|
|
|
|
59,061
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59,061
|
|
Money market
|
|
|
135,186
|
|
|
|
135,186
|
|
|
|
—
|
|
|
|
—
|
|
|
|
135,186
|
|
NOW accounts
|
|
|
61,324
|
|
|
|
61,324
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,324
|
|
Time Deposits
|
|
|
84,571
|
|
|
|
—
|
|
|
|
85,165
|
|
|
|
—
|
|
|
|
85,165
|
|
Short-term borrowings
|
|
|
3,500
|
|
|
|
3,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,500
|
|
Long-term borrowings
|
|
|
7,500
|
|
|
|
—
|
|
|
|
7,502
|
|
|
|
—
|
|
|
|
7,502
|
|
Accrued interest payable
|
|
|
60
|
|
|
|
—
|
|
|
|
60
|
|
|
|
—
|
|
|
|
60
|
|
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 values of its financial instruments at June 30,
2016 and December 31, 2015:
Cash
and due from banks
: The carrying amounts of cash and short-term instruments approximate fair values and are classified as
Level 1.
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
and are classified as Level 2.
Investment
securities
: For investment securities, fair values are based on quoted market prices, where available, and are classified
as Level 1. 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 and are classified as Level 2.
FHLB
stock
: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans
and leases
: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level
3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality also resulting in a Level 3 classification.
The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
Deposits
:
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types
of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their
carrying amount) resulting in a Level 1 classification. For time deposits, the fair values for fixed rate certificates of
deposit are estimated using a discounted cash flow methodology that applies market interest rates to a schedule of aggregated
expected monthly maturities on time deposits resulting in a Level 2 classification.
Short-term
and long-term borrowings
: The fair value of short-term borrowings is estimated to be the carrying amount and is classified
as Level 1. The fair value of long-term borrowings is estimated using a discounted cash flow analysis using interest rates currently
available for similar debt instruments and are classified as Level 2.
Accrued
interest receivable and payable
: The carrying amount of accrued interest receivable approximates fair value resulting in a
Level 3 classification and the carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.
Off-balance
sheet instruments
: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit
standing. The fair value of commitments was not material at June 30, 2016 and December 31, 2015.
Assets and
liabilities measured at fair value on a recurring and non-recurring basis along with any related gain or loss recognized in the
income statement due to fair value changes are presented in the following table:
Description
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Gains
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
228,722
|
|
|
$
|
—
|
|
|
$
|
228,722
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Obligations of states and political subdivisions
|
|
|
24,143
|
|
|
|
—
|
|
|
|
24,143
|
|
|
|
—
|
|
|
|
—
|
|
Corporate bonds
|
|
|
1,537
|
|
|
|
—
|
|
|
|
1,537
|
|
|
|
—
|
|
|
|
—
|
|
Corporate stock
|
|
|
81
|
|
|
|
36
|
|
|
|
45
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
254,483
|
|
|
$
|
36
|
|
|
$
|
254,447
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,848
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,848
|
|
|
$
|
—
|
|
Residential
|
|
|
337
|
|
|
|
—
|
|
|
|
—
|
|
|
|
337
|
|
|
|
—
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
243
|
|
|
|
—
|
|
|
|
—
|
|
|
|
243
|
|
|
|
—
|
|
Land
|
|
|
653
|
|
|
|
—
|
|
|
|
—
|
|
|
|
653
|
|
|
|
(376
|
)
|
Total nonrecurring
|
|
$
|
5,081
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,081
|
|
|
$
|
(376
|
)
|
Description
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Gains
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
246,185
|
|
|
$
|
—
|
|
|
$
|
246,185
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate Debt securities
|
|
|
1,551
|
|
|
|
—
|
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
26,013
|
|
|
|
—
|
|
|
|
26,013
|
|
|
|
—
|
|
|
|
—
|
|
Corporate stock
|
|
|
70
|
|
|
|
24
|
|
|
|
46
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
273,819
|
|
|
$
|
24
|
|
|
$
|
273,795
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,900
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,900
|
|
|
$
|
(334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,522
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,522
|
|
|
|
—
|
|
Land
|
|
|
1,029
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,029
|
|
|
|
—
|
|
Total nonrecurring
|
|
$
|
7,451
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,451
|
|
|
$
|
(334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no
significant transfers between Levels 1 and 2 during the three-month and six-month periods ended June 30, 2016 or the twelve months
ended December 31, 2015.
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, and are considered
Level 1, or evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information
and are considered Level 2. 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 collateral dependent impaired loans adjusted for specific allocations of the allowance for
loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize
a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments
are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales
and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification
of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring impaired loans is the sales
comparison approach less a reserve for past due taxes and selling costs ranging from 8% to 10%.
Other
real estate owned
– Certain commercial and residential real estate properties classified as OREO are measured at fair
value, less costs to sell. Fair values are based on recent real estate appraisals and/or evaluations. These appraisals and/or
evaluations may use a single valuation approach or a combination of approaches including comparable sales, cost and the income
approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between
the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level
3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring OREO is the
sales comparison approach less selling costs ranging from 8% to 10%.
12.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
January 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-01,
“Recognition and Measurement of Financial Assets and Financial Liabilities.”
This ASU addresses
certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements
to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those
that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring
a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is
required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments
measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business
entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed
for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit
price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present
separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change
in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the
fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by
measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying
notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred
tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01
is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of
the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned
above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this
evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s financial
position, results of operations or cash flows.
In
February 2016, the FASB issued ASU No. 2016-02,
“Leases.”
Under the new guidance, lessees will be required
to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present
value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the
lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance
remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases,
and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases
using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model
and the new revenue recognition standard
.
All entities will classify leases to determine how to recognize lease-related
revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of
enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention
is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more
about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods
beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach
for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.
They have the option to use certain relief; full retrospective application is prohibited. The Company is currently evaluating
the provisions of ASU No. 2016-02 and will be closely monitoring developments and additional guidance to determine the potential
impact the new standard will have on the Company’s Consolidated Financial Statements.
In
March 2016, the FASB issued ASU No. 2016-09,
“Improvements to Employee Share-Based Payment Accounting.”
This
ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and
presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer
record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they
will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC
pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies
can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on
the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover
income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the
employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the
cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a
financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be
classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition
of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur.
ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is
permitted, but all of the guidance must be adopted in the same period. The Company is currently evaluating the provisions of
ASU No. 2016-09 to determine the potential impact the new standard will have on the Company’s Consolidated Financial
Statements.
In
June 2016, the FASB issued ASU No. 2016-13,
“Measurement of Credit Losses on Financial Instruments.”
This ASU
significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t
measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance
delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected
loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1)
financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures.
This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees.
The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized
losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized
as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements
to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies
the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements
regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition,
entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated
by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15,
2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply
the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting
period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions
of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following
is management’s discussion and analysis of the significant changes in American River Bankshares’ (the “Company”)
balance sheet accounts between December 31, 2015 and June 30, 2016 and its income and expense accounts for the three-month and
six-month periods ended June 30, 2016 and 2015. The discussion is designed to provide a better understanding of significant trends
related to the Company’s financial condition, results of operations, liquidity, capital resources and interest rate sensitivity.
This discussion and supporting tables and the consolidated financial statements and related notes appearing elsewhere in this
report are unaudited. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within management’s
discussion and analysis. Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q including,
but not limited to, matters described in “Item 2 - 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
legislation promulgated by the United States Congress and actions taken by governmental
agencies, including the United States Department of the Treasury, to deal with challenges
to the U.S. financial system;
|
|
·
|
the
risks presented by economic volatility and 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
loan and lease losses;
|
|
·
|
potential
expenses associated with resolving nonperforming 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;
|
|
·
|
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 increased capital and regulatory compliance requirements
and further 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, cybersecurity and other operational systems failures, breach or fraud;
|
|
·
|
potential
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 military conflicts in connection with the conduct of the war on terrorism by the United
States and its allies, negative 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.
|
The factors
set forth under “Item 1A - Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December
31, 2015, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should be carefully
considered and understood as being applicable to all related forward-looking statements contained in this Quarterly Report on
Form 10-Q, 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.
Use of Non-GAAP
Financial Measures
This Quarterly
Report on Form 10-Q (“Form 10Q”) contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures
in addition to results presented in accordance with GAAP. These measures include tangible book value and taxable equivalent
basis. Management has presented these non-GAAP financial measures in this Form 10Q because it believes that they provide
useful and comparative information to assess trends in the Company’s financial position reflected in the current quarter
and year-to-date results and facilitate comparison of our performance with the performance of our peers.
Net Interest
Margin and Efficiency Ratio (non-GAAP financial measures)
In accordance with
industry standards, certain designated net interest income amounts are presented on a
taxable equivalent
basis, including the calculation of net interest margin and the efficiency ratio. The Company believes the presentation
of net interest margin on a taxable equivalent basis using a 34% effective tax rate allows comparability of net interest margin
with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both
taxable and tax-exempt loans and investments.
Tangible Equity
(non-GAAP financial measures)
Tangible common
stockholders’ equity (tangible book value) excludes goodwill and other intangible assets. The Company believes the exclusion
of goodwill and other intangible assets to create “tangible equity” facilitates the comparison of results for ongoing
business operations. The Company’s management internally assesses its performance based, in part, on these non-GAAP
financial measures.
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. 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 probable incurred credit loss risk inherent in our loan and lease portfolio as
of the balance sheet date. 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) the “Receivables” topic, 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 or lease 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 an historical loss view as an indicator of future losses and as a
result could differ from the actual losses 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 factors, or some combination
of these), 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 2.
Stock-Based
Compensation
The Company recognizes
compensation expense over the vesting period in an amount equal to the fair value of all share-based payments which consist of
stock options and restricted stock awarded to directors and employees. The fair value of each stock option award is estimated
on the date of the award and amortized over the service period using a Black-Scholes-Merton based option valuation model that
requires the use of assumptions. Critical assumptions that affect the estimated fair value of each award include expected
stock price volatility, dividend yields, option life and the risk-free interest rate.
Goodwill
Business combinations
involving the Company’s acquisition of 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. 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 on an annual basis. Impairment exists when a reporting unit’s carrying value of goodwill exceeds
its fair value. The most recent annual assessment was performed as of December 31, 2015, and at that time, the Company’s
reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely
than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment
indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in
no impairment.
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 (benefit from) 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.
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 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, if applicable, 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 Company recognizes accrued interest
and penalties related to unrecognized tax benefits, if applicable, as a component of interest expense in the consolidated statement
of income. There were no unrecognized tax benefits or accrued interest and penalties at June 30, 2016 or 2015 or for the three-month
and six-month periods then ended.
General
Development of Business
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) 854-0123. The Company employed
an equivalent of 97 full-time employees as of June 30, 2016.
The Company
owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank (the “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 in Sacramento, Gold River, and Roseville; two
full service offices in Sonoma County in Healdsburg and Santa Rosa; and three full service offices in Amador County in Jackson,
Pioneer, and Ione.
In addition,
American River Bank operates a loan production office in Santa Clara County, in the city of San Jose.
In 2000,
the Company acquired North Coast Bank as a separate bank subsidiary. 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. 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.
The Bank’s
deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. On July
21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
The Dodd-Frank Act includes a permanent increase to $250,000 as the maximum FDIC insurance limit per depositor retroactive to
January 1, 2008 and the extension of unlimited FDIC insurance for noninterest-bearing transaction accounts effective December
31, 2010 through December 31, 2012. On November 9, 2010, the FDIC implemented a final rule to permanently increase the maximum
insurance limit to $250,000 under the Dodd-Frank Act. The unlimited insurance coverage for noninterest bearing transaction accounts
was not extended and terminated on December 31, 2012. The $250,000 maximum deposit insurance amount per depositor remains in effect.
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 certain types of business equipment. American River Bank owns
100% of two inactive companies, ARBCO and American River Mortgage. ARBCO was formed in 1984 to conduct real estate development
and has been inactive since 1995. American River Mortgage has been inactive since its formation in 1994. During 2015 and 2016,
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 “Federal Reserve Board”), 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.”
Overview
The Company
recorded net income of $1,304,000 for the quarter ended June 30, 2016, which was a decrease of $82,000 compared to $1,386,000
reported for the same period of 2015. Diluted earnings per share for the second quarter of 2016 were $0.19 compared to $0.18 recorded
in the second quarter of 2015. The return on average equity (“ROAE”) and the return on average assets (“ROAA”)
for the second quarter of 2016 were 6.29% and 0.84%, respectively, as compared to 6.31% and 0.90%, respectively, for the same
period in 2015.
Net income for
the six months ended June 30, 2016 and 2015 was $2,676,000 and $2,342,000, respectively, with diluted earnings per share of $0.39
in 2016 and $0.30 in 2015. For the first six months of 2016, ROAE was 6.37% and ROAA was 0.85% compared to 5.36% and 0.77%, respectively,
for the same period in 2015.
Total assets
of the Company decreased by $8,829,000 (1.4%) from $634,460,000 at December 31, 2015 to $625,811,000 at June 30, 2016. Net loans
totaled $305,088,000 at June 30, 2016, an increase of $15,986,000 (5.5%) from $289,102,000 at December 31, 2015. Deposit balances
at June 30, 2016 totaled $525,933,000, a decrease of $4,757,000 (0.9%) from the $530,690,000 at December 31, 2015.
The Company ended
the second quarter of 2016 with a leverage capital ratio of 10.4%, a Tier 1 capital ratio of 18.0%, and a total risk-based capital
ratio of 19.2% compared to 11.0%, 19.3%, and 20.6%, respectively, at December 31, 2015. Table One below provides a summary of
the components of net income for the periods indicated (See the “Results of Operations” section that follows for an
explanation of the fluctuations in the individual components).
Table One: Components of Net Income
(dollars in thousands)
|
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest income*
|
|
$
|
5,343
|
|
|
$
|
5,386
|
|
|
$
|
10,740
|
|
|
$
|
10,359
|
|
Interest expense
|
|
|
(221
|
)
|
|
|
(244
|
)
|
|
|
(455
|
)
|
|
|
(492
|
)
|
Net interest income*
|
|
|
5,122
|
|
|
|
5,142
|
|
|
|
10,285
|
|
|
|
9,867
|
|
Provision for loan and lease losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Noninterest income
|
|
|
363
|
|
|
|
507
|
|
|
|
1,117
|
|
|
|
1,092
|
|
Noninterest expense
|
|
|
(3,415
|
)
|
|
|
(3,415
|
)
|
|
|
(7,206
|
)
|
|
|
(7,228
|
)
|
Provision for income taxes
|
|
|
(652
|
)
|
|
|
(745
|
)
|
|
|
(1,285
|
)
|
|
|
(1,215
|
)
|
Tax equivalent adjustment
|
|
|
(114
|
)
|
|
|
(103
|
)
|
|
|
(235
|
)
|
|
|
(174
|
)
|
Net income
|
|
$
|
1,304
|
|
|
$
|
1,386
|
|
|
$
|
2,676
|
|
|
$
|
2,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
625,652
|
|
|
$
|
615,492
|
|
|
$
|
630,364
|
|
|
$
|
612,418
|
|
Net income (annualized) as a percentage of average total assets
|
|
|
0.84
|
%
|
|
|
0.90
|
%
|
|
|
0.85
|
%
|
|
|
0.77
|
%
|
*
Fully taxable equivalent basis (FTE)
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 and leases, securities, Federal funds
sold and investments in time deposits) over the interest paid on interest-bearing deposits and borrowed funds. Net interest margin
is net interest income expressed as a percentage of average earning assets. The Company’s net interest margin was 3.64%
for the three months ended June 30, 2016, 3.69% for the three months ended June 30, 2015, 3.64% for the six months ended June
30, 2016 and 3.58% for the six months ended June 30, 2015.
The
fully taxable equivalent interest income component for the second quarter of 2016 decreased $43,000 (0.8%) to $5,343,000 compared
to $5,386,000 for the three months ended June 30, 2015. The decrease in the fully taxable equivalent interest income for the second
quarter of 2016 compared to the same period in 2015 is broken down by rate (down $226,000) and volume (up $183,000). The yield
on earning assets decreased from 3.87% during the second quarter of 2015 to 3.80% during the second quarter of 2016. The primary
driver in this rate decrease was a decrease in the yield on loans which saw a decrease from 5.01% in the second quarter of 2015
to 4.92% in the second quarter of 2016. While average loans increased $23,452,000 (8.5%) from $276,976,000 during the second quarter
of 2015 to $300,423,000 during the second quarter of 2016, due to the overall lower interest rate environment, the new loans added
were at lower yields than the existing loans. The investment portfolio also experienced lower yields, decreasing from 2.75% in
the second quarter of 2015 to 2.53% in the second quarter of 2016. Part of this decrease is related to a special one-time cash
dividend from the Federal Home Loan Bank of San Francisco (the “FHLB”) recorded in 2015 in the amount of $136,000.
The volume increase of $183,000 was primarily from loans ($300,000) partially offset by a decrease in investment balances. The
average balance of earning assets increased $6,930,000 (1.2%) from $558,901,000 in the second quarter of 2015 to $565,831,000
in the second quarter of 2016. When compared to the second quarter of 2015, average investment securities decreased $16,543,000
(5.9%) from $280,952,000 for the second quarter of 2015 compared to $264,409,000 for the second quarter of 2016.
Total
fully taxable equivalent interest income for the six months ended June 30, 2016 increased $381,000 (3.7%) to $10,740,000 compared
to $10,359,000 for the six months ended June 30, 2015. The breakdown of the fully taxable equivalent interest income for the six
months ended June 30, 2016 over the same period in 2015 resulted from a decrease in rate (down $121,000) and an increase in volume
(up $502,000). Average earning assets increased $12,098,000 (2.2%) from $556,486,000 during the first six months of 2015 to $568,584,000
for the same period in 2016. During the six month periods, the Company also experienced an increase in interest income due to
the rates earned on investments (up $74,000) but this was more than offset by a reduction in rates on loans (down $199,000). The
yield on investments increased from 2.54% in 2015 to 2.58% in 2016. Part of this increase is related to the slow down in the mortgage
refinance market and the related slower amortization of the premiums paid on the mortgage related bonds. Average loan balances
increased by $27,966,000 (10.4%) from $269,798,000 during 2015 to $297,764,000 during 2016, but the Company did experience a drop
in rates on these loans from 5.05% in 2015 to 4.91% in 2016. This decrease is caused by the overall lower interest rate environment.
The volume increase of $502,000 is primarily related to the above mentioned increase in loan balances from 2015 to 2016, which
accounted for a $704,000 increase in interest income, which was partially offset by a decrease in average investment balances.
Average investment securities decreased $15,871,000 (5.6%) from $285,699,000 for the first six months of 2015 compared to $269,828,000
for the first six months of 2016.
Interest
expense was $23,000 (9.4%) lower in the second quarter of 2016 versus the prior year period, decreasing from $244,000 to $221,000.
The average balances on interest bearing liabilities were $345,417,000 or $4,974,000 (1.4%) lower in the second quarter of 2016
compared to $350,391,000 for the same quarter in 2015. The decrease in balances had a slight impact on the overall interest expense
as the volume decrease accounted for only a $9,000 decrease in interest expense. The primary decrease in interest expense relates
to lower rates (down $14,000). Rates paid on interest bearing liabilities decreased 2 basis points from 0.28% to 0.26% for the
second quarter of 2015 compared to the second quarter of 2016.
Interest
expense was $37,000 (7.5%) lower in the six-month period ended June 30, 2016 decreasing from $492,000 in 2015 to $455,000 in 2016.
The decrease is related to rates (down $55,000) partially offset by volume (up $18,000). The average balances on interest-bearing
liabilities were $350,681,000 (down $3,537,000 or 1.0% lower) in the six-month period ended June 30, 2016 compared $354,218,000
in the same period in 2015. Although the average balances were lower, the decreased balances did not result in a decrease in interest
expense as the decrease in interest bearing balances (down $18,000) was more than offset by an increase in other borrowings which
increased by $36,000. Average other borrowings increased $6,562,000 (51.4%) from $12,765,000 in the first six months of 2015 to
$19,327,000 in the first six months of 2016. The primary decrease in interest expense relates to lower rates (down $55,000). Rates
paid on interest bearing liabilities decreased 2 basis points from 0.28% to 0.26% for 2015 compared to 2016.
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 trends of the Company’s interest income
and expenses. Table Two provides an analysis of net interest margin on earning assets setting forth average assets, liabilities
and shareholders’ equity; interest income earned and interest expense paid and average rates earned and paid; and the net
interest margin on earning assets. Table Three sets forth a summary of the changes in interest income and interest expense from
changes in average asset and liability balances (volume) and changes in average interest rates.
Table Two: Analysis
of Net Interest Margin on Earning Assets
|
|
Three Months Ended June 30,
|
|
2016
|
|
|
2015
|
|
(Taxable Equivalent Basis)
(dollars in thousands)
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield
(4)
|
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield
(4)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable loans and leases (1)
|
|
$
|
283,373
|
|
|
$
|
3,445
|
|
|
|
4.89
|
%
|
|
$
|
267,888
|
|
|
$
|
3,339
|
|
|
|
5.00
|
%
|
Tax-exempt loans and leases (2)
|
|
|
17,050
|
|
|
|
232
|
|
|
|
5.47
|
%
|
|
|
9,073
|
|
|
|
123
|
|
|
|
5.43
|
%
|
Taxable investment securities
|
|
|
240,997
|
|
|
|
1,441
|
|
|
|
2.40
|
%
|
|
|
254,676
|
|
|
|
1,657
|
|
|
|
2.61
|
%
|
Tax-exempt investment securities (2)
|
|
|
23,336
|
|
|
|
215
|
|
|
|
3.71
|
%
|
|
|
26,202
|
|
|
|
255
|
|
|
|
3.90
|
%
|
Corporate stock (2)
|
|
|
76
|
|
|
|
8
|
|
|
|
42.34
|
%
|
|
|
74
|
|
|
|
11
|
|
|
|
59.62
|
%
|
Federal funds sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Investments in time deposits
|
|
|
999
|
|
|
|
2
|
|
|
|
0.81
|
%
|
|
|
978
|
|
|
|
1
|
|
|
|
0.41
|
%
|
Total earning assets
|
|
|
565,831
|
|
|
|
5,343
|
|
|
|
3.80
|
%
|
|
|
558,901
|
|
|
|
5,386
|
|
|
|
3.87
|
%
|
Cash & due from banks
|
|
|
28,070
|
|
|
|
|
|
|
|
|
|
|
|
22,221
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
36,849
|
|
|
|
|
|
|
|
|
|
|
|
39,715
|
|
|
|
|
|
|
|
|
|
Allowance for loan & lease losses
|
|
|
(5,098
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,345
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
625,652
|
|
|
|
|
|
|
|
|
|
|
$
|
615,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
$
|
188,365
|
|
|
|
35
|
|
|
|
0.07
|
%
|
|
$
|
189,816
|
|
|
|
62
|
|
|
|
0.13
|
%
|
Savings
|
|
|
59,679
|
|
|
|
5
|
|
|
|
0.03
|
%
|
|
|
57,915
|
|
|
|
9
|
|
|
|
0.06
|
%
|
Time deposits
|
|
|
83,087
|
|
|
|
142
|
|
|
|
0.69
|
%
|
|
|
88,116
|
|
|
|
137
|
|
|
|
0.62
|
%
|
Other borrowings
|
|
|
14,286
|
|
|
|
39
|
|
|
|
1.10
|
%
|
|
|
14,544
|
|
|
|
36
|
|
|
|
0.99
|
%
|
Total interest bearing liabilities
|
|
|
345,417
|
|
|
|
221
|
|
|
|
0.26
|
%
|
|
|
350,391
|
|
|
|
244
|
|
|
|
0.28
|
%
|
Noninterest bearing demand deposits
|
|
|
190,646
|
|
|
|
|
|
|
|
|
|
|
|
170,792
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,258
|
|
|
|
|
|
|
|
|
|
|
|
6,266
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
542,321
|
|
|
|
|
|
|
|
|
|
|
|
527,449
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
83,331
|
|
|
|
|
|
|
|
|
|
|
|
88,043
|
|
|
|
|
|
|
|
|
|
|
|
$
|
625,652
|
|
|
|
|
|
|
|
|
|
|
$
|
615,492
|
|
|
|
|
|
|
|
|
|
Net interest income & margin (3)
|
|
|
|
|
|
$
|
5,122
|
|
|
|
3.64
|
%
|
|
|
|
|
|
$
|
5,142
|
|
|
|
3.69
|
%
|
|
(1)
|
Loan interest includes loan
fees of $55,000 and $56,000, respectively, during the three months ended June 30, 2016 and June 30, 2015. Average
loan balances include nonperforming loans.
|
|
(2)
|
Includes taxable-equivalent
adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal
statutory tax rate was 34% for 2016 and 2015.
|
|
(3)
|
Net interest margin is computed
by dividing net interest income by total average earning assets.
|
|
(4)
|
Average yield is calculated
based on actual days in the period (91 days) and annualized to actual days in the year (366 days in 2016 and 365 days in 2015).
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
|
2015
|
|
(Taxable Equivalent Basis)
(dollars in thousands)
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield
(4)
|
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield
(4)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable loans and leases (1)
|
|
$
|
281,143
|
|
|
$
|
6,807
|
|
|
|
4.87
|
%
|
|
$
|
263,161
|
|
|
$
|
6,596
|
|
|
|
5.05
|
%
|
Tax-exempt loans and leases (2)
|
|
|
16,621
|
|
|
|
462
|
|
|
|
5.59
|
%
|
|
|
6,637
|
|
|
|
167
|
|
|
|
5.07
|
%
|
Taxable investment securities
|
|
|
245,310
|
|
|
|
2,993
|
|
|
|
2.45
|
%
|
|
|
259,312
|
|
|
|
3,073
|
|
|
|
2.39
|
%
|
Tax-exempt investment securities (2)
|
|
|
24,446
|
|
|
|
461
|
|
|
|
3.79
|
%
|
|
|
26,314
|
|
|
|
509
|
|
|
|
3.90
|
%
|
Corporate stock (2)
|
|
|
72
|
|
|
|
14
|
|
|
|
39.10
|
%
|
|
|
73
|
|
|
|
12
|
|
|
|
33.15
|
%
|
Federal funds sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing deposits in banks
|
|
|
992
|
|
|
|
3
|
|
|
|
0.61
|
%
|
|
|
989
|
|
|
|
2
|
|
|
|
0.41
|
%
|
Total earning assets
|
|
|
568,584
|
|
|
|
10,740
|
|
|
|
3.80
|
%
|
|
|
556,486
|
|
|
|
10,359
|
|
|
|
3.75
|
%
|
Cash & due from banks
|
|
|
28,108
|
|
|
|
|
|
|
|
|
|
|
|
21,746
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
38,723
|
|
|
|
|
|
|
|
|
|
|
|
39,511
|
|
|
|
|
|
|
|
|
|
Allowance for loan & lease losses
|
|
|
(5,051
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,325
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
630,364
|
|
|
|
|
|
|
|
|
|
|
$
|
612,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
$
|
188,463
|
|
|
|
75
|
|
|
|
0.08
|
%
|
|
$
|
195,141
|
|
|
|
131
|
|
|
|
0.14
|
%
|
Savings
|
|
|
59,442
|
|
|
|
10
|
|
|
|
0.03
|
%
|
|
|
58,405
|
|
|
|
17
|
|
|
|
0.06
|
%
|
Time deposits
|
|
|
83,449
|
|
|
|
281
|
|
|
|
0.68
|
%
|
|
|
87,907
|
|
|
|
274
|
|
|
|
0.63
|
%
|
Other borrowings
|
|
|
19,327
|
|
|
|
89
|
|
|
|
0.93
|
%
|
|
|
12,765
|
|
|
|
70
|
|
|
|
1.11
|
%
|
Total interest-bearing liabilities
|
|
|
350,681
|
|
|
|
455
|
|
|
|
0.26
|
%
|
|
|
354,218
|
|
|
|
492
|
|
|
|
0.28
|
%
|
Noninterest-bearing demand deposits
|
|
|
188,791
|
|
|
|
|
|
|
|
|
|
|
|
163,635
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,362
|
|
|
|
|
|
|
|
|
|
|
|
6,403
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
545,834
|
|
|
|
|
|
|
|
|
|
|
|
524,256
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
84,530
|
|
|
|
|
|
|
|
|
|
|
|
88,162
|
|
|
|
|
|
|
|
|
|
|
|
$
|
630,364
|
|
|
|
|
|
|
|
|
|
|
$
|
612,418
|
|
|
|
|
|
|
|
|
|
Net interest income & margin (3)
|
|
|
|
|
|
$
|
10,285
|
|
|
|
3.64
|
%
|
|
|
|
|
|
$
|
9,867
|
|
|
|
3.58
|
%
|
|
(1)
|
Loan interest includes loan fees of $95,000 and $93,000,
respectively, during the six months ended June 30, 2016 and June 30, 2015. Average loan balances include nonperforming
loans.
|
|
(2)
|
Includes taxable-equivalent adjustments that primarily relate
to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% for
2016 and 2015.
|
|
(3)
|
Net interest margin is computed by dividing net interest
income by total average earning assets.
|
|
(4)
|
Average yield is calculated based on actual days in the
period (182 days for 2016 and 181 days for 2015) and annualized to actual days in the year (366 days for 2016 and 365 days for
2015).
|
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
|
Three Months Ended June 30, 2016 over 2015 (dollars in thousands)
|
Increase (decrease) due to change in:
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
Volume
|
|
|
Rate (4)
|
|
|
Net Change
|
|
Taxable loans and leases (1)
|
|
$
|
192
|
|
|
$
|
(86
|
)
|
|
$
|
106
|
|
Tax-exempt loans and leases (2)
|
|
|
108
|
|
|
|
1
|
|
|
|
109
|
|
Taxable investment securities
|
|
|
(89
|
)
|
|
|
(127
|
)
|
|
|
(216
|
)
|
Tax exempt investment securities (3)
|
|
|
(28
|
)
|
|
|
(12
|
)
|
|
|
(40
|
)
|
Corporate stock
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Interest-bearing deposits in banks
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Total
|
|
|
183
|
|
|
|
(226
|
)
|
|
|
(43
|
)
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
(27
|
)
|
Savings deposits
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Time deposits
|
|
|
(8
|
)
|
|
|
13
|
|
|
|
5
|
|
Other borrowings
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
3
|
|
Total
|
|
|
(9
|
)
|
|
|
(14
|
)
|
|
|
(23
|
)
|
Interest differential
|
|
$
|
192
|
|
|
$
|
(212
|
)
|
|
$
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016 over 2015 (dollars in thousands)
|
|
|
|
|
|
|
|
|
Increase (decrease) due to change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
Volume
|
|
|
Rate (4)
|
|
|
Net Change
|
|
Taxable loans and leases (1)
|
|
$
|
452
|
|
|
$
|
(241
|
)
|
|
$
|
211
|
|
Tax-exempt loans and leases (2)
|
|
|
252
|
|
|
|
43
|
|
|
|
295
|
|
Taxable investment securities
|
|
|
(166
|
)
|
|
|
86
|
|
|
|
(80
|
)
|
Tax exempt investment securities (3)
|
|
|
(36
|
)
|
|
|
(12
|
)
|
|
|
(48
|
)
|
Corporate stock
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
Interest-bearing deposits in banks
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Total
|
|
|
502
|
|
|
|
(121
|
)
|
|
|
381
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
|
(4
|
)
|
|
|
(52
|
)
|
|
|
(56
|
)
|
Savings deposits
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Time deposits
|
|
|
(14
|
)
|
|
|
21
|
|
|
|
7
|
|
Other borrowings
|
|
|
36
|
|
|
|
(17
|
)
|
|
|
19
|
|
Total
|
|
|
18
|
|
|
|
(55
|
)
|
|
|
(37
|
)
|
Interest differential
|
|
$
|
484
|
|
|
$
|
(66
|
)
|
|
$
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The average balance of non-accruing
loans is immaterial as a percentage of total loans and, as such, has been included in net loans.
|
|
(2)
|
Loan fees of $55,000 and $56,000,
respectively, during the three months ended June 30, 2016 and June 30, 2015, and loan fees of $95,000 and $93,000, respectively,
during the six months ended June 30, 2016 and June 30, 2015, have been included in the interest income computation.
|
|
(3)
|
Includes taxable-equivalent
adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for 2016 and 2015.
|
|
(4)
|
The rate/volume variance has
been included in the rate variance.
|
Provision for Loan and
Lease Losses
The Company
did not provide any provision for loan and lease losses for the second quarter of 2016 or 2015. The Company experienced net loan
and lease recoveries of $50,000 or 0.07% (on an annualized basis) of average loans and leases for the three months ended June
30, 2016 compared to net loan and lease recoveries of $51,000 or 0.07% (on an annualized basis) of average loans and leases for
the three months ended June 30, 2015. For the first six months of 2016 and 2015, the Company did not make any provisions for loan
and lease losses and net loan and lease recoveries were $157,000 or 0.11% (on an annualized basis) of average loans and leases
outstanding in 2016 and $58,000 or 0.04% (on an annualized basis) of average loans and leases outstanding in 2015. The Company
continued to experience an overall improvement in the credit quality of the loan and lease portfolio and a reduction of credit
losses. For additional information see the “Allowance for Loan and Lease Losses Activity.”
Noninterest 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
|
|
|
|
Three
Months
Ended
June
30,
|
|
|
Six
Months
Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service charges on deposit accounts
|
|
$
|
128
|
|
|
$
|
127
|
|
|
$
|
257
|
|
|
$
|
244
|
|
(Loss) gain on sale/call/impairment of securities
|
|
|
(1
|
)
|
|
|
51
|
|
|
|
281
|
|
|
|
218
|
|
Merchant fee income
|
|
|
93
|
|
|
|
99
|
|
|
|
179
|
|
|
|
187
|
|
Bank owned life insurance
|
|
|
81
|
|
|
|
81
|
|
|
|
159
|
|
|
|
159
|
|
Income from OREO properties
|
|
|
—
|
|
|
|
90
|
|
|
|
106
|
|
|
|
161
|
|
Other
|
|
|
62
|
|
|
|
59
|
|
|
|
135
|
|
|
|
123
|
|
Total noninterest income
|
|
$
|
363
|
|
|
$
|
507
|
|
|
$
|
1,117
|
|
|
$
|
1,092
|
|
Noninterest income
decreased $144,000 (28.4%) to $363,000 for the three months ended June 30, 2016 compared to $507,000 for the three months ended
June 30, 2015. The decrease from the second quarter of 2015 to the second quarter of 2016 was primarily related to a decrease
in gain on sale of securities, which decreased $52,000 (102.0%) from $51,000 in 2015 to a loss of $1,000 in 2016 and rental income
from OREO properties which decreased $90,000 (100.0%) from $90,000 in 2015 to zero in 2016. The decrease in OREO income resulted
from the sale of the only income producing OREO property in the first quarter of 2016.
For the six months
ended June 30, 2016, noninterest income increased $25,000 (2.3%) from $1,092,000 to $1,117,000. The increase from the first six
months of 2015 compared to the same period in 2016 was primarily related to the gain on sale of securities (up $63,000 or 28.9%)
resulting in income of $218,000 in the first half of 2015 compared to $281,000 for the first half of 2016. In addition, there
was a decrease in rental income from OREO properties which declined $55,000 (34.2%) from $161,000 in 2015 to $106,000 in 2016.
Noninterest Expense
Noninterest
expense was $3,415,000 in the second quarter of 2016 and 2015. Salary and employee benefits expense increased $56,000 (2.7%) from
$2,045,000 during the second quarter of 2015 to $2,101,000 during the second quarter of 2016. The increase in salaries and benefits
resulted from normal salary adjustments and increased benefit costs. Occupancy expense decreased $9,000 (3.0%) and furniture and
equipment expense decreased $16,000 (8.9%) from the second quarter of 2015 to the second quarter of 2016. FDIC assessments were
$76,000 during both the second quarter of 2016 and 2015. OREO related expenses decreased $35,000 (63.6%) during the second quarter
of 2016 to $20,000, from $55,000 in the second quarter of 2015. The primary reason for the decrease in OREO related expenses was
the reduction in OREO properties reducing carrying costs. Other expenses increased $4,000 (0.5%) to $763,000 in the second quarter
of 2016 compared to $759,000 in the second quarter of 2015. The fully taxable equivalent efficiency ratio for the second quarter
of 2016 increased to 62.3% from 60.5% for the second quarter of 2015.
Noninterest
expense for the six-month period ended June 30, 2016 was $7,206,000 compared to $7,228,000 for the same period in 2015 for a decrease
of $22,000 (0.3%). Salaries and benefits expense decreased $54,000 (1.3%) from $4,315,000 for the six months ended June 30, 2015
to $4,261,000 for the same period in 2016. The decrease in salaries and benefit expense is related to lower incentive accruals,
which decreased $34,000 (12.6%) from $270,000 in 2015 to $236,000 in 2016, as not all of the incentive targets have been met.
Occupancy expense decreased $4,000 (0.7%) and furniture and equipment expense decreased $28,000 (7.9%). FDIC assessments were
$156,000 during both 2016 and 2015. OREO related expenses increased $158,000 (78.2%) during 2016 to $360,000, from $202,000 in
2015. The increase in OREO expenses is directly related to a $376,000 property write-down partially offset by a $117,000 gain
on sale, both items occurring in the first quarter of 2016. Other expenses decreased $94,000 (5.9%) from $1,605,000 for the six
months ended June 30, 2015 to $1,511,000 for the same period in 2016. The decrease in other expenses results from lower operating
losses which decreased $32,000 (43.8%) from $73,000 in 2015 to $41,000 in 2016.
The overhead
efficiency ratio (fully taxable equivalent), excluding the amortization of intangible assets, for the first six months of 2016
was 63.2% as compared to 66.0% in the same period of 2015.
Provision for
Income Taxes
Federal
and state income taxes for the quarter ended June 30, 2016 decreased $93,000 (12.5%) from $745,000 in the second quarter of 2015
to $652,000 in the second quarter of 2016 and increased $70,000 (5.8%) from $1,215,000 in the six months ended June 30, 2015 to
$1,285,000 for the six months ended June 30, 2016. The combined federal and state effective tax rate for the quarter ended June
30, 2016 was 33.3%, compared to 35.0% for the second quarter of 2015. For the six months ended June 30, 2016, the combined federal
and state effective tax rate was 32.4% compared to 34.2% for the six months ended June 30, 2015. The lower effective tax rate
for both periods in 2016 compared to 2015 resulted from an increase in tax exempt loan interest. Tax exempt loan interest was
$173,000 in the second quarter of 2016 compared to $85,000 in the second quarter of 2015 and tax exempt loan interest was $345,000
in the first six months of 2016 compared to $123,000 in the first six months of 2015.
Balance Sheet
Analysis
The Company’s
total assets were $625,811,000 at June 30, 2016 compared to $634,460,000 at December 31, 2015, representing a decrease of $8,829,000
(1.4%). The average assets for the three months ended June 30, 2016 were $625,652,000, which represents an increase of $10,160,000
(1.7%) from the balance of $615,492,000 during the three-month period ended June 30, 2015. The average assets for the six months
ended June 30, 2016 were $630,364,000, which represents an increase of $17,946,000 (2.9%) from the average balance of $612,418,000
during the six-month period ended June 30, 2015.
Investment
Securities
The
Company classifies its investment securities as available-for-sale or held-to-maturity. The Company’s intent is to hold
all securities classified as held-to-maturity until maturity and management believes that it has the ability to do so. Securities
available-for-sale may be sold to implement asset/liability management strategies and in response to changes in interest rates,
prepayment rates and similar factors.
Table
Five below summarizes the values of the Company’s investment securities held on June 30, 2016 and December 31, 2015.
Table Five: Investment Securities Composition
|
|
(dollars in thousands)
|
|
|
|
|
|
|
Available-for-sale (at fair value)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
228,722
|
|
|
$
|
246,185
|
|
Obligations of states and political subdivisions
|
|
|
24,143
|
|
|
|
26,013
|
|
Corporate bonds
|
|
|
1,537
|
|
|
|
1,551
|
|
Corporate stock
|
|
|
81
|
|
|
|
70
|
|
Total available-for-sale investment securities
|
|
$
|
254,483
|
|
|
$
|
273,819
|
|
Held-to-maturity
(at amortized cost)
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
540
|
|
|
$
|
623
|
|
Total held-to-maturity investment securities
|
|
$
|
540
|
|
|
$
|
623
|
|
Net
unrealized gains on available-for-sale investment securities totaling $6,935,000 were recorded, net of $2,774,000 in tax liabilities,
as accumulated other comprehensive income within shareholders’ equity at June 30, 2016 and net unrealized gains on available-for-sale
investment securities totaling $3,504,000 were recorded, net of $1,401,000 in tax liabilities, as accumulated other comprehensive
income within shareholders’ equity at December 31, 2015.
Management
periodically evaluates each investment security in a loss position for other than temporary impairment relying primarily on industry
analyst reports, observation of market conditions and interest rate fluctuations. Management has the ability and intent to hold
securities with established maturity dates until recovery of fair value, which may be until maturity, and believes it will be
able to collect all amounts due according to the contractual terms for all of the underlying investment securities; therefore,
management does not consider these investments to be other-than-temporarily impaired.
Loans and Leases
The Company’s
historical lending activities have been 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. The Company’s continuing focus in our market area, new borrowers developed
through the Company’s marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company originating
$39 million in new loans during the first half of 2016. This production was partially offset by normal pay downs and payoffs,
but still resulted in an overall net increase in net loans and leases of $16.0 million (5.5%) from December 31, 2015. The market
in which the Company operates has begun to show demand for credit products as the continued low rate environment and expectations
for economic expansion have increased refinancing as well as new loan activity. Table Six below summarizes the composition of
the loan portfolio as of June 30, 2016 and December 31, 2015.
Table Six: Loan and Lease Portfolio Composition
|
|
(dollars in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Change in
|
|
|
Percentage
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
dollars
|
|
|
change
|
|
Commercial
|
|
$
|
36,193
|
|
|
|
12
|
%
|
|
$
|
36,195
|
|
|
|
12
|
%
|
|
$
|
(2
|
)
|
|
|
(0.1
|
%)
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
203,439
|
|
|
|
66
|
%
|
|
|
199,591
|
|
|
|
68
|
%
|
|
|
3,848
|
|
|
|
1.9
|
%
|
Multi-family
|
|
|
35,525
|
|
|
|
11
|
%
|
|
|
23,494
|
|
|
|
8
|
%
|
|
|
12,031
|
|
|
|
51.2
|
%
|
Construction
|
|
|
13,795
|
|
|
|
4
|
%
|
|
|
14,533
|
|
|
|
5
|
%
|
|
|
(738
|
)
|
|
|
(5.1
|
%)
|
Residential
|
|
|
16,360
|
|
|
|
5
|
%
|
|
|
14,200
|
|
|
|
5
|
%
|
|
|
2,160
|
|
|
|
15.2
|
%
|
Lease financing receivable
|
|
|
534
|
|
|
|
—
|
|
|
|
732
|
|
|
|
—
|
%
|
|
|
(198
|
)
|
|
|
(27.1
|
%)
|
Agriculture
|
|
|
2,317
|
|
|
|
1
|
%
|
|
|
2,431
|
|
|
|
1
|
%
|
|
|
(114
|
)
|
|
|
(4.7
|
%)
|
Consumer
|
|
|
2,304
|
|
|
|
1
|
%
|
|
|
3,122
|
|
|
|
1
|
%
|
|
|
(818
|
)
|
|
|
(26.2
|
%)
|
Total loans and leases
|
|
|
310,467
|
|
|
|
100
|
%
|
|
|
294,298
|
|
|
|
100
|
%
|
|
|
16,169
|
|
|
|
5.5
|
%
|
Deferred loan and lease fees, net
|
|
|
(247
|
)
|
|
|
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(5,132
|
)
|
|
|
|
|
|
|
(4,975
|
)
|
|
|
|
|
|
|
(157
|
)
|
|
|
|
|
Total net loans and leases
|
|
$
|
305,088
|
|
|
|
|
|
|
$
|
289,102
|
|
|
|
|
|
|
$
|
15,986
|
|
|
|
5.5
|
%
|
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 networking, local promotional activity, and personal contacts by American River Bank officers, directors
and employees to compete with other financial institutions. The Company makes loans and leases to borrowers whose applications
include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment.
Commercial
loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business
loan products. Consumer loans include a range of traditional consumer loan products such as personal lines of credit and homeowner
equity lines of credit and loans to finance purchases of autos, boats, recreational vehicles, mobile homes and various other consumer
items. Construction loans are generally comprised of commitments to customers within the Company’s service area for construction
of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans
consist primarily of loans secured by first trust deeds on commercial, multi-family, and residential properties typically with
maturities from 3 to 10 years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily
of vineyard loans. 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.
“Subprime”
real estate loans generally refer to residential mortgages made to higher-risk borrowers with lower credit and/or income histories.
Within the banking industry, many of these loans were originated with adjustable interest rates that reset upward after an introductory
period. These “subprime” loans coupled with declines in housing prices led to an increase in default rates resulting
in many instances of increased foreclosure rates as the adjustable interest rates reset to higher levels. The Company did not
have any such “subprime” loans at June 30, 2016 and December 31, 2015.
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.
Ultimately,
underlying trends in economic and business cycles 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, which is focused on businesses within the two communities in which the Bank has
offices (Santa Rosa and Healdsburg); and in Amador County, in which the Bank is primarily focused on businesses within the three
communities in which it has offices (Jackson, Pioneer, and Ione). 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 recently entered the Santa
Clara, Contra Costa, and Alameda County markets and services these markets through a loan production office in San Jose. The economies
of Santa Clara, Contra Costa and Alameda Counties are diversified with professional services, manufacturing, technology related
companies, real estate investment and construction.
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 rates and terms, vacancy rates, absorption and sale rates and capitalization
rates; real estate values, supply and demand factors, and rates of return; operating expenses; inflation and deflation; 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 86% of the
Company’s loan and lease portfolio at June 30, 2016 and December 31, 2015. Management believes that the residential
land portion of the Company’s loan portfolio carries more than the normal credit risk, due primarily to curtailed
demand for new and resale residential property, relative to pre-recession levels, a resulting oversupply of unsold
residential land, 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 by taking actions
where possible to reduce credit risk exposure by methods that include, but are not limited to, seeking liquidation of the
loan by the borrower, seeking additional tangible collateral or other repayment support, converting the property through
judicial or non-judicial foreclosure proceedings, and other collection techniques. Management currently believes that it
maintains its allowance for loan and lease losses at levels adequate to reflect the loss risk inherent in its total loan
portfolio.
A decline in
the economy in general, or decline in real estate values in the Company’s primary market areas, in particular, could have an adverse
impact on the collectability of real estate loans and require an increase in the provision for loan and lease losses. This could
adversely affect the Company’s future prospects, results of operations, profitability and stock price. Management believes that
its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no assurance
that losses will not occur. The Company’s loan practices and underwriting standards include, but are not limited to, the
following: (1) maintaining a thorough understanding of the Company’s service area and originating a significant majority
of its loans within that area, (2) maintaining a thorough understanding of borrowers’ knowledge, capacity, and market position
in their field of expertise, (3) basing real estate loan approvals not only on market demand for the project, but also on the
borrowers’ capacity to support the project financially in the event it does not perform to expectations (whether sale or income
performance), and (4) maintaining conforming and prudent loan-to-value and loan-to-cost ratios based on independent outside appraisals
and ongoing inspection and analysis by the Company’s lending officers or contracted third-party professionals.
Nonperforming,
Past Due and Restructured Loans and Leases
At June
30, 2016, nonperforming loans and leases (those loans and leases on nonaccrual status and those loans and leases still accruing
and past due 90 days or more) were $1,055,000 or 0.34% of total loans and leases. The $1,055,000 in nonperforming loans and leases
was made up of seven loans. Four of those loans totaling $643,000 were current (less than 30 days past due pursuant to their original
or modified terms) and all seven loans were less than 90 days past due. Nonperforming loans and leases were $1,643,000 or 0.56%
of total loans and leases at December 31, 2015. Specific reserves of $26,000 were held on the nonperforming loans at June 30,
2016 and specific reserves of $28,000 were held on the nonperforming loans at December 31, 2015.
The overall
level of nonperforming loans decreased $66,000 (4.0%) to $1,577,000 during the first quarter of 2016 from $1,643,000 at December
31, 2015, and decreased further by $522,000 (33.1%) during the second quarter of 2016. At December 31, 2015, the Company’s
nonperforming loans included four real estate loans totaling $1,493,000; four consumer loans totaling $120,000 and a single commercial
loan totaling $30,000. At June 30, 2016, the Company had three real estate loans totaling $968,000; three consumer loans totaling
$65,000; and a single commercial loan in the amount of $22,000.
Table Seven
below sets forth nonaccrual loans and loans past due 90 days or more as of June 30, 2016 and December 31, 2015.
Table Seven: Nonperforming Loans and Leases
|
|
(dollars in thousands)
|
|
June 30,
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Past due 90 days or more and still accruing:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Nonaccrual:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
22
|
|
|
|
30
|
|
Real estate
|
|
|
968
|
|
|
|
1,493
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
65
|
|
|
|
120
|
|
Total nonperforming loans
|
|
$
|
1,055
|
|
|
$
|
1,643
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2016. Management is not aware of any potential problem loans, which were accruing and current at June 30,
2016, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms and that would result
in a significant loss to the Company.
Impaired
Loans and Leases
The Company
considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect
all amounts due (principal and interest) according to the original contractual terms of the loan or lease agreement. The measurement
of impairment may be based on (i) the present value of the expected cash flows of the impaired loan or lease discounted at
the loan’s or lease’s original effective interest rate, (ii) the observable market price of the impaired loan
or lease, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition
to smaller-balance loans or leases that are collectively evaluated for credit risk. In assessing whether a loan or lease is impaired,
the Company typically reviews loans or leases graded substandard or lower with outstanding principal balances in excess of $100,000,
as well as loans considered troubled debt restructures with outstanding principal balances in excess of $25,000. The Company identifies
troubled debt restructures by reviewing each renewal, modification, or extension of a loan with a screening document. This
document is designed to identify any characteristics of such a loan that would qualify it as a troubled debt restructure.
If the characteristics are not present that would qualify a loan as a troubled debt restructure, it is deemed to be a modification.
At June 30,
2016, the recorded investment in loans and leases that were considered to be impaired totaled $20,832,000, which includes $19,803,000
in performing loans and leases. Of the total impaired loans of $20,832,000, loans totaling $11,980,000 were deemed to require
no specific reserve and loans totaling $8,852,000 were deemed to require a related valuation allowance of $904,000. Of the $11,890,000
impaired loans that did not carry a specific reserve there were $4,186,000 in loans or leases that had previous partial charge-offs
and $7,794,000 in loans or leases that were analyzed and determined not to require a specific reserve or charge-off because the
collateral value or discounted cash flow value exceeded the loan or lease balance The recorded investment in loans and leases
that were considered to be impaired totaled $21,365,000 at December 31, 2015. Of the total impaired loans of $21,365,000, loans
totaling $12,607,000 were deemed to require no specific reserve and loans totaling $8,758,000 were deemed to require a related
valuation allowance of $899,000.
The Company
has been operating in a market that has recently experienced sporadic improvement in real estate values of commercial, residential,
land, and construction properties. As such, the Company is focused on monitoring collateral values for those loans considered
collateral dependent. For collateral dependent loans in excess of $250,000, the Company performs an internal evaluation or obtains
an updated appraisal, as necessary, which is generally once every twelve months. In the second quarter of 2016, the Company
had net recoveries of $50,000 with no provision. In the second quarter of 2015, the Company had net recoveries of $51,000 with
no provision.
During the quarter
ended June 30, 2016, there were no loans that were modified as troubled debt restructurings. During the quarter ended June 30,
2015, there were five loans totaling $1,975,000 that were modified as troubled debt restructurings, none of which required a reduction
in principal. The five troubled debt restructurings in the second quarter of 2015 increased the allowance for loan and lease losses
by $138,000 and resulted in no charge-offs. There were no payment defaults during the three months ended June 30, 2016 or June
30, 2015 on troubled debt restructurings made in the preceding twelve months. At June 30, 2016 and December 31, 2015 there were
no unfunded commitments on those loans considered troubled debt restructures.
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 estimate 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. Table Eight below summarizes, for the periods indicated, the activity in the ALLL.
Table Eight: Allowance for Loan and Lease Losses
|
|
(dollars in thousands)
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans and leases outstanding
|
|
$
|
300,423
|
|
|
$
|
276,971
|
|
|
$
|
297,764
|
|
|
$
|
269,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses at beginning of period
|
|
$
|
5,082
|
|
|
$
|
5,308
|
|
|
$
|
4,975
|
|
|
$
|
5,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(6
|
)
|
Total
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
Recoveries of loans and leases previously charged
off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
39
|
|
|
|
17
|
|
|
|
73
|
|
|
|
23
|
|
Real estate
|
|
|
11
|
|
|
|
39
|
|
|
|
12
|
|
|
|
40
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
|
|
2
|
|
Total
|
|
|
50
|
|
|
|
56
|
|
|
|
157
|
|
|
|
65
|
|
Net loans and leases charged off
|
|
|
50
|
|
|
|
51
|
|
|
|
157
|
|
|
|
58
|
|
Additions to
allowance charged to operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Allowance for loan and lease losses at
end of period
|
|
$
|
5,132
|
|
|
$
|
5,359
|
|
|
$
|
5,132
|
|
|
$
|
5,359
|
|
Ratio of net charge-offs to average loans and
leases outstanding (annualized)
|
|
|
-0.07
|
%
|
|
|
-0.07
|
%
|
|
|
-0.11
|
%
|
|
|
-0.04
|
%
|
Provision of allowance for loan and lease
losses to average loans and leases
outstanding (annualized)
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Allowance for loan and lease losses to loans and leases net of deferred fees at end of period
|
|
|
1.65
|
%
|
|
|
1.91
|
%
|
|
|
1.65
|
%
|
|
|
1.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ALLL
totaled $5,132,000 or 1.65% of total loans and leases at June 30, 2016 compared to $4,975,000 or 1.69% of total loans and leases
at December 31, 2015. The Company establishes general and specific reserves in accordance with accounting principles generally
accepted in the United States of America. The ALLL is composed of categories of the loan and lease portfolio based on loan type
and loan rating; however, the entire allowance is available to cover actual loan and lease losses. While management uses available
information to recognize possible losses on loans and leases, future additions to the allowance may be necessary, based on changes
in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Company’s ALLL. Such agencies may require the Company to provide additions to the allowance based
on their judgment of information available to them at the time of their examination.
The ALLL
as a percentage of nonperforming loans and leases was 486.4% at June 30, 2016 and 302.8% at December 31, 2015. The ALLL as a percentage
of impaired loans and leases was 24.6% at June 30, 2016 and 23.3% at December 31, 2015. Of the total nonperforming and impaired
loans and leases outstanding as of June 30, 2016, there were $4,565,000 in loans or leases that had been reduced by partial charge-offs
of $814,000. As these loan or lease balances are charged off, the remaining balances, following analysis, normally do not initially
require specific reserves and are not eligible for general reserves. The impact of this on credit ratios is such that the Company’s
ALLL as a percentage may be lower, because the partial charge-offs have reduced the potential future losses related to those credits.
The Company’s
policy with regard to loan or lease charge-offs continues to be that a loan or lease is charged off against the ALLL when management
believes that the collectability of the principal is unlikely. As previously discussed in the “Impaired Loans and Leases”
section, certain loans are evaluated for impairment. Generally, if a loan is collateralized by real estate, and considered collateral
dependent, the impaired portion will be charged off to the allowance for loan and lease losses unless it is in the process of
collection, in which case a specific reserve may be warranted. If the collateral is other than real estate and considered impaired,
a specific reserve may be warranted.
It is the policy
of management to maintain the allowance for loan and lease losses at a level believed to be adequate for known and inherent risks
in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing
an allowance for loan and lease losses that management believes is appropriate at each reporting date. Based on information currently
available to analyze inherent credit risk, 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.
Other Real Estate
Owned
At June
30, 2016, the Company had two other real estate owned (“OREO”) properties totaling $896,000. This is a reduction of
$2,655,000 (74.8%) from the $3,551,000 reported as of December 31, 2015. At June 30, 2015, the Company had four properties totaling
$3,781,000. During the second quarter of 2016, the Company did not foreclose on any property nor was any OREO property sold. There
were no valuation adjustments to the book value of the existing OREO properties during the second quarter of 2016. The Company
believes that both of the OREO properties owned at June 30, 2016 are carried approximately at fair value.
Deposits
At June
30, 2016, total deposits were $525,933,000 representing a $4,757,000 (0.9%) decrease from the December 31, 2015 balance of $530,690,000.
The Company’s deposit growth plan for 2016 is to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing
money market and NOW accounts, and savings accounts while allowing higher cost time deposits to mature and close or renew at lower
rates. During the first six months of 2016, the Company experienced deposit account increases in noninterest-bearing accounts
($5,355,000 or 2.8%) and savings ($820,000 or 1.4%) and decreases in interest-bearing checking ($1,638,000 or 2.7%), money market
accounts ($7,322,000 or 5.4%), and time deposits ($1,972,000 or 2.3%). The decrease in money market accounts during the period
is partially related to the Company’s decision to allow some higher rate promotional accounts to exit the Bank.
Other
Borrowed Funds
Other
borrowings outstanding as of June 30, 2016 and December 31, 2015, consist of advances (both long-term and short-term) from the
FHLB. Table Nine below summarizes these borrowings.
Table Nine: Other Borrowed Funds
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
5,000
|
|
|
|
0.99
|
%
|
|
$
|
3,500
|
|
|
|
1.28
|
%
|
Long-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
6,000
|
|
|
|
1.55
|
%
|
|
$
|
7,500
|
|
|
|
1.24
|
%
|
The
maximum amount of short-term borrowings at any month-end during the first six months of 2016 and 2015 was $25,500,000 and $3,500,000,
respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of
rates and maturities on FHLB advances (dollars in thousands):
|
|
Short-term
|
|
|
Long-term
|
|
Amount
|
|
$
|
5,000
|
|
|
$
|
6,000
|
|
Maturity
|
|
|
2016-2017
|
|
|
|
2017 to 2019
|
|
Weighted average rates
|
|
|
0.99
|
%
|
|
|
1.55
|
%
|
Capital
Resources
The Company and
American River Bank are subject to certain regulatory capital requirements administered by the Federal Reserve Board and the Federal
Deposit Insurance Corporation (the “FDIC”). Failure to meet these minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect
on the Company’s consolidated financial statements. Under current capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and American River Bank’s
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings
and other factors.
At June 30, 2016,
shareholders’ equity was $83,566,000, representing a decrease of $2,509,000 (2.9%) from $86,075,000 at December 31, 2015.
The decrease results from repurchases of common stock exceeding the additions from other comprehensive income, net income for
the period, and the stock based compensation. The ratio of total risk-based capital to risk adjusted assets was 19.2% at June
30, 2016 and 20.3% at December 31, 2015. Tier 1 risk-based capital to risk-adjusted assets was 18.0% at June 30, 2016 and 19.3%
at December 31, 2015. The leverage ratio was 10.4% at June 30, 2016 and 11.0% at December 31, 2015. Table Ten below lists the
Company’s and American River Bank’s capital ratios at June 30, 2016 and December 31, 2015 as well as the minimum capital
ratios for capital adequacy and the minimum requirement for a well-capitalized institution.
Table Ten: Capital Ratios
|
|
Capital to Risk-Adjusted Assets
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
Minimum
Regulatory
Capital
Requirements
|
|
|
Well-Capitalized
Minimum
Requirements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American River Bankshares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
10.4
|
%
|
|
|
11.0
|
%
|
|
|
4.0
|
%
|
|
|
N/A
|
|
Tier 1 Risk-Based Capital
|
|
|
18.0
|
%
|
|
|
19.3
|
%
|
|
|
6.0
|
%
|
|
|
N/A
|
|
Total Risk-Based Capital
|
|
|
19.2
|
%
|
|
|
20.3
|
%
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American River Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
10.5
|
%
|
|
|
11.0
|
%
|
|
|
4.0
|
%
|
|
|
5.0
|
%
|
Common Equity Tier 1 Risk-Based Capital
|
|
|
17.7
|
%
|
|
|
19.1
|
%
|
|
|
4.5
|
%
|
|
|
6.5
|
%
|
Tier 1 Risk-Based Capital
|
|
|
17.7
|
%
|
|
|
19.1
|
%
|
|
|
6.0
|
%
|
|
|
8.0
|
%
|
Total Risk-Based Capital
|
|
|
19.0
|
%
|
|
|
20.3
|
%
|
|
|
8.0
|
%
|
|
|
10.0
|
%
|
Capital
ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory requirements and is adequate to
meet future needs. Management believes that both the Company and American River Bank met all of their capital adequacy requirements
as of June 30, 2016 and December 31, 2015.
In July 2013,
the federal bank regulatory agencies issued interim final rules that revised the risk-based capital requirements in order to implement
the “Basel III” regulatory capital reforms released by the Basel Committee on Banking Supervision and changes required
by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Basel III reforms reflected in the final rules include
an increase in the risk-based capital requirements and certain changes to capital components and the calculation of risk-weighted
assets.
Effective January
1, 2015, banking organizations like American River Bank must comply with new minimum capital ratio requirements to be phased-in
between January 1, 2015 and January 1, 2019, which would consist of the following: (i) a new common equity Tier 1 capital to total
risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii)
a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted
average total assets (“leverage”) ratio of 4%.
In addition,
a “capital conservation buffer,” is established which when fully phased-in will require maintenance of a minimum of
2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements
described above. The 2.5% buffer will increase the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%,
(ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new buffer requirement will be phased-in between
January 1, 2016 and January 1, 2019. The buffer requirement for 2016 is 0.625% and will increase gradually to 2.50% by January
1, 2019. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization
will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments
under Tier 1 instruments; and (iv) engaging in share repurchases.
The federal bank
regulatory agencies also implemented changes to the prompt corrective action framework, which is designed to place restrictions
on insured depository institutions if their capital ratios begin to show signs of weakness. These changes became effective January
1, 2015 and require insured depository institutions to meet the following increased capital ratio requirements in order to qualify
as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased
from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased
from 4%).
On January 20,
2016, the Company approved and authorized a stock repurchase program for 2016 (the “2016 Program”). The repurchase
target of 5% of the outstanding common shares was reached in the first quarter of 2016 and, on April 20, 2016, the Company approved
and authorized an increase to this stock repurchase program. The repurchase target was also 5% of the outstanding common shares
and was reached in the second quarter of 2016. See Part II,
Item 2
, for additional disclosure regarding the 2016 Program.
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 and it
subsidiaries 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 significant effect upon the results of operations of the Company and its subsidiaries during
the periods ended June 30, 2016 and 2015.
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 June 30, 2016 were approximately $25,804,000 and $238,000, 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 and/or pledged for secured borrowings. At June 30, 2016, consolidated liquid assets
totaled $213.1 million or 34.1% of total assets compared to $229.7 million or 36.2% of total assets on December 31, 2015. In addition
to liquid assets, the Company maintains two short-term unsecured lines of credit in the amount of $17,000,000 with two of its
correspondent banks. At June 30, 2016, the Company had $17,000,000 available under these credit lines. Additionally, the Bank
is a member of the FHLB. At June 30, 2016, the Bank could have arranged for up to $94,483,000 in secured borrowings from the FHLB.
These borrowings are secured by pledged mortgage loans and investment securities. At June 30, 2016, the Bank had advances, borrowings
and commitments (including letters of credit) outstanding of $11,000,000, leaving $83,483,000 available under these FHLB secured
borrowing arrangements. The Bank also has a secured borrowing arrangement with the Federal Reserve Bank of San Francisco. The
borrowing can be secured by pledging selected loans and investment securities. At June 30, 2016, the Bank’s borrowing capacity
at the Federal Reserve Bank was $12,399,000. 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 and borrowing capacity to offset the potential runoff of these volatile and/or 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. The Bank
has established a master repurchase agreement with a correspondent bank to enable such transactions. Furthermore, the Bank can
pledge additional unencumbered securities to borrow from the Federal Reserve Bank of San Francisco and the FHLB.
Off-Balance Sheet Items
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.
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 applies the same credit policies to commitments and
letters of credit as it does for loans included on the consolidated balance sheet. As of June 30, 2016 and December 31, 2015,
commitments to extend credit and standby 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.
Loan commitments and standby letters of credit were $26,042,000 and $26,968,000 at June 30, 2016 and December 31, 2015, respectively.
As a percentage of net loans and leases these off-balance sheet items represent 8.5% and 9.3%, respectively.
The Company
has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results.
Website
Access
American
River Bankshares 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 Securities and Exchange Commission (the “SEC”). These reports are free of charge
and can be accessed through the address
www.americanriverbank.com
by clicking on the
Investor Relations
/
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 other above-referenced reports filed by the Company by selecting the appropriate
link.