Item 1. Financial Statements.
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
BALANCE SHEET
(Unaudited)
(dollars
in thousands)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
43,094
|
|
|
$
|
23,727
|
|
Interest-bearing
deposits in banks
|
|
|
999
|
|
|
|
750
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
253,502
|
|
|
|
273,819
|
|
Held-to-maturity, at amortized cost
|
|
|
508
|
|
|
|
623
|
|
Loans and leases, less allowance for loan and lease losses of $4,983 at September 30, 2016 and $4,975 at December 31, 2015
|
|
|
313,302
|
|
|
|
289,102
|
|
Premises and equipment, net
|
|
|
1,259
|
|
|
|
1,407
|
|
Federal Home Loan Bank stock
|
|
|
3,779
|
|
|
|
3,779
|
|
Goodwill and other intangible assets
|
|
|
16,321
|
|
|
|
16,321
|
|
Other real estate owned
|
|
|
653
|
|
|
|
3,551
|
|
Bank owned life insurance
|
|
|
14,722
|
|
|
|
14,483
|
|
Accrued interest receivable and other assets
|
|
|
5,707
|
|
|
|
7,078
|
|
|
|
$
|
653,846
|
|
|
$
|
634,640
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
209,586
|
|
|
$
|
190,548
|
|
Interest-bearing
|
|
|
336,579
|
|
|
|
340,142
|
|
Total deposits
|
|
|
546,165
|
|
|
|
530,690
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
5,000
|
|
|
|
3,500
|
|
Long-term borrowings
|
|
|
9,000
|
|
|
|
7,500
|
|
Accrued interest payable and other liabilities
|
|
|
9,015
|
|
|
|
6,875
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
569,180
|
|
|
|
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 – 6,656,594 shares at September 30, 2016 and 7,343,649 shares at December 31, 2015
|
|
|
42,402
|
|
|
|
49,554
|
|
Retained
earnings
|
|
|
38,907
|
|
|
|
34,418
|
|
Accumulated
other comprehensive income, net of taxes
|
|
|
3,357
|
|
|
|
2,103
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
84,666
|
|
|
|
86,075
|
|
|
|
$
|
653,846
|
|
|
$
|
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 September 30,
|
|
Three months
|
|
|
Nine months
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and
fees on loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
3,617
|
|
|
$
|
3,541
|
|
|
$
|
10,424
|
|
|
$
|
10,140
|
|
Exempt from Federal income taxes
|
|
|
189
|
|
|
|
92
|
|
|
|
534
|
|
|
|
222
|
|
Interest on
deposits in banks
|
|
|
2
|
|
|
|
2
|
|
|
|
5
|
|
|
|
4
|
|
Interest and
dividends on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,340
|
|
|
|
1,633
|
|
|
|
4,333
|
|
|
|
4,706
|
|
Exempt
from Federal income taxes
|
|
|
156
|
|
|
|
190
|
|
|
|
502
|
|
|
|
571
|
|
Dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
|
10
|
|
Total
interest income
|
|
|
5,304
|
|
|
|
5,458
|
|
|
|
15,809
|
|
|
|
15,643
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on
deposits
|
|
|
179
|
|
|
|
202
|
|
|
|
545
|
|
|
|
624
|
|
Interest
on borrowings
|
|
|
44
|
|
|
|
38
|
|
|
|
133
|
|
|
|
108
|
|
Total
interest expense
|
|
|
223
|
|
|
|
240
|
|
|
|
678
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
5,081
|
|
|
|
5,218
|
|
|
|
15,131
|
|
|
|
14,911
|
|
Provision for loan
and lease losses
|
|
|
(668
|
)
|
|
|
—
|
|
|
|
(668
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
after provision for loan and lease losses
|
|
|
5,749
|
|
|
|
5,218
|
|
|
|
15,799
|
|
|
|
14,911
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
124
|
|
|
|
132
|
|
|
|
381
|
|
|
|
376
|
|
Gain on sale, call, or impairment of
securities
|
|
|
33
|
|
|
|
33
|
|
|
|
314
|
|
|
|
251
|
|
Rental income from other real estate owned
|
|
|
—
|
|
|
|
87
|
|
|
|
106
|
|
|
|
248
|
|
Other noninterest
income
|
|
|
242
|
|
|
|
238
|
|
|
|
715
|
|
|
|
707
|
|
Total noninterest
income
|
|
|
399
|
|
|
|
490
|
|
|
|
1,516
|
|
|
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
employee benefits
|
|
|
2,073
|
|
|
|
2,185
|
|
|
|
6,334
|
|
|
|
6,500
|
|
Occupancy
|
|
|
295
|
|
|
|
294
|
|
|
|
885
|
|
|
|
888
|
|
Furniture and
equipment
|
|
|
165
|
|
|
|
171
|
|
|
|
493
|
|
|
|
527
|
|
Federal Deposit
Insurance Corporation assessments
|
|
|
77
|
|
|
|
83
|
|
|
|
233
|
|
|
|
239
|
|
Expenses related
to other real estate owned
|
|
|
(30
|
)
|
|
|
58
|
|
|
|
330
|
|
|
|
260
|
|
Other
expense
|
|
|
766
|
|
|
|
641
|
|
|
|
2,277
|
|
|
|
2,246
|
|
Total
noninterest expense
|
|
|
3,346
|
|
|
|
3,432
|
|
|
|
10,552
|
|
|
|
10,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
2,802
|
|
|
|
2,276
|
|
|
|
6,763
|
|
|
|
5,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income
taxes
|
|
|
989
|
|
|
|
807
|
|
|
|
2,274
|
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,813
|
|
|
$
|
1,469
|
|
|
$
|
4,489
|
|
|
$
|
3,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.28
|
|
|
$
|
0.20
|
|
|
$
|
0.66
|
|
|
$
|
0.50
|
|
Diluted earnings per share
|
|
$
|
0.27
|
|
|
$
|
0.20
|
|
|
$
|
0.66
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30,
|
|
Three months
|
|
|
Nine months
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
1,813
|
|
|
$
|
1,469
|
|
|
$
|
4,489
|
|
|
$
|
3,811
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in net unrealized gains on
investment securities
|
|
|
(1,306
|
)
|
|
|
769
|
|
|
|
2,406
|
|
|
|
1,023
|
|
Deferred tax benefit (expense)
|
|
|
522
|
|
|
|
(308
|
)
|
|
|
(963
|
)
|
|
|
(409
|
)
|
(Decrease) increase in net unrealized gains on investment securities, net of tax
|
|
|
(784
|
)
|
|
|
461
|
|
|
|
1,443
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains included in net income
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
(314
|
)
|
|
|
(251
|
)
|
Tax effect
|
|
|
13
|
|
|
|
13
|
|
|
|
125
|
|
|
|
100
|
|
Realized gains, net of tax
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
|
(189
|
)
|
|
|
(151
|
)
|
Total other comprehensive (loss) income
|
|
|
(804
|
)
|
|
|
441
|
|
|
|
1,254
|
|
|
|
463
|
|
Comprehensive income
|
|
$
|
1,009
|
|
|
$
|
1,910
|
|
|
$
|
5,743
|
|
|
$
|
4,274
|
|
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
|
|
|
|
|
|
|
|
|
|
|
3,811
|
|
|
|
|
|
|
|
3,811
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains on available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
463
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net restricted stock award activity and related compensation expense
|
|
|
45,023
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
Stock option compensation expense
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Retirement of common stock
|
|
|
(790,989
|
)
|
|
|
(7,843
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2015
|
|
|
7,343,649
|
|
|
$
|
49,483
|
|
|
$
|
32,961
|
|
|
$
|
3,834
|
|
|
$
|
86,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
|
7,343,649
|
|
|
$
|
49,554
|
|
|
$
|
34,418
|
|
|
$
|
2,103
|
|
|
$
|
86,075
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
4,489
|
|
|
|
|
|
|
|
4,489
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains on available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,254
|
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net restricted stock award activity and related compensation expense
|
|
|
28,342
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
219
|
|
Stocks option exercised and compensation expense
|
|
|
1,500
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Retirement of common stock
|
|
|
(716,897
|
)
|
|
|
(7,414
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
|
|
6,656,594
|
|
|
$
|
42,402
|
|
|
$
|
38,907
|
|
|
$
|
3,357
|
|
|
$
|
84,666
|
|
See
Notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,489
|
|
|
$
|
3,811
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses
|
|
|
(668
|
)
|
|
|
—
|
|
Increase (decrease) in deferred loan origination fees, net
|
|
|
27
|
|
|
|
(48
|
)
|
Depreciation and amortization
|
|
|
326
|
|
|
|
324
|
|
Gain on sale, call, and impairment of investment securities, net
|
|
|
(314
|
)
|
|
|
(251
|
)
|
Amortization of investment security premiums and discounts, net
|
|
|
2,159
|
|
|
|
2,470
|
|
Increase in cash surrender values of life insurance policies
|
|
|
(239
|
)
|
|
|
(239
|
)
|
Stock based compensation expense
|
|
|
249
|
|
|
|
200
|
|
Loss/gain on sale/write-down of other real estate owned
|
|
|
207
|
|
|
|
68
|
|
Decrease in accrued interest receivable and other assets
|
|
|
535
|
|
|
|
27
|
|
(Decrease) increase
in accrued interest payable and other liabilities
|
|
|
(322
|
)
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,449
|
|
|
|
6,495
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of available-for-sale investment securities
|
|
|
12,656
|
|
|
|
23,764
|
|
Proceeds from matured available-for-sale investment securities
|
|
|
600
|
|
|
|
175
|
|
Proceeds from called available-for-sale investment securities
|
|
|
1,165
|
|
|
|
—
|
|
Purchases of available-for-sale investment securities
|
|
|
(25,146
|
)
|
|
|
(41,254
|
)
|
Proceeds from principal repayments for available-for-sale investment securities
|
|
|
33,749
|
|
|
|
38,193
|
|
Proceeds from principal repayments for held-to-maturity investment securities
|
|
|
115
|
|
|
|
188
|
|
Net increase in interest-bearing deposits in banks
|
|
|
(249
|
)
|
|
|
—
|
|
Net increase in loans
|
|
|
(21,873
|
)
|
|
|
(31,669
|
)
|
Proceeds from sale of other real estate
|
|
|
1,005
|
|
|
|
924
|
|
Capitalized additions to other real estate
|
|
|
—
|
|
|
|
(126
|
)
|
Net increase in FHLB stock
|
|
|
—
|
|
|
|
(93
|
)
|
Purchases of equipment
|
|
|
(178
|
)
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used
in) investing activities
|
|
|
1,844
|
|
|
|
(10,139
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase in demand, interest-bearing and savings deposits
|
|
$
|
17,125
|
|
|
$
|
12,200
|
|
Net decrease in time deposits
|
|
|
(1,650
|
)
|
|
|
(1,524
|
)
|
Net increase in short-term borrowings
|
|
|
1,500
|
|
|
|
—
|
|
Net increase in long-term borrowings
|
|
|
1,500
|
|
|
|
—
|
|
Proceeds from stock option exercise
|
|
|
13
|
|
|
|
—
|
|
Cash paid to repurchase common stock
|
|
|
(7,414
|
)
|
|
|
(7,843
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
$
|
11,074
|
|
|
$
|
2,833
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
19,367
|
|
|
|
(811
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
23,727
|
|
|
|
22,449
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
43,094
|
|
|
$
|
21,638
|
|
See
Notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September
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 September 30, 2016 and December 31, 2015, the results of its operations and statement of comprehensive income for the three-month
and nine-month periods ended September 30, 2016 and 2015, its cash flows for the nine-month periods ended September 30, 2016 and
2015 and its statement of changes in shareholders’ equity for the nine months ended September 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 nine-month periods ended September 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 110,587 options remain outstanding at September
30, 2016. At September 30, 2016, under the 2010 Plan, there were 76,461 stock options and 66,692 restricted shares outstanding
and the total number of authorized shares that remain available for issuance was 1,376,819. 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 September 30, 2016 and 2015, the compensation cost recognized for equity compensation was $83,000
and $73,000, respectively. The recognized tax benefit for equity compensation expense was $29,000 and $25,000, respectively, for
the three-month periods ended September 30, 2016 and 2015. For the nine-month periods ended September 30, 2016 and 2015, the compensation
cost recognized for equity compensation was $249,000 and $200,000, respectively. The recognized tax benefit for equity compensation
expense was $88,000 and $70,000, respectively, for the nine-month periods ended September 30, 2016 and 2015.
At
September 30, 2016, the total compensation cost related to nonvested stock option awards not yet recorded was $109,000. This amount
will be recognized over the next 3.75 years and the weighted average period of recognizing these costs is expected to be 1.8 years.
At September 30, 2016, the total compensation cost related to restricted stock awards not yet recorded was $441,000. This amount
will be recognized over the next 4.8 years and the weighted average period of recognizing these costs is expected to be 1.6 years.
Equity
Plans Activity
Stock
Options
There
were no stock options awarded during the three-month and nine-month periods ended September 30, 2016 or the three-month period
ended September 30, 2015. There were 26,427 stock options awarded during the nine-month period ended September 30, 2015 at a weighted
average exercise price of $9.56. A summary of option activity under the Plans as of September 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
|
|
|
1,500
|
|
|
|
8.50
|
|
|
|
—
|
|
|
|
—
|
|
Expired, forfeited or cancelled
|
|
|
59,863
|
|
|
|
22.45
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2016
|
|
|
187,048
|
|
|
$
|
12.91
|
|
|
|
3.9 years
|
|
|
$
|
252
|
|
Vested at September 30, 2016
|
|
|
142,805
|
|
|
$
|
14.11
|
|
|
|
2.7 years
|
|
|
$
|
173
|
|
Non-vested at September 30, 2016
|
|
|
44,243
|
|
|
$
|
9.05
|
|
|
|
8.0 years
|
|
|
$
|
79
|
|
Restricted
Stock
There
were no shares of restricted stock awarded during the three-month periods ended September 30, 2016 and 2015. There were 29,756
and 45,023 shares of restricted stock awarded during the nine-month periods ended September 30, 2016 and 2015, respectively. Of
the 29,756 restricted shares awarded in 2016, 10,094 restricted shares will vest one year from the date of the award, 1,829 vest
over five years at 20% per year from the date of the award, and 17,833 are performance based awards that must meet minimum performance
criteria before they begin to vest. If the performance metrics are not met, up to 100% of the award may be forfeited and if the
performance metrics are exceeded, the awards may be increased by up to 150% of the original award. Of the 45,023 restricted shares
awarded in 2015, 12,552 restricted shares vested one year from the date of the award, 11,939 vest over five years at 20% per year
from the date of the award, and 20,532 are performance based awards that must meet minimum performance criteria before they begin
to vest. If the performance metrics are not met, up to 100% of the award may be forfeited and if the performance metrics are exceeded,
the awards may be increased by up to 150% of the original award. Award date fair value is determined by the market price of the
Company’s common stock on the date of award ($10.17 on February 17, 2016, $10.40 on May 19, 2016, $9.41 on March 18, 2015, and
$9.56 on May 22, 2015).
There
were 947 restricted share awards that were fully vested during the three-month period ended September 30, 2016 and 19,166 restricted
share awards that were fully vested during the nine-month period ended September 30, 2016. There were 3,274 restricted share awards
that were fully vested during the three-month period ended September 30, 2015 and 20,345 restricted share awards that were fully
vested during the nine-month period ended September 30, 2015. There were 386 and 1,414 restricted share awards forfeited during
the three-month and nine-month periods ended September 30, 2016, respectively, and no restricted share awards forfeited during
the three-month and nine-month periods ended September 30, 2015. The intrinsic value of nonvested restricted shares at September
30, 2016 was $723,000.
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
|
|
|
19,166
|
|
|
|
9.10
|
|
Less: Expired, forfeited or cancelled
|
|
|
1,414
|
|
|
|
9.32
|
|
Nonvested at September 30, 2016
|
|
|
66,692
|
|
|
$
|
9.71
|
|
Other
Equity Awards
There
were no stock appreciation rights; restricted performance stock; unrestricted Company stock; or performance units awarded during
the three-month or nine-month month periods ended September 30, 2016 or 2015 or outstanding at September 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 $10.84 as of September 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 $23,697,000 and standby letters of credit of approximately $238,000 at
September 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 September
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 (6,589,125
and 6,800,016 shares for the three-month and nine-month periods ended September 30, 2016, and (7,481,529 and 7,653,109 shares
for the three-month and nine-month periods ended September 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 32,515 and 28,108, respectively, dilutive
shares for the three-month and nine-month periods ended September 30, 2016 and 19,930 and 14,878, respectively, dilutive shares
for the three-month and nine-month periods ended September 30, 2015. For the three-month periods ended September 30, 2016 and
2015, there were 99,308 and 192,106 stock options, respectively, that were excluded from the calculation as they were considered
antidilutive. For the nine-month periods ended September 30, 2016 and 2015, there were 99,308 and 192,106 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 September 30, 2016
and December 31, 2015 consisted of the following (dollars in thousands):
Available-for-Sale
|
|
September 30, 2016
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
224,159
|
|
|
$
|
4,739
|
|
|
$
|
(165
|
)
|
|
$
|
228,733
|
|
Obligations of states and political subdivisions
|
|
|
22,197
|
|
|
|
1,017
|
|
|
|
(41
|
)
|
|
|
23,173
|
|
Corporate bonds
|
|
|
1,501
|
|
|
|
28
|
|
|
|
—
|
|
|
|
1,529
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate stock
|
|
|
49
|
|
|
|
18
|
|
|
|
—
|
|
|
|
67
|
|
|
|
$
|
247,906
|
|
|
$
|
5,802
|
|
|
$
|
(206
|
)
|
|
$
|
253,502
|
|
|
|
|
|
|
|
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 $5,596,000 were recorded, net of $2,239,000 in tax liabilities,
as accumulated other comprehensive income within shareholders’ equity at September 30, 2016. Proceeds and gross realized gains
from the sale, call, and impairment of available-for-sale investment securities totaled $5,534,000 and $33,000, respectively,
for the three-month period ended September 30, 2016 and for the nine-month period ended September 30, 2016, proceeds and gross
realized gains from the sale, call, and impairment of available-for-sale investment securities totaled $13,821,000 and $314,000,
respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended
September 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 September 30, 2015 totaled
$8,381,000 and $33,000, respectively, and for the nine-month period ended September 30, 2015 totaled $23,764,000 and $251,000,
respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended
September 30, 2015.
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
508
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2016 and September 30,
2015. Investment securities with unrealized losses at September 30, 2016 and December 31, 2015 are summarized and classified according
to the duration of the loss period as follows (dollars in thousands):
September 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
|
|
$
|
18,319
|
|
|
$
|
(81
|
)
|
|
|
5,475
|
|
|
|
(84
|
)
|
|
$
|
23,794
|
|
|
$
|
(165
|
)
|
Obligations of states and political subdivisions
|
|
|
3,564
|
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,564
|
|
|
|
(41
|
)
|
|
|
$
|
21,883
|
|
|
$
|
(122
|
)
|
|
$
|
5,475
|
|
|
$
|
(84
|
)
|
|
$
|
27,358
|
|
|
$
|
(206
|
)
|
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 September 30, 2016 or December 31, 2015. At
September 30, 2016, the Company held 215 securities of which twelve were in a loss position for less than twelve months and three
were in a loss position for twelve months or more. Of the twelve securities in a loss position for less than twelve months,
nine were U.S. Government Agencies and Sponsored Agencies securities and three were obligations of states or political subdivisions
and of the three securities that were in a loss position for greater than twelve months, all three 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 September 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
|
|
$
|
2,577
|
|
|
$
|
2,615
|
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
2,656
|
|
|
|
2,768
|
|
|
|
|
|
|
|
|
|
After five years through ten years
|
|
|
12,953
|
|
|
|
13,758
|
|
|
|
|
|
|
|
|
|
After ten years
|
|
|
5,512
|
|
|
|
5,561
|
|
|
|
|
|
|
|
|
|
|
|
|
23,698
|
|
|
|
24,702
|
|
|
|
|
|
|
|
|
|
Investment securities not due at a single maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
|
224,159
|
|
|
|
228,733
|
|
|
$
|
508
|
|
|
$
|
551
|
|
Corporate stock
|
|
|
49
|
|
|
|
67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
247,906
|
|
|
$
|
253,502
|
|
|
$
|
508
|
|
|
$
|
551
|
|
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
September 30, 2016 and December 31, 2015, the recorded investment in nonperforming loans and leases was approximately $778,000
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 September 30, 2016, the recorded investment in loans and leases that were considered to be impaired totaled
$18,357,000, which includes $753,000 in nonaccrual loans and leases and $17,604,000 in performing loans and leases. Of the total
impaired loans of $18,357,000, loans totaling $11,569,000 were deemed to require no specific reserve and loans totaling $6,788,000
were deemed to require a related valuation allowance of $564,000. 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
September 30, 2016 and December 31, 2015, the balance in other real estate owned (“OREO”) was $653,000 and $3,551,000,
respectively. At September 30, 2016, the Company did not own any residential OREO properties nor were 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 $126,000. 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.
During the third quarter of 2016, the Company did not add any properties to OREO and sold one single commercial property in Amador
County for a gain of $43,000. The September 30, 2016 OREO balance of $653,000 consisted of one parcel of land zoned for commercial
use. Nonperforming assets at September 30, 2016 and December 31, 2015 are summarized as follows:
(dollars in thousands)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Nonaccrual loans and leases that are current to terms (less than 30 days past due)
|
|
$
|
297
|
|
|
$
|
379
|
|
Nonaccrual loans and leases that are past due
|
|
|
481
|
|
|
|
1,264
|
|
Loans and leases past due 90 days and accruing interest
|
|
|
—
|
|
|
|
—
|
|
Other assets
|
|
|
878
|
|
|
|
878
|
|
Other real estate owned
|
|
|
653
|
|
|
|
3,551
|
|
Total nonperforming assets
|
|
$
|
2,309
|
|
|
$
|
6,072
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans and leases to total loans and leases
|
|
|
0.24
|
%
|
|
|
0.56
|
%
|
Total nonperforming assets to total assets
|
|
|
0.35
|
%
|
|
|
0.96
|
%
|
Impaired
loans and leases as of and for the periods ended September 30, 2016 and December 31, 2015 are summarized as follows:
(dollars in thousands)
|
|
As of September 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
|
|
|
11,233
|
|
|
|
11,931
|
|
|
|
—
|
|
|
|
12,269
|
|
|
|
12,902
|
|
|
|
—
|
|
Real estate-residential
|
|
|
336
|
|
|
|
423
|
|
|
|
—
|
|
|
|
338
|
|
|
|
338
|
|
|
|
—
|
|
Subtotal
|
|
$
|
11,569
|
|
|
$
|
12,354
|
|
|
$
|
—
|
|
|
$
|
12,607
|
|
|
$
|
13,240
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
31
|
|
|
$
|
31
|
|
|
$
|
3
|
|
|
$
|
121
|
|
|
$
|
121
|
|
|
$
|
25
|
|
Real estate-commercial
|
|
|
4,053
|
|
|
|
4,148
|
|
|
|
366
|
|
|
|
5,597
|
|
|
|
5,693
|
|
|
|
598
|
|
Real estate-multi-family
|
|
|
483
|
|
|
|
483
|
|
|
|
3
|
|
|
|
488
|
|
|
|
488
|
|
|
|
5
|
|
Real estate-residential
|
|
|
1,827
|
|
|
|
1,827
|
|
|
|
139
|
|
|
|
2,114
|
|
|
|
2,201
|
|
|
|
204
|
|
Agriculture
|
|
|
360
|
|
|
|
360
|
|
|
|
30
|
|
|
|
370
|
|
|
|
370
|
|
|
|
38
|
|
Consumer
|
|
|
34
|
|
|
|
34
|
|
|
|
23
|
|
|
|
68
|
|
|
|
68
|
|
|
|
29
|
|
Subtotal
|
|
$
|
6,788
|
|
|
$
|
6,883
|
|
|
$
|
564
|
|
|
$
|
8,758
|
|
|
$
|
8,941
|
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
31
|
|
|
$
|
31
|
|
|
$
|
3
|
|
|
$
|
121
|
|
|
$
|
121
|
|
|
$
|
25
|
|
Real estate-commercial
|
|
|
15,286
|
|
|
|
16,079
|
|
|
|
366
|
|
|
|
17,866
|
|
|
|
18,595
|
|
|
|
598
|
|
Real estate-multi-family
|
|
|
483
|
|
|
|
483
|
|
|
|
3
|
|
|
|
488
|
|
|
|
488
|
|
|
|
5
|
|
Real estate-residential
|
|
|
2,163
|
|
|
|
2,250
|
|
|
|
139
|
|
|
|
2,452
|
|
|
|
2,539
|
|
|
|
204
|
|
Agriculture
|
|
|
360
|
|
|
|
360
|
|
|
|
30
|
|
|
|
370
|
|
|
|
370
|
|
|
|
38
|
|
Consumer
|
|
|
34
|
|
|
|
34
|
|
|
|
23
|
|
|
|
68
|
|
|
|
68
|
|
|
|
29
|
|
|
|
$
|
18,357
|
|
|
$
|
19,237
|
|
|
$
|
564
|
|
|
$
|
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 nine months ended
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
32
|
|
|
$
|
125
|
|
|
$
|
33
|
|
|
$
|
145
|
|
Real estate-commercial
|
|
|
15,369
|
|
|
|
19,335
|
|
|
|
15,202
|
|
|
|
19,749
|
|
Real estate-multi-family
|
|
|
484
|
|
|
|
491
|
|
|
|
486
|
|
|
|
493
|
|
Real estate-residential
|
|
|
2,169
|
|
|
|
2,473
|
|
|
|
2,182
|
|
|
|
2,511
|
|
Agriculture
|
|
|
362
|
|
|
|
375
|
|
|
|
365
|
|
|
|
377
|
|
Consumer
|
|
|
35
|
|
|
|
91
|
|
|
|
36
|
|
|
|
77
|
|
Total
|
|
$
|
18,451
|
|
|
$
|
22,890
|
|
|
$
|
18,304
|
|
|
$
|
23,352
|
|
|
|
|
|
|
|
|
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 nine months ended
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
7
|
|
Real estate-commercial
|
|
|
123
|
|
|
|
259
|
|
|
|
567
|
|
|
|
728
|
|
Real estate-multi-family
|
|
|
15
|
|
|
|
8
|
|
|
|
25
|
|
|
|
21
|
|
Real estate-residential
|
|
|
24
|
|
|
|
14
|
|
|
|
76
|
|
|
|
69
|
|
Agriculture
|
|
|
6
|
|
|
|
5
|
|
|
|
16
|
|
|
|
13
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
168
|
|
|
$
|
288
|
|
|
$
|
686
|
|
|
$
|
838
|
|
7.
TROUBLED DEBT RESTRUCTURINGS
During
the three and nine-month periods ended September 30, 2016, there were no loans that were modified as troubled debt restructurings.
There were no loans modified as troubled debt restructurings during the three months ended September 30, 2015.
The
following table presents loans by class modified as troubled debt restructurings during the nine months ended September 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
|
|
|
|
1,645
|
|
|
|
1,645
|
|
Real estate - residential
|
|
|
2
|
|
|
|
416
|
|
|
|
416
|
|
Consumer
|
|
|
1
|
|
|
|
23
|
|
|
|
23
|
|
Total
|
|
|
6
|
|
|
$
|
2,131
|
|
|
$
|
2,131
|
|
The
troubled debt restructurings described above increased the allowance for loan and lease losses by $151,000 and resulted in no
charge-offs during the nine months ended September 30, 2015.
There
were no payment defaults on troubled debt restructurings within 12 months following the modification for the three-month and nine-month
periods ended September 30, 2016 and September 30, 2015.
8.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The
Company’s loan and lease portfolio allocated by management’s internal risk ratings as of September 30, 2016 and December
31, 2015 are summarized below:
September 30, 2016
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
30,334
|
|
|
$
|
169,327
|
|
|
$
|
50,442
|
|
|
$
|
6,684
|
|
|
$
|
13,014
|
|
Watch
|
|
|
1,416
|
|
|
|
21,371
|
|
|
|
485
|
|
|
|
10,181
|
|
|
|
1,797
|
|
Special mention
|
|
|
637
|
|
|
|
3,392
|
|
|
|
—
|
|
|
|
—
|
|
|
|
717
|
|
Substandard
|
|
|
2,785
|
|
|
|
719
|
|
|
|
—
|
|
|
|
—
|
|
|
|
465
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
35,172
|
|
|
$
|
194,809
|
|
|
$
|
50,927
|
|
|
$
|
16,865
|
|
|
$
|
15,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
|
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
462
|
|
|
$
|
1,875
|
|
|
$
|
1,382
|
|
|
|
|
|
|
$
|
273,520
|
|
Watch
|
|
|
—
|
|
|
|
360
|
|
|
|
405
|
|
|
|
|
|
|
|
36,015
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
221
|
|
|
|
|
|
|
|
4,967
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
62
|
|
|
|
|
|
|
|
4,031
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
462
|
|
|
$
|
2,235
|
|
|
$
|
2,070
|
|
|
|
|
|
|
$
|
318,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
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
|
|
|
(769
|
)
|
|
|
(64
|
)
|
|
|
250
|
|
|
|
39
|
|
|
|
(53
|
)
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
(97
|
)
|
|
|
39
|
|
|
|
(668
|
)
|
Loans charged-off
|
|
|
—
|
|
|
|
(68
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(68
|
)
|
Recoveries
|
|
|
658
|
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
|
|
—
|
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2016
|
|
$
|
749
|
|
|
$
|
2,251
|
|
|
$
|
478
|
|
|
$
|
852
|
|
|
$
|
266
|
|
|
$
|
1
|
|
|
$
|
64
|
|
|
$
|
53
|
|
|
$
|
269
|
|
|
$
|
4,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
3
|
|
|
$
|
365
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
140
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
746
|
|
|
$
|
1,886
|
|
|
$
|
475
|
|
|
$
|
852
|
|
|
$
|
126
|
|
|
$
|
1
|
|
|
$
|
34
|
|
|
$
|
30
|
|
|
$
|
269
|
|
|
$
|
4,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
35,172
|
|
|
$
|
194,809
|
|
|
$
|
50,927
|
|
|
$
|
16,865
|
|
|
$
|
15,993
|
|
|
$
|
462
|
|
|
$
|
2,235
|
|
|
$
|
2,070
|
|
|
$
|
—
|
|
|
$
|
318,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
31
|
|
|
$
|
15,286
|
|
|
$
|
483
|
|
|
$
|
—
|
|
|
$
|
2,163
|
|
|
$
|
—
|
|
|
$
|
360
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
18,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
35,141
|
|
|
$
|
179,523
|
|
|
$
|
50,444
|
|
|
$
|
16,865
|
|
|
$
|
13,830
|
|
|
$
|
462
|
|
|
$
|
1,875
|
|
|
$
|
2,036
|
|
|
$
|
—
|
|
|
$
|
300,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, June 30, 2016
|
|
$
|
808
|
|
|
$
|
2,647
|
|
|
$
|
329
|
|
|
$
|
725
|
|
|
$
|
283
|
|
|
$
|
1
|
|
|
$
|
73
|
|
|
$
|
60
|
|
|
$
|
206
|
|
|
$
|
5,132
|
|
Provision for loan losses
|
|
|
(644
|
)
|
|
|
(330
|
)
|
|
|
149
|
|
|
|
127
|
|
|
|
(17
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
(7
|
)
|
|
|
63
|
|
|
|
(668
|
)
|
Loans charged off
|
|
|
—
|
|
|
|
(68
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(68
|
)
|
Recoveries
|
|
|
585
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2016
|
|
$
|
749
|
|
|
$
|
2,251
|
|
|
$
|
478
|
|
|
$
|
852
|
|
|
$
|
266
|
|
|
$
|
1
|
|
|
$
|
64
|
|
|
$
|
53
|
|
|
$
|
269
|
|
|
$
|
4,983
|
|
December 31, 2015
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
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
|
|
|
38
|
|
|
|
(58
|
)
|
|
|
27
|
|
|
|
160
|
|
|
|
(133
|
)
|
|
|
—
|
|
|
|
14
|
|
|
|
(24
|
)
|
|
|
(24
|
)
|
|
|
—
|
|
Loans charged off
|
|
|
(609
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
(616
|
)
|
Recoveries
|
|
|
88
|
|
|
|
41
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2015
|
|
$
|
947
|
|
|
$
|
2,300
|
|
|
$
|
157
|
|
|
$
|
743
|
|
|
$
|
379
|
|
|
$
|
1
|
|
|
$
|
76
|
|
|
$
|
96
|
|
|
$
|
230
|
|
|
$
|
4,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, June 30, 2015
|
|
$
|
1,652
|
|
|
$
|
1,968
|
|
|
$
|
107
|
|
|
$
|
807
|
|
|
$
|
385
|
|
|
$
|
1
|
|
|
$
|
50
|
|
|
$
|
122
|
|
|
$
|
267
|
|
|
$
|
5,359
|
|
Provision for loan losses
|
|
|
(161
|
)
|
|
|
331
|
|
|
|
50
|
|
|
|
(64
|
)
|
|
|
(119
|
)
|
|
|
—
|
|
|
|
26
|
|
|
|
(26
|
)
|
|
|
(37
|
)
|
|
|
—
|
|
Loans charged off
|
|
|
(609
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(609
|
)
|
Recoveries
|
|
|
65
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2015
|
|
$
|
947
|
|
|
$
|
2,300
|
|
|
$
|
157
|
|
|
$
|
743
|
|
|
$
|
379
|
|
|
$
|
1
|
|
|
$
|
76
|
|
|
$
|
96
|
|
|
$
|
230
|
|
|
$
|
4,929
|
|
The
Company’s aging analysis of the loan and lease portfolio at September 30, 2016 and December 31, 2015 are summarized below:
September 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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,172
|
|
|
$
|
35,172
|
|
|
|
—
|
|
|
$
|
—
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
446
|
|
|
|
446
|
|
|
|
194,363
|
|
|
|
194,809
|
|
|
|
—
|
|
|
|
719
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,927
|
|
|
|
50,927
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,865
|
|
|
|
16,865
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,993
|
|
|
|
15,993
|
|
|
|
—
|
|
|
|
—
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
462
|
|
|
|
462
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,235
|
|
|
|
2,235
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
36
|
|
|
|
35
|
|
|
|
—
|
|
|
|
71
|
|
|
|
1,999
|
|
|
|
2,070
|
|
|
|
—
|
|
|
|
59
|
|
Total
|
|
$
|
36
|
|
|
$
|
35
|
|
|
$
|
446
|
|
|
$
|
517
|
|
|
$
|
318,016
|
|
|
$
|
318,533
|
|
|
$
|
—
|
|
|
$
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 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 September 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 $14,000,000 were outstanding from the FHLB at September
30, 2016, bearing interest rates ranging from 0.75% to 1.52% and maturing between October 31, 2016 and July 13, 2020. 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 September 30, 2016 and December 31, 2015 totaled $87,263,000 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 September 30, 2016 and December 31, 2015 were $11,698,000
and $11,371,000, respectively. There were no advances outstanding under this borrowing arrangement as of September 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 nine-month
periods ended September 30, 2016 and 2015.
Federal
and state income taxes for the quarter ended September 30, 2016 increased $182,000 (22.6%) from $807,000 in the third quarter
of 2015 to $989,000 in the third quarter of 2016 and increased $252,000 (12.5%) from $2,022,000 in the nine months ended September
30, 2015 to $2,274,000 for the nine months ended September 30, 2016. The combined federal and state effective tax rate for the
quarter ended September 30, 2016 was 35.3%, compared to 35.5% for the third quarter of 2015. For the nine months ended September
30, 2016, the combined federal and state effective tax rate was 33.6% compared to 34.7% for the nine months ended September 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 $189,000 in the third quarter of 2016 compared to $99,000 in the third quarter of 2015 and tax exempt
loan interest was $534,000 in the first nine months of 2016 compared to $222,000 in the first nine months of 2015. The benefit
from tax exempt loan interest was partially offset by higher taxable income in both periods as well. Taxable income was $2,802,000
in the third quarter of 2016 compared to $2,276,000 in the third quarter of 2015 and taxable income was $6,763,000 in the first
nine months of 2016 compared to $5,833,000 in the first nine 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 September 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:
|
|
|
|
|
September 30, 2016
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
43,094
|
|
|
$
|
43,094
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,094
|
|
Interest-bearing deposits in banks
|
|
|
999
|
|
|
|
—
|
|
|
|
999
|
|
|
|
—
|
|
|
|
999
|
|
Available-for-sale securities
|
|
|
253,502
|
|
|
|
23
|
|
|
|
253,479
|
|
|
|
—
|
|
|
|
253,502
|
|
Held-to-maturity securities
|
|
|
508
|
|
|
|
—
|
|
|
|
551
|
|
|
|
—
|
|
|
|
551
|
|
FHLB stock
|
|
|
3,779
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net loans and leases:
|
|
|
313,302
|
|
|
|
—
|
|
|
|
—
|
|
|
|
316,221
|
|
|
|
316,221
|
|
Accrued interest receivable
|
|
|
1,792
|
|
|
|
—
|
|
|
|
866
|
|
|
|
926
|
|
|
|
1,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
209,586
|
|
|
$
|
209,586
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
209,586
|
|
Savings
|
|
|
60,605
|
|
|
|
60,605
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,605
|
|
Money market
|
|
|
131,655
|
|
|
|
131,655
|
|
|
|
—
|
|
|
|
—
|
|
|
|
131,655
|
|
NOW accounts
|
|
|
61,398
|
|
|
|
61,398
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,398
|
|
Time Deposits
|
|
|
82,921
|
|
|
|
—
|
|
|
|
83,429
|
|
|
|
—
|
|
|
|
83,429
|
|
Short-term borrowings
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
Long-term borrowings
|
|
|
9,000
|
|
|
|
—
|
|
|
|
9,080
|
|
|
|
—
|
|
|
|
9,080
|
|
Accrued interest payable
|
|
|
40
|
|
|
|
—
|
|
|
|
40
|
|
|
|
—
|
|
|
|
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 September
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 September 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
228,733
|
|
|
$
|
—
|
|
|
$
|
228,733
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Obligations of states and political subdivisions
|
|
|
23,173
|
|
|
|
—
|
|
|
|
23,173
|
|
|
|
—
|
|
|
|
—
|
|
Corporate bonds
|
|
|
1,529
|
|
|
|
—
|
|
|
|
1,529
|
|
|
|
—
|
|
|
|
—
|
|
Corporate stock
|
|
|
67
|
|
|
|
23
|
|
|
|
44
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
253,502
|
|
|
$
|
23
|
|
|
$
|
253,479
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,271
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,271
|
|
|
$
|
—
|
|
Residential
|
|
|
336
|
|
|
|
—
|
|
|
|
—
|
|
|
|
336
|
|
|
|
(68
|
)
|
Other real estate owned
Land
|
|
|
653
|
|
|
|
—
|
|
|
|
—
|
|
|
|
653
|
|
|
|
(376
|
)
|
Total nonrecurring
|
|
$
|
5,260
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,260
|
|
|
$
|
(444
|
)
|
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 nine-month periods ended September 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 September 30, 2016 and its income and expense accounts for the three-month
and nine-month periods ended September 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 items), 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 September 30, 2016 or 2015 or
for the three-month and nine-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 99 full-time employees as of September 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 $1,813,000 for the quarter ended September 30, 2016, which was an increase of $344,000 compared
to $1,469,000 reported for the same period of 2015. Diluted earnings per share for the third quarter of 2016 were $0.27 compared
to $0.20 recorded in the third quarter of 2015. The return on average equity (“ROAE”) and the return on average assets
(“ROAA”) for the third quarter of 2016 were 8.62% and 1.13%, respectively, as compared to 6.71% and 0.92%, respectively,
for the same period in 2015.
Net
income for the nine months ended September 30, 2016 and 2015 was $4,489,000 and $3,811,000, respectively, with diluted earnings
per share of $0.66 in 2016 and $0.50 in 2015. For the first nine months of 2016, ROAE was 7.12% and ROAA was 0.95% compared to
5.81% and 0.82%, respectively, for the same period in 2015.
Total
assets of the Company increased by $19,206,000 (3.0%) from $634,460,000 at December 31, 2015 to $653,846,000 at September 30,
2016. Net loans totaled $313,302,000 at September 30, 2016, an increase of $24,200,000 (8.4%) from $289,102,000 at December 31,
2015. Deposit balances at September 30, 2016 totaled $546,165,000, an increase of $15,475,000 (2.9%) from the $530,690,000 at
December 31, 2015.
The
Company ended the third quarter of 2016 with a leverage capital ratio of 10.6%, a Tier 1 capital ratio of 18.4%, and a total risk-based
capital ratio of 19.7% 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
September 30,
|
|
|
For the nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest income*
|
|
$
|
5,412
|
|
|
$
|
5,553
|
|
|
$
|
16,152
|
|
|
$
|
15,912
|
|
Interest expense
|
|
|
(223
|
)
|
|
|
(240
|
)
|
|
|
(678
|
)
|
|
|
(732
|
)
|
Net interest income*
|
|
|
5,189
|
|
|
|
5,313
|
|
|
|
15,474
|
|
|
|
15,180
|
|
Provision for loan and lease losses
|
|
|
668
|
|
|
|
—
|
|
|
|
668
|
|
|
|
—
|
|
Noninterest income
|
|
|
399
|
|
|
|
490
|
|
|
|
1,516
|
|
|
|
1,582
|
|
Noninterest expense
|
|
|
(3,346
|
)
|
|
|
(3,432
|
)
|
|
|
(10,552
|
)
|
|
|
(10,660
|
)
|
Provision for income taxes
|
|
|
(989
|
)
|
|
|
(807
|
)
|
|
|
(2,274
|
)
|
|
|
(2,022
|
)
|
Tax equivalent adjustment
|
|
|
(108
|
)
|
|
|
(95
|
)
|
|
|
(343
|
)
|
|
|
(269
|
)
|
Net income
|
|
$
|
1,813
|
|
|
$
|
1,469
|
|
|
$
|
4,489
|
|
|
$
|
3,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
635,561
|
|
|
$
|
630,704
|
|
|
$
|
632,120
|
|
|
$
|
618,551
|
|
Net income (annualized) as a percentage of average total assets
|
|
|
1.13
|
%
|
|
|
0.92
|
%
|
|
|
0.95
|
%
|
|
|
0.82
|
%
|
*
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
3.65% for the three months ended September 30, 2016, 3.72% for the three months ended September 30, 2015, 3.64% for the nine months
ended September 30, 2016 and 3.62% for the nine months ended September 30, 2015.
The
fully taxable equivalent interest income component for the third quarter of 2016 decreased $141,000 (2.5%) to $5,412,000 compared
to $5,553,000 for the three months ended September 30, 2015. The decrease in the fully taxable equivalent interest income for
the third quarter of 2016 compared to the same period in 2015 is broken down by rate (down $244,000) and volume (up $103,000).
The yield on earning assets decreased from 3.89% during the third quarter of 2015 to 3.81% during the third quarter of 2016. The
primary driver in this rate decrease was a decrease in the yield on loans which saw a decrease from 5.07% in the third quarter
of 2015 to 5.01% in the third quarter of 2016 and a decrease in the yield on investments, which saw a decrease from 2.69% in the
third quarter of 2015 to 2.38% in the third quarter of 2016. While average loans increased $20,410,000 (7.1%) from $286,914,000
during the third quarter of 2015 to $307,324,000 during the third quarter of 2016, due to the overall lower interest rate environment,
the new loans added were at lower yields than the existing loans. The decrease in the yield on the investment portfolio is also
due primarily to the lower rate environment as principal paydowns were reinvested at lower rates. The volume increase of $103,000
was primarily from loans ($252,000) partially offset by a decrease in investment balances ($149,000). The average balance of earning
assets decreased $1,652,000 (0.3%) from $566,722,000 in the third quarter of 2015 to $565,070,000 in the third quarter of 2016.
When compared to the third quarter of 2015, average investment securities decreased $22,061,000 (7.9%) from $278,808,000 for the
third quarter of 2015 compared to $256,747,000 for the third quarter of 2016.
Total
fully taxable equivalent interest income for the nine months ended September 30, 2016 increased $240,000 (1.5%) to $16,152,000
compared to $15,912,000 for the nine months ended September 30, 2015. The breakdown of the fully taxable equivalent interest income
for the nine months ended September 30, 2016 over the same period in 2015 resulted from a decrease in rate (down $380,000) and
an increase in volume (up $620,000). Average earning assets increased $8,139,000 (1.5%) from $559,936,000 during the first nine
months of 2015 to $568,075,000 for the same period in 2016. During the nine month periods, the Company also experienced a decrease
in interest income due to the rates earned on loans (down $258,000) and investments (down $123,000). The yield on loans decreased
from 5.06% in 2015 to 4.93% in 2016 and the yield on investments decreased from 2.59% in 2015 to 2.52% in 2016. Part of this decrease
in the yield on investments was related to an increase in the mortgage refinance market and the related faster amortization of
the premiums paid on the mortgage related bonds, as well as, a special one-time cash dividend in 2015 from the Federal Home Loan
Bank of San Francisco (the “FHLB”) in the amount of $136,000. Average loan balances increased by $26,079,000 (9.5%)
from $275,566,000 during 2015 to $301,645,000 during 2016. The volume increase of $620,000 is primarily related to the above mentioned
increase in loan balances from 2015 to 2016, which accounted for a $971,000 increase in interest income, which was partially offset
by a decrease in average investment balances. Average investment securities decreased $17,941,000 (6.3%) from $283,377,000 for
the first nine months of 2015 compared to $265,436,000 for the first nine months of 2016.
Interest
expense was $17,000 (7.1%) lower in the third quarter of 2016 versus the prior year period, decreasing from $240,000 to $223,000.
The average balances on interest bearing liabilities were $347,173,000 or $12,713,000 (3.5%) lower in the third quarter of 2016
compared to $359,886,000 for the same quarter in 2015. The decrease in balances caused a $15,000 reduction on the overall interest
expense while the decrease in rates caused a $2,000 reduction. Rates paid on interest bearing liabilities did not change during
the periods as the Company’s cost of funds was 0.26% for both quarters.
Interest
expense was $54,000 (7.4%) lower in the nine-month period ended September 30, 2016 decreasing from $732,000 in 2015 to $678,000
in 2016. The decrease is related to rates (down $53,000) and volume (down $1,000). The average balances on interest-bearing liabilities
were $349,503,000 (down $6,625,000 or 1.9% lower) in the nine-month period ended September 30, 2016 compared $356,128,000 in the
same period in 2015. Although the average balances were lower, the decreased balances did not result in a significant decrease
in interest expense as the decrease in interest bearing deposit balances (down $26,000) was offset by an increase in other borrowings
which increased by $25,000. Average other borrowings increased $3,330,000 (22.8%) from $14,606,000 in the first nine months of
2015 to $17,936,000 in the first nine months of 2016. The primary decrease in interest expense relates to lower rates (down $53,000).
Rates paid on interest bearing liabilities decreased 1 basis point from 0.27% 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 September 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)
|
|
$
|
289,795
|
|
|
$
|
3,617
|
|
|
|
4.97
|
%
|
|
$
|
275,313
|
|
|
$
|
3,534
|
|
|
|
5.09
|
%
|
Tax-exempt loans and leases (2)
|
|
|
17,529
|
|
|
|
254
|
|
|
|
5.76
|
%
|
|
|
11,601
|
|
|
|
130
|
|
|
|
4.45
|
%
|
Taxable investment securities
|
|
|
232,858
|
|
|
|
1,340
|
|
|
|
2.29
|
%
|
|
|
252,760
|
|
|
|
1,633
|
|
|
|
2.56
|
%
|
Tax-exempt investment securities (2)
|
|
|
23,811
|
|
|
|
199
|
|
|
|
3.32
|
%
|
|
|
25,965
|
|
|
|
254
|
|
|
|
3.88
|
%
|
Corporate stock (2)
|
|
|
78
|
|
|
|
—
|
|
|
|
—
|
|
|
|
83
|
|
|
|
—
|
|
|
|
—
|
|
Federal funds sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Investments in time deposits
|
|
|
999
|
|
|
|
2
|
|
|
|
0.80
|
%
|
|
|
1,000
|
|
|
|
2
|
|
|
|
0.79
|
%
|
Total earning assets
|
|
|
565,070
|
|
|
|
5,412
|
|
|
|
3.81
|
%
|
|
|
566,722
|
|
|
|
5,553
|
|
|
|
3.89
|
%
|
Cash & due from banks
|
|
|
37,343
|
|
|
|
|
|
|
|
|
|
|
|
29,465
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
38,618
|
|
|
|
|
|
|
|
|
|
|
|
40,010
|
|
|
|
|
|
|
|
|
|
Allowance for loan & lease losses
|
|
|
(5,470
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,493
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
635,561
|
|
|
|
|
|
|
|
|
|
|
$
|
630,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
$
|
188,292
|
|
|
|
35
|
|
|
|
0.07
|
%
|
|
$
|
196,395
|
|
|
|
61
|
|
|
|
0.12
|
%
|
Savings
|
|
|
60,925
|
|
|
|
4
|
|
|
|
0.03
|
%
|
|
|
58,579
|
|
|
|
6
|
|
|
|
0.04
|
%
|
Time deposits
|
|
|
82,771
|
|
|
|
140
|
|
|
|
0.67
|
%
|
|
|
86,684
|
|
|
|
135
|
|
|
|
0.62
|
%
|
Other borrowings
|
|
|
15,185
|
|
|
|
44
|
|
|
|
1.15
|
%
|
|
|
18,228
|
|
|
|
38
|
|
|
|
0.83
|
%
|
Total interest bearing liabilities
|
|
|
347,173
|
|
|
|
223
|
|
|
|
0.26
|
%
|
|
|
359,886
|
|
|
|
240
|
|
|
|
0.26
|
%
|
Noninterest bearing demand deposits
|
|
|
198,655
|
|
|
|
|
|
|
|
|
|
|
|
177,737
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,031
|
|
|
|
|
|
|
|
|
|
|
|
6,253
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
551,859
|
|
|
|
|
|
|
|
|
|
|
|
543,876
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
83,702
|
|
|
|
|
|
|
|
|
|
|
|
86,828
|
|
|
|
|
|
|
|
|
|
|
|
$
|
635,561
|
|
|
|
|
|
|
|
|
|
|
$
|
630,704
|
|
|
|
|
|
|
|
|
|
Net interest income & margin (3)
|
|
|
|
|
|
$
|
5,189
|
|
|
|
3.65
|
%
|
|
|
|
|
|
$
|
5,313
|
|
|
|
3.72
|
%
|
|
|
(1)
|
Loan interest includes loan fees of $102,000 and $157,000,
respectively, during the three months ended September 30, 2016 and September 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 (92 days) and annualized to actual days in the year (366 days in 2016 and 365 days in 2015).
|
Nine Months Ended September 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)
|
|
$
|
284,782
|
|
|
$
|
10,424
|
|
|
|
4.89
|
%
|
|
$
|
267,256
|
|
|
$
|
10,130
|
|
|
|
5.07
|
%
|
Tax-exempt loans and leases (2)
|
|
|
16,863
|
|
|
|
716
|
|
|
|
5.67
|
%
|
|
|
8,310
|
|
|
|
297
|
|
|
|
4.78
|
%
|
Taxable investment securities
|
|
|
241,129
|
|
|
|
4,333
|
|
|
|
2.40
|
%
|
|
|
257,103
|
|
|
|
4,706
|
|
|
|
2.45
|
%
|
Tax-exempt investment securities (2)
|
|
|
24,233
|
|
|
|
660
|
|
|
|
3.64
|
%
|
|
|
26,196
|
|
|
|
763
|
|
|
|
3.89
|
%
|
Corporate stock (2)
|
|
|
74
|
|
|
|
14
|
|
|
|
25.27
|
%
|
|
|
78
|
|
|
|
12
|
|
|
|
20.57
|
%
|
Federal funds sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing deposits in banks
|
|
|
994
|
|
|
|
5
|
|
|
|
0.67
|
%
|
|
|
993
|
|
|
|
4
|
|
|
|
0.54
|
%
|
Total earning assets
|
|
|
568,075
|
|
|
|
16,152
|
|
|
|
3.80
|
%
|
|
|
559,936
|
|
|
|
15,912
|
|
|
|
3.80
|
%
|
Cash & due from banks
|
|
|
31,209
|
|
|
|
|
|
|
|
|
|
|
|
24,347
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
38,027
|
|
|
|
|
|
|
|
|
|
|
|
39,650
|
|
|
|
|
|
|
|
|
|
Allowance for loan & lease losses
|
|
|
(5,191
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,382
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
632,120
|
|
|
|
|
|
|
|
|
|
|
$
|
618,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
$
|
188,405
|
|
|
|
110
|
|
|
|
0.08
|
%
|
|
$
|
195,563
|
|
|
|
192
|
|
|
|
0.13
|
%
|
Savings
|
|
|
59,940
|
|
|
|
14
|
|
|
|
0.03
|
%
|
|
|
58,464
|
|
|
|
23
|
|
|
|
0.05
|
%
|
Time deposits
|
|
|
83,222
|
|
|
|
421
|
|
|
|
0.68
|
%
|
|
|
87,495
|
|
|
|
409
|
|
|
|
0.62
|
%
|
Other borrowings
|
|
|
17,936
|
|
|
|
133
|
|
|
|
0.99
|
%
|
|
|
14,606
|
|
|
|
108
|
|
|
|
0.99
|
%
|
Total interest-bearing liabilities
|
|
|
349,503
|
|
|
|
678
|
|
|
|
0.26
|
%
|
|
|
356,128
|
|
|
|
732
|
|
|
|
0.27
|
%
|
Noninterest-bearing demand deposits
|
|
|
192,103
|
|
|
|
|
|
|
|
|
|
|
|
168,546
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,262
|
|
|
|
|
|
|
|
|
|
|
|
6,157
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
547,868
|
|
|
|
|
|
|
|
|
|
|
|
550,831
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
84,252
|
|
|
|
|
|
|
|
|
|
|
|
87,720
|
|
|
|
|
|
|
|
|
|
|
|
$
|
632,120
|
|
|
|
|
|
|
|
|
|
|
$
|
618,551
|
|
|
|
|
|
|
|
|
|
Net interest income & margin (3)
|
|
|
|
|
|
$
|
15,474
|
|
|
|
3.64
|
%
|
|
|
|
|
|
$
|
15,180
|
|
|
|
3.62
|
%
|
|
|
(1)
|
Loan interest includes loan fees of $197,000 and $250,000,
respectively, during the nine months ended September 30, 2016 and September 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 (274 days for 2016 and 273 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 September 30, 2016 over 2015 (dollars in thousands)
|
Increase (decrease) due to change in:
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
Rate (4)
|
|
|
Net Change
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable loans and leases (1)
|
|
$
|
186
|
|
|
$
|
(103
|
)
|
|
$
|
83
|
|
Tax-exempt loans and leases (2)
|
|
|
66
|
|
|
|
58
|
|
|
|
124
|
|
Taxable investment securities
|
|
|
(128
|
)
|
|
|
(165
|
)
|
|
|
(293
|
)
|
Tax exempt investment securities (3)
|
|
|
(21
|
)
|
|
|
(34
|
)
|
|
|
(55
|
)
|
Corporate stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing deposits in banks
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
103
|
|
|
|
(244
|
)
|
|
|
(141
|
)
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
|
(3
|
)
|
|
|
(23
|
)
|
|
|
(26
|
)
|
Savings deposits
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Time deposits
|
|
|
(6
|
)
|
|
|
11
|
|
|
|
5
|
|
Other borrowings
|
|
|
(6
|
)
|
|
|
12
|
|
|
|
6
|
|
Total
|
|
|
(15
|
)
|
|
|
(2
|
)
|
|
|
(17
|
)
|
Interest differential
|
|
$
|
118
|
|
|
$
|
(242
|
)
|
|
$
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016 over 2015 (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) due to change in:
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
Rate (4)
|
|
|
Net Change
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable loans and leases (1)
|
|
$
|
665
|
|
|
$
|
(371
|
)
|
|
$
|
294
|
|
Tax-exempt loans and leases (2)
|
|
|
306
|
|
|
|
113
|
|
|
|
419
|
|
Taxable investment securities
|
|
|
(293
|
)
|
|
|
(80
|
)
|
|
|
(373
|
)
|
Tax exempt investment securities (3)
|
|
|
(57
|
)
|
|
|
(46
|
)
|
|
|
(103
|
)
|
Corporate stock
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
2
|
|
Interest-bearing deposits in banks
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Total
|
|
|
620
|
|
|
|
(380
|
)
|
|
|
240
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
|
(7
|
)
|
|
|
(75
|
)
|
|
|
(82
|
)
|
Savings deposits
|
|
|
1
|
|
|
|
(10
|
)
|
|
|
(9
|
)
|
Time deposits
|
|
|
(20
|
)
|
|
|
32
|
|
|
|
12
|
|
Other borrowings
|
|
|
25
|
|
|
|
—
|
|
|
|
25
|
|
Total
|
|
|
(1
|
)
|
|
|
(53
|
)
|
|
|
(54
|
)
|
Interest differential
|
|
$
|
621
|
|
|
$
|
(327
|
)
|
|
$
|
294
|
|
|
(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 $102,000 and $157,000, respectively, during the three months ended September 30, 2016 and September 30, 2015, and
loan fees of $197,000 and $250,000, respectively, during the nine months ended September 30, 2016 and September 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 experienced net loan and lease recoveries of $519,000 or 0.67% (on an annualized basis) of average loans and leases for
the three months ended September 30, 2016 compared to net loan and lease losses of $430,000 or 0.59% (on an annualized basis)
of average loans and leases for the three months ended September 30, 2015. As a result of the loan recoveries experienced in 2016,
the Company reversed $668,000 from the allowance for loan and lease losses during the third quarter. The Company did not provide
any provision for loan and lease losses for the third quarter of 2015. For the first nine months of 2016, the Company reversed
$668,000 from the loan and lease loss allowance and net loan and lease recoveries were $676,000 or 0.30% (on an annualized basis)
of average loans and leases outstanding in 2016 compared to net loan and lease losses of $372,000 or 0.18% (on an annualized basis)
of average loans and leases outstanding in the first nine months of 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
September
30,
|
|
|
Nine
Months
Ended
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service charges on deposit accounts
|
|
$
|
124
|
|
|
$
|
132
|
|
|
$
|
381
|
|
|
$
|
376
|
|
Gain on sale/call/impairment of securities
|
|
|
33
|
|
|
|
33
|
|
|
|
314
|
|
|
|
251
|
|
Merchant fee income
|
|
|
98
|
|
|
|
98
|
|
|
|
277
|
|
|
|
285
|
|
Bank owned life insurance
|
|
|
80
|
|
|
|
80
|
|
|
|
239
|
|
|
|
239
|
|
Income from OREO properties
|
|
|
—
|
|
|
|
87
|
|
|
|
106
|
|
|
|
248
|
|
Other
|
|
|
64
|
|
|
|
60
|
|
|
|
199
|
|
|
|
183
|
|
Total noninterest income
|
|
$
|
399
|
|
|
$
|
490
|
|
|
$
|
1,516
|
|
|
$
|
1,582
|
|
Noninterest
income decreased $91,000 (18.6%) to $399,000 for the three months ended September 30, 2016 compared to $490,000 for the three
months ended September 30, 2015. The decrease from the third quarter of 2015 to the third quarter of 2016 was primarily related
to a decrease in rental income from OREO properties which decreased $87,000 (100.0%) from $87,000 in 2015 to zero in 2016. The
decrease in OREO income resulted from the sale of the Bank’s only remaining income producing OREO property in the first
quarter of 2016.
For
the nine months ended September 30, 2016, noninterest income decreased $66,000 (4.2%) from $1,582,000 to $1,516,000. The decrease
from the first nine months of 2015 compared to the same period in 2016 was primarily related to the decrease in rental income
from OREO properties which declined $142,000 (57.3%) from $248,000 in 2015 to $106,000 in 2016.
Noninterest
Expense
Noninterest
expense decreased $86,000 (2.5%) from $3,432,000 in the third quarter of 2015 to $3,346,000 in the third quarter of 2015. Salary
and employee benefits expense decreased $112,000 (5.1%) from $2,185,000 during the third quarter of 2015 to $2,073,000 during
the third quarter of 2016. The decrease in salaries and benefits resulted from a lower number of full time equivalent employees
and the associated benefit and taxes. Average full-time equivalent employees decreased from 100 in the third quarter of 2015 to
98 in the third quarter of 2016. Occupancy expense increased $1,000 (0.3%) and furniture and equipment expense decreased $6,000
(3.5%) from the third quarter of 2015 to the third quarter of 2016. FDIC assessments decreased $6,000 (7.2%) from the third quarter
of 2015 to the third quarter of 2016. OREO related expenses decreased $88,000 during the third quarter of 2016 from $58,000 in
the third quarter of 2015 to a credit of $30,000 in the third quarter of 2016. The primary reason for the decrease in OREO related
expenses was the reduction in OREO properties reducing carrying costs as well as a gain on sale of $43,000 recorded in the third
quarter of 2016. The gain on sale was greater than the operating costs for the quarter resulting in the credit balance. Other
expenses increased $125,000 (19.5%) to $766,000 in the third quarter of 2016 compared to $641,000 in the third quarter of 2015.
Much of the increase is related to higher legal fees and network administration fees. Legal fees increased from $17,000 to $43,000
and is related to the resolution of a former loan relationship. The increased network administration fees increased from $69,000
to $114,000 and is related to additional work performed by the network vendor, including full hosting of the Company’s computer
network. The fully taxable equivalent efficiency ratio for the third quarter of 2016 increased to 59.9% from 59.1% for the third
quarter of 2015.
Noninterest
expense for the nine-month period ended September 30, 2016 was $10,552,000 compared to $10,660,000 for the same period in 2015
for a decrease of $108,000 (1.0%). Salaries and employee benefits expense decreased $166,000 (2.6%) from $6,500,000 for the nine
months ended September 30, 2015 to $6,334,000 for the same period in 2016. The decrease in salaries and benefit expense is related
to lower incentive accruals, which decreased $81,000 (18.0%) from $450,000 in 2015 to $369,000 in 2016, as not all of the incentive
targets have been met as of September 30, 2016. In addition, fees paid to employment agencies for placement fees decreased $50,000
(69.4%) from $72,000 in the first nine months of 2015 to $22,000 in the first nine months of 2016. Occupancy expense decreased
$3,000 (0.3%) and furniture and equipment expense decreased $34,000 (6.5%). FDIC assessments decreased $6,000 (2.5%). OREO related
expenses increased $70,000 (26.9%) during 2016 to $330,000, from $260,000 in 2015. The increase in OREO expenses is directly related
to a $376,000 property write-down partially offset by the $169,000 gain on sale from two properties sold during 2016. Other expenses
increased $31,000 (1.4%) from $2,246,000 for the nine months ended September 30, 2015 to $2,277,000 for the same period in 2016.
The increase in other expenses resulted from higher legal fees and network administration fees. Legal fees increased from $102,000
to $126,000 and network administration fees increased from $210,000 to $322,000. The overhead efficiency ratio (fully taxable
equivalent) for the first nine months of 2016 was 62.1% as compared to 63.6% in the same period of 2015.
Provision
for Income Taxes
Federal
and state income taxes for the quarter ended September 30, 2016 increased $182,000 (22.6%) from $807,000 in the third quarter
of 2015 to $989,000 in the third quarter of 2016 and increased $252,000 (12.5%) from $2,022,000 in the nine months ended September
30, 2015 to $2,274,000 for the nine months ended September 30, 2016. The combined federal and state effective tax rate for the
quarter ended September 30, 2016 was 35.3%, compared to 35.5% for the third quarter of 2015. For the nine months ended September
30, 2016, the combined federal and state effective tax rate was 33.6% compared to 34.7% for the nine months ended September 30,
2015. The lower effective tax rate for 2016 compared to 2015 resulted from an increase in tax exempt loan interest. Tax exempt
loan interest was $534,000 in the first nine months of 2016 compared to $222,000 in the first nine months of 2015. The higher
provision for taxes in 2016 resulted from a higher level of taxable income. Taxable income increased $930,000 (15.9%) from $5,833,000
in 2015 to $6,763,000 in 2016.
Balance
Sheet Analysis
The
Company’s total assets were $653,846,000 at September 30, 2016 compared to $634,460,000 at December 31, 2015, representing
an increase of $19,386,000 (3.1%). The average assets for the three months ended September 30, 2016 were $635,561,000, which represents
an increase of $4,857,000 (0.8%) from the balance of $630,704,000 during the three-month period ended September 30, 2015. The
average assets for the nine months ended September 30, 2016 were $632,120,000, which represents an increase of $13,569,000 (2.2%)
from the average balance of $618,551,000 during the nine-month period ended September 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 September 30, 2016 and December 31, 2015.
Table
Five: Investment Securities Composition
(dollars
in thousands)
Available-for-sale (at fair value)
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
228,733
|
|
|
$
|
246,185
|
|
Obligations of states and political subdivisions
|
|
|
23,173
|
|
|
|
26,013
|
|
Corporate bonds
|
|
|
1,529
|
|
|
|
1,551
|
|
Corporate stock
|
|
|
67
|
|
|
|
70
|
|
Total available-for-sale investment securities
|
|
$
|
253,502
|
|
|
$
|
273,819
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity (at amortized cost)
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
508
|
|
|
$
|
623
|
|
Total held-to-maturity investment securities
|
|
$
|
508
|
|
|
$
|
623
|
|
Net
unrealized gains on available-for-sale investment securities totaling $5,596,000 were recorded, net of $2,239,000 in tax liabilities,
as accumulated other comprehensive income within shareholders’ equity at September 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 adding $66 million in new loans during the first nine months 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 $24.2 million (8.4%) from December
31, 2015. Included in the $66 million in new loans in 2016 was a $13.2 million pool of performing multi-family loans purchased
from another financial institution. These purchased loans consisted of seven loans primarily in the Company’s lending footprint
and two loans in San Diego County. 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 September 30, 2016 and December 31, 2015.
Table
Six: Loan and Lease Portfolio Composition
(dollars in thousands)
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
Change in
|
|
|
Percentage
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
dollars
|
|
|
change
|
|
Commercial
|
|
$
|
35,172
|
|
|
|
11
|
%
|
|
$
|
36,195
|
|
|
|
12
|
%
|
|
$
|
(1,023
|
)
|
|
|
(2.8
|
%)
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
194,809
|
|
|
|
61
|
%
|
|
|
199,591
|
|
|
|
68
|
%
|
|
|
(4,782
|
)
|
|
|
(2.4
|
%)
|
Multi-family
|
|
|
50,927
|
|
|
|
16
|
%
|
|
|
23,494
|
|
|
|
8
|
%
|
|
|
27,433
|
|
|
|
116.8
|
%
|
Construction
|
|
|
16,865
|
|
|
|
5
|
%
|
|
|
14,533
|
|
|
|
5
|
%
|
|
|
2,332
|
|
|
|
16.0
|
%
|
Residential
|
|
|
15,993
|
|
|
|
5
|
%
|
|
|
14,200
|
|
|
|
5
|
%
|
|
|
1,793
|
|
|
|
12.6
|
%
|
Lease financing receivable
|
|
|
462
|
|
|
|
0
|
%
|
|
|
732
|
|
|
|
0
|
%
|
|
|
(270
|
)
|
|
|
(36.9
|
%)
|
Agriculture
|
|
|
2,235
|
|
|
|
1
|
%
|
|
|
2,431
|
|
|
|
1
|
%
|
|
|
(196
|
)
|
|
|
(8.1
|
%)
|
Consumer
|
|
|
2,070
|
|
|
|
1
|
%
|
|
|
3,122
|
|
|
|
1
|
%
|
|
|
(1,052
|
)
|
|
|
(33.7
|
%)
|
Total loans and leases
|
|
|
318,533
|
|
|
|
100
|
%
|
|
|
294,298
|
|
|
|
100
|
%
|
|
|
24,235
|
|
|
|
8.2
|
%
|
Deferred loan and lease fees, net
|
|
|
(248
|
)
|
|
|
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(4,983
|
)
|
|
|
|
|
|
|
(4,975
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
Total net loans and leases
|
|
$
|
313,302
|
|
|
|
|
|
|
$
|
289,102
|
|
|
|
|
|
|
$
|
24,200
|
|
|
|
8.4
|
%
|
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 September 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 a presence in the Santa Clara,
Contra Costa, and Alameda County markets and services these markets through a loan production office in San Jose. In October 2016,
the sole business development employee located at this office terminated employment and the Company is currently looking for a
replacement. 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 flows 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 87% of the Company’s
loan and lease portfolio at September 30, 2016 and 86% as of 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, 2006/2007 levels, a supply imbalance, 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
September 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 $778,000 or 0.24% of total loans and leases. The $778,000 in nonperforming loans and
leases was made up of five loans. Three of those loans totaling $297,000 were current (less than 30 days past due pursuant to
their original or modified terms). Nonperforming loans and leases were $1,643,000 or 0.56% of total loans and leases at December
31, 2015. Specific reserves of $83,000 were held on the nonperforming loans at September 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 and by $277,000 (26.3%) during
the third 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 September 30, 2016, the Company’s
nonperforming loans included two real estate loans totaling $719,000 and three consumer loans totaling $59,000.
Table
Seven below sets forth nonaccrual loans and loans past due 90 days or more as of September 30, 2016 and December 31, 2015.
Table Seven: Nonperforming Loans and Leases
|
|
|
|
(dollars in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Past due 90 days or more and still accruing:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Nonaccrual:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
30
|
|
Real estate
|
|
|
719
|
|
|
|
1,493
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
59
|
|
|
|
120
|
|
Total nonperforming loans
|
|
$
|
778
|
|
|
$
|
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 September 30, 2016. Management is not aware of any potential problem loans, which were accruing and current at
September 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
September 30, 2016, the recorded investment in loans and leases that were considered to be impaired totaled $18,357,000, which
includes $17,604,000 in performing loans and leases. Of the total impaired loans of $18,357,000, loans totaling $11,569,000 were
deemed to require no specific reserve and loans totaling $6,788,000 were deemed to require a related valuation allowance of $564,000.
Of the $11,569,000 impaired loans that did not carry a specific reserve there were $4,160,000 in loans or leases that had previous
partial charge-offs and $7,409,000 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 third quarter of 2016,
the Company had net recoveries of $519,000 and a negative provision of $668,000 (or a reduction of $668,000 in the allowance for
loan and lease losses). In the third quarter of 2015, the Company had net loan and lease losses of $430,000 with no provision.
During
the quarters ended September 30, 2016 and 2015, there were no loans that were modified as troubled debt restructurings. There
were no payment defaults during the three months ended September 30, 2016 or September 30, 2015 on troubled debt restructurings
made in the preceding twelve months. At September 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. 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 September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans and leases outstanding
|
|
$
|
307,324
|
|
|
$
|
286,914
|
|
|
$
|
301,645
|
|
|
$
|
275,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses at beginning of period
|
|
$
|
5,132
|
|
|
$
|
5,359
|
|
|
$
|
4,975
|
|
|
$
|
5,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
(609
|
)
|
|
|
—
|
|
|
|
(609
|
)
|
Real estate
|
|
|
(68
|
)
|
|
|
—
|
|
|
|
(68
|
)
|
|
|
—
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6
|
)
|
Total
|
|
|
(68
|
)
|
|
|
(609
|
)
|
|
|
(68
|
)
|
|
|
(616
|
)
|
Recoveries of loans and leases previously charged
off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
585
|
|
|
|
65
|
|
|
|
658
|
|
|
|
88
|
|
Real estate
|
|
|
2
|
|
|
|
114
|
|
|
|
14
|
|
|
|
154
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
|
|
2
|
|
Total
|
|
|
587
|
|
|
|
179
|
|
|
|
744
|
|
|
|
244
|
|
Net loans and leases (recovered) charged off
|
|
|
(519
|
)
|
|
|
430
|
|
|
|
(676
|
)
|
|
|
372
|
|
Reductions to allowance
charged credited to operating expenses
|
|
|
(668
|
)
|
|
|
—
|
|
|
|
(668
|
)
|
|
|
—
|
|
Allowance for loan and lease losses at end
of period
|
|
$
|
4,983
|
|
|
$
|
4,929
|
|
|
$
|
4,983
|
|
|
$
|
4,929
|
|
Ratio of net charge-offs to average loans and
leases outstanding (annualized)
|
|
|
-0.67
|
%
|
|
|
0.59
|
%
|
|
|
-0.30
|
%
|
|
|
0.18
|
%
|
Provision of allowance for loan and lease
losses to average loans and leases
outstanding (annualized)
|
|
|
-0.86
|
%
|
|
|
0.00
|
%
|
|
|
-0.30
|
%
|
|
|
0.00
|
%
|
Allowance for loan and lease losses to loans and leases net of deferred fees at end of period
|
|
|
1.57
|
%
|
|
|
1.67
|
%
|
|
|
1.57
|
%
|
|
|
1.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 borrower’s business, valuation of collateral, the determination of impaired loans or
leases and exposure to potential losses.
The
ALLL totaled $4,983,000 or 1.57% of total loans and leases at September 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 640.5% at September 30, 2016 and 302.8% at December 31, 2015. The ALLL
as a percentage of impaired loans and leases was 27.1% at September 30, 2016 and 23.3% at December 31, 2015. Of the total nonperforming
and impaired loans and leases outstanding as of September 30, 2016, there were $4,160,000 in loans or leases that had been reduced
by partial charge-offs of $720,000. 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
September 30, 2016, the Company had one other real estate owned (“OREO”) property totaling $653,000. This is a reduction
of $2,898,000 (81.6%) from the $3,551,000 reported as of December 31, 2015. At September 30, 2015, the Company had four properties
totaling $3,781,000. During the third quarter of 2016, the Company did not foreclose on any property and sold one OREO property
that had a book value of $243,000 and recorded a $43,000 gain on sale. There were no valuation adjustments to the book value of
the existing OREO properties during the third quarter of 2016. The Company believes that the OREO property owned at September
30, 2016 is carried approximately at fair value.
Deposits
At
September 30, 2016, total deposits were $546,165,000 representing a $15,475,000 (2.9%) increase 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 nine months of 2016, the Company experienced deposit account increases in
noninterest-bearing accounts ($19,038,000 or 10.0%), interest-bearing checking ($74,000 or 0.1%), and savings ($1,544,000 or 2.6%)
and decreases in money market accounts ($3,531,000 or 2.6%), and time deposits ($1,650,000 or 2.0%). 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 September 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
5,000
|
|
|
|
0.93
|
%
|
|
$
|
3,500
|
|
|
|
1.28
|
%
|
Long-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
9,000
|
|
|
|
1.37
|
%
|
|
$
|
7,500
|
|
|
|
1.24
|
%
|
The
maximum amount of short-term borrowings at any month-end during the first nine 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
|
|
|
$
|
9,000
|
|
Maturity
|
|
|
2016-2017
|
|
|
|
2017 to 2020
|
|
Weighted average rates
|
|
|
0.93
|
%
|
|
|
1.37
|
%
|
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
September 30, 2016, shareholders’ equity was $84,666,000, representing a decrease of $1,409,000 (1.6%) from $86,075,000
at December 31, 2015. The decrease resulted from repurchases of common stock exceeding the additions from other comprehensive
income, net income for the period, and the stock based compensation. The Company’s ratio of Total Risk-Based Capital to
risk adjusted assets was 19.7% at September 30, 2016 and 20.3% at December 31, 2015. Its Tier 1 Risk-Based Capital to risk-adjusted
assets was 18.4% at September 30, 2016 and 19.3% at December 31, 2015. Its Leverage Ratio was 10.6% at September 30, 2016 and
11.0% at December 31, 2015. Table Ten below lists the Company’s and American River Bank’s capital ratios at September
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
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Minimum
Regulatory
Capital
Requirements
|
|
|
Well-Capitalized
Minimum
Requirements
|
|
American River Bankshares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
10.6
|
%
|
|
|
11.0
|
%
|
|
|
4.0
|
%
|
|
|
N/A
|
|
Tier 1 Risk-Based Capital
|
|
|
18.4
|
%
|
|
|
19.3
|
%
|
|
|
6.0
|
%
|
|
|
N/A
|
|
Total Risk-Based Capital
|
|
|
19.7
|
%
|
|
|
20.3
|
%
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American River Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
10.6
|
%
|
|
|
11.0
|
%
|
|
|
4.0
|
%
|
|
|
5.0
|
%
|
Common Equity Tier 1 Risk-Based Capital
|
|
|
18.1
|
%
|
|
|
19.1
|
%
|
|
|
4.5
|
%
|
|
|
6.5
|
%
|
Tier 1 Risk-Based Capital
|
|
|
18.1
|
%
|
|
|
19.1
|
%
|
|
|
6.0
|
%
|
|
|
8.0
|
%
|
Total Risk-Based Capital
|
|
|
19.4
|
%
|
|
|
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 September 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 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 September 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 September 30, 2016 were approximately $23,697,000 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 September 30, 2016, consolidated
liquid assets totaled $228.1 million or 34.9% 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 September 30, 2016, the Company had $17,000,000 available under these credit lines. Additionally,
the Bank is a member of the FHLB. At September 30, 2016, the Bank could have arranged for up to $101,263,000 in secured borrowings
from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At September 30, 2016, the Bank
had advances, borrowings and commitments (including letters of credit) outstanding of $14,000,000, leaving $87,263,000 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 September 30, 2016, the
Bank’s borrowing capacity at the Federal Reserve Bank was $11,698,000. 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 September 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 $23,935,000 and $26,968,000 at September 30, 2016 and December
31, 2015, respectively. As a percentage of net loans and leases these off-balance sheet items represent 7.6% 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.