|
Item 1.
|
Financial Statements.
|
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
BALANCE SHEET
(Unaudited)
(dollars
in thousands)
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
16,610
|
|
|
$
|
20,987
|
|
Interest-bearing deposits in banks
|
|
|
2,835
|
|
|
|
1,746
|
|
Federal funds sold
|
|
|
—
|
|
|
|
7,000
|
|
Total cash and cash equivalents
|
|
|
19,445
|
|
|
|
29,733
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
286,602
|
|
|
|
294,933
|
|
Held-to-maturity, at amortized cost fair value of $293 in 2019 and $306 in 2018
|
|
|
277
|
|
|
|
292
|
|
Loans and leases, less allowance for loan and lease losses of $4,577
at March 31, 2019 and $4,392 at December 31, 2018
|
|
|
336,007
|
|
|
|
318,516
|
|
Premises and equipment, net
|
|
|
1,151
|
|
|
|
1,071
|
|
Federal Home Loan Bank stock
|
|
|
3,932
|
|
|
|
3,932
|
|
Goodwill and other intangible assets
|
|
|
16,321
|
|
|
|
16,321
|
|
Other real estate owned
|
|
|
957
|
|
|
|
957
|
|
Bank owned life insurance
|
|
|
15,509
|
|
|
|
15,429
|
|
Accrued interest receivable and other assets
|
|
|
9,167
|
|
|
|
6,908
|
|
|
|
$
|
689,368
|
|
|
$
|
688,092
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
213,012
|
|
|
$
|
214,745
|
|
Interest-bearing
|
|
|
359,367
|
|
|
|
375,929
|
|
Total deposits
|
|
|
572,379
|
|
|
|
590,674
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
19,000
|
|
|
|
5,000
|
|
Long-term borrowings
|
|
|
10,500
|
|
|
|
10,500
|
|
Accrued interest payable and other liabilities
|
|
|
9,913
|
|
|
|
7,197
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
611,792
|
|
|
|
613,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; 10,000,000 shares authorized; none
outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding – 5,887,962 shares at
March 31, 2019 and 5,858,428 shares at December 31, 2018
|
|
|
30,281
|
|
|
|
30,103
|
|
Retained earnings
|
|
|
47,347
|
|
|
|
46,494
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(52
|
)
|
|
|
(1,876
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
77,576
|
|
|
|
74,721
|
|
|
|
$
|
689,368
|
|
|
$
|
688,092
|
|
See
Notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF INCOME
(Unaudited)
(dollars
in thousands, except per share data)
For the
three months ended March 31,
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases:
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
3,818
|
|
|
$
|
3,328
|
|
Exempt
from Federal income taxes
|
|
|
149
|
|
|
|
128
|
|
Interest
on Federal funds sold
|
|
|
5
|
|
|
|
50
|
|
Interest
on deposits in banks
|
|
|
44
|
|
|
|
6
|
|
Interest
and dividends on investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,024
|
|
|
|
1,391
|
|
Exempt
from Federal income taxes
|
|
|
92
|
|
|
|
163
|
|
Total
interest income
|
|
|
6,132
|
|
|
|
5,066
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
489
|
|
|
|
275
|
|
Interest
on borrowings
|
|
|
94
|
|
|
|
54
|
|
Total
interest expense
|
|
|
583
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
5,549
|
|
|
|
4,737
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
180
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan and lease losses
|
|
|
5,369
|
|
|
|
4,737
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
121
|
|
|
|
117
|
|
Gain
on sale of securities
|
|
|
36
|
|
|
|
1
|
|
Other
noninterest income
|
|
|
254
|
|
|
|
254
|
|
Total
noninterest income
|
|
|
411
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
2,781
|
|
|
|
2,206
|
|
Occupancy
|
|
|
257
|
|
|
|
262
|
|
Furniture
and equipment
|
|
|
140
|
|
|
|
138
|
|
Federal
Deposit Insurance Corporation assessments
|
|
|
50
|
|
|
|
53
|
|
Expenses
related to other real estate owned
|
|
|
4
|
|
|
|
5
|
|
Other
expense
|
|
|
1,028
|
|
|
|
686
|
|
Total
noninterest expense
|
|
|
4,260
|
|
|
|
3,350
|
|
Income
before provision for income taxes
|
|
|
1,520
|
|
|
|
1,759
|
|
Provision
for income taxes
|
|
|
374
|
|
|
|
406
|
|
Net
income
|
|
$
|
1,146
|
|
|
$
|
1,353
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.23
|
|
Diluted
earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.22
|
|
See notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(dollars
in thousands)
For the
three months ended March 31,
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,146
|
|
|
$
|
1,353
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Increase (decrease) in net unrealized gains on investment securities
|
|
|
2,626
|
|
|
|
(2,730
|
)
|
Deferred tax (expense) benefit
|
|
|
(776
|
)
|
|
|
821
|
|
Increase in net unrealized gains (losses) on investment securities, net of tax
|
|
|
1,850
|
|
|
|
(1,909
|
)
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains included in net income
|
|
|
(36
|
)
|
|
|
(1
|
)
|
Tax effect
|
|
|
10
|
|
|
|
—
|
|
Realized gains, net of tax
|
|
|
(26
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
1,824
|
|
|
|
(1,908
|
)
|
Comprehensive income (loss)
|
|
$
|
2,970
|
|
|
$
|
(555
|
)
|
See
notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Other
|
|
|
Total
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
Balance, January 1, 2018
|
|
|
6,132,362
|
|
|
$
|
34,463
|
|
|
$
|
42,779
|
|
|
$
|
(321
|
)
|
|
$
|
76,921
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,353
|
|
|
|
|
|
|
|
1,353
|
|
Other comprehensive loss,
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized gains on available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,908
|
)
|
|
|
(1,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.05 per share)
|
|
|
|
|
|
|
|
|
|
|
(307
|
)
|
|
|
|
|
|
|
(307
|
)
|
Net restricted stock
award activity and related compensation expense
|
|
|
6,944
|
|
|
|
65
|
|
|
|
1
|
|
|
|
|
|
|
|
66
|
|
Stock options exercised
|
|
|
7,086
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
Stock option compensation
expense
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Retirement of common
stock
|
|
|
(264,178
|
)
|
|
|
(4,099
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2018
|
|
|
5,882,214
|
|
|
$
|
30,501
|
|
|
$
|
43,826
|
|
|
$
|
(2,229
|
)
|
|
$
|
72,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019
|
|
|
5,858,428
|
|
|
$
|
30,103
|
|
|
$
|
46,494
|
|
|
$
|
(1,876
|
)
|
|
$
|
74,721
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,146
|
|
|
|
|
|
|
|
1,146
|
|
Other comprehensive income,
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized
gains on available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,824
|
|
|
|
1,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.05 per share)
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
|
|
(293
|
)
|
Net restricted stock
award activity and related compensation expense
|
|
|
18,394
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Stock options exercised
|
|
|
11,140
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
Stock option compensation
expense
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
|
5,887,962
|
|
|
$
|
30,281
|
|
|
$
|
47,347
|
|
|
$
|
(52
|
)
|
|
$
|
77,576
|
|
See Notes to Unaudited
Consolidated Financial Statements
AMERICAN RIVER
BANKSHARES
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
(dollars
in thousands)
For the
three months ended March 31,
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,146
|
|
|
$
|
1,353
|
|
Adjustments to reconcile
net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan and
lease losses
|
|
|
180
|
|
|
|
—
|
|
Decrease in deferred
loan origination fees and costs, net
|
|
|
(231
|
)
|
|
|
(16
|
)
|
Depreciation and amortization
|
|
|
66
|
|
|
|
70
|
|
Gain on sale and call
of investment securities
|
|
|
(36
|
)
|
|
|
(1
|
)
|
Amortization of investment
security premiums and discounts, net
|
|
|
404
|
|
|
|
792
|
|
Increase in cash surrender
values of life insurance policies
|
|
|
(81
|
)
|
|
|
(75
|
)
|
Stock based compensation
expense
|
|
|
83
|
|
|
|
73
|
|
Decrease (increase) in
accrued interest receivable and other assets
|
|
|
349
|
|
|
|
(729
|
)
|
(Decrease) increase in
accrued interest payable and other liabilities
|
|
|
(656
|
)
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities
|
|
|
1,224
|
|
|
|
1,708
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from the sale
of available-for-sale investment securities
|
|
|
2,022
|
|
|
|
—
|
|
Proceeds from called
available-for-sale investment securities
|
|
|
—
|
|
|
|
500
|
|
Proceeds from matured
available-for-sale investment Securities
|
|
|
3,000
|
|
|
|
—
|
|
Purchases of available-for-sale
investment securities
|
|
|
(4,702
|
)
|
|
|
(39,933
|
)
|
Proceeds from principal
repayments for available-for-sale investment securities
|
|
|
10,232
|
|
|
|
9,867
|
|
Proceeds from principal
repayments for held-to-maturity investment securities
|
|
|
15
|
|
|
|
21
|
|
Net (increase) decrease
in loans
|
|
|
(11,746
|
)
|
|
|
9,662
|
|
Purchases of loans
|
|
|
(5,694
|
)
|
|
|
—
|
|
Purchases of equipment
|
|
|
(146
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(7,019
|
)
|
|
|
(19,918
|
)
|
AMERICAN RIVER
BANKSHARES
CONSOLIDATED
STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
For the three months
ended March 31,
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Net (decrease) increase
in demand, interest-bearing
and savings
deposits
|
|
$
|
(17,895
|
)
|
|
$
|
44,041
|
|
Net (decrease) increase
in time deposits
|
|
|
(400
|
)
|
|
|
66
|
|
Increase in short term
borrowing
|
|
|
14,000
|
|
|
|
—
|
|
Proceeds from exercised
options
|
|
|
95
|
|
|
|
65
|
|
Cash dividends paid
|
|
|
(293
|
)
|
|
|
(307
|
)
|
Cash paid to repurchase
common stock
|
|
|
—
|
|
|
|
(4,099
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided
by financing activities
|
|
$
|
(4,493
|
)
|
|
$
|
39,766
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in
cash and cash equivalents
|
|
|
(10,288
|
)
|
|
|
21,556
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
at beginning of year
|
|
|
29,733
|
|
|
|
38,467
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
at end of period
|
|
$
|
19,445
|
|
|
$
|
60,023
|
|
|
|
|
|
|
|
|
|
|
Supplemental noncash
disclosures:
|
|
|
|
|
|
|
|
|
Right of use asset and
obligation recorded upon adoption of ASU 2016-02
|
|
$
|
3,570
|
|
|
$
|
—
|
|
See Notes to Unaudited
Consolidated Financial Statements
AMERICAN RIVER
BANKSHARES
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
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 March 31, 2019 and December 31, 2018, the results of its operations and its cash flows for the three-month periods ended March
31, 2019 and 2018 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, 2018. The results of operations for the three-month period ended March 31, 2019 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.
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.
Adoption
of New Accounting Standard:
On January 1, 2019, the Company adopted ASU No. 2016-02, “
Leases
”, utilizing
the effective date method under the modified retrospective approach.
The Company currently leases nine of its office leases
under operating leases. The Company’s present value of future lease payments as of January 1, 2019 was $3,570,000 which
was recorded as a right-of-use asset included in accrued interest receivable and other assets with an offsetting liability included
in accrued interest payable and other liabilities on the consolidated balance sheet. The effects of adopting ASU No. 2016-02 did
not have a material impact on the Company’s financial position, results of operations or cash flows.
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”). There were 11,140 stock options outstanding at December
31, 2018, all of which were exercised during the first quarter of 2019; accordingly, there are no further grants outstanding under
the 2000 Plan. At March 31, 2019, there were 29,958 stock options and 47,058 restricted shares outstanding and the total number
of authorized shares that remain available for issuance under the 2010 Plan was 1,283,232. 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. 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 requires 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 2010 Plan 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 2010 Plan are exercisable until their expiration.
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 March 31, 2019 and 2018, the compensation cost recognized for equity compensation was $83,000 and
$73,000, respectively. The recognized tax benefit for equity compensation expense was $21,000 and $18,000, for the three-month
periods ended March 31, 2019 and 2018, respectively.
At
March 31, 2019, the total compensation cost related to nonvested stock option awards not yet recorded is $13,000. This amount
will be recognized over the next 1.3 years and the weighted average period of recognizing these costs is expected to be 0.6 years.
At March 31, 2019, the total compensation cost related to restricted stock awards not yet recorded is $497,000. This amount will
be recognized over the next 4.2 years and the weighted average period of recognizing these costs is expected to be 1.2 years.
Equity
Plans Activity
Stock
Options
There
were no stock options awarded during the three-month periods ended March 31, 2019 and 2018. A summary of option activity under
the Plans as of March 31, 2018 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, 2019
|
|
|
41,098
|
|
|
$
|
8.71
|
|
|
|
2.3 years
|
|
|
$
|
215
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
11,140
|
|
|
|
8.50
|
|
|
|
—
|
|
|
|
—
|
|
Expired, forfeited or cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2019
|
|
|
29,958
|
|
|
$
|
8.79
|
|
|
|
5.2 years
|
|
|
$
|
126
|
|
Vested at March 31, 2019
|
|
|
22,822
|
|
|
$
|
8.64
|
|
|
|
5.0 years
|
|
|
$
|
100
|
|
Non-vested at March 31, 2019
|
|
|
7,136
|
|
|
$
|
9.29
|
|
|
|
5.8 years
|
|
|
$
|
26
|
|
Restricted
Stock
There
were 18,394 shares of restricted stock awarded during the three-month period ended March 31, 2019 and 11,599 shares of restricted
stock awarded during the three-month period ended March 31, 2018. There were 3,864 and 14,917 restricted stock awards that were
fully vested during the three-month periods ended March 31, 2019 and 2018, respectively. The intrinsic value of nonvested restricted
stock at March 31, 2019 was $612,000.
Restricted
Stock
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested at January 1, 2019
|
|
|
32,528
|
|
|
$
|
14.60
|
|
Awarded
|
|
|
18,394
|
|
|
|
14.05
|
|
Less: Vested
|
|
|
3,864
|
|
|
|
15.30
|
|
Less: Expired, forfeited or cancelled
|
|
|
—
|
|
|
|
—
|
|
Nonvested at March 31, 2019
|
|
|
47,058
|
|
|
$
|
14.32
|
|
Other
Equity Awards
There
were no stock appreciation rights, restricted performance stock, unrestricted Company stock, or performance units awarded during
the three-month periods ended March 31, 2019 or 2018 or outstanding at March 31, 2019 or December 31, 2018.
The
intrinsic value used for stock options and restricted stock was derived from the market price of the Company’s common stock
of $13.00 as of March 31, 2019.
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 $32,047,000 and standby letters of credit of approximately $240,000 at March 31, 2019
and loan commitments of approximately $34,276,000 and standby letters of credit of approximately $361,000 at December 31, 2018.
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 2019 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 March 31,
2019 or December 31, 2018.
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 (5,836,579 shares
and 5,996,146 shares for the three-month periods ended March 31, 2019 and 2018, respectively). 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 (21,048 shares for the three-month period
ended March 31, 2019 and 36,641 shares for the three-month period ended March 31, 2018). For the three-month periods ended March
31, 2019 and 2018, there were zero stock options 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 investment securities at March 31, 2019 and December 31, 2018 consisted of the following
(dollars in thousands):
Available-for-Sale
|
|
March 31, 2019
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
265,796
|
|
|
$
|
1,922
|
|
|
$
|
(2,291
|
)
|
|
$
|
265,427
|
|
Obligations of states and political subdivisions
|
|
|
12,398
|
|
|
|
287
|
|
|
|
(46
|
)
|
|
|
12,639
|
|
Corporate bonds
|
|
|
6,494
|
|
|
|
80
|
|
|
|
(27
|
)
|
|
|
6,547
|
|
US Treasury securities
|
|
|
1,988
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1,989
|
|
|
|
$
|
286,676
|
|
|
$
|
2,290
|
|
|
$
|
(2,364
|
)
|
|
$
|
286,602
|
|
|
|
December 31, 2018
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
271,685
|
|
|
$
|
984
|
|
|
$
|
(3,620
|
)
|
|
$
|
269,049
|
|
Obligations of states and political subdivisions
|
|
|
14,440
|
|
|
|
165
|
|
|
|
(205
|
)
|
|
|
14,400
|
|
Corporate bonds
|
|
|
6,493
|
|
|
|
74
|
|
|
|
(59
|
)
|
|
|
6,508
|
|
US Treasury securities
|
|
|
4,979
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
4,976
|
|
|
|
$
|
297,597
|
|
|
$
|
1,223
|
|
|
$
|
(3,887
|
)
|
|
$
|
294,933
|
|
Net
unrealized losses on available-for-sale investment securities totaling $74,000 were recorded, net of $22,000 in tax assets, as
accumulated other comprehensive loss within shareholders’ equity at March 31, 2019. Net unrealized losses on available-for-sale
investment securities totaling $2,664,000 were recorded, net of $788,000 in tax liabilities, as accumulated other comprehensive
loss within shareholders’ equity at December 31, 2018. There were no transfers of available-for-sale investment securities
for the three-month periods ended March 31, 2019 or March 31, 2018.
Proceeds
and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended March
31, 2019 totaled $2,022,000 and $36,000, respectively. Proceeds and gross realized gains from the sale and call of available-for-sale
investment securities for the three-month period ended March 31, 2018 totaled $500,000 and $1,000, respectively.
Held-to-Maturity
March
31, 2019
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and
Sponsored Agencies
|
|
$
|
277
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored
Agencies
|
|
$
|
292
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
306
|
|
There
were no sales or transfers of held-to-maturity investment securities for the periods ended March 31, 2019 and March 31, 2018.
Investment securities with unrealized losses at March 31, 2019 and December 31, 2018 are summarized and classified according to
the duration of the loss period as follows (dollars in thousands):
March 31, 2019
|
|
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
|
|
$
|
14,404
|
|
|
$
|
(99
|
)
|
|
$
|
144,192
|
|
|
$
|
(2,192
|
)
|
|
$
|
158,596
|
|
|
$
|
(2,291
|
)
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
1,179
|
|
|
|
(46
|
)
|
|
|
1,179
|
|
|
|
(46
|
)
|
Corporate bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
2,467
|
|
|
|
(27
|
)
|
|
|
2,467
|
|
|
|
(27
|
)
|
|
|
$
|
14,404
|
|
|
$
|
(99
|
)
|
|
$
|
147,838
|
|
|
$
|
(2,265
|
)
|
|
$
|
162,242
|
|
|
$
|
(2,364
|
)
|
December 31, 2018
|
|
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
|
|
$
|
39,267
|
|
|
$
|
(310
|
)
|
|
$
|
138,894
|
|
|
$
|
(3,310
|
)
|
|
$
|
178,161
|
|
|
$
|
(3,620
|
)
|
Obligations of states and political subdivisions
|
|
|
2,168
|
|
|
|
(28
|
)
|
|
|
5,583
|
|
|
|
(177
|
)
|
|
|
7,751
|
|
|
|
(205
|
)
|
Corporate bonds
|
|
|
497
|
|
|
|
(4
|
)
|
|
|
1,938
|
|
|
|
(55
|
)
|
|
|
2,435
|
|
|
|
(59
|
)
|
US Treasury securities
|
|
|
4,976
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,976
|
|
|
|
(3
|
)
|
|
|
$
|
46,908
|
|
|
$
|
(345
|
)
|
|
$
|
146,415
|
|
|
$
|
(3,542
|
)
|
|
$
|
193,323
|
|
|
$
|
(3,887
|
)
|
There
were no held-to-maturity investment securities with unrealized losses as of March 31, 2019 or December 31, 2018.
At
March 31, 2019, the Company held 217 securities of which 8 were in a loss position for less than twelve months and 97 were in
a loss position for twelve months or more. Of the 97 securities in a loss position for greater than twelve months at March 31,
2019, one was a municipal security, two were corporate securities, and 94 were US Government Agencies and Sponsored Agencies securities.
At December 31, 2018, the Company held 220 securities of which 26 were in a loss position for less than twelve months and 97 were
in a loss position for twelve months or more. Of the 97 securities in a loss position for greater than twelve months at December
31, 2018, one was a corporate securities, five were municipal securities and 91 were US Government Agencies and Sponsored Agencies
securities.
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 March 31, 2019 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
|
|
$
|
2,243
|
|
|
$
|
2,244
|
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
3,596
|
|
|
|
3,609
|
|
|
|
|
|
|
|
|
|
After five years through ten years
|
|
|
11,893
|
|
|
|
12,061
|
|
|
|
|
|
|
|
|
|
After ten years
|
|
|
3,148
|
|
|
|
3,261
|
|
|
|
|
|
|
|
|
|
|
|
|
20,880
|
|
|
|
21,175
|
|
|
|
|
|
|
|
|
|
Investment securities not due at a single maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
|
265,796
|
|
|
|
265,427
|
|
|
$
|
277
|
|
|
$
|
293
|
|
|
|
$
|
286,676
|
|
|
$
|
286,602
|
|
|
$
|
277
|
|
|
$
|
293
|
|
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
March 31, 2019 and December 31, 2018, the recorded investment in nonperforming loans and leases was approximately $25,000 and
$27,000, 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 March 31, 2019, the recorded investment in loans and leases that were considered to be impaired totaled $8,640,000.
Of the total impaired loans of $8,640,000, loans totaling $5,936,000 were deemed to require no specific reserve and loans totaling
$2,704,000 were deemed to require a related valuation allowance of $164,000. At December 31, 2018, the recorded investment in
loans and leases that were considered to be impaired totaled $8,702,000 and had a related valuation allowance of $185,000.
At
March 31, 2019 and December 31, 2018, the recorded investment in other real estate owned (“OREO”) was $957,000. During
the first quarter of 2019, the Company did not add any new or sell or impair any of the OREO properties. The March 31, 2019 and
December 31, 2018 OREO balance of $957,000 consisted of one commercial land property.
Nonperforming
loans and leases and other assets and OREO at March 31, 2019 and December 31, 2018 are summarized as follows (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Nonaccrual loans and leases that are current to terms (less than 30 days past due)
|
|
$
|
25
|
|
|
$
|
27
|
|
Nonaccrual loans and leases that are past due
|
|
|
—
|
|
|
|
—
|
|
Loans and leases past due 90 days and accruing interest
|
|
|
—
|
|
|
|
—
|
|
Other real estate owned
|
|
|
957
|
|
|
|
957
|
|
Total nonperforming assets
|
|
$
|
982
|
|
|
$
|
984
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans and leases to total loans and leases
|
|
|
0.01
|
%
|
|
|
0.01
|
%
|
Total nonperforming assets to total assets
|
|
|
0.14
|
%
|
|
|
0.14
|
%
|
Impaired
loans and leases as of and for the periods ended March 31, 2019 and December 31, 2018 are summarized as follows:
(in thousands)
|
|
As of March 31, 2019
|
|
|
As of December 31, 2018
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-commercial
|
|
$
|
5,613
|
|
|
$
|
5,746
|
|
|
$
|
—
|
|
|
$
|
5,645
|
|
|
$
|
5,879
|
|
|
$
|
—
|
|
Real estate-residential
|
|
|
323
|
|
|
|
410
|
|
|
|
—
|
|
|
|
323
|
|
|
|
410
|
|
|
|
—
|
|
Subtotal
|
|
$
|
5,936
|
|
|
$
|
6,156
|
|
|
$
|
—
|
|
|
$
|
5,968
|
|
|
$
|
6,289
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-commercial
|
|
$
|
2,116
|
|
|
$
|
2,193
|
|
|
$
|
117
|
|
|
|
2,138
|
|
|
|
2,217
|
|
|
|
132
|
|
Real estate-residential
|
|
|
588
|
|
|
|
588
|
|
|
|
47
|
|
|
|
596
|
|
|
|
596
|
|
|
|
53
|
|
Subtotal
|
|
$
|
2,704
|
|
|
$
|
2,781
|
|
|
$
|
164
|
|
|
$
|
2,734
|
|
|
$
|
2,813
|
|
|
$
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-commercial
|
|
$
|
7,729
|
|
|
$
|
7,939
|
|
|
$
|
117
|
|
|
$
|
7,783
|
|
|
$
|
8,096
|
|
|
$
|
32
|
|
Real estate-residential
|
|
|
911
|
|
|
|
998
|
|
|
|
47
|
|
|
|
919
|
|
|
|
1,006
|
|
|
|
53
|
|
|
|
$
|
8,640
|
|
|
$
|
8,937
|
|
|
$
|
164
|
|
|
$
|
8,702
|
|
|
$
|
9,102
|
|
|
$
|
185
|
|
The
following table presents the average balance related to impaired loans and leases for the periods indicated (in thousands):
|
|
Average Recorded Investments
for the three months ended
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
1,580
|
|
Real estate-commercial
|
|
|
7,823
|
|
|
|
8,861
|
|
Real estate-multi-family
|
|
|
—
|
|
|
|
473
|
|
Real estate-residential
|
|
|
915
|
|
|
|
1,609
|
|
Total
|
|
$
|
8,738
|
|
|
$
|
12,523
|
|
The
following table presents the interest income recognized on impaired loans and leases for the periods indicated (in thousands):
|
|
Interest Income Recognized
for the three months ended
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate-commercial
|
|
|
114
|
|
|
|
108
|
|
Real estate-multi-family
|
|
|
—
|
|
|
|
8
|
|
Real estate-residential
|
|
|
11
|
|
|
|
22
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
125
|
|
|
$
|
138
|
|
7.
TROUBLED DEBT RESTRUCTURINGS
During
the periods ended March 31, 2019 and 2018, there were no loans that were modified as troubled debt restructurings.
There
were no payment defaults during the three months ended March 31, 2019 or March 31, 2018 on troubled debt restructurings made in
the preceding twelve months. At March 31, 2019 and December 31, 2018, there were no unfunded commitments on those loans considered
troubled debt restructures. See also “Impaired Loans and Leases” in Item 2.
8. ALLOWANCE FOR
LOAN AND LEASE LOSSES
The
Company’s loan and lease portfolio allocated by management’s internal risk ratings as of March 31, 2019 and December
31, 2019 are summarized below:
March 31, 2019
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
29,754
|
|
|
$
|
185,247
|
|
|
$
|
50,904
|
|
|
$
|
8,862
|
|
|
$
|
24,941
|
|
Watch
|
|
|
48
|
|
|
|
10,016
|
|
|
|
3,821
|
|
|
|
—
|
|
|
|
951
|
|
Special mention
|
|
|
—
|
|
|
|
1,069
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Substandard
|
|
|
25
|
|
|
|
139
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
29,827
|
|
|
$
|
196,471
|
|
|
$
|
54,725
|
|
|
$
|
8,862
|
|
|
$
|
25,892
|
|
|
|
Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
10
|
|
|
$
|
8,787
|
|
|
$
|
15,719
|
|
|
|
|
|
|
$
|
324,224
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
|
|
|
|
14,858
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
1,070
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
164
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
10
|
|
|
$
|
8,787
|
|
|
$
|
15,742
|
|
|
|
|
|
|
$
|
340,316
|
|
December 31, 2018
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
29,570
|
|
|
$
|
185,548
|
|
|
$
|
52,301
|
|
|
$
|
5,685
|
|
|
$
|
15,373
|
|
Watch
|
|
|
53
|
|
|
|
13,118
|
|
|
|
3,838
|
|
|
|
—
|
|
|
|
965
|
|
Special mention
|
|
|
—
|
|
|
|
1,087
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Substandard
|
|
|
27
|
|
|
|
141
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
29,650
|
|
|
$
|
199,894
|
|
|
$
|
56,139
|
|
|
$
|
5,685
|
|
|
$
|
16,338
|
|
|
|
Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
32
|
|
|
$
|
4,419
|
|
|
$
|
10,691
|
|
|
|
|
|
|
$
|
303,619
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
|
|
|
|
17,996
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
1,088
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
168
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
32
|
|
|
$
|
4,419
|
|
|
$
|
10,714
|
|
|
|
|
|
|
$
|
322,871
|
|
The
allocation of the Company’s allowance for loan and lease losses and by portfolio segment and by impairment methodology are
summarized below:
March
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-Family
|
|
|
Construction
|
|
|
Residential
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance
for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2019
|
|
$
|
668
|
|
|
$
|
2,114
|
|
|
$
|
564
|
|
|
$
|
267
|
|
|
$
|
220
|
|
|
$
|
—
|
|
|
$
|
88
|
|
|
$
|
192
|
|
|
$
|
279
|
|
|
$
|
4,392
|
|
Provision
for loan losses
|
|
|
(9
|
)
|
|
|
(86
|
)
|
|
|
(144
|
)
|
|
|
141
|
|
|
|
129
|
|
|
|
—
|
|
|
|
80
|
|
|
|
65
|
|
|
|
4
|
|
|
|
180
|
|
Loans
charged-off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recoveries
|
|
|
2
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance, March 31, 2019
|
|
$
|
661
|
|
|
$
|
2,031
|
|
|
$
|
420
|
|
|
$
|
408
|
|
|
$
|
349
|
|
|
$
|
—
|
|
|
$
|
168
|
|
|
$
|
257
|
|
|
$
|
283
|
|
|
$
|
4,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
—
|
|
|
$
|
117
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
661
|
|
|
$
|
1,914
|
|
|
$
|
420
|
|
|
$
|
408
|
|
|
$
|
302
|
|
|
$
|
—
|
|
|
$
|
168
|
|
|
$
|
257
|
|
|
$
|
283
|
|
|
$
|
4,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
29,827
|
|
|
$
|
196,471
|
|
|
$
|
54,725
|
|
|
$
|
8,862
|
|
|
$
|
25,892
|
|
|
$
|
10
|
|
|
$
|
8,787
|
|
|
$
|
15,742
|
|
|
$
|
—
|
|
|
$
|
340,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
—
|
|
|
$
|
7,729
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
911
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
29,827
|
|
|
$
|
188,742
|
|
|
$
|
54,725
|
|
|
$
|
8,862
|
|
|
$
|
24,981
|
|
|
$
|
10
|
|
|
$
|
8,787
|
|
|
$
|
15,742
|
|
|
$
|
—
|
|
|
$
|
331,676
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Real
Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-Family
|
|
|
Construction
|
|
|
Residential
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
—
|
|
|
$
|
132
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
668
|
|
|
$
|
1,982
|
|
|
$
|
564
|
|
|
$
|
267
|
|
|
$
|
167
|
|
|
$
|
—
|
|
|
$
|
88
|
|
|
$
|
192
|
|
|
$
|
279
|
|
|
$
|
4,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
29,650
|
|
|
$
|
199,894
|
|
|
$
|
56,139
|
|
|
$
|
5,685
|
|
|
$
|
16,338
|
|
|
$
|
32
|
|
|
$
|
4,419
|
|
|
$
|
10,714
|
|
|
$
|
—
|
|
|
$
|
322,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
—
|
|
|
$
|
7,783
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
919
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
29,650
|
|
|
$
|
192,111
|
|
|
$
|
56,139
|
|
|
$
|
5,685
|
|
|
$
|
15,419
|
|
|
$
|
32
|
|
|
$
|
4,419
|
|
|
$
|
10,714
|
|
|
$
|
—
|
|
|
$
|
314,169
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-Family
|
|
|
Construction
|
|
|
Residential
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning
balance, January 1, 2018
|
|
$
|
447
|
|
|
$
|
2,174
|
|
|
$
|
1,047
|
|
|
$
|
269
|
|
|
$
|
205
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
14
|
|
|
$
|
291
|
|
|
$
|
4,478
|
|
Provision for loan losses
|
|
|
92
|
|
|
|
(33
|
)
|
|
|
(81
|
)
|
|
|
19
|
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
(10
|
)
|
|
|
—
|
|
Loans charged-off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recoveries
|
|
|
7
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March
31, 2018
|
|
$
|
546
|
|
|
$
|
2,143
|
|
|
$
|
966
|
|
|
$
|
288
|
|
|
$
|
218
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
15
|
|
|
$
|
281
|
|
|
$
|
4,488
|
|
The
Company’s aging analysis of the loan and lease portfolio at March 31, 2019 and December 31, 2018 are summarized below:
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
|
|
|
|
|
|
|
Greater
Than
|
|
|
|
|
|
|
30-59
Days
|
|
|
60-89
Days
|
|
|
Greater
Than
|
|
|
Total
Past
|
|
|
|
|
|
|
|
|
90
Days and
|
|
|
|
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
90
Days
|
|
|
Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29,827
|
|
|
$
|
29,827
|
|
|
$
|
—
|
|
|
$
|
25
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
423
|
|
|
|
—
|
|
|
|
—
|
|
|
|
423
|
|
|
|
196,048
|
|
|
|
196,471
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54,725
|
|
|
|
54,725
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,862
|
|
|
|
8,862
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,892
|
|
|
|
25,892
|
|
|
|
—
|
|
|
|
—
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,787
|
|
|
|
8,787
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,742
|
|
|
|
15,742
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
423
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
423
|
|
|
$
|
339,893
|
|
|
$
|
340,316
|
|
|
$
|
—
|
|
|
$
|
25
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
(dollars in
thousands)
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
|
|
|
|
|
|
|
Greater
Than
|
|
|
|
|
|
|
30-59
Days
|
|
|
60-89
Days
|
|
|
Greater
Than
|
|
|
Total
Past
|
|
|
|
|
|
|
|
|
90
Days and
|
|
|
|
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
90
Days
|
|
|
Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29,650
|
|
|
$
|
29,650
|
|
|
$
|
—
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
199,894
|
|
|
|
199,894
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,139
|
|
|
|
56,139
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,685
|
|
|
|
5,685
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,338
|
|
|
|
16,338
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32
|
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,419
|
|
|
|
4,419
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,714
|
|
|
|
10,714
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
322,871
|
|
|
$
|
322,871
|
|
|
$
|
—
|
|
|
$
|
27
|
|
9. LEASES
The
Company adopted ASU 2016-02,
Leases (Topic 842),
on January 1, 2019, using the alternative transition method whereby
comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required.
The Company also elected the package of practical expedients permitted under the transition guidance within the new standard,
which among other things allowed the Company to carry forward the historical lease classifications. Additionally, the Company
elected the hindsight practical expedient to determine the lease term for existing leases.
The Company
leases nine locations for administrative offices and branch locations. All leases were classified as operating leases. Leases with
an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line
basis over the lease term. The Company elected to use the practical expedient to not recognize short-term leases on the consolidated
balance sheet and instead account for them as executory contracts.
Certain
leases include options to renew, with renewal terms that can extend the lease term, typically for five years. Lease assets and
liabilities include related options that are reasonably certain of being exercised, however, in the case of those leases that
have renewal options, the Company is not including those additional lease terms as the rates are undeterminable and it has been
the Company’s historical practice to renegotiate lease terms upon expiration of the original lease terms. The depreciable
life of leased assets are limited by the expected lease term.
Adoption
of this standard resulted in the Company recognizing a right of use asset and a corresponding lease liability of $3,570,000 on
January 1, 2019.
Supplemental lease information at or for the three months ended March 31, 2019 is as follows:
Balance Sheet
|
|
|
|
|
|
|
|
|
|
Operating lease asset classified as premises and equipment
|
|
$
|
3,372,000
|
|
Operating lease liability classified as other liabilities
|
|
|
3,372,000
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
Operating lease cost classified as occupancy and equipment expense
|
|
$
|
188,000
|
|
Weighted average lease term, in years
|
|
|
6.33
|
|
Weighted average discount rate (1)
|
|
|
3.03
|
%
|
Operating cash flows
|
|
$
|
189,000
|
|
|
(1)
|
The discount rate was developed
by using the fixed rate credit advance borrowing rate at the Federal Home Loan Bank of San Francisco for a term
correlating
to the remaining life of each lease.
|
A maturity
analysis of the Company’s lease liabilities at March 31, 2019 was as follows:
|
|
Balance
|
|
April 1, 2019 to March 31,
2020
|
|
$
|
728,000
|
|
April 1, 2020 to March 31, 2021
|
|
|
689,000
|
|
April 1, 2021 to March 31, 2022
|
|
|
653,000
|
|
April 1, 2022 to March 31, 2023
|
|
|
539,000
|
|
April 1, 2023 to March 31, 2024
|
|
|
283,000
|
|
Thereafter
|
|
|
859,000
|
|
Total lease payments
|
|
|
3,751,000
|
|
Less: Interest
|
|
|
(379,000
|
)
|
Present value of lease liabilities
|
|
$
|
3,372,000
|
|
10. BORROWING ARRANGEMENTS
At
March 31, 2019, 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 March 31, 2019 or December 31, 2018.
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 $29,500,000 were outstanding from the FHLB at March 31,
2019, bearing interest rates ranging from 1.18% to 3.17% and maturing between April 1, 2021 and November 24, 2023. Advances totaling
$15,500,000 were outstanding from the FHLB at December 31, 2018, bearing interest rates ranging from 1.18% to 3.17% and maturing
between April 30, 2019 and November 24, 2023. Remaining amounts available under the borrowing arrangement with the FHLB at March
31, 2019 and December 31, 2018 totaled $92,451,000 and $107,262,000, 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 March 31, 2019 and December 31, 2018 were $6,465,000 and $8,340,000, respectively.
There were no advances outstanding under this borrowing arrangement as of March 31, 2019 and December 31, 2018.
11. 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 periods
ended March 31, 2019 and 2018.
12. 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 March 31, 2019 and December 31, 2018. 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 2018, the Company adopted the provisions of Accounting
Standard Update 2016-01 “
Recognition and Measurement of Financial Assets and Financial Liabilities
” (“ASU
2016-01”). ASU 2016-01 requires the Company to use the exit price notion when measuring the fair value of financial instruments.
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:
|
|
|
|
|
March 31, 2019
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
16,610
|
|
|
$
|
16,610
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,610
|
|
Federal funds sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing deposits in banks
|
|
|
2,835
|
|
|
|
1,089
|
|
|
|
1,746
|
|
|
|
—
|
|
|
|
2,835
|
|
Available-for-sale securities
|
|
|
286,602
|
|
|
|
1,989
|
|
|
|
284,613
|
|
|
|
—
|
|
|
|
286,602
|
|
Held-to-maturity securities
|
|
|
277
|
|
|
|
—
|
|
|
|
293
|
|
|
|
—
|
|
|
|
293
|
|
FHLB stock
|
|
|
3,932
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net loans and leases:
|
|
|
336,007
|
|
|
|
—
|
|
|
|
—
|
|
|
|
338,298
|
|
|
|
338,298
|
|
Accrued interest receivable
|
|
|
2,050
|
|
|
|
—
|
|
|
|
1,030
|
|
|
|
898
|
|
|
|
1,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
213,012
|
|
|
$
|
213,012
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
213,012
|
|
Savings
|
|
|
72,576
|
|
|
|
72,576
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,576
|
|
Money market
|
|
|
132,966
|
|
|
|
132,966
|
|
|
|
—
|
|
|
|
—
|
|
|
|
132,966
|
|
NOW accounts
|
|
|
66,148
|
|
|
|
66,148
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,148
|
|
Time Deposits
|
|
|
87,677
|
|
|
|
—
|
|
|
|
87,649
|
|
|
|
—
|
|
|
|
87,649
|
|
Short-term borrowings
|
|
|
19,000
|
|
|
|
19,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,000
|
|
Long-term borrowings
|
|
|
10,500
|
|
|
|
—
|
|
|
|
10,737
|
|
|
|
—
|
|
|
|
10,737
|
|
Accrued interest payable
|
|
|
95
|
|
|
|
7
|
|
|
|
88
|
|
|
|
—
|
|
|
|
95
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
December 31, 2018
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
20,987
|
|
|
$
|
20,987
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,987
|
|
Federal funds sold
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Interest-bearing deposits in banks
|
|
|
1,746
|
|
|
|
—
|
|
|
|
1,746
|
|
|
|
—
|
|
|
|
1,746
|
|
Available-for-sale securities
|
|
|
294,933
|
|
|
|
4,976
|
|
|
|
289,957
|
|
|
|
—
|
|
|
|
294,933
|
|
Held-to-maturity securities
|
|
|
292
|
|
|
|
—
|
|
|
|
306
|
|
|
|
—
|
|
|
|
306
|
|
FHLB stock
|
|
|
3,932
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net loans and leases:
|
|
|
318,516
|
|
|
|
—
|
|
|
|
—
|
|
|
|
315,235
|
|
|
|
315,235
|
|
Accrued interest receivable
|
|
|
1,959
|
|
|
|
—
|
|
|
|
1,044
|
|
|
|
915
|
|
|
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
214,745
|
|
|
$
|
214,745
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
214,745
|
|
Savings
|
|
|
72,522
|
|
|
|
72,522
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,522
|
|
Money market
|
|
|
145,831
|
|
|
|
145,831
|
|
|
|
—
|
|
|
|
—
|
|
|
|
145,831
|
|
NOW accounts
|
|
|
69,489
|
|
|
|
69,489
|
|
|
|
—
|
|
|
|
—
|
|
|
|
69,489
|
|
Time Deposits
|
|
|
88,087
|
|
|
|
—
|
|
|
|
88,078
|
|
|
|
—
|
|
|
|
88,078
|
|
Short-term borrowings
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
Long-term borrowings
|
|
|
10.500
|
|
|
|
—
|
|
|
|
10,733
|
|
|
|
—
|
|
|
|
10,733
|
|
Accrued interest payable
|
|
|
63
|
|
|
|
—
|
|
|
|
63
|
|
|
|
—
|
|
|
|
63
|
|
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.
Assets and
liabilities measured at fair value on a recurring and non-recurring basis 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities
measured on a
recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
and
Sponsored
Agencies
|
|
$
|
265,427
|
|
|
$
|
—
|
|
|
$
|
265,427
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Obligations
of states and political
subdivisions
|
|
|
12,639
|
|
|
|
—
|
|
|
|
12,639
|
|
|
|
—
|
|
|
|
—
|
|
Corporate bonds
|
|
|
6,547
|
|
|
|
—
|
|
|
|
6,547
|
|
|
|
—
|
|
|
|
—
|
|
US Treasury securities
|
|
|
1,989
|
|
|
|
1,989
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
286,602
|
|
|
$
|
1,989
|
|
|
$
|
284,613
|
|
|
$
|
—
|
|
|
$
|
—
|
|
At March 31, 2019,
there were no assets or liabilities measured on a nonrecurring basis.
Description
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Gains
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities
measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government
Agencies and Sponsored Agencies
|
|
$
|
269,049
|
|
|
$
|
—
|
|
|
$
|
269,049
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate Debt securities
|
|
|
6,508
|
|
|
|
—
|
|
|
|
6,508
|
|
|
|
|
|
|
|
|
|
Obligations of states
and political subdivisions
|
|
|
14,400
|
|
|
|
—
|
|
|
|
14,400
|
|
|
|
—
|
|
|
|
—
|
|
US Treasury securities
|
|
|
4,976
|
|
|
|
4,976
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
294,933
|
|
|
$
|
4,976
|
|
|
$
|
289,957
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities
measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
5,274
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,274
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
957
|
|
|
|
—
|
|
|
|
—
|
|
|
|
957
|
|
|
|
(4
|
)
|
Total nonrecurring
|
|
$
|
6,231
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,231
|
|
|
$
|
(4
|
)
|
There were no
transfers between Levels 1 and 2 during the three-month period ended March 31, 2019 or the twelve months ended December 31, 2018.
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 dues 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%.
13.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 was effective for interim and annual reporting periods
beginning after December 15, 2018; early adoption was 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. Based on evaluation of the Company’s current lease obligations, the Company has determined
that the provisions of ASU No. 2016-02 resulted in an increase in assets to recognize the present value of the lease obligations
with a corresponding increase in liabilities. The Company currently leases nine of its office leases under operating leases. The
Company adopted ASU No. 2016-02 on January 1, 2019. The Company’s present value of future lease payments as of January 1,
2019 is $3,570,000, to be recorded as a right-of-use asset with an offsetting liability. The effects of adopting ASU No. 2016-02
did not have a material impact on the Company’s financial position, results of operations or cash flows.
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). While 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, it has taken steps to prepare for the implementation when it
becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals,
evaluating its current IT systems, and purchasing a software solution. The Company has imported current and historical data
into the new software and is currently validating the data and intends to begin processing information, on a test basis, with
the new CECL specific software during 2019 and to disclose any material potential impact of this modeling once it becomes
available.
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, 2018 and March 31, 2019 and its income and expense accounts for the three-month periods
ended March 31, 2019 and 2018. 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 “this 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:
|
·
|
Current and future
legislation and regulation promulgated by the United States Congress and actions taken by governmental agencies that may impact
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;
|
|
·
|
changes in the interest
rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed
funds;
|
|
·
|
inadequate internal
controls over financial reporting or disclosure controls and procedures;
|
|
·
|
changes in accounting
policies and practices and the effects of adopting ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“CECL”);
|
|
·
|
potential declines
in fee and other noninterest income earned associated with economic factors;
|
|
·
|
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 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, natural disasters (including earthquakes and wildfires), 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;
|
|
·
|
our ability to comply
with any regulatory orders or requirements we may become subject to;
|
|
·
|
the effects and costs
of litigation and other legal developments;
|
|
·
|
the reputation of
the financial services industry could experience 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, 2018, 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 the taxable equivalent basis used in the computation
of the net interest margin and efficiency ratio. 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 21% 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. The efficiency ratio is a measure of a banking company’s overhead as a percentage of its revenue. The Company
derives this ratio by dividing total noninterest expense by the sum of the taxable equivalent net interest income and the total
noninterest income.
Reconciliation
of Annualized Net Interest Margin, Fully Tax Equivalent (non-GAAP)
(dollars in thousands)
|
|
For the three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net interest income (GAAP)
|
|
$
|
5,549
|
|
|
$
|
4,737
|
|
Tax equivalent adjustment
|
|
|
48
|
|
|
|
59
|
|
Net interest income - tax equivalent adjusted (non-GAAP)
|
|
$
|
5,597
|
|
|
$
|
4,796
|
|
|
|
|
|
|
|
|
|
|
Average earning assets
|
|
$
|
632,995
|
|
|
$
|
591,854
|
|
Net interest margin (GAAP)
|
|
|
3.55
|
%
|
|
|
3.25
|
%
|
Net interest margin (non-GAAP)
|
|
|
3.59
|
%
|
|
|
3.29
|
%
|
Reconciliation
of Non-GAAP Measure – Efficiency Ratio
(dollars in thousands)
|
|
For the three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net interest income (GAAP)
|
|
$
|
5,549
|
|
|
$
|
4,737
|
|
Tax equivalent adjustment
|
|
|
48
|
|
|
|
59
|
|
Net interest income – tax-equivalent adjusted (non-GAAP)
|
|
|
5,597
|
|
|
|
4,796
|
|
Noninterest income
|
|
|
411
|
|
|
|
372
|
|
Total income
|
|
|
6,008
|
|
|
|
5,168
|
|
Total noninterest expense
|
|
|
4,260
|
|
|
|
3,350
|
|
Efficiency ratio, fully tax-equivalent (non-GAAP)
|
|
|
70.91
|
%
|
|
|
64.82
|
%
|
Critical Accounting Policies
General
The Company’s
financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). The financial information contained within our statements is, to a significant extent, financial information
that is based on measures of the financial effects of transactions and events that have already occurred. We use historical loss
data and the economic environment as factors, among others, in determining the inherent loss that may be present in our loan and
lease portfolio. Actual losses could differ significantly from the factors that we use. 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 probable credit losses inherent in the Company’s credit portfolio that have
been incurred 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 balance.
The
allowance for loan and lease losses is determined based upon estimates that can and do change when the actual risk, loss events,
or changes in other factors, occur. The analysis of the allowance uses a historical loss view as an indicator of future losses
and as a result could differ from the actual losses incurred in the future. If the allowance for loan and lease losses falls below
that deemed adequate (by reason of loan and lease growth, actual losses, the effect of changes in risk factors, or some combination
of these), the Company has a strategy for supplementing the allowance
for loan and lease
losses, over the short-term. For further information regarding our allowance for loan and lease losses, see “Allowance for
Loan and Lease Losses Activity.”
Stock-Based
Compensation
The Company recognizes
compensation expense over the service 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 grant and amortized over the service period using a Black-Scholes-Merton based option valuation model that requires
the use of assumptions. Critical assumptions that affect the estimated fair value of each award include expected stock price volatility,
dividend yields, option life and the risk-free interest rate. The fair value of each restricted award is estimated on the
date of award and amortized over the service period.
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 103 full-time employees as of March 31, 2019.
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 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. 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 2019
and 2018, 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 $1,146,000 for the quarter ended March 31, 2019, which was a decrease of $207,000 (15.3%) compared to
$1,353,000 reported for the same period of 2018. Diluted earnings per share for the first quarter of 2019 was $0.20, a
decrease of 9.1% compared to the $0.22 per share reported in the first quarter of 2018. The return on average equity
(“ROAE”) and the return on average assets (“ROAA”) for the first quarter of 2019 were 6.17% and
0.68%, respectively, as compared to 7.39% and 0.80%, respectively, for the same period in 2018.
Total assets
of the Company increased by $1,276,000 (0.2%) from $688,092,000 at December 31, 2018 to $689,368,000 at March 31, 2019. Net loans
totaled $336,007,000 at March 31, 2019, an increase of $17,491,000 (5.5%) from $318,516,000 at December 31, 2018. Deposit balances
at March 31, 2019 totaled $572,379,000, a decrease of $18,295,000 (3.1%) from $590,674,000 at December 31, 2018.
The Company ended
the first quarter of 2019 with a leverage capital ratio of 9.1%, a Tier 1 capital ratio of 15.8%, and a total risk-based capital
ratio of 17.0% compared to 8.9%, 16.1%, and 17.3%, respectively, at December 31, 2018. 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
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Interest income*
|
|
$
|
6,180
|
|
|
$
|
5,125
|
|
Interest expense
|
|
|
(583
|
)
|
|
|
(329
|
)
|
Net interest income*
|
|
|
5,597
|
|
|
|
4,796
|
|
Provision for loan and lease losses
|
|
|
(180
|
)
|
|
|
—
|
|
Noninterest income
|
|
|
411
|
|
|
|
372
|
|
Noninterest expense
|
|
|
(4,260
|
)
|
|
|
(3,350
|
)
|
Provision for income taxes
|
|
|
(374
|
)
|
|
|
(406
|
)
|
Tax equivalent adjustment
|
|
|
(48
|
)
|
|
|
(59
|
)
|
Net income
|
|
$
|
1,146
|
|
|
$
|
1,353
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
686,162
|
|
|
$
|
683,392
|
|
Net income (annualized) as a percentage of average total assets
|
|
|
0.68
|
%
|
|
|
0.80
|
%
|
*
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 3.59%
for the three months ended March 31, 2019 and 3.29% for the three months ended March 31, 2018.
The fully
taxable equivalent interest income component for the first quarter of 2019 increased $1,055,000 (20.6%) to $6,180,000 compared
to $5,125,000 for the three months ended March 31, 2018. The decrease in the fully taxable equivalent interest income for the
first quarter of 2019 compared to the same period in 2018 is broken down by rate (up $711,000) and volume (up $344,000). The primary
driver in this rate increase was an increase in the yield on loans which saw an increase from 4.59% in the first quarter of 2018
to 4.93% in the first quarter of 2019 and an increase in the yield on investments, which saw an increase from 2.36% in the first
quarter of 2018 to 2.87% in the first quarter of 2019. The increased yield in 2019 compared to 2018 was due to the overall higher
interest rate environment. The yield on earning assets increased from 3.51% during the first quarter of 2018 to 3.96% during the
first quarter of 2019. The volume increase of $344,000 was primarily from an increase in loans ($241,000) and an increase in investment
balances ($134,000). Average loans balances increased $21,304,000, (or 6.9%), from $307,266,000 during the first quarter of 2018
to $328,570,000 during the first quarter of 2019 and the average investment balances increased $28,157,000, (or 10.5%), from $269,109,000
during the first quarter of 2018 to $297,266,000 during the first quarter of 2019.
Interest
expense was $583,000 or $254,000 (77.2%) higher in the first quarter of 2019 versus $329,000 in the first quarter of 2018. The
net $254,000 increase in interest expense during the first quarter of 2019 compared to the first quarter of 2018 was predominantly
due to higher rates (up $221,000). Increased volume added an additional expense of $33,000. The increase in deposit expense can
be attributed to the higher rate environment particularly from an increase in rates paid on time deposit balances. Some of these
time deposits are indexed to the three-month or six-month treasury rates which have increased over the past twelve months. Interest
expense on time deposits related to rate was $155,000. Rates paid on interest bearing liabilities increased 25 basis points from
0.35% to 0.60% for the first quarter of 2018 compared to the same period in 2019.
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 March 31,
|
|
2019
|
|
|
2018
|
|
(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)
|
|
$
|
312,588
|
|
|
$
|
3,818
|
|
|
|
4.95
|
%
|
|
$
|
293,307
|
|
|
$
|
3,328
|
|
|
|
4.60
|
%
|
Tax-exempt loans and leases (2)
|
|
|
15,982
|
|
|
|
178
|
|
|
|
4.52
|
%
|
|
|
13,959
|
|
|
|
153
|
|
|
|
4.45
|
%
|
Taxable investment Securities
|
|
|
283,006
|
|
|
|
2,024
|
|
|
|
2.90
|
%
|
|
|
245,476
|
|
|
|
1,391
|
|
|
|
2.30
|
%
|
Tax-exempt investment securities (2)
|
|
|
14,260
|
|
|
|
111
|
|
|
|
3.16
|
%
|
|
|
23,573
|
|
|
|
197
|
|
|
|
3.39
|
%
|
Federal funds sold
|
|
|
700
|
|
|
|
5
|
|
|
|
2.90
|
%
|
|
|
13,733
|
|
|
|
50
|
|
|
|
1.48
|
%
|
Investments in time deposits
|
|
|
6,459
|
|
|
|
44
|
|
|
|
2.76
|
%
|
|
|
1,746
|
|
|
|
6
|
|
|
|
1.39
|
%
|
Total earning assets
|
|
|
632,995
|
|
|
|
6,180
|
|
|
|
3.96
|
%
|
|
|
591,854
|
|
|
|
5,125
|
|
|
|
3.51
|
%
|
Cash & due from banks
|
|
|
16,176
|
|
|
|
|
|
|
|
|
|
|
|
56,973
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
41,411
|
|
|
|
|
|
|
|
|
|
|
|
39,051
|
|
|
|
|
|
|
|
|
|
Allowance for loan & lease losses
|
|
|
(4,420
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,486
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
686,162
|
|
|
|
|
|
|
|
|
|
|
$
|
683,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
$
|
211,003
|
|
|
|
94
|
|
|
|
0.18
|
%
|
|
$
|
219,499
|
|
|
|
57
|
|
|
|
0.11
|
%
|
Savings
|
|
|
73,602
|
|
|
|
7
|
|
|
|
0.04
|
%
|
|
|
69,612
|
|
|
|
6
|
|
|
|
0.03
|
%
|
Time deposits
|
|
|
87,636
|
|
|
|
388
|
|
|
|
1.80
|
%
|
|
|
79,693
|
|
|
|
212
|
|
|
|
1.08
|
%
|
Other borrowings
|
|
|
19,533
|
|
|
|
94
|
|
|
|
1.95
|
%
|
|
|
15,500
|
|
|
|
54
|
|
|
|
1.41
|
%
|
Total interest bearing liabilities
|
|
|
391,774
|
|
|
|
583
|
|
|
|
0.60
|
%
|
|
|
384,304
|
|
|
|
329
|
|
|
|
0.35
|
%
|
Noninterest bearing demand deposits
|
|
|
209,456
|
|
|
|
|
|
|
|
|
|
|
|
217,583
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
9,628
|
|
|
|
|
|
|
|
|
|
|
|
7,259
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
610,858
|
|
|
|
|
|
|
|
|
|
|
|
609,146
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
75,304
|
|
|
|
|
|
|
|
|
|
|
|
74,246
|
|
|
|
|
|
|
|
|
|
|
|
$
|
686,162
|
|
|
|
|
|
|
|
|
|
|
$
|
683,392
|
|
|
|
|
|
|
|
|
|
Net interest income & margin (3)
|
|
|
|
|
|
$
|
5,597
|
|
|
|
3.59
|
%
|
|
|
|
|
|
$
|
4,796
|
|
|
|
3.29
|
%
|
|
(1)
|
Loan interest includes loan fees of $106,000 and $131,000,
respectively, during the three months ended March 31, 2019 and March 31, 2018. Average loan balances include non-performing
loans.
|
|
(2)
|
Includes taxable-equivalent adjustments that primarily
relate to income on certain loans and securities that is exempt from federal income taxes. The effective federal statutory tax
rate was 21% for 2019 and 2018.
|
|
(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 (90 days) and annualized to actual days in the year (365 days).
|
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
Three Months Ended March 31, 2019 over 2018 (dollars in thousands)
Increase (decrease) due to change in:
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
Volume
|
|
|
Rate (4)
|
|
|
Net Change
|
|
Taxable net loans and leases (1)(2)
|
|
$
|
219
|
|
|
$
|
271
|
|
|
$
|
490
|
|
Tax-exempt net loans and leases (3)
|
|
|
22
|
|
|
|
3
|
|
|
|
25
|
|
Taxable investment securities
|
|
|
212
|
|
|
|
421
|
|
|
|
633
|
|
Tax exempt investment securities (3)
|
|
|
(78
|
)
|
|
|
(8
|
)
|
|
|
(86
|
)
|
Federal funds sold
|
|
|
(47
|
)
|
|
|
2
|
|
|
|
(45
|
)
|
Interest-bearing deposits in banks
|
|
|
16
|
|
|
|
22
|
|
|
|
38
|
|
Total
|
|
|
344
|
|
|
|
711
|
|
|
|
1,055
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
|
(2
|
)
|
|
|
39
|
|
|
|
37
|
|
Savings deposits
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Time deposits
|
|
|
21
|
|
|
|
155
|
|
|
|
176
|
|
Other borrowings
|
|
|
14
|
|
|
|
26
|
|
|
|
40
|
|
Total
|
|
|
33
|
|
|
|
221
|
|
|
|
254
|
|
Interest differential
|
|
$
|
311
|
|
|
$
|
490
|
|
|
$
|
801
|
|
|
(1)
|
The average balance of nonaccrual
loans is immaterial as a percentage of total loans and has been included in net loans.
|
|
(2)
|
Loan interest includes loan
fees of $106,000 and $131,000, respectively, during the three months ended March 31, 2019 and March 31, 2018 which have been
included in the interest income computation.
|
|
(3)
|
Includes taxable-equivalent
adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 21% for 2019 and 2018.
|
|
(4)
|
The rate/volume variance
has been included in the rate variance.
|
Provision for Loan and
Lease Losses
The Company added
$180,000 to the provision for loan and lease losses for the first quarter of 2019 compared to zero in the first quarter of 2018.
The Company experienced net loan and lease recoveries of $5,000 or (0.01%) (on an annualized basis) of average loans and leases
for the three months ended March 31, 2019 compared to net loan and lease recoveries of $10,000 or (0.01%) (on an annualized basis)
of average loans and leases for the three months ended March 31, 2018. The Company continued to experience an overall improvement
in the credit quality of the loan and lease portfolio and a reduction of credit losses, however, due to the net growth in the
loans outstanding during the first quarter of 2019, management believed the $180,000 addition to the provision for loan and lease
losses was warranted. 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
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Service charges on deposit accounts
|
|
$
|
121
|
|
|
$
|
117
|
|
Gain on sale of securities
|
|
|
36
|
|
|
|
1
|
|
Merchant fee income
|
|
|
90
|
|
|
|
110
|
|
Bank owned life insurance
|
|
|
81
|
|
|
|
75
|
|
Other
|
|
|
83
|
|
|
|
69
|
|
Total noninterest income
|
|
$
|
411
|
|
|
$
|
372
|
|
Noninterest income
increased $39,000 (10.5%) to 411,000 for the three months ended March 31, 2019 as compared to $372,000 for the three months ended
March 31, 2018. The increase in noninterest income was primarily related to higher gains from sales of securities, which increased
from $1,000 in 2018 to $36,000 in 2019.
Noninterest
Expense
Noninterest
expense increased $910,000 (27.2%) to a total of $4,260,000 in the first quarter of 2019 compared to $3,350,000 in the first quarter
of 2018. Salary and employee benefits expense increased $575,000 (26.1%) from $2,206,000 during the first quarter of 2018 to $2,781,000
during the first quarter of 2019. The increase in salaries and benefits expense resulted from filling some vacant positions, hiring
additional relationship managers, replacing the Chief Credit Officer, and normal cost of living increases and promotions. Average
full-time equivalent employees was 103 during the first quarter of 2019 compared to 90 during the first quarter of 2018. On a
quarter-over-quarter basis, occupancy expense decreased $5,000 (1.9%) and furniture and equipment expense increased $2,000 (1.4%).
FDIC assessments decreased $3,000 (5.7%) from the first quarter of 2018 to the first quarter of 2019. OREO related expenses decreased
$1,000 (20.0%) during the first quarter of 2019 from $5,000 in the first quarter of 2018 to $4,000 in the first quarter of 2019.
Other expense increased $342,000 (49.9%) to $1,028,000 in the first quarter of 2019 compared to $686,000 in the first quarter
of 2018. There were numerous line items that make up the $342,000 increase in other expenses including advertising and business
development (increased $115,000), correspondent bank charges (increased $117,000), professional fees (increased $23,000), and
director expenses (increased $28,000). Much of this increase in advertising and business development is related to the expenses
to sponsor community events and other promotional activities as the Company is focusing more effort in our markets to strengthen
our brand. The increase in correspondent bank charges relates to lower average balances maintained by the Company in these accounts
resulting in higher service charges and the interest earned on these balances has increased due to the higher interest rate environment
and beginning in 2019 is being considered as interest income by the Company and classified as such and is reflected in the higher
balances in the interest due from banks in the consolidated statement of income. The fully taxable equivalent efficiency ratio
increased from 64.8% for the first quarter of 2018 to 70.9% for the first quarter of 2019.
Provision for
Income Taxes
Federal
and state income taxes for the quarter ended March 31, 2019 decreased $32,000 (7.9%) from $406,000 in the first quarter of 2018
to $374,000 in the first quarter of 2019. The effective tax rate for the quarter ended March 31, 2019 was 24.6% compared to 23.1%
for the first quarter of 2018. The lower tax expense was related to the lower level of taxable income in 2019 ($1,520,000) compared
to 2018 ($1,759,000). The higher effective tax rate in 2019 compared to 2018 is related to the tax treatment of equity based compensation
under Accounting Standards Update 2016-09 (“ASU 2016-09”). Under ASU 2016-09, if the market value of the Company’s
stock price on the date restricted stock vests is higher than the Company’s stock price on the date the restricted stock
was awarded the Company receives a tax credit for the difference in values and if the market price on the vesting date is lower
than the stock price on the award date the Company recognizes additional tax expense. In the first quarter of 2018 the Company
recognized an $87,000 tax credit under ASU 2016-09 and in the first quarter of 2019 the Company recognized a $5,000 tax expense
under ASU 2016-09.
Balance
Sheet Analysis
The Company’s
total assets were $689,368,000 at March 31, 2019 as compared to $688,092,000 at December 31, 2018, representing an increase of
$1,276,000 (0.2%). The average assets for the three months ended March 31, 2019 were $686,162,000, which represents an increase
of $2,770,000 or 0.4% over the balance of $683,392,000 during the three-month period ended March 31, 2018.
Federal
Funds
The
balance held in correspondent banks classified as Federal funds at March 31, 2019, was zero compared to $7,000,000 at December
31, 2018. The primary reason for the decrease in Federal funds since December 31, 2018 is directly related to the increase in
loan balances during the same period.
Investment
Securities
Table
Five below summarizes the values of the Company’s investment securities held on March 31, 2019 and December 31, 2018.
Table Five: Investment
Securities Composition
(dollars in thousands)
|
|
|
|
|
|
|
Available-for-sale (at fair value)
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
US
Government Agencies and Sponsored Agencies
|
|
$
|
265,427
|
|
|
$
|
269,049
|
|
Obligations of states and political subdivisions
|
|
|
12,639
|
|
|
|
14,400
|
|
Corporate bonds
|
|
|
6,547
|
|
|
|
6,508
|
|
US Treasury securities
|
|
|
1,989
|
|
|
|
4,976
|
|
Total available-for-sale investment securities
|
|
$
|
286,602
|
|
|
$
|
294,933
|
|
Held-to-maturity (at amortized cost)
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
US
Government Agencies and Sponsored Agencies
|
|
$
|
277
|
|
|
$
|
292
|
|
Total held-to-maturity investment securities
|
|
$
|
277
|
|
|
$
|
292
|
|
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. Net unrealized losses on available-for-sale investment securities totaling $74,000 were
recorded, net of $22,000 in tax assets, as accumulated other comprehensive loss within shareholders’ equity at March 31,
2019 and net unrealized losses on available-for-sale investment securities totaling $2,664,000 were recorded, net of $788,000
in tax liabilities, as accumulated other comprehensive loss within shareholders’ equity at December 31, 2018.
Management
periodically evaluates each investment security in a loss position for other than temporary impairment relying primarily on industry
analyst reports, observation of market conditions and interest rate fluctuations. Management has the ability and intent to hold
securities with established maturity dates until recovery of fair value, which may be until maturity, and believes it will be
able to collect all amounts due according to the contractual terms for all of the underlying investment securities; therefore,
management does not consider these investments to be other-than-temporarily impaired.
Loans and Leases
The Company’s
historical lending activities have been in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family
real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) lease financing
receivable; (7) agriculture; and (8) consumer loans. The Company’s continuing focus in our market area, new borrowers developed
through the Company’s marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company originating
$30.5 million in new loans during the first three months of 2019. This production was partially offset by pay downs and payoffs,
but resulted in an overall increase in net loans and leases of $17,491,000 (5.5%) from December 31, 2018.
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 (including classic and collectors 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 first trust deed loans on properties that produce grapes, fruit, and nut loans. In general, except
in the case of loans under SBA programs or Farm Services Agency guarantees, the Company does not make long-term residential mortgage
loans.
Table Six
below summarizes the composition of the loan portfolio as of March 31, 2019 and December 31, 2018.
Table Six: Loan
and Lease Portfolio Composition
(dollars in thousands)
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Change in
|
|
|
Percentage
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
dollars
|
|
|
change
|
|
Commercial
|
|
$
|
29,827
|
|
|
|
9
|
%
|
|
$
|
29,650
|
|
|
|
9
|
%
|
|
$
|
177
|
|
|
|
0.6
|
%
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
196,471
|
|
|
|
58
|
%
|
|
|
199,894
|
|
|
|
62
|
%
|
|
|
(3,423
|
)
|
|
|
(1.7
|
%)
|
Multi-family
|
|
|
54,725
|
|
|
|
16
|
%
|
|
|
56,139
|
|
|
|
18
|
%
|
|
|
(1,414
|
)
|
|
|
(2.5
|
%)
|
Construction
|
|
|
8,862
|
|
|
|
3
|
%
|
|
|
5,685
|
|
|
|
2
|
%
|
|
|
3,177
|
|
|
|
55.9
|
%
|
Residential
|
|
|
25,892
|
|
|
|
7
|
%
|
|
|
16,338
|
|
|
|
5
|
%
|
|
|
9,554
|
|
|
|
58.5
|
%
|
Lease financing receivable
|
|
|
10
|
|
|
|
—
|
%
|
|
|
32
|
|
|
|
—
|
%
|
|
|
(22
|
)
|
|
|
(68.8
|
%)
|
Agriculture
|
|
|
8,787
|
|
|
|
2
|
%
|
|
|
4,419
|
|
|
|
1
|
%
|
|
|
4,368
|
|
|
|
98.8
|
%
|
Consumer
|
|
|
15,742
|
|
|
|
5
|
%
|
|
|
10,714
|
|
|
|
3
|
%
|
|
|
5,028
|
|
|
|
46.9
|
%
|
Total loans and leases
|
|
|
340,316
|
|
|
|
100
|
%
|
|
|
322,871
|
|
|
|
100
|
%
|
|
|
17,445
|
|
|
|
5.4
|
%
|
Deferred loan fees and costs, net
|
|
|
268
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(4,577
|
)
|
|
|
|
|
|
|
(4,392
|
)
|
|
|
|
|
|
|
(185
|
)
|
|
|
|
|
Total net loans and leases
|
|
$
|
336,007
|
|
|
|
|
|
|
$
|
318,516
|
|
|
|
|
|
|
$
|
17,491
|
|
|
|
5.5
|
%
|
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 serviced markets in Santa Clara,
Contra Costa, and Alameda Counties through a loan production office. In the fourth quarter of 2016, the Company discontinued operating
the loan production office, however, the Company continues to service loans originated through these offices. 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 84% of the Company’s loan and lease
portfolio at March 31, 2019 and 87% as of December 31, 2018. Management believes that the residential land and construction portion
of the Company’s loan portfolio carries a reasonable level of credit risk. As of March 31, 2019, outstanding unimproved
residential land and construction loans were $6,773,000 (or just 2.4% of the total real estate loans). Of the $6,773,000, $2,079,000
(31%) was represented by one amortizing loan, which was considered well-secured, with a favorable loan-to-value ratio. 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 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 market 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
Management places
loans and leases on nonaccrual status when they become 90 days past due or if a loss is expected, unless the loan or lease is
well secured and in the process of collection. Loans and leases are partially or fully charged off when, in the opinion of management,
collection of such amount appears unlikely. The recorded investments in nonperforming loans and leases, which includes nonaccrual
loans and leases and loans and leases that were 90 days or more past due and on accrual, totaled $25,000 and $27,000 at March
31, 2019 and December 31, 2018, respectively. The $25,000 in nonperforming loans and leases at March 31, 2019 were comprised of
one commercial loan relationship with two loans totaling $27,000, both of which were current to terms.
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 March 31, 2019. Management is not aware of any potential problem loans, which were accruing and current at March 31, 2019,
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 apart from those loans identified in the Bank’s impairment analysis.
Table Seven below
sets forth nonaccrual loans and loans past due 90 days or more as of March 31, 2019 and December 31, 2018.
Table
Seven: Nonperforming Loans and Leases
(dollars in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Past due 90 days or more and still accruing:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Nonaccrual:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
25
|
|
|
|
27
|
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming loans
|
|
$
|
25
|
|
|
$
|
27
|
|
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 March 31,
2019, the recorded investment in loans and leases that were considered to be impaired totaled $8,640,000, all of which are considered
performing loans and leases. Of the total impaired loans of $8,640,000, loans totaling $5,936,000 were deemed to require no specific
reserve and loans totaling $2,704,000 were deemed to require a related valuation allowance of $164,000. Of the $5,936,000 impaired
loans that did not carry a specific reserve there were $489,000 in loans or leases that had previous partial charge-offs and $5,447,000
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 $8,702,000 at December 31, 2018. Of the total impaired loans of $8,702,000, loans totaling $5,968,000 were
deemed to require no specific reserve and loans totaling $2,734,000 were deemed to require a related valuation allowance of $185,000.
Prior to 2013,
the Company had been operating in a market that had experienced significant decreases in real estate values of commercial, residential,
land, and construction properties. As such, the Company is focused on monitoring collateral values for those loans considered
collateral dependent. For collateral dependent loans the Company performs an internal evaluation or obtains an updated appraisal,
as necessary. In the first quarter of 2019, the Company had net loan recoveries of $5,000 with $180,000 in provisions for loan
and lease losses. Despite the Company’s continued improvement in the credit quality of the loan and lease portfolio, due
to the net growth in the loans outstanding during the first quarter of 2019, the $180,000 addition to the provision for loan and
lease losses was warranted. In the first quarter of 2018, the Company had net loan recoveries of $10,000 with no added provision.
During the periods
ended March 31, 2019 and March 31, 2018, there were no loans that were modified as troubled debt restructurings. There were no
payment defaults during the three months ended March 31, 2019 or March 31, 2018 on troubled debt restructurings made in the preceding
twelve months. At March 31, 2019 and December 31, 2018, there were no unfunded commitments on those loans considered troubled
debt restructures.
Allowance
for Loan and Lease Losses Activity
The Company
maintains an allowance for loan and lease losses (“ALLL”) to cover probable losses inherent in the loan and lease
portfolio, which is based upon management’s estimate of those losses. The ALLL is established through a provision for loan
and lease losses and is increased by provisions charged against current earnings and recoveries and reduced by charge-offs. Actual
losses for loans and leases can vary significantly from this estimate. The methodology and assumptions used to calculate the allowance
are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the
estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change.
The adequacy
of the ALLL and the level of the related provision for loan and lease losses is determined based on management’s judgment
after consideration of numerous factors including, but not limited to: (i) local and regional economic conditions, (ii) the
financial condition of the borrowers, (iii) loan impairment and the related level of expected charge-offs, (iv) evaluation
of industry trends, (v) industry and other concentrations, (vi) loans and leases which are contractually current as
to payment terms but demonstrate a higher degree of risk as identified by management, (vii) continuing evaluations of the
performing loan portfolio, (viii) ongoing review and evaluation of problem loans identified as having loss potential, (ix) quarterly
review by the Board of Directors, and (x) assessments by banking regulators and other third parties. Management and the Board
of Directors evaluate the ALLL and determine its appropriate level considering objective and subjective measures, such as knowledge
of the borrower’s business, valuation of collateral, the determination of impaired loans or leases and exposure to potential
losses.
The ALLL
totaled $4,577,000 or 1.34% of total loans and leases at March 31, 2019 compared to $4,392,000 or 1.36% of total loans and leases
at December 31, 2018. The Company establishes general and specific reserves in accordance with accounting principles generally
accepted in the United States of America. 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 non-performing loans and leases was 183.1 times the nonperforming loans and leases at March 31, 2019 and 162.7
times the nonperforming loans and leases at December 31, 2018. The allowance for loans and leases as a percentage of impaired
loans and leases was 53.0% at March 31, 2019 and 50.5% at December 31, 2018. Of the total non-performing and impaired loans and
leases outstanding as of March 31, 2019, there were $814,000 in loans or leases that had been reduced by partial charge-offs of
$297,000.
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. Formula allocations are
calculated by applying historical loss factors to outstanding loans with similar characteristics. Historical loss factors are
based upon the Company’s loss experience. These historical loss factors are adjusted for changes in the business cycle and
for significant factors that, in management’s judgment, affect the collectability of the loan portfolio as of the evaluation
date. The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not
directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited
to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral
values, loan volumes and concentrations, and other business conditions. Based on information currently available, management believes
that the allowance for loan and lease losses is prudent and adequate. However, no prediction of the ultimate level of loans and
leases charged off in future periods can be made with any certainty.
Table
Eight: Allowance for Loan and Lease Losses
(dollars
in thousands)
|
|
Three Months
|
|
|
|
Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Average
loans and leases outstanding
|
|
$
|
328,570
|
|
|
$
|
307,266
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses at beginning of
period
|
|
$
|
4,392
|
|
|
$
|
4,478
|
|
Loans
and leases charged off:
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
Recoveries
of loans and leases previously charged off:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
7
|
|
Real
estate
|
|
|
3
|
|
|
|
2
|
|
Consumer
|
|
|
—
|
|
|
|
1
|
|
Total
|
|
|
5
|
|
|
|
10
|
|
Net
loans and leases recovered
|
|
|
5
|
|
|
|
10
|
|
Additions
to allowance charged to operating expenses
|
|
|
180
|
|
|
|
—
|
|
Allowance
for loan and lease losses at end of period
|
|
$
|
4,577
|
|
|
$
|
4,488
|
|
Ratio
of net recoveries to average loans and
leases
outstanding (annualized)
|
|
|
(0.01
|
%)
|
|
|
(0.01
|
%)
|
Provision
of allowance for loan and lease losses to average loans and leases outstanding (annualized)
|
|
|
0.22
|
%
|
|
|
—
|
|
Allowance
for loan and lease losses to loans and leases net of deferred fees at end of period
|
|
|
1.34
|
%
|
|
|
1.48
|
%
|
Other Real Estate
Owned
At March
31, 2019 and December 31, 2018, the Company had one other real estate owned (“OREO”) property totaling $957,000. During
the first quarter of 2019, the Company did not acquire or sell any OREO properties nor were there any impairment charges to this
property. There was no valuation allowance at March 31, 2019 nor at year-end 2018. The Company believes that the OREO property
owned at March 31, 2019 was carried approximately at fair value.
Deposits
At March
31, 2019, total deposits were $572,379,000 representing an $18,295,000 (3.1%) decrease from the December 31, 2018 balance of $590,674,000.
The Company’s deposit growth plan for 2019 is to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing
money market and NOW accounts, and savings accounts while continuing to focus on maintaining an overall lower cost of funds than
our peer group while at the same time retaining our high-valued deposit relationships. The Company’s balances in noninterest-bearing
checking, interest-bearing checking, savings and time, in total, remained relatively unchanged from December 31, 2018 decreasing
in overall by $5,430,000 (1.2%), however, money market accounts decreased $12,865,000 (8.8%) due in part to one relationship transferring
a portion of their deposit relationship in the amount of $10,000,000 to another financial institution for investment purposes.
Other
Borrowed Funds
Other
borrowings outstanding as of March 31, 2019 and December 31, 2018, consist of advances (both short-term and long-term) from the
Federal Home Loan Bank of San Francisco (“FHLB”). Table Nine below summarizes these borrowings.
Table
Nine: Other Borrowed Funds
(dollars
in thousands)
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
$
|
19,000
|
|
|
|
2.26
|
%
|
|
$
|
5,000
|
|
|
|
1.32
|
%
|
Long-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
$
|
10,500
|
|
|
|
2.02
|
%
|
|
$
|
10,500
|
|
|
|
2.02
|
%
|
The maximum
amount of short-term borrowings at any month-end during the first three months of 2019 and 2018 was $19,000,000 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) as of March 31, 2019:
|
|
Short-term
|
|
|
Long-term
|
|
Amount
|
|
$
|
1,900
|
|
|
$
|
10,500
|
|
Maturity
|
|
|
2019
|
|
|
|
2020
to 2023
|
|
Weighted average rates
|
|
|
2.26
|
%
|
|
|
2.02
|
%
|
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 March 31,
2019, shareholders’ equity was $77,576,000, representing an increase of $2,855,000 (3.8%) from $74,721,000 at December 31,
2018. The increase results from net income for the period ($1,146,000), stock based compensation ($178,000), and the increase
from other comprehensive income ($1,824,000), exceeding the payment of cash dividends ($293,000). Table Ten below lists the Company’s
and American River Bank’s capital ratios at March 31, 2019 and December 31, 2018, as well as the minimum capital ratios
for capital adequacy and the minimum requirement for a well-capitalized institution.
Table Ten: Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
Minimum
Regulatory
Capital
|
|
|
|
March 31,
|
|
|
December
31,
|
|
|
|
|
|
Requirements
|
|
Capital
to Risk-Adjusted Assets
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American River Bankshares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
Ratio
|
|
|
9.1
|
%
|
|
|
8.9
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Risk-Based Capital
|
|
|
15.8
|
%
|
|
|
16.1
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Risk-Based Capital
|
|
|
17.0
|
%
|
|
|
17.3
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American River Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
9.2
|
%
|
|
|
9.0
|
%
|
|
|
6.5
|
%
|
|
|
5.9
|
%
|
Common Equity Tier 1
Risk-Based Capital
|
|
|
16.0
|
%
|
|
|
16.2
|
%
|
|
|
7.0
|
%
|
|
|
6.4
|
%
|
Tier 1 Risk-Based Capital
|
|
|
16.0
|
%
|
|
|
16.2
|
%
|
|
|
8.5
|
%
|
|
|
7.9
|
%
|
Total Risk-Based Capital
|
|
|
17.1
|
%
|
|
|
17.4
|
%
|
|
|
10.5
|
%
|
|
|
9.9
|
%
|
On January 24,
2018, the Company approved and authorized a 5% stock repurchase program for 2018 (the “2018 Program”). See Part II,
Item 2, for additional disclosure regarding the 2018 Program. In addition, on February 13, 2019, the Company paid a $0.05 per
common share cash dividend to shareholders of record on January 30, 2019. This 2019 quarterly dividend follows four quarterly
cash dividends, totaling $0.20 per share, paid in 2018. 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 March 31, 2019 and December 31, 2018.
Effective January
1, 2015, bank holding companies with consolidated assets of $1 Billion or more ($3 Billion or more effective August 30, 2018)
and banks 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%; (iii) a total capital to total risk weighted assets
ratio of 8%; and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.
In addition,
a “capital conservation buffer,” was established which was is now fully phased-in and requires 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 increases 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 was phased-in between January
1, 2016 and January 1, 2019. The buffer requirement for 2018 was 1.875% and became fully phased in on January 1, 2019, increasing
to 2.50%. 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.
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 its
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 March 31, 2019 and 2018.
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 March 31, 2019 were approximately
$32,047,000 and $240,000, 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 March 31, 2019, consolidated liquid assets
totaled $206.4 million or 29.9% of total assets compared to $226.5 million or 32.9% of total assets on December 31, 2018. 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 March 31, 2019, the Company had $17,000,000 available under these credit lines. Additionally, the Bank
is a member of the FHLB. At
March 31, 2019, the Bank could have arranged for up to $121,951,000
in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At March
31, 2019, the Company had advances, borrowings and commitments (including letters of credit) outstanding of $29,500,000, leaving
$92,451,000 available under these FHLB secured borrowing arrangements. American River 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 March 31, 2019, the Company’s borrowing capacity at the Federal Reserve Bank was $6,465,000. 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. 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 March 31, 2019 and December 31, 2018,
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 $32,287,000 and $35,113,000 at March 31, 2019 and December 31, 2018, respectively.
As a percentage of net loans and leases these off-balance sheet items represent 9.6% and 11.0%, respectively. See also, Note 3
to the unaudited consolidated financial statements included herein for additional information about the Company’s off-balance
sheet items.