Item 1. Financial Statements.
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
BALANCE SHEET
(Unaudited)
(dollars
in thousands)
|
|
March
31,
2020
|
|
|
December
31,
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and
due from banks
|
|
$
|
15,272
|
|
|
$
|
15,258
|
|
Interest-bearing deposits
in banks
|
|
|
11,400
|
|
|
|
2,552
|
|
Total cash and cash equivalents
|
|
|
26,672
|
|
|
|
17,810
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
255,624
|
|
|
|
261,965
|
|
Held-to-maturity, at
amortized cost fair value of $261 in 2020 and $266 in 2019
|
|
|
240
|
|
|
|
248
|
|
Loans, less allowance for loan losses
of $5,637 at March 31, 2020 and $5,138 at December 31, 2019
|
|
|
388,044
|
|
|
|
393,802
|
|
Premises and equipment,
net
|
|
|
996
|
|
|
|
1,191
|
|
Federal Home Loan Bank
stock
|
|
|
4,259
|
|
|
|
4,259
|
|
Goodwill
|
|
|
16,321
|
|
|
|
16,321
|
|
Other real estate owned
|
|
|
846
|
|
|
|
846
|
|
Bank owned life insurance
|
|
|
15,847
|
|
|
|
15,763
|
|
Accrued interest receivable
and other assets
|
|
|
7,204
|
|
|
|
8,148
|
|
Total assets
|
|
$
|
716,053
|
|
|
$
|
720,353
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
229,793
|
|
|
$
|
227,055
|
|
Interest-bearing
|
|
|
373,343
|
|
|
|
377,782
|
|
Total deposits
|
|
|
603,136
|
|
|
|
604,837
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
5,000
|
|
|
|
9,000
|
|
Long-term borrowings
|
|
|
10,500
|
|
|
|
10,500
|
|
Accrued interest payable
and other liabilities
|
|
|
10,563
|
|
|
|
13,107
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
629,199
|
|
|
|
637,444
|
|
|
|
|
|
|
|
|
|
|
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 – 5,918,375 shares at March 31, 2020 and
5,898,878 shares at December 31, 2019
|
|
|
30,634
|
|
|
|
30,536
|
|
Retained earnings
|
|
|
51,600
|
|
|
|
50,581
|
|
Accumulated other
comprehensive income, net of taxes
|
|
|
4,620
|
|
|
|
1,792
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
86,854
|
|
|
|
82,909
|
|
Total liabilities and
shareholders’ equity
|
|
$
|
716,053
|
|
|
$
|
720,353
|
|
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,
|
|
2020
|
|
|
2019
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
Interest
and fees on loans:
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
4,675
|
|
|
$
|
3,818
|
|
Exempt
from Federal income taxes
|
|
|
230
|
|
|
|
149
|
|
Interest on Federal funds sold
|
|
|
—
|
|
|
|
5
|
|
Interest on deposits in banks
|
|
|
34
|
|
|
|
44
|
|
Interest
and dividends on investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,739
|
|
|
|
2,024
|
|
Exempt
from Federal income taxes
|
|
|
37
|
|
|
|
92
|
|
Total
interest income
|
|
|
6,715
|
|
|
|
6,132
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
440
|
|
|
|
489
|
|
Interest on
borrowings
|
|
|
87
|
|
|
|
94
|
|
Total interest
expense
|
|
|
527
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
6,188
|
|
|
|
5,549
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
495
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
|
5,693
|
|
|
|
5,369
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
155
|
|
|
|
121
|
|
Gain
on sale of securities
|
|
|
38
|
|
|
|
36
|
|
Other
noninterest income
|
|
|
259
|
|
|
|
254
|
|
Total
noninterest income
|
|
|
452
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,865
|
|
|
|
2,781
|
|
Occupancy
|
|
|
256
|
|
|
|
257
|
|
Furniture and equipment
|
|
|
143
|
|
|
|
140
|
|
Federal Deposit Insurance Corporation
assessments
|
|
|
27
|
|
|
|
50
|
|
Expenses related to other real estate
owned
|
|
|
5
|
|
|
|
4
|
|
Other expense
|
|
|
920
|
|
|
|
1,028
|
|
Total noninterest
expense
|
|
|
4,216
|
|
|
|
4,260
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
1,929
|
|
|
|
1,520
|
|
Provision
for income taxes
|
|
|
497
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,432
|
|
|
$
|
1,146
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
Diluted
earnings per share
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
See
notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)
|
|
|
|
For the three months ended March 31,
|
|
2020
|
|
|
2019
|
|
Net income
|
|
$
|
1,432
|
|
|
$
|
1,146
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Increase in net unrealized gains on investment securities
|
|
|
4,053
|
|
|
|
2,626
|
|
Deferred tax expense
|
|
|
(1,198
|
)
|
|
|
(776
|
)
|
Increase in net unrealized gains on investment securities, net of tax
|
|
|
2,855
|
|
|
|
1,850
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains included in net income
|
|
|
(38
|
)
|
|
|
(36
|
)
|
Tax effect
|
|
|
11
|
|
|
|
10
|
|
Realized gains, net of tax
|
|
|
(27
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
2,828
|
|
|
|
1,824
|
|
Comprehensive income
|
|
$
|
4,260
|
|
|
$
|
2,970
|
|
|
|
|
|
|
|
|
|
|
See
notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
(dollars in thousands)
|
|
Common
Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2020
|
|
|
5,898,878
|
|
|
$
|
30,536
|
|
|
$
|
50,581
|
|
|
$
|
1,792
|
|
|
$
|
82,909
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,432
|
|
|
|
|
|
|
|
1,432
|
|
Other comprehensive income,
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized
gains on available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,828
|
|
|
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.07 per share)
|
|
|
|
|
|
|
|
|
|
|
(413
|
)
|
|
|
|
|
|
|
(413
|
)
|
Net restricted stock
award activity and related compensation expense
|
|
|
19,497
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
Stock
option compensation expense
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31,
2020
|
|
|
5,918,375
|
|
|
$
|
30,634
|
|
|
$
|
51,600
|
|
|
$
|
4,620
|
|
|
$
|
86,854
|
|
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,
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,432
|
|
|
$
|
1,146
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
495
|
|
|
|
180
|
|
Decrease in deferred loan origination fees and costs, net
|
|
|
(64
|
)
|
|
|
(231
|
)
|
Depreciation and amortization
|
|
|
219
|
|
|
|
66
|
|
Gain on sale and call of investment securities
|
|
|
(38
|
)
|
|
|
(36
|
)
|
Amortization of investment security premiums and discounts, net
|
|
|
304
|
|
|
|
404
|
|
Increase in cash surrender values of life insurance policies
|
|
|
(84
|
)
|
|
|
(81
|
)
|
Stock based compensation expense
|
|
|
98
|
|
|
|
83
|
|
(Increase) decrease in accrued interest receivable and other assets
|
|
|
(407
|
)
|
|
|
349
|
|
Decrease in accrued interest payable and other liabilities
|
|
|
(2,380
|
)
|
|
|
(656
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(425
|
)
|
|
|
1,224
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of available-for-sale investment securities
|
|
|
4,229
|
|
|
|
2,022
|
|
Proceeds from matured available-for-sale investment securities
|
|
|
—
|
|
|
|
3,000
|
|
Purchases of available-for-sale investment securities
|
|
|
(4,987
|
)
|
|
|
(4,702
|
)
|
Proceeds from principal repayments for available-for-sale investment securities
|
|
|
10,848
|
|
|
|
10,232
|
|
Proceeds from principal repayments for held-to-maturity investment securities
|
|
|
8
|
|
|
|
15
|
|
Net decrease (increase) in loans
|
|
|
8,164
|
|
|
|
(11,746
|
)
|
Purchases of loans
|
|
|
(2,837
|
)
|
|
|
(5,694
|
)
|
Purchases of equipment
|
|
|
(24
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
15,401
|
|
|
|
(7,019
|
)
|
(Continued)
AMERICAN RIVER
BANKSHARES
CONSOLIDATED STATEMENT
OF CASH FLOWS (Continued)
(Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2020
|
|
|
2019
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase (decrease) in demand, interest-bearing and savings deposits
|
|
$
|
1,193
|
|
|
$
|
(17,895
|
)
|
Net decrease in time deposits
|
|
|
(2,894
|
)
|
|
|
(400
|
)
|
(Decrease) increase in short term borrowing
|
|
|
(4,000
|
)
|
|
|
14,000
|
|
Proceeds from exercised options
|
|
|
—
|
|
|
|
95
|
|
Cash dividends paid
|
|
|
(413
|
)
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(6,114
|
)
|
|
|
(4,493
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
8,862
|
|
|
|
(10,288
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
17,810
|
|
|
|
27,733
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
26,672
|
|
|
$
|
19,445
|
|
|
|
|
|
|
|
|
|
|
Supplemental noncash disclosures:
|
|
|
|
|
|
|
|
|
Right of use asset and obligation recorded upon adoption of ASU 2016-02
|
|
$
|
—
|
|
|
$
|
3,570
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
533
|
|
|
$
|
551
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
See Notes to Unaudited
Consolidated Financial Statements
AMERICAN RIVER
BANKSHARES
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
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, 2020 and December 31, 2019, the results of its operations and its cash flows for the three-month periods ended March 31, 2020
and 2019 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, 2019.
The results of operations for the three-month period ended March 31, 2020 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.
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. At March 31, 2020 there were 29,958 stock options and 54,468 restricted
shares outstanding. The 2010 Plan expired by its term on March 17, 2020. Accordingly, outstanding awards under the 2010 Plan are
exercisable and will continue to vest until their expiration, but no new awards may be granted under the 2010 Plan. The 2010 Plan
provided 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 were granted to employees and directors under incentive and nonqualified option agreements, restricted stock agreements,
and other awards agreements. The unvested restricted stock under the 2010 Plan have dividend and voting rights. The 2010 Plan
required 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 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 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 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, 2020 and 2019, the compensation cost recognized for equity compensation was $98,000 and
$83,000, respectively. The recognized tax benefit for equity compensation expense was $26,000 and $21,000, for the three-month
periods ended March 31, 2020 and 2019, respectively.
At
March 31, 2020, the total compensation cost related to nonvested stock option awards not yet recorded is $1,000. This amount will
be recognized over the next 0.25 years and the weighted average period of recognizing these costs is expected to be 0.1 years.
At March 31, 2020, the total compensation cost related to restricted stock awards not yet recorded is $591,000. This amount will
be recognized over the next 4.2 years and the weighted average period of recognizing these costs is expected to be 1.3 years.
Equity
Plans Activity
Stock
Options
There
were no stock options awarded during the three-month periods ended March 31, 2020 and 2019. A summary of option activity under
the Plans as of March 31, 2020 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, 2020
|
|
|
29,958
|
|
|
$
|
8.79
|
|
|
|
4.4 years
|
|
|
$
|
182
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired, forfeited or cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2020
|
|
|
29,958
|
|
|
$
|
8.79
|
|
|
|
4.2 years
|
|
|
$
|
8
|
|
Vested at March 31, 2020
|
|
|
27,735
|
|
|
$
|
8.73
|
|
|
|
4.1 years
|
|
|
$
|
8
|
|
Non-vested at March 31, 2020
|
|
|
2,223
|
|
|
$
|
9.56
|
|
|
|
5.1 years
|
|
|
$
|
—
|
|
Restricted
Stock
There
were 19,497 shares of restricted stock awarded during the three-month period ended March 31, 2020 and 18,394 shares of restricted
stock awarded during the three-month period ended March 31, 2019. There were 9,000 and 3,864 restricted stock awards that were
fully vested during the three-month periods ended March 31, 2020 and 2019, respectively. The intrinsic value of nonvested restricted
stock at March 31, 2020 was $470,000.
Restricted Stock
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested at January 1, 2020
|
|
|
43,971
|
|
|
$
|
13.95
|
|
Awarded
|
|
|
19,497
|
|
|
|
14.64
|
|
Less: Vested
|
|
|
9,000
|
|
|
|
14.59
|
|
Less: Expired, forfeited or cancelled
|
|
|
—
|
|
|
|
—
|
|
Nonvested at March 31, 2020
|
|
|
54,468
|
|
|
$
|
14.09
|
|
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, 2020 or 2019 or outstanding at March 31, 2020 or December 31, 2019.
The
intrinsic value used for stock options and restricted stock was derived from the market price of the Company’s common stock
of $8.62 as of March 31, 2020.
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 $30,524,000 and standby letters of credit of approximately $60,000 at March 31, 2020
and loan commitments of approximately $40,324,000 and standby letters of credit of approximately $300,000 at December 31, 2019.
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 2020 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,
2020 or December 31, 2019.
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 (5,858,919 shares
and 5,836,579 shares for the three-month periods ended March 31, 2020 and 2019, 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 (24,657 shares for the three-month period
ended March 31, 2020 and 21,048 shares for the three-month period ended March 31, 2019). For the three-month periods ended March
31, 2020 and 2019, 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, 2020 and December 31, 2019 consisted of the following
(dollars in thousands):
Available-for-Sale
|
|
March 31, 2020
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
229,280
|
|
|
$
|
7,529
|
|
|
$
|
(1,421
|
)
|
|
$
|
235,388
|
|
Obligations of states and political subdivisions
|
|
|
13,290
|
|
|
|
310
|
|
|
|
(2
|
)
|
|
|
13,598
|
|
Corporate bonds
|
|
|
6,496
|
|
|
|
147
|
|
|
|
(5
|
)
|
|
|
6,638
|
|
|
|
$
|
249,066
|
|
|
$
|
7,986
|
|
|
$
|
(1,428
|
)
|
|
$
|
255,624
|
|
|
|
December 31, 2019
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
239,617
|
|
|
$
|
3,371
|
|
|
$
|
(1,101
|
)
|
|
$
|
241,887
|
|
Obligations of states and political subdivisions
|
|
|
13,308
|
|
|
|
212
|
|
|
|
(73
|
)
|
|
|
13,447
|
|
Corporate bonds
|
|
|
6,496
|
|
|
|
135
|
|
|
|
—
|
|
|
|
6,631
|
|
|
|
$
|
259,421
|
|
|
$
|
3,718
|
|
|
$
|
(1,174
|
)
|
|
$
|
261,965
|
|
Net
unrealized gains on available-for-sale investment securities totaling $6,558,000 were recorded, net of $1,938,000 in tax liabilities,
as accumulated other comprehensive income within shareholders’ equity at March 31, 2020. Proceeds and gross realized gains
from the sale and call of available-for-sale investment securities for the three-month period ended March 31, 2020 totaled $4,229,000
and $38,000, respectively. There were no transfers of available-for-sale investment securities for the three-month period ended
March 31, 2020.
Net
unrealized gains on available-for-sale investment securities totaling $2,544,000 were recorded, net of $752,000 in tax liabilities,
as accumulated other comprehensive loss within shareholders’ equity at December 31, 2019. 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. There were no transfers of available-for-sale investment securities for the three-month period ended
March 31, 2019.
Held-to-Maturity
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
240
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
248
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
266
|
|
There
were no sales or transfers of held-to-maturity investment securities for the periods ended March 31, 2020 and March 31, 2019.
Investment securities with unrealized losses at March 31, 2020 and December 31, 2019 are summarized and classified according to
the duration of the loss period as follows (dollars in thousands):
March 31, 2020
|
|
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
|
|
$
|
39,050
|
|
|
$
|
(693
|
)
|
|
$
|
22,708
|
|
|
$
|
(728
|
)
|
|
$
|
61,758
|
|
|
$
|
(1,421
|
)
|
Obligations of states and political subdivisions
|
|
|
1,507
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,507
|
|
|
|
(2
|
)
|
Corporate bonds
|
|
|
2,491
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,491
|
|
|
|
(5
|
)
|
|
|
$
|
43,048
|
|
|
$
|
(700
|
)
|
|
$
|
22,708
|
|
|
$
|
(728
|
)
|
|
$
|
65,756
|
|
|
$
|
(1,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
|
$
|
65,082
|
|
|
$
|
(438
|
)
|
|
$
|
38,380
|
|
|
$
|
(663
|
)
|
|
$
|
103,462
|
|
|
$
|
(1,101
|
)
|
Obligations of states and political subdivisions
|
|
|
8,060
|
|
|
|
(73
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
8,060
|
|
|
|
(73
|
)
|
|
|
$
|
73,142
|
|
|
$
|
(511
|
)
|
|
$
|
38,380
|
|
|
$
|
(663
|
)
|
|
$
|
111,522
|
|
|
$
|
(1,174
|
)
|
There
were no held-to-maturity investment securities with unrealized losses as of March 31, 2020 or December 31, 2019.
At
March 31, 2020, the Company held 204 securities of which 22 were in a loss position for less than twelve months and 17 were in
a loss position for twelve months or more. These 17 securities consisted of mortgage-backed, corporate and municipal securities. At
December 31, 2019, the Company held 205 securities of which 41 were in a loss position for less than twelve months and 29 were
in a loss position for twelve months or more. These 29 securities consisted of mortgage-backed, corporate and municipal
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, 2020
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
|
|
$
|
500
|
|
|
$
|
498
|
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
2,937
|
|
|
|
2,940
|
|
|
|
|
|
|
|
|
|
After five years through ten years
|
|
|
10,395
|
|
|
|
10,673
|
|
|
|
|
|
|
|
|
|
After ten years
|
|
|
5,954
|
|
|
|
6,125
|
|
|
|
|
|
|
|
|
|
|
|
|
19,786
|
|
|
|
20,236
|
|
|
|
|
|
|
|
|
|
Investment securities not due at a single maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
|
229,280
|
|
|
|
235,388
|
|
|
$
|
240
|
|
|
$
|
261
|
|
|
|
$
|
249,066
|
|
|
$
|
255,624
|
|
|
$
|
240
|
|
|
$
|
261
|
|
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 OTHER REAL ESTATE OWNED
At
March 31, 2020 and December 31, 2019, the recorded investment in nonperforming loans was zero in both periods. Nonperforming loans
include all such loans 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.
At
March 31, 2020 and December 31, 2019, the recorded investment in other assets was zero and $517,000, respectively. During the
first quarter of 2020, the Company sold the repossessed automobile that was in the other assets category at December 31, 2019
for $517,000. Nonperforming loans and other assets and OREO at March 31, 2020 and December 31, 2019 are summarized as follows
(in thousands):
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Nonaccrual loans that are current to terms (less than 30 days past due)
|
|
$
|
—
|
|
|
$
|
—
|
|
Nonaccrual loans that are past due
|
|
|
—
|
|
|
|
—
|
|
Loans past due 90 days and accruing interest
|
|
|
—
|
|
|
|
—
|
|
Other real estate owned
|
|
|
846
|
|
|
|
846
|
|
Other assets
|
|
|
—
|
|
|
|
517
|
|
Total nonperforming assets
|
|
$
|
846
|
|
|
$
|
1,363
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming assets to total assets
|
|
|
0.12
|
%
|
|
|
0.19
|
%
|
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. Impaired loans
as of and for the periods ended March 31, 2020 and December 31, 2019 are summarized as follows:
(in thousands)
|
|
As of March 31, 2020
|
|
|
As of December 31, 2019
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-commercial
|
|
$
|
5,502
|
|
|
$
|
5,636
|
|
|
$
|
—
|
|
|
$
|
5,530
|
|
|
$
|
5,664
|
|
|
$
|
—
|
|
Real estate-residential
|
|
|
316
|
|
|
|
403
|
|
|
|
—
|
|
|
|
318
|
|
|
|
405
|
|
|
|
—
|
|
Subtotal
|
|
$
|
5,818
|
|
|
$
|
6,039
|
|
|
$
|
—
|
|
|
$
|
5,848
|
|
|
$
|
6,069
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-commercial
|
|
$
|
1,596
|
|
|
$
|
1,667
|
|
|
$
|
126
|
|
|
|
1,622
|
|
|
|
1,693
|
|
|
|
133
|
|
Real estate-residential
|
|
|
130
|
|
|
|
130
|
|
|
|
8
|
|
|
|
134
|
|
|
|
134
|
|
|
|
9
|
|
Subtotal
|
|
$
|
1,726
|
|
|
$
|
1,797
|
|
|
$
|
134
|
|
|
$
|
1,756
|
|
|
$
|
1,827
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-commercial
|
|
$
|
7,098
|
|
|
$
|
7,303
|
|
|
$
|
126
|
|
|
$
|
7,152
|
|
|
$
|
7,357
|
|
|
$
|
133
|
|
Real estate-residential
|
|
|
446
|
|
|
|
533
|
|
|
|
8
|
|
|
|
452
|
|
|
|
539
|
|
|
|
9
|
|
|
|
$
|
7,544
|
|
|
$
|
7,836
|
|
|
$
|
134
|
|
|
$
|
7,604
|
|
|
$
|
7,896
|
|
|
$
|
142
|
|
The
following table presents the average balance related to impaired loans for the periods indicated (in thousands):
|
|
Average Recorded Investments
for the three months ended
|
|
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
|
|
|
|
|
|
|
Real estate-commercial
|
|
$
|
7,125
|
|
|
$
|
7,823
|
|
Real estate-residential
|
|
|
449
|
|
|
|
915
|
|
Total
|
|
$
|
7,574
|
|
|
$
|
8,738
|
|
The
following table presents the interest income recognized on impaired loans for the periods indicated (in thousands):
|
|
Interest Income Recognized
for the three months ended
|
|
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
|
|
|
|
|
|
|
Real estate-commercial
|
|
$
|
106
|
|
|
$
|
114
|
|
Real estate-residential
|
|
|
7
|
|
|
|
11
|
|
Total
|
|
$
|
113
|
|
|
$
|
125
|
|
7.
TROUBLED DEBT RESTRUCTURINGS
During
the periods ended March 31, 2020 and 2019, there were no loans that were modified as troubled debt restructurings.
There
were no payment defaults during the three months ended March 31, 2020 or March 31, 2019 on troubled debt restructurings made in
the preceding twelve months. At March 31, 2020 and December 31, 2019, there were no unfunded commitments on those loans considered
troubled debt restructures. See also “Impaired Loans” in Item 2.
8. ALLOWANCE FOR
LOAN LOSSES
The
Company’s loan portfolio allocated by management’s internal risk ratings as of March 31, 2020 and December 31, 2019 are
summarized below:
March 31, 2020
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
38,000
|
|
|
$
|
211,866
|
|
|
$
|
52,082
|
|
|
$
|
20,871
|
|
|
$
|
28,538
|
|
Watch
|
|
|
37
|
|
|
|
4,291
|
|
|
|
—
|
|
|
|
—
|
|
|
|
598
|
|
Special mention
|
|
|
4,850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Substandard
|
|
|
—
|
|
|
|
134
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
42,887
|
|
|
$
|
216,291
|
|
|
$
|
52,082
|
|
|
$
|
20,871
|
|
|
$
|
29,136
|
|
|
|
Credit
Risk Profile by Internally Assigned
Grade Other Credit Exposure
|
|
|
|
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
6,411
|
|
|
$
|
26,587
|
|
|
$
|
384,355
|
|
Watch
|
|
|
—
|
|
|
|
73
|
|
|
|
4,999
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
4,850
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
134
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
6,411
|
|
|
$
|
26,660
|
|
|
$
|
394,338
|
|
December 31, 2019
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
38,085
|
|
|
$
|
208,140
|
|
|
$
|
56,818
|
|
|
$
|
23,169
|
|
|
$
|
28,570
|
|
Watch
|
|
|
4,915
|
|
|
|
6,329
|
|
|
|
—
|
|
|
|
—
|
|
|
|
610
|
|
Special mention
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Substandard
|
|
|
—
|
|
|
|
135
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
43,019
|
|
|
$
|
214,604
|
|
|
$
|
56,818
|
|
|
$
|
23,169
|
|
|
$
|
29,180
|
|
|
|
Credit Risk Profile by Internally Assigned
Grade Other Credit Exposure
|
|
|
|
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
6,479
|
|
|
$
|
26,317
|
|
|
$
|
387,578
|
|
Watch
|
|
|
—
|
|
|
|
75
|
|
|
|
11,929
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
135
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
6,479
|
|
|
$
|
26,392
|
|
|
$
|
399,661
|
|
The
allocation of the Company’s allowance for loan losses and by portfolio segment and by impairment methodology are summarized
below:
March
31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Real
Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2020
|
|
$
|
950
|
|
|
$
|
1,906
|
|
|
$
|
329
|
|
|
$
|
986
|
|
|
$
|
281
|
|
|
$
|
107
|
|
|
$
|
334
|
|
|
$
|
245
|
|
|
$
|
5,138
|
|
Provision
for loan losses
|
|
|
63
|
|
|
|
349
|
|
|
|
64
|
|
|
|
(98
|
)
|
|
|
56
|
|
|
|
(4
|
)
|
|
|
58
|
|
|
|
7
|
|
|
|
495
|
|
Loans
charged-off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recoveries
|
|
|
1
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance, March 31, 2020
|
|
$
|
1,014
|
|
|
$
|
2,258
|
|
|
$
|
393
|
|
|
$
|
888
|
|
|
$
|
337
|
|
|
$
|
103
|
|
|
$
|
392
|
|
|
$
|
252
|
|
|
$
|
5,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
—
|
|
|
$
|
126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
1,014
|
|
|
$
|
2,132
|
|
|
$
|
393
|
|
|
$
|
888
|
|
|
$
|
329
|
|
|
$
|
103
|
|
|
$
|
392
|
|
|
$
|
252
|
|
|
$
|
5,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
42,887
|
|
|
$
|
216,291
|
|
|
$
|
52,082
|
|
|
$
|
20,871
|
|
|
$
|
29,136
|
|
|
$
|
6,411
|
|
|
$
|
26,660
|
|
|
$
|
—
|
|
|
$
|
394,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
—
|
|
|
$
|
7,098
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
446
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
42,887
|
|
|
$
|
209,193
|
|
|
$
|
52,082
|
|
|
$
|
20,871
|
|
|
$
|
28,690
|
|
|
$
|
6,411
|
|
|
$
|
26,660
|
|
|
$
|
—
|
|
|
$
|
386,794
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Real
Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
950
|
|
|
$
|
1,906
|
|
|
$
|
329
|
|
|
$
|
986
|
|
|
$
|
281
|
|
|
$
|
107
|
|
|
$
|
334
|
|
|
$
|
142
|
|
|
$
|
5,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
—
|
|
|
$
|
133
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
950
|
|
|
$
|
1,773
|
|
|
$
|
329
|
|
|
$
|
986
|
|
|
$
|
272
|
|
|
$
|
107
|
|
|
$
|
334
|
|
|
$
|
245
|
|
|
$
|
4,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
43,019
|
|
|
$
|
214,604
|
|
|
$
|
56,818
|
|
|
$
|
23,169
|
|
|
$
|
29,180
|
|
|
$
|
6,479
|
|
|
$
|
26,392
|
|
|
$
|
—
|
|
|
$
|
399,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
—
|
|
|
$
|
7,152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
452
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
43,019
|
|
|
$
|
207,452
|
|
|
$
|
56,818
|
|
|
$
|
23,169
|
|
|
$
|
28,728
|
|
|
$
|
6,479
|
|
|
$
|
26,392
|
|
|
$
|
—
|
|
|
$
|
392,057
|
|
March
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Real
Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
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
|
|
The
Company’s aging analysis of the loan portfolio at March 31, 2020 and December 31, 2019 are summarized below:
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Past Due
Greater Than
89 Days
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
Past Due
Greater Than
89 Days and
Accruing
|
|
|
Nonaccrual
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,834
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,834
|
|
|
$
|
38,053
|
|
|
$
|
42,887
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
810
|
|
|
|
—
|
|
|
|
—
|
|
|
|
810
|
|
|
|
215,481
|
|
|
|
216,291
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
52,082
|
|
|
|
52,082
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,871
|
|
|
|
20,871
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,136
|
|
|
|
29,136
|
|
|
|
—
|
|
|
|
—
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,411
|
|
|
|
6,411
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
36
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36
|
|
|
|
26,624
|
|
|
|
26,660
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
5,680
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,680
|
|
|
$
|
388,658
|
|
|
$
|
394,338
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Past Due
Greater Than
89 Days
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
Past Due
Greater Than
89 Days and
Accruing
|
|
|
Nonaccrual
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,019
|
|
|
$
|
43,019
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
214,604
|
|
|
|
214,604
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,818
|
|
|
|
56,818
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,169
|
|
|
|
23,169
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,180
|
|
|
|
29,180
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,479
|
|
|
|
6,479
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,317
|
|
|
|
26,392
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
399,586
|
|
|
$
|
399,661
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 is 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, 2020 is as follows:
Balance Sheet
|
|
|
|
|
Operating lease asset classified as other assets
|
|
$
|
2,717,000
|
|
Operating lease liability classified as other liabilities
|
|
|
2,932,000
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
Operating lease cost classified as occupancy and equipment expense
|
|
$
|
190,000
|
|
Weighted average lease term, in years
|
|
|
5.47
|
|
Weighted average discount rate (1)
|
|
|
2.98
|
%
|
Operating cash flows
|
|
$
|
194,000
|
|
|
|
|
|
|
|
(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, 2020 was as follows:
|
|
Balance
|
|
April 1, 2020 to December 31, 2020
|
|
$
|
579,000
|
|
January 1, 2021 to December 31, 2021
|
|
|
739,000
|
|
January 1, 2022 to December 31, 2022
|
|
|
707,000
|
|
January 1, 2023 to December 31, 2023
|
|
|
282,000
|
|
January 1, 2024 to December 31, 2024
|
|
|
273,000
|
|
Thereafter
|
|
|
657,000
|
|
Total lease payments
|
|
|
3,237,000
|
|
Less: Interest
|
|
|
(305,000
|
)
|
Present value of lease liabilities
|
|
$
|
2,932,000
|
|
10. BORROWING ARRANGEMENTS
At
March 31, 2020 and December 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, 2020 or December 31, 2019.
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 $15,500,000 were outstanding from the FHLB at March 31,
2020, bearing interest rates ranging from 1.31% to 3.17% and maturing between July 13, 2020 and November 24, 2023. Advances totaling
$19,500,000 were outstanding from the FHLB at December 31, 2019, bearing interest rates ranging from 1.31% to 3.17% and maturing
between January 1, 2020 and November 24, 2023. Remaining amounts available under the borrowing arrangement with the FHLB at March
31, 2020 and December 31, 2019 totaled $144,547,000 and $143,406,000, 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, 2020 and December 31, 2019 were $6,527,000 and $8,642,000, respectively.
There were no advances outstanding under this borrowing arrangement as of March 31, 2020 and December 31, 2019.
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, 2020 and 2019.
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, 2020 and December 31, 2019. They indicate the fair value hierarchy of the valuation techniques
utilized by the Company to determine such fair value. The authoritative accounting guidance for fair
value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. The fair value measurement is the exchange price to sell the asset or transfer
the liability (exit price) in the principal market for the asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair
value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes
exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary
for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers
in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing
to transact.
The
authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income
approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions
involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts,
such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that
currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently
applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.
Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s
own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best
information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. The fair value hierarchy is as follows:
|
·
|
Level 1
Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has
the ability to access at the measurement date.
|
|
·
|
Level 2
Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices
for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable
for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and
default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other
means.
|
|
·
|
Level 3
Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would
use in pricing the assets or liabilities.
|
A
description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification
of such instruments pursuant to the valuation hierarchy, is set forth below. In general, fair value is based upon quoted market
prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models
that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate
and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities
classified as available-for-sale are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities,
the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable
data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution
data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among
other items.
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, 2020
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
15,272
|
|
|
$
|
15,272
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,272
|
|
Interest-bearing deposits in banks
|
|
|
11,400
|
|
|
|
11,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,400
|
|
Available-for-sale securities
|
|
|
255,624
|
|
|
|
—
|
|
|
|
255,624
|
|
|
|
—
|
|
|
|
255,624
|
|
Held-to-maturity securities
|
|
|
240
|
|
|
|
—
|
|
|
|
261
|
|
|
|
—
|
|
|
|
261
|
|
FHLB stock
|
|
|
4,259
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net loans
|
|
|
388,044
|
|
|
|
—
|
|
|
|
—
|
|
|
|
399,333
|
|
|
|
399,333
|
|
Accrued interest receivable
|
|
|
2,012
|
|
|
|
—
|
|
|
|
731
|
|
|
|
1,281
|
|
|
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
229,793
|
|
|
$
|
229,793
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
229,793
|
|
Savings
|
|
|
72,800
|
|
|
|
72,800
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,800
|
|
Money market
|
|
|
162,184
|
|
|
|
162,184
|
|
|
|
—
|
|
|
|
—
|
|
|
|
162,184
|
|
NOW accounts
|
|
|
67,444
|
|
|
|
67,444
|
|
|
|
—
|
|
|
|
—
|
|
|
|
67,444
|
|
Time Deposits
|
|
|
70,915
|
|
|
|
—
|
|
|
|
71,206
|
|
|
|
—
|
|
|
|
71,206
|
|
Short-term borrowings
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
Long-term borrowings
|
|
|
10,500
|
|
|
|
—
|
|
|
|
10,797
|
|
|
|
—
|
|
|
|
10,797
|
|
Accrued interest payable
|
|
|
114
|
|
|
|
6
|
|
|
|
108
|
|
|
|
—
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
December 31, 2019
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
15,258
|
|
|
$
|
15,258
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,258
|
|
Interest-bearing deposits in banks
|
|
|
2,552
|
|
|
|
2,552
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,552
|
|
Available-for-sale securities
|
|
|
261,965
|
|
|
|
—
|
|
|
|
261,965
|
|
|
|
—
|
|
|
|
261,965
|
|
Held-to-maturity securities
|
|
|
248
|
|
|
|
—
|
|
|
|
266
|
|
|
|
—
|
|
|
|
266
|
|
FHLB stock
|
|
|
4,259
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net loans:
|
|
|
393,802
|
|
|
|
—
|
|
|
|
—
|
|
|
|
396,089
|
|
|
|
396,089
|
|
Accrued interest receivable
|
|
|
1,929
|
|
|
|
—
|
|
|
|
780
|
|
|
|
1,149
|
|
|
|
1,929
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
227,055
|
|
|
$
|
227,055
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
227,055
|
|
Savings
|
|
|
75,820
|
|
|
|
75,820
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,820
|
|
Money market
|
|
|
158,319
|
|
|
|
158,319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
158,319
|
|
NOW accounts
|
|
|
69,834
|
|
|
|
69,834
|
|
|
|
—
|
|
|
|
—
|
|
|
|
69,834
|
|
Time Deposits
|
|
|
73,809
|
|
|
|
—
|
|
|
|
73,924
|
|
|
|
—
|
|
|
|
73,924
|
|
Short-term borrowings
|
|
|
9,000
|
|
|
|
9,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,000
|
|
Long-term borrowings
|
|
|
10.500
|
|
|
|
—
|
|
|
|
10,714
|
|
|
|
—
|
|
|
|
10,714
|
|
Accrued interest payable
|
|
|
120
|
|
|
|
—
|
|
|
|
120
|
|
|
|
—
|
|
|
|
120
|
|
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, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Entities
|
|
$
|
235,388
|
|
|
$
|
—
|
|
|
$
|
235,388
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Obligations of states and political subdivisions
|
|
|
13,598
|
|
|
|
—
|
|
|
|
13,598
|
|
|
|
—
|
|
|
|
—
|
|
Corporate Debt securities
|
|
|
6,638
|
|
|
|
—
|
|
|
|
6,638
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
255,624
|
|
|
$
|
—
|
|
|
$
|
255,624
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned Land
|
|
$
|
846
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
846
|
|
|
$
|
—
|
|
Total nonrecurring
|
|
$
|
846
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
846
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Gains
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
241,887
|
|
|
$
|
—
|
|
|
$
|
241,887
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate Debt securities
|
|
|
6,631
|
|
|
|
—
|
|
|
|
6,631
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
13,447
|
|
|
|
—
|
|
|
|
13,447
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
261,965
|
|
|
$
|
—
|
|
|
$
|
261,965
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repossessed asset
|
|
$
|
517
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
517
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned Land
|
|
|
846
|
|
|
|
—
|
|
|
|
—
|
|
|
|
846
|
|
|
|
—
|
|
Total nonrecurring
|
|
$
|
1,363
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,363
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no
transfers between Levels 1 and 2 during the three-month period ended March 31, 2020 or the twelve months ended December 31, 2019.
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
assets and real estate owned – Other assets can contain non-real estate property obtained by repossession of collateral
in the case of a loan default and are measured at fair value, less costs to sell. 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 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 other assets and OREO is the sales comparison approach less selling costs ranging from 8% to 10%.
13.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
June 2016, the Financial Accounting Standards Board (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 changes 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 credit 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 was initially scheduled to become
effective for the Company for interim and annual reporting periods beginning after December 15, 2019, however, on November 15,
2019 the FASB issued ASU 2019-10 delaying the effective date for smaller reporting companies, such as the Company, to interim
and annual reporting periods beginning after December 15, 2022; early adoption is still 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, including if it will early adopt the standard, 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 2020 and 2021 and to disclose any material potential
impact of this modeling once it becomes available.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820). – Disclosure
Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure
requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 remove disclosures that no longer are considered
cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as
relevant. ASU 2018-13 became effective for the Company on January 1, 2020. The effects of adopting ASU No. 2018-13
did not have a material impact on the Company’s financial position, results of operations or cash flows.
14.
NOVEL CORONAVIRUS PANDEMIC (“COVID-19”)
The
COVID-19 pandemic has placed significant health, economic and other major pressure throughout the communities we serve, the state
of California, the United States and the entire world. We have implemented a number of procedures in response to the pandemic
to support the safety and wellbeing of our employees and clients, and the financial viability
of our clients, that continue through the date of this report:
|
·
|
We
have addressed the safety of our ten branches and our corporate office, following the guidelines of the Center for Disease
Control. While the branches generally remain open to clients, we have taken steps, and continue to evaluate those
steps, to push as much traffic and transactions as possible to our digital and electronic
channels and our night depositories, and many of our employees can and are working remotely;
|
|
·
|
We
hold executive meetings to address issues that change rapidly;
|
|
·
|
We
have provided extensions and deferrals to borrowers requesting such extensions and deferrals and who have demonstrated adverse
effects from COVID-19 provided such clients were not 30 days past due; and
|
|
·
|
We
have been participating in the Small Business Administration’s (“SBA’s”) Paycheck Protection Program (“PPP”)
under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to help provide potentially forgivable loans
to our business clients to provide them with additional working capital to enable them to retain their employees. Through May 4, 2020, we have received SBA approval to fund approximately 470 PPP loans totaling $80 million.
We believe these loans and our participation in the program are good for our clients and the communities we serve.
|
We
continue to closely monitor this pandemic and expect to make future changes to respond to the pandemic as this situation continues
to evolve.
The
potential financial impact is unknown at this time. However, if the economic downturn currently being experienced is sustained,
it may adversely impact industries within our business footprint and impair the ability of the Company’s borrowers to fulfill
their contractual obligations and reduce our opportunity to create new client relationships. This could cause the Company to experience
a material adverse effect to its business operations, asset valuations, financial condition and results of operations. Material
adverse effects may include valuation impairments on the Company’s loans, investments, goodwill, or deferred tax assets.
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, 2019 and March 31, 2020 and its income and expense accounts for the three-month periods
ended March 31, 2020 and 2019. 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:
|
·
|
The
adverse effects of the COVID-19 pandemic on the economy, our business, borrowers, customers
and employees and the impact of local, state and federal governments in response to the
pandemic, including various government stimulus packages;
|
|
·
|
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
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), pandemic
disease and viruses, 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, 2019, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should also 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.
Potential
Impact of COVID-19
The first
quarter of 2020 began with optimism based off the progress made in 2019, but that was stalled when the novel coronavirus pandemic
(“COVID-19”) arrived and created a global health crisis that has set off an economic crisis causing significant disruption
in the local, national and global economies and financial markets. Continuation and further spread of COVID-19 could cause additional
quarantines, shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions
and overall economic and financial market instability. The disruptions in the economy will impair the ability of some of our borrowers
to make their loan payments, which could result in significant increases in delinquencies, defaults, foreclosures, declining collateral
values, and credit losses on our loans. Similarly, because of changing economic and market conditions,
we may be required to recognize credit losses on the investment securities we hold as well. COVID-19 may also materially
disrupt banking and other financial activity generally and may result in a decline in demand for our products and services, including
loans and deposits which could negatively impact our liquidity position and our growth strategy. Any one or more of these developments
could have a material adverse effect on our business, operations, consolidated financial condition, and consolidated results of
operations.
In
response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the “FRB”)
has taken a number of actions that have significantly affected the financial markets in the United States, including actions intended
to result in substantial decreases in market interest rates, including reducing the target federal funds range by 150 basis points
during the first quarter of 2020 to 0% and announcing further quantitative easing in response to the expected economic downturn
caused by COVID-19. We expect that these reductions in interest rates, among other actions of the FRB and the Federal government
generally, especially if prolonged, could adversely affect our net interest income, margins and profitability.
In addition
to preparing the Company to handle the impact of the economic crisis, protecting the health and wellbeing of our employees and
the financial viability of our clients, is now our highest priority. The Company quickly put its pandemic plan into action to
adjust to the impact of the health issues from the COVID-19 pandemic on our employees and our clients. We have been working with
our clients by assisting them with loan payment deferrals and maintaining service at all of our branch locations, subject to reduced
operating hours. We are encouraging the use of our digital and electronic channels and our night depositories, all the while adhering
to the ever-evolving State and Federal guidelines. We have been participating in the Small Business Administration’s (“SBA’s”)
Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security (“CARES”)
Act to help provide loans to our business clients to provide them with additional working capital to enable them to retain their
employees.
We believe
the COVID-19 pandemic has already impacted our local economy when Federal, State and local shelter-in-place recommendations were
enacted in our markets in March 2020 causing many businesses to close and workers to be furloughed or become unemployed. Essential
purpose entities such as medical professionals, food and agricultural businesses, and transportation and logistical businesses
were exempted from the closures; however, unemployment rates are increasing in our local market area. Prior to the pandemic unemployment
rates were at all-time lows but we believe these figures will increase significantly in the coming months. According to a study
performed by the Center for Business & Policy Research at the University of the Pacific, unemployment rates in the Company’s
markets are projected to climb to 18.5% in the Sacramento area and 19% in the Santa Rosa area in May 2020. No data is available
for the Amador County area but we anticipate unemployment in Amador County to increase along the same lines. The same article
predicts the unemployment rate will increase to 19% in the State of California.
The Company
has taken measures to protect the health and safety of its employees by implementing remote work arrangements to the full extent
possible, and by adjusting banking offices hours and operational measures to promote social distancing. The Company will continue
to analyze economic conditions in our geographic markets and perform stress testing of our investment and loan portfolios. The
Company does not currently have a stock repurchase program in place. Our Board of Directors will evaluate whether or not to implement
a program following such time that the economic impact of the COVID-19 has been assessed and minimized. On April 16, 2020, the
Company announced a $0.07 per share cash dividend payable on May 13, 2020 to shareholders of record on April 29, 2020. Future
cash dividend decisions will consider, among other business considerations, the impact of COVID-19 on the Company’s capital
and liquidity levels. Based on the Company’s current capital levels, historical conservative underwriting policies, low
loan-to-deposit ratio, concentration and geographical diversification of the loan portfolio, the Company currently expects to
be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic with sufficient liquidity and capital
levels.
While
the Company is not exposed to large oil and gas, airline, or the entertainment industries we have been evaluating the exposure
to potentially increased loan losses related to the COVID-19 pandemic and have identified the following industry segments most
impacted by the pandemic as of March 31, 2020:
Industry
|
|
Loan
Balance
|
|
|
Percentage
of
total loans
outstanding
|
|
|
|
|
|
|
|
|
Hospitality
|
|
|
—
|
|
|
|
N/A
|
|
Churches
|
|
$
|
18,037,000
|
|
|
|
4.6
|
%
|
Restaurants
|
|
$
|
5,832,000
|
|
|
|
1.5
|
%
|
Eldercare
|
|
$
|
6,829,000
|
|
|
|
1.7
|
%
|
School/childcare
|
|
$
|
4,650,000
|
|
|
|
1.2
|
%
|
Recreation (golf/sportsclubs)
|
|
$
|
1,943,000
|
|
|
|
0.5
|
%
|
Oil/Gas
|
|
$
|
6,263,000
|
(1)
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Of
this total, $1,080,000 is to a gas station and convenience store; $3,376,000 is to a
gas station, convenience store and car wash; $845,000 is to a gas station and convenience
store; $642,000 is to an auto restoration company; and $320,000 is to a drive though
oil change and car wash facility.
|
The
Company is closely monitoring the effects of the pandemic on our loan and deposit clients. We are focusing on assessing the risks
in our loan portfolio and working with our borrowers to minimize potential loan losses. We have implemented loan programs to allow
borrowers to defer loan principal and interest payments. See “Working with Borrowers” for more information on loan
deferrals. Prior to the SBA closing the PPP and the initial $349 billion that was approved for the program was committed, the
Company received approval from the SBA to process and fund 139 PPP loans totaling $49,370,000. On April 24, 2020, another $310
billion was added to the PPP. On April 27, 2020, we began to submit applications to the SBA to seek approval for our clients to
obtain PPP loans. As of May 4, 2020, we have received approval from the SBA to process
and fund 331 additional PPP loans totaling $30,176,000.
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,
|
|
|
|
2020
|
|
|
2019
|
|
Net interest income (GAAP)
|
|
$
|
6,188
|
|
|
$
|
5,549
|
|
Tax equivalent adjustment
|
|
|
56
|
|
|
|
48
|
|
Net interest income - tax equivalent adjusted (non-GAAP)
|
|
$
|
6,244
|
|
|
$
|
5,597
|
|
|
|
|
|
|
|
|
|
|
Average earning assets
|
|
$
|
669,974
|
|
|
$
|
632,995
|
|
Net interest margin (GAAP)
|
|
|
3.71
|
%
|
|
|
3.54
|
%
|
Net interest margin (non-GAAP)
|
|
|
3.75
|
%
|
|
|
3.59
|
%
|
Reconciliation
of Non-GAAP Measure – Efficiency Ratio
(dollars in thousands)
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net interest income (GAAP)
|
|
$
|
6,188
|
|
|
$
|
5,519
|
|
Tax equivalent adjustment
|
|
|
56
|
|
|
|
78
|
|
Net interest income – tax-equivalent adjusted (non-GAAP)
|
|
$
|
6,244
|
|
|
$
|
5,597
|
|
Noninterest income
|
|
|
452
|
|
|
|
411
|
|
Total income
|
|
|
6,696
|
|
|
|
6,008
|
|
Total noninterest expense
|
|
|
4,216
|
|
|
|
4,260
|
|
Efficiency ratio, fully tax-equivalent (non-GAAP)
|
|
|
62.96
|
%
|
|
|
70.91
|
%
|
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 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 Losses
The allowance
for loan 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 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. Although management believes the allowance to be adequate, ultimate losses
may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration
of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management
determine that changes are warranted based on those reviews, the allowance is adjusted. For further information regarding our
allowance for loan losses, see “Allowance for Loan Losses Activity.”
General
Development of Business
The Company
is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under
the laws of the State of California in 1995. As a bank holding company, the Company is authorized to engage in the activities
permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. Its principal office is located
at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and its telephone number is (916) 854-0123. The Company employed
an equivalent of 99 full-time employees as of March 31, 2020.
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.
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 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 2020 and 2019, 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 $1,432,000 for the quarter ended March 31, 2020, which was an increase of $286,000 (25.0%) compared to $1,146,000
reported for the same period of 2019. Diluted earnings per share for the first quarter of 2020 was $0.24, an increase of 20.0%
compared to the $0.20 per share reported in the first quarter of 2019. The return on average equity (“ROAE”) and the
return on average assets (“ROAA”) for the first quarter of 2020 were 6.77% and 0.80%, respectively, as compared to
6.17% and 0.68%, respectively, for the same period in 2019.
Total assets
of the Company decreased by $4,300,000 (0.6%) from $720,353,000 at December 31, 2019 to $716,053,000 at March 31, 2020. Net loans
totaled $388,044,000 at March 31, 2020, a decrease of $5,758,000 (1.5%) from $393,802,000 at December 31, 2019. Deposit balances
at March 31, 2020 totaled $603,136,000, a decrease of $1,701,000 (0.3%) from $604,837,000 at December 31, 2019. The Company ended
the first quarter of 2020 with a leverage capital ratio of 9.4%, a Tier 1 capital ratio of 15.3%, and a total risk-based capital
ratio of 16.6% compared to 9.2%, 14.8%, and 15.9%, respectively, at December 31, 2019.
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,
|
|
|
|
2020
|
|
|
2019
|
|
Interest income*
|
|
$
|
6,771
|
|
|
$
|
6,180
|
|
Interest expense
|
|
|
(527
|
)
|
|
|
(583
|
)
|
Net interest income*
|
|
|
6,244
|
|
|
|
5,597
|
|
Provision for loan losses
|
|
|
(495
|
)
|
|
|
(180
|
)
|
Noninterest income
|
|
|
452
|
|
|
|
411
|
|
Noninterest expense
|
|
|
(4,216
|
)
|
|
|
(4,260
|
)
|
Provision for income taxes
|
|
|
(497
|
)
|
|
|
(374
|
)
|
Tax equivalent adjustment
|
|
|
(56
|
)
|
|
|
(48
|
)
|
Net income
|
|
$
|
1,432
|
|
|
$
|
1,146
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
721,439
|
|
|
$
|
686,162
|
|
Net income (annualized) as a percentage of average total assets
|
|
|
0.80
|
%
|
|
|
0.68
|
%
|
|
*
|
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, 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 3.75% for the
three months ended March 31, 2020 and 3.59% for the three months ended March 31, 2019.
The fully
taxable equivalent interest income component for the first quarter of 2020 increased $591,000 (9.6%) to $6,771,000 compared to
$6,180,000 for the three months ended March 31, 2019. The increase in the fully taxable equivalent interest income for the first
quarter of 2020 compared to the same period in 2019 is broken down by rate (down $7,000) and volume (up $598,000). The primary
driver in this rate decrease was a decrease in the yield on investments, which led to a decrease of $113,000, and a decrease in
the yield on interest-bearing deposits in banks, which led to a decrease of $25,000. These decreases were partially offset by
an increase in the yield on loans, which contributed an increase of $131,000. The yield on investments decreased from 2.87% in
the first three months of 2019 to a yield of 2.69% during the first three months of 2020. The yield on loans increased from 4.93%
in the first quarter of 2019 to 5.03% in the first quarter of 2020. The volume increase of $598,000 was primarily from an increase
in loans ($826,000) partially offset by a decrease in investment balances ($238,000). Average loans balances increased $67,752,000,
(or 20.6%), from $328,570,000 during the first quarter of 2019 to $396,322,000 during the first quarter of 2020 and the average
investment balances decreased $32,229,000, (or 10.8%), from $297,266,000 during the first quarter of 2019 to $265,037,000 during
the first quarter of 2020. This increase in loans and decrease in investments increased the yield on earning assets from 3.96%
during the first quarter of 2019 to 4.06% during the first quarter of 2020.
Interest
expense was $527,000 or $56,000 (9.6%) lower in the first quarter of 2020 compared to $583,000 in the first quarter of 2019. The
net $56,000 decrease in interest expense during the first quarter of 2020 compared to the first quarter of 2019 was predominantly
volume related which reduced expense by $79,000. This decrease was partially offset by rates which increased expense by $23,000.
Despite the decrease in interest expense related to volume, the Company experienced an increase in interest bearing balances.
Average interest bearing balances increased $743,000 (0.2%) from $391,774,000 in the first quarter of 2019 to $392,517,000 in
the first quarter of 2020. The increase in balances occurred in the lower cost interest checking and money market deposit balances
which increased $19,219,000 (9.1%) from $211,003,000 in the first quarter of 2019 to $230,222,000 in the first quarter of 2020.
This increase was partially offset by a decrease in the higher cost time deposit balances which decreased $16,849,000 (19.2%)
from $87,636,000 in the first quarter of 2019 to $70,787,000 in the first quarter of 2020. Also, despite the increase in interest
expense due to rates the overall cost of funds decreased from 0.60% in the first three months of 2019 to 0.54% during the first
three months of 2020. Rates decreased in the higher cost time deposits, which decreased from 1.80% in the first quarter of 2019
to 1.30% in the first quarter of 2020.
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,
|
|
2020
|
|
|
2019
|
|
(Taxable Equivalent Basis)
(dollars in thousands)
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield
(4)
|
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield
(4)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable loans(1)
|
|
$
|
372,826
|
|
|
$
|
4,675
|
|
|
|
5.04
|
%
|
|
$
|
312,588
|
|
|
$
|
3,818
|
|
|
|
4.95
|
%
|
Tax-exempt loans(2)
|
|
|
23,496
|
|
|
|
278
|
|
|
|
4.76
|
%
|
|
|
15,982
|
|
|
|
178
|
|
|
|
4.52
|
%
|
Taxable investment securities
|
|
|
259,592
|
|
|
|
1,739
|
|
|
|
2.69
|
%
|
|
|
283,006
|
|
|
|
2,024
|
|
|
|
2.90
|
%
|
Tax-exempt investment securities(2)
|
|
|
5,445
|
|
|
|
45
|
|
|
|
3.32
|
%
|
|
|
14,260
|
|
|
|
111
|
|
|
|
3.16
|
%
|
Federal funds sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
|
|
5
|
|
|
|
2.90
|
%
|
Interest-bearing deposits in banks
|
|
|
8,615
|
|
|
|
34
|
|
|
|
1.59
|
%
|
|
|
6,459
|
|
|
|
44
|
|
|
|
2.76
|
%
|
Total earning assets
|
|
|
669,974
|
|
|
|
6,771
|
|
|
|
4.06
|
%
|
|
|
632,995
|
|
|
|
6,180
|
|
|
|
3.96
|
%
|
Cash & due from banks
|
|
|
16,008
|
|
|
|
|
|
|
|
|
|
|
|
16,176
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
40,675
|
|
|
|
|
|
|
|
|
|
|
|
41,411
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(5,218
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,420
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
721,439
|
|
|
|
|
|
|
|
|
|
|
$
|
686,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
$
|
230,222
|
|
|
|
204
|
|
|
|
0.36
|
%
|
|
$
|
211,003
|
|
|
|
94
|
|
|
|
0.18
|
%
|
Savings
|
|
|
74,530
|
|
|
|
7
|
|
|
|
0.04
|
%
|
|
|
73,602
|
|
|
|
7
|
|
|
|
0.04
|
%
|
Time deposits
|
|
|
70,787
|
|
|
|
229
|
|
|
|
1.30
|
%
|
|
|
87,636
|
|
|
|
388
|
|
|
|
1.80
|
%
|
Other borrowings
|
|
|
16,978
|
|
|
|
87
|
|
|
|
2.06
|
%
|
|
|
19,533
|
|
|
|
94
|
|
|
|
1.95
|
%
|
Total interest bearing liabilities
|
|
|
392,517
|
|
|
|
527
|
|
|
|
0.54
|
%
|
|
|
391,774
|
|
|
|
583
|
|
|
|
0.60
|
%
|
Noninterest bearing demand deposits
|
|
|
232,562
|
|
|
|
|
|
|
|
|
|
|
|
209,456
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
11,282
|
|
|
|
|
|
|
|
|
|
|
|
9,628
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
636,361
|
|
|
|
|
|
|
|
|
|
|
|
610,858
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
85,078
|
|
|
|
|
|
|
|
|
|
|
|
75,304
|
|
|
|
|
|
|
|
|
|
|
|
$
|
721,439
|
|
|
|
|
|
|
|
|
|
|
$
|
686,162
|
|
|
|
|
|
|
|
|
|
Net interest income & margin(3)
|
|
|
|
|
|
$
|
6,244
|
|
|
|
3.75
|
%
|
|
|
|
|
|
$
|
5,597
|
|
|
|
3.59
|
%
|
|
(1)
|
Loan interest includes loan
fees of $171,000 and $106,000, respectively, during the three months ended March 31, 2020 and March 31, 2019. 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 2020 and 2019.
|
|
(3)
|
Net interest margin is computed
by dividing net interest income by total average earning assets.
|
|
(4)
|
Average yield is calculated
based on actual days in the period (91 days for 2020 and 90 days for 2019) and annualized to actual days in the year (366 days
for 2020 and 365 days for 2019).
|
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
Three Months Ended March 31, 2020 over 2019 (dollars in thousands)
Increase
(decrease) due to change in:
Interest-earning assets:
|
|
Volume
|
|
|
Rate (4)
|
|
|
Net Change
|
|
Taxable net loans (1)(2)
|
|
$
|
742
|
|
|
$
|
115
|
|
|
$
|
857
|
|
Tax-exempt net loans (3)
|
|
|
84
|
|
|
|
16
|
|
|
|
100
|
|
Taxable investment securities
|
|
|
(169
|
)
|
|
|
(116
|
)
|
|
|
(285
|
)
|
Tax exempt investment securities (3)
|
|
|
(69
|
)
|
|
|
3
|
|
|
|
(66
|
)
|
Federal funds sold
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
Interest-bearing deposits in banks
|
|
|
15
|
|
|
|
(25
|
)
|
|
|
(10
|
)
|
Total
|
|
|
598
|
|
|
|
(7
|
)
|
|
|
591
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
|
9
|
|
|
|
101
|
|
|
|
110
|
|
Savings deposits
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Time deposits
|
|
|
(75
|
)
|
|
|
(84
|
)
|
|
|
(159
|
)
|
Other borrowings
|
|
|
(13
|
)
|
|
|
6
|
|
|
|
(7
|
)
|
Total
|
|
|
(79
|
)
|
|
|
23
|
|
|
|
(56
|
)
|
Interest differential
|
|
$
|
677
|
|
|
$
|
(30
|
)
|
|
$
|
647
|
|
|
(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 $171,000 and $106,000, respectively, during the three months ended March 31, 2020 and March 31, 2019 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 2020 and 2019.
|
|
(4)
|
The rate/volume variance
has been included in the rate variance.
|
Provision for Loan Losses
The Company provided
$495,000 to the provision for loan losses for the first quarter of 2020 compared to $180,000 in the first quarter of 2019. The
Company experienced net loan recoveries of $4,000 or (0.00%) (on an annualized basis) of average loans for the three months ended
March 31, 2020 compared to net loan recoveries of $5,000 or (0.01%) (on an annualized basis) of average loans for the three months
ended March 31, 2019. The Company continues to experience an overall improvement in the credit quality of the loan portfolio and
a reduction of credit losses, however, due to the uncertain economic impact on the Company’s borrowers due to COVID-19,
the $495,000 addition to the provision for loan losses during the first quarter of 2020 was warranted. For additional information
see the “Allowance for Loan Losses Activity” and “Potential Impact of COVID-19.”
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
(dollars in thousands)
|
|
Three Months Ended
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
Service charges on deposit accounts
|
|
$
|
155
|
|
|
$
|
121
|
|
Gain on sale of securities
|
|
|
38
|
|
|
|
36
|
|
Merchant fee income
|
|
|
93
|
|
|
|
90
|
|
Bank owned life insurance
|
|
|
84
|
|
|
|
81
|
|
Other
|
|
|
82
|
|
|
|
83
|
|
Total noninterest income
|
|
$
|
452
|
|
|
$
|
411
|
|
Noninterest income
increased $41,000 (10.0%) to $452,000 for the three months ended March 31, 2020 as compared to $411,000 for the three months ended
March 31, 2019. The increase in noninterest income was primarily related to higher service charges on deposit accounts, which
increased $34,000 (28.1%) from $121,000 in 2019 to $155,000 in 2020.
Noninterest
Expense
Noninterest
expense decreased $44,000 (1.0%) to a total of $4,216,000 in the first quarter of 2020 compared to $4,260,000 in the first quarter
of 2019. Salary and employee benefits expense increased $83,000 (3.0%) from $2,781,000 during the first quarter of 2019 to $2,865,000
during the first quarter of 2020. The increase in salaries and benefits expense resulted from normal cost of living increases
and promotions. Average full-time equivalent employees was 101 during the first quarter of 2020 compared to 103 during the first
quarter of 2019. On a quarter-over-quarter basis, occupancy expense decreased $1,000 (0.4%) and furniture and equipment expense
increased $3,000 (2.1%). FDIC assessments decreased $23,000 (46.0%) from the first quarter of 2019 to the first quarter of 2020.
The decreased FDIC assessments result from the FDIC insurance fund reaching the target of 1.38% and the Company being able to
use the Small Bank Assessment Credits, awarded to banks like American River Bank, which essentially gave banks a credit for the
assessments paid in the latter half of 2019 and for a partial amount of the expense for the first quarter of 2020. OREO related
expenses increased $1,000 (25.0%) from $4,000 in the first quarter of 2019 to $5,000 in the first quarter of 2020. Other expense
decreased $108,000 (10.5%) from $1,028,000 in the first quarter of 2019 to $920,000 in the first quarter of 2020. There were numerous
line items that make up the $108,000 decrease in other expenses but the largest change occurred in advertising and business development.
Advertising and business development decreased $123,000 (63.4%) from $194,000 in the first quarter of 2019 to $71,000 in the first
quarter of 2020. Much of this decrease is related to the shelter-in-place order within our markets reducing the number of business
development opportunities and events. The fully taxable equivalent efficiency ratio decreased from 70.9% for the first quarter
of 2019 to 63.0% for the first quarter of 2020.
Provision for
Income Taxes
Federal
and state income taxes for the quarter ended March 31, 2020 increased $123,000 (33.3%) from $374,000 in the first quarter of 2019
to $497,000 in the first quarter of 2020. The effective tax rate for the quarter ended March 31, 2020 was 25.8% compared to 24.6%
for the first quarter of 2019. The higher tax expense was related to the higher level of taxable income ($406,000 or 26.9%) in
2020 ($1,929,000) compared to 2019 ($1,520,000). The higher effective tax rate in 2020 compared to 2019 is also 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 2019 the Company recognized $44,000 in tax credit under ASU 2016-09 and in the first quarter of 2020 the Company
recognized $4,000 in tax credit under ASU 2016-09.
Balance
Sheet Analysis
The Company’s
total assets were $716,053,000 at March 31, 2020 as compared to $720,353,000 at December 31, 2019, representing a decrease of
$4,300,000 (0.6%). The average assets for the three months ended March 31, 2020 were $721,439,000, which represents an increase
of $35,277,000 or 5.1% over the balance of $686,162,000 during the three-month period ended March 31, 2019.
Investment Securities
Table
Five below summarizes the values of the Company’s investment securities held on March 31, 2020 and December 31, 2019.
Table Five: Investment
Securities Composition
(dollars
in thousands)
|
|
|
|
|
|
|
Available-for-sale
(at fair value)
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
US
Government Agencies and Sponsored Agencies
|
|
$
|
235,388
|
|
|
$
|
241,887
|
|
Obligations
of states and political subdivisions
|
|
|
13,598
|
|
|
|
13,447
|
|
Corporate
bonds
|
|
|
6,638
|
|
|
|
6,631
|
|
Total
available-for-sale investment securities
|
|
$
|
255,624
|
|
|
$
|
261,965
|
|
Held-to-maturity (at amortized cost)
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
240
|
|
|
$
|
248
|
|
Total held-to-maturity investment securities
|
|
$
|
240
|
|
|
$
|
248
|
|
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 gains on available-for-sale investment securities totaling $6,558,000 were
recorded, net of $1,938,000 in tax liabilities, as accumulated other comprehensive loss within shareholders’ equity at March
31, 2020 and net unrealized gains on available-for-sale investment securities totaling $2,544,000 were recorded, net of $752,000
in tax liabilities, as accumulated other comprehensive loss within shareholders’ equity at December 31, 2019.
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
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) agriculture; and
(7) 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 $12.9 million in new
loans during the first three months of 2020. This production was offset by pay downs and payoffs, and resulted in an overall decrease
in net loans of $5,758,000 (1.5%) from December 31, 2019.
A significant
portion of the Company’s loans are direct loans 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 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 three to ten 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, 2020 and December 31, 2019.
Table Six: Loan
Portfolio Composition
(dollars in thousands)
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Change in
|
|
|
Percentage
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
dollars
|
|
|
change
|
|
Commercial
|
|
$
|
42,887
|
|
|
|
11
|
%
|
|
$
|
43,019
|
|
|
|
11
|
%
|
|
$
|
(132
|
)
|
|
|
(0.3
|
%)
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
216,291
|
|
|
|
55
|
%
|
|
|
214,604
|
|
|
|
54
|
%
|
|
|
1,687
|
|
|
|
0.8
|
%
|
Multi-family
|
|
|
52,082
|
|
|
|
13
|
%
|
|
|
56,818
|
|
|
|
14
|
%
|
|
|
(4,736
|
)
|
|
|
(8.3
|
%)
|
Construction
|
|
|
20,871
|
|
|
|
5
|
%
|
|
|
23,169
|
|
|
|
6
|
%
|
|
|
(2,298
|
)
|
|
|
(9.9
|
%)
|
Residential
|
|
|
29,136
|
|
|
|
7
|
%
|
|
|
29,180
|
|
|
|
7
|
%
|
|
|
(44
|
)
|
|
|
(0.2
|
%)
|
Agriculture
|
|
|
6,411
|
|
|
|
2
|
%
|
|
|
6,479
|
|
|
|
2
|
%
|
|
|
(68
|
)
|
|
|
(1.0
|
%)
|
Consumer
|
|
|
26,660
|
|
|
|
7
|
%
|
|
|
26,392
|
|
|
|
6
|
%
|
|
|
268
|
|
|
|
1.0
|
%
|
Total loans
|
|
|
394,338
|
|
|
|
100
|
%
|
|
|
399,661
|
|
|
|
100
|
%
|
|
|
(5,323
|
)
|
|
|
(1.3
|
%)
|
Deferred loan (fees) and costs, net
|
|
|
(657
|
)
|
|
|
|
|
|
|
(721
|
)
|
|
|
|
|
|
|
64
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(5,637
|
)
|
|
|
|
|
|
|
(5,138
|
)
|
|
|
|
|
|
|
(499
|
)
|
|
|
|
|
Total net loans
|
|
$
|
388,044
|
|
|
|
|
|
|
$
|
393,802
|
|
|
|
|
|
|
$
|
(5,758
|
)
|
|
|
(1.5
|
%)
|
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 portfolio. Management believes its ability to identify and assess risk and return characteristics
of the Company’s loan portfolio is critical for profitability and growth. Management strives to continue its emphasis on
credit quality in the loan approval process, through active credit administration and regular monitoring. With this in mind, management
has designed and implemented a comprehensive loan review and grading system that functions to continually assess the credit risk
inherent in the loan portfolio.
Ultimately,
underlying trends in economic and business cycles influence credit quality. American River Bank’s business is concentrated
in the Sacramento Metropolitan Statistical Area, which is a diversified economy, but with a large State of California government
presence and employment base; in Sonoma County, which is focused on businesses within the two communities in which the Bank has
offices (Santa Rosa and Healdsburg); and in Amador County, in which the Bank is primarily focused on businesses within the three
communities in which it has offices (Jackson, Pioneer, and Ione). The economy of Sonoma County is diversified with professional
services, manufacturing, agriculture and real estate investment and construction, while the economy of Amador County is reliant
upon government, services, retail trade, manufacturing industries and Indian gaming.
The Company has
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 80% of the Company’s loan portfolio
at March 31, 2020 and 81% as of December 31, 2019. 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, 2020, outstanding unimproved residential
land and construction loans were $4,269,000 (or just 1.3% of the total real estate loans). Of the $4,269,000, $1,969,000 (46%)
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 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 losses. This could adversely affect
the Company’s future prospects, results of operations, profitability and stock price. See “Potential Impact of COVID-19.”
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
Management places
loans on nonaccrual status when they become 90 days past due or if a loss is expected, unless the loan is well secured and in
the process of collection. Loans are partially or fully charged off when, in the opinion of management, collection of such amount
appears unlikely. The recorded investments in nonperforming loans, which includes nonaccrual loans and loans that were 90 days
or more past due and on accrual, totaled zero at both March 31, 2020 and December 31, 2019, respectively.
There were no
loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as of March 31, 2020. Management
is not aware of any potential problem loans, which were accruing and current at March 31, 2020, 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, 2020 and December 31, 2019.
Table Seven: Nonperforming Loans
|
|
|
|
|
|
|
(dollars in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Past due 90 days or more and still accruing:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Nonaccrual:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming loans
|
|
$
|
—
|
|
|
$
|
—
|
|
Impaired
Loans
The Company
considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect
all amounts due (principal and interest) according to the original contractual terms of the loan agreement. The measurement of
impairment may be based on (i) the present value of the expected cash flows of the impaired loan discounted at the loan’s
original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of
the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans that are collectively
evaluated for credit risk. In assessing whether a loan is impaired, the Company typically reviews loans 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,
2020, the recorded investment in loans that were considered to be impaired totaled $7,544,000, all of which are considered performing
loans. Of the total impaired loans of $7,544,000, loans totaling $5,818,000 were deemed to require no specific reserve and loans
totaling $1,726,000 were deemed to require a related valuation allowance of $134,000. Of the $5,818,000 impaired loans that did
not carry a specific reserve there were $474,000 in loans that had previous partial charge-offs and $5,344,000 in loans 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 balance. The recorded investment in loans that were considered to be impaired totaled $7,604,000 at December
31, 2019. Of the total impaired loans of $7,604,000, loans totaling $5,848,000 were deemed to require no specific reserve and
loans totaling $1,756,000 were deemed to require a related valuation allowance of $142,000.
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 2020, the Company had net loan recoveries of $4,000 with $495,000 in provisions for
loan losses. Despite the Company’s continued improvement in the credit quality of the loan portfolio, due to the uncertain
economic impact on the Company’s borrowers due to COVID-19, management believes that the $495,000 addition to the provision
for loan losses during the first quarter of 2020 was warranted. In the first quarter of 2019, the Company had net loan recoveries
of $5,000 with $180,000 in added provision.
During the periods
ended March 31, 2020 and March 31, 2019, there were no loans that were modified as troubled debt restructurings. There were no
payment defaults during the three months ended March 31, 2020 or March 31, 2019 on troubled debt restructurings made in the preceding
twelve months. At March 31, 2020 and December 31, 2019, there were no unfunded commitments on those loans considered troubled
debt restructures.
Working with
Borrowers
The FDIC is encouraging
financial institutions, like American River Bank, to provide borrowers affected in a variety of ways by the COVID-19 outbreak
with payment accommodations that facilitate their ability to work through the immediate impact of the virus. Such assistance provided
in a prudent manner to borrowers facing short-term setbacks could help the borrower and our community to recover. The FDIC suggested
that these loan accommodation programs may involve protracted resolutions, but that all accommodations should be ultimately targeted
toward loan repayment.
The FDIC
suggested that financial institutions should consider ways to address any deferred or skipped payments such as extending the original
maturity date or by making those payments due in a balloon payment at the maturity date of the loan. As of March 31, 2020, the
Company was in discussion with its borrowers to seek ways in which the Company could assist them during the COVID-19 but had not
yet deferred any loan payments. On April 1, 2020, the Company began deferring loan payments for some its borrowers. As of May
4, 2020, the following arrangements had been made for borrowers requesting loan deferrals:
Payments
for principal and interest deferred for three months with the maturity extended three months:
Seven commercial
loans with principal balances totaling $3,942,000;
Thirty-six consumer
auto loans with principal balances totaling $4,289,000;
Twenty-nine commercial
real estate loans with principal balances totaling $33,110,000;
Five residential
real estate loans with principal balances totaling $5,539,000; and
Three multi-family
loans with principal balances totaling $10,133,000.
Payments
for principal and interest deferred for four months with the maturity extended four months:
Three commercial
loans with principal balances totaling $5,109,000; and
Four commercial
real estate loans with principal balances totaling $3,465,000.
Payments
for principal and interest deferred for three months, due at maturity:
Five commercial
real estate loans with principal balances totaling $9,068,000;
One multi-family
loan with a principal balance totaling $1,381,000: and
One residential
real estate loan with a principal balance totaling $771,000.
Payments
for principal and interest deferred for four months, due at maturity:
One commercial
real estate loan with a principal balance totaling $125,000.
Payments
for interest only for six months, maturity was not extended:
One commercial
real estate loan with a principal balance totaling $2,657,000.
The Company expects
to continue to work with its borrowers and make prudent credit arrangements if needed, with the intention of acting in a safe
and sound manner.
Allowance
for Loan Losses Activity
The Company
maintains an allowance for loan losses (“ALLL”) to cover probable losses inherent in the loan portfolio, which is
based upon management’s estimate of those losses. The ALLL is established through a provision for loan losses and is increased
by provisions charged against current earnings and recoveries and reduced by charge-offs. Actual losses for loans 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 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 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 and exposure to potential losses.
The ALLL
totaled $5,637,000 or 1.43% of total loans at March 31, 2020 compared to $5,138,000 or 1.29% of total loans at December 31, 2019.
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 portfolio based on loan type and loan rating; however, the entire
allowance is available to cover actual loan losses. While management uses available information to recognize possible losses on
loans, 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 allowance
for loans as a percentage of impaired loans was 74.7% at March 31, 2020 and 67.6% at December 31, 2019. Of the total non-performing
and impaired loans outstanding as of March 31, 2020, there were $787,000 in loans that had been reduced by partial charge-offs
of $292,000.
The Company’s
policy with regard to loan charge-offs continues to be that a loan is charged off against the ALLL when management believes that
the collectability of the principal is unlikely. As previously discussed in the “Impaired Loans” section, certain
loans are evaluated for impairment. Generally, if a loan is collateralized by real estate or other collateral, and considered
collateral dependent, the impaired portion will be charged off to the allowance for loan losses unless it is in the process of
collection, in which case a specific reserve may be warranted.
It is the policy
of management to maintain the allowance for loan 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 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 losses is prudent and adequate. However, no prediction of the ultimate level of loans charged off
in future periods can be made with any certainty. Table Eight below summarizes, for the periods indicated, the activity in the
ALLL.
Table Eight: Allowance for Loan Losses
(dollars in thousands)
|
|
Three
Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Average
loans outstanding
|
|
$
|
396,322
|
|
|
$
|
328,570
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
at beginning of period
|
|
$
|
5,138
|
|
|
$
|
4,392
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
Recoveries
of loans previously charged off:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1
|
|
|
|
2
|
|
Real
estate
|
|
|
3
|
|
|
|
3
|
|
Total
|
|
|
4
|
|
|
|
5
|
|
Net loans recovered
|
|
|
4
|
|
|
|
5
|
|
Additions
to allowance charged to operating expenses
|
|
|
495
|
|
|
|
180
|
|
Allowance
for loan losses at end of period
|
|
$
|
5,637
|
|
|
$
|
4,577
|
|
Ratio of net recoveries
to average loans outstanding (annualized)
|
|
|
0.00
|
%
|
|
|
(0.01
|
%)
|
Provision of allowance
for loan losses to average loans outstanding (annualized)
|
|
|
0.50
|
%
|
|
|
0.22
|
%
|
Allowance for loan losses
to loans net of deferred fees at end of period
|
|
|
1.43
|
%
|
|
|
1.34
|
%
|
Other Real Estate
Owned
At March
31, 2020 and December 31, 2019, the Company had one other real estate owned (“OREO”) property totaling $846,000. During
the first quarter of 2020, 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, 2020 nor at year-end 2019. The Company believes that the OREO property
owned at March 31, 2020 was carried approximately at fair value.
Deposits
At March
31, 2020, total deposits were $603,136,000 representing a $1,701,000 (0.3%) decrease from the December 31, 2019 balance of $604,837,000.
The Company’s deposit growth plan for 2020 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, and savings, in total, remained relatively unchanged from December 31, 2019 increasing overall
by $1,193,000 (0.2%), however, balances in money market accounts increased $3,865,000 (2.4%). The increase in money market accounts
was offset by a decrease in time deposits balances, which decreased $2,894,000 (3.9%) from $73,809,000 at December 31, 2019 to
$70,915,000 at March 31, 2020 and savings accounts balances, which decreased $3,020,000 (4.0%) from $75,820,000 at December 31,
2019 to $72,800,000 at March 31, 2020.
Other
Borrowed Funds
Other
borrowings outstanding as of March 31, 2020 and December 31, 2019, 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, 2020
|
|
|
December 31, 2019
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
5,000
|
|
|
|
1.31
|
%
|
|
$
|
9,000
|
|
|
|
1.46
|
%
|
Long-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
10,500
|
|
|
|
2.48
|
%
|
|
$
|
10,500
|
|
|
|
2.48
|
%
|
The
maximum amount of short-term borrowings at any month-end during the first three months of 2020 and 2019 was $12,000,000 and $19,000,000,
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, 2020:
|
|
Short-term
|
|
|
Long-term
|
|
Amount
|
|
$
|
5,000
|
|
|
$
|
10,500
|
|
Maturity
|
|
|
2020
|
|
|
|
2021 to 2023
|
|
Weighted average rates
|
|
|
1.31
|
%
|
|
|
2.48
|
%
|
Capital Resources
The Company and
American River Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal
Reserve System and the Federal Deposit Insurance Corporation (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 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,
2020, shareholders’ equity was $86,854,000, representing an increase of $3,945,000 (4.8%) from $82,909,000 at December 31,
2019. The increase results from net income for the period ($1,432,000), stock based compensation ($98,000), and the increase from
other comprehensive income ($2,828,000), exceeding the payment of cash dividends ($413,000). Table Ten below lists the Company’s
and American River Bank’s capital ratios at March 31, 2020 and December 31, 2019, as well as the minimum capital ratios
for capital adequacy and the minimum requirement for a well-capitalized institution. While the Company has elected to adopt the
community bank leverage ratio framework in which it is no longer required to report the risk-based capital ratios, we believe
reporting them to our shareholders allows them to compare the ratios of companies of similar size and, therefore, are presented
below.
Table Ten: Capital Ratios
|
|
|
|
|
|
|
|
|
|
Capital to Risk-Adjusted Assets
|
|
March 31,
|
|
|
December 31,
|
|
|
Minimum Regulatory Capital
Requirements
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
American River Bankshares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
9.4
|
%
|
|
|
9.2
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Risk-Based Capital
|
|
|
15.3
|
%
|
|
|
14.8
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Risk-Based Capital
|
|
|
16.6
|
%
|
|
|
15.9
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American River Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
9.5
|
%
|
|
|
9.3
|
%
|
|
|
6.5
|
%
|
|
|
6.5
|
%
|
Common Equity Tier 1 Risk-Based Capital
|
|
|
15.5
|
%
|
|
|
14.9
|
%
|
|
|
N/A
|
|
|
|
7.0
|
%
|
Tier 1 Risk-Based Capital
|
|
|
15.5
|
%
|
|
|
14.9
|
%
|
|
|
N/A
|
|
|
|
8.5
|
%
|
Total Risk-Based Capital
|
|
|
16.7
|
%
|
|
|
16.1
|
%
|
|
|
N/A
|
|
|
|
10.5
|
%
|
On February 12,
2020, the Company paid a $0.07 per common share cash dividend to shareholders of record on January 29, 2020. This 2020 quarterly
dividend follows four quarterly cash dividends, totaling $0.24 per share, paid in 2019. Capital ratios are reviewed on a regular
basis to ensure that capital exceeds the prescribed regulatory requirements and is adequate to meet future needs. Accordingly,
we cannot provide any assurance that we will continue to pay cash dividends at the same historical rates, or at all. Management
believes that both the Company and American River Bank met all of their capital adequacy requirements as of March 31, 2020 and
December 31, 2019.
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 minimum capital ratio requirements which have been fully phased in. The capital
requirements consist of the following: (i) a 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 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 buffer requirement 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, 2020 and 2019.
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 repayments contribute to liquidity, along with
deposit increases, while loan 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, 2020 were approximately $30,524,000
and $60,000, 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, 2020, consolidated liquid assets
totaled $138.0 million or 19.3% of total assets compared to $141.5 million or 19.6% of total assets on December 31, 2019. 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, 2020, the Company had $17,000,000 available under these credit lines. Additionally, the Bank
is a member of the FHLB. At March 31, 2020, the Bank could have arranged for up to $160,047,000 in secured borrowings from the
FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At March 31, 2020, the Company had advances,
borrowings and commitments (including letters of credit) outstanding of $15,500,000, leaving $144,547,000 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, 2020, the Company’s
borrowing capacity at the Federal Reserve Bank was $6,527,000. 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, 2020 and December 31, 2019,
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 $30,584,000 and $40,624,000 at March 31, 2020 and December 31, 2019, respectively.
As a percentage of net loans these off-balance sheet items represent 7.9% and 10.3%, respectively.