Item 1. Financial Statements.
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
BALANCE SHEET
(Unaudited)
(dollars
in thousands)
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
24,634
|
|
|
$
|
38,467
|
|
Federal funds sold
|
|
|
10,000
|
|
|
|
—
|
|
Total cash and cash equivalents
|
|
|
34,634
|
|
|
|
38,467
|
|
Interest-bearing deposits in banks
|
|
|
1,746
|
|
|
|
1,746
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
277,269
|
|
|
|
262,322
|
|
Held-to-maturity, at amortized cost
|
|
|
311
|
|
|
|
378
|
|
Loans and leases, less allowance for loan and lease losses of $4,332
at September 30, 2018 and $4,478 at December 31, 2017
|
|
|
310,322
|
|
|
|
308,713
|
|
Premises and equipment, net
|
|
|
1,072
|
|
|
|
1,158
|
|
Federal Home Loan Bank stock
|
|
|
3,932
|
|
|
|
3,932
|
|
Goodwill and other intangible assets
|
|
|
16,321
|
|
|
|
16,321
|
|
Other real estate owned
|
|
|
961
|
|
|
|
961
|
|
Bank owned life insurance
|
|
|
15,350
|
|
|
|
15,122
|
|
Accrued interest receivable and other assets
|
|
|
8,076
|
|
|
|
6,502
|
|
|
|
$
|
669,994
|
|
|
$
|
655,622
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
209,322
|
|
|
$
|
215,528
|
|
Interest-bearing
|
|
|
366,498
|
|
|
|
340,552
|
|
Total deposits
|
|
|
575,820
|
|
|
|
556,080
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
6,500
|
|
|
|
3,500
|
|
Long-term borrowings
|
|
|
9,000
|
|
|
|
12,000
|
|
Accrued interest payable and other liabilities
|
|
|
6,939
|
|
|
|
7,121
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
598,259
|
|
|
|
578,701
|
|
|
|
|
|
|
|
|
|
|
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 – 5,864,802 shares at September 30, 2018 and 6,132,362 shares at December 31, 2017
|
|
|
30,165
|
|
|
|
34,463
|
|
Retained earnings
|
|
|
45,660
|
|
|
|
42,779
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(4,090
|
)
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
71,735
|
|
|
|
76,921
|
|
|
|
$
|
669,994
|
|
|
$
|
655,622
|
|
See
Notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF INCOME
(Unaudited)
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the periods ended September 30,
|
|
Three months
|
|
|
Nine months
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
3,405
|
|
|
$
|
3,496
|
|
|
$
|
10,216
|
|
|
$
|
10,384
|
|
Exempt from Federal income taxes
|
|
|
127
|
|
|
|
110
|
|
|
|
383
|
|
|
|
376
|
|
Interest on Federal funds sold
|
|
|
120
|
|
|
|
—
|
|
|
|
268
|
|
|
|
—
|
|
Interest on deposits in banks
|
|
|
10
|
|
|
|
4
|
|
|
|
23
|
|
|
|
9
|
|
Interest and dividends on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,902
|
|
|
|
1,292
|
|
|
|
4,930
|
|
|
|
3,978
|
|
Exempt from Federal income taxes
|
|
|
102
|
|
|
|
180
|
|
|
|
410
|
|
|
|
496
|
|
Dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
Total interest income
|
|
|
5,666
|
|
|
|
5,082
|
|
|
|
16,230
|
|
|
|
15,256
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
346
|
|
|
|
224
|
|
|
|
945
|
|
|
|
621
|
|
Interest on borrowings
|
|
|
63
|
|
|
|
55
|
|
|
|
171
|
|
|
|
152
|
|
Total interest expense
|
|
|
409
|
|
|
|
279
|
|
|
|
1,116
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,257
|
|
|
|
4,803
|
|
|
|
15,114
|
|
|
|
14,483
|
|
Provision for loan and lease losses
|
|
|
50
|
|
|
|
300
|
|
|
|
50
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses
|
|
|
5,207
|
|
|
|
4,503
|
|
|
|
15,064
|
|
|
|
14,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
119
|
|
|
|
117
|
|
|
|
352
|
|
|
|
348
|
|
Gain on sale or call of securities
|
|
|
8
|
|
|
|
19
|
|
|
|
19
|
|
|
|
161
|
|
Other noninterest income
|
|
|
250
|
|
|
|
241
|
|
|
|
758
|
|
|
|
726
|
|
Total noninterest income
|
|
|
377
|
|
|
|
377
|
|
|
|
1,129
|
|
|
|
1,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,551
|
|
|
|
2,102
|
|
|
|
7,274
|
|
|
|
6,336
|
|
Occupancy
|
|
|
267
|
|
|
|
262
|
|
|
|
791
|
|
|
|
793
|
|
Furniture and equipment
|
|
|
141
|
|
|
|
141
|
|
|
|
415
|
|
|
|
439
|
|
Federal Deposit Insurance Corporation assessments
|
|
|
52
|
|
|
|
51
|
|
|
|
158
|
|
|
|
156
|
|
Expenses related to other real estate owned
|
|
|
10
|
|
|
|
4
|
|
|
|
12
|
|
|
|
36
|
|
Other expense
|
|
|
982
|
|
|
|
752
|
|
|
|
2,531
|
|
|
|
2,350
|
|
Total noninterest expense
|
|
|
4,003
|
|
|
|
3,312
|
|
|
|
11,181
|
|
|
|
10,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
1,581
|
|
|
|
1,568
|
|
|
|
5,012
|
|
|
|
5,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
428
|
|
|
|
459
|
|
|
|
1,237
|
|
|
|
1,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,153
|
|
|
$
|
1,109
|
|
|
$
|
3,775
|
|
|
$
|
3,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.18
|
|
|
$
|
0.64
|
|
|
$
|
0.56
|
|
Diluted earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.17
|
|
|
$
|
0.64
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
See
notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the periods ended September 30,
|
|
Three months
|
|
|
Nine months
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,153
|
|
|
$
|
1,109
|
|
|
$
|
3,775
|
|
|
$
|
3,590
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in net unrealized gains on investment securities
|
|
|
(1,606
|
)
|
|
|
(497
|
)
|
|
|
(5,516
|
)
|
|
|
376
|
|
Deferred tax benefit (expense)
|
|
|
511
|
|
|
|
199
|
|
|
|
1,760
|
|
|
|
(144
|
)
|
(Decrease) increase in net unrealized gains (losses) on investment securities, net of tax
|
|
|
(1,095
|
)
|
|
|
(298
|
)
|
|
|
(3,756
|
)
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains included in net income
|
|
|
(8
|
)
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
(161
|
)
|
Tax effect
|
|
|
3
|
|
|
|
8
|
|
|
|
6
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains, net of tax
|
|
|
(5
|
)
|
|
|
(11
|
)
|
|
|
(13
|
)
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income
|
|
|
(1,100
|
)
|
|
|
(309
|
)
|
|
|
(3,769
|
)
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
53
|
|
|
$
|
800
|
|
|
$
|
6
|
|
|
$
|
3,725
|
|
See
Notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
(dollars
in thousands)
|
|
Common
Stock
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
Balance,
January 1, 2017
|
|
|
6,661,726
|
|
|
$
|
42,484
|
|
|
$
|
40,822
|
|
|
$
|
544
|
|
|
$
|
83,850
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
3,590
|
|
|
|
|
|
|
|
3,590
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized gains on available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends ($0.15 per share)
|
|
|
|
|
|
|
|
|
|
|
(975
|
)
|
|
|
|
|
|
|
(975
|
)
|
Net
restricted stock award activity and related compensation expense
|
|
|
22,032
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Stock
options exercised
|
|
|
41,898
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
351
|
|
Stock
option compensation expense
|
|
|
—
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Retirement
of common stock
|
|
|
(333,086
|
)
|
|
|
(5,006
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2017
|
|
|
6,392,570
|
|
|
$
|
38,139
|
|
|
$
|
43,437
|
|
|
$
|
679
|
|
|
$
|
82,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2018
|
|
|
6,132,362
|
|
|
|
34,463
|
|
|
|
42,779
|
|
|
|
(321
|
)
|
|
|
76,921
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
3,775
|
|
|
|
|
|
|
|
3,775
|
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized gains on available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,769
|
)
|
|
|
(3,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends ($0.15 per share)
|
|
|
|
|
|
|
|
|
|
|
(895
|
)
|
|
|
|
|
|
|
(895
|
)
|
Net
restricted stock award activity and related compensation expense
|
|
|
17,859
|
|
|
|
212
|
|
|
|
1
|
|
|
|
|
|
|
|
213
|
|
Stock
options exercised
|
|
|
13,359
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
Stock
option compensation expense
|
|
|
—
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Retirement
of common stock
|
|
|
(298,778
|
)
|
|
|
(4,654
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2018
|
|
|
5,864,802
|
|
|
$
|
30,165
|
|
|
$
|
45,660
|
|
|
$
|
(4,090
|
)
|
|
$
|
71,735
|
|
See Notes to Unaudited Consolidated
Financial Statements
AMERICAN RIVER
BANKSHARES
CONSOLIDATED STATEMENT
OF CASH FLOWS
(Unaudited
)
(dollars in thousands)
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,775
|
|
|
$
|
3,590
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses
|
|
|
50
|
|
|
|
300
|
|
(Decrease) increase in deferred loan origination fees, net
|
|
|
(53
|
)
|
|
|
5
|
|
Depreciation and amortization
|
|
|
201
|
|
|
|
255
|
|
Gain on sale and call of investment securities, net
|
|
|
(19
|
)
|
|
|
(161
|
)
|
Amortization of investment security premiums and
discounts, net
|
|
|
1,969
|
|
|
|
2,447
|
|
Increase in cash surrender values of life insurance policies
|
|
|
(228
|
)
|
|
|
(238
|
)
|
Stock based compensation expense
|
|
|
234
|
|
|
|
310
|
|
Gain on sale of other real estate owned
|
|
|
—
|
|
|
|
(8
|
)
|
Decrease (increase) in accrued interest receivable
and other assets
|
|
|
163
|
|
|
|
(581
|
)
|
Decrease in accrued interest payable and other liabilities
|
|
|
(182
|
)
|
|
|
(347
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,910
|
|
|
|
5,572
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of available-for-sale
investment securities
|
|
|
24,753
|
|
|
|
31,288
|
|
Proceeds from matured available-for-sale investment securities
|
|
|
—
|
|
|
|
1,930
|
|
Proceeds from called available-for-sale investment securities
|
|
|
1,499
|
|
|
|
145
|
|
Purchases of available-for-sale investment securities
|
|
|
(81,850
|
)
|
|
|
(63,061
|
)
|
Proceeds from principal repayments for available-
for-sale investment securities
|
|
|
33,196
|
|
|
|
31,768
|
|
Proceeds from principal repayments for held-to-
maturity investment securities
|
|
|
67
|
|
|
|
79
|
|
Net increase in interest-bearing deposits in banks
|
|
|
—
|
|
|
|
(249
|
)
|
Net (increase) decrease in loans
|
|
|
(2,956
|
)
|
|
|
1,543
|
|
Proceed from sale of loans
|
|
|
1,349
|
|
|
|
—
|
|
Proceeds from sale of other real estate
|
|
|
—
|
|
|
|
395
|
|
Net increase in FHLB stock
|
|
|
—
|
|
|
|
(153
|
)
|
Purchases of equipment
|
|
|
(115
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(24,057
|
)
|
|
|
3,566
|
|
AMERICAN RIVER
BANKSHARES
CONSOLIDATED STATEMENT
OF CASH FLOWS (Continued)
(Unaudited
)
(dollars in thousands)
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase in demand, interest-bearing and savings deposits
|
|
$
|
22,420
|
|
|
$
|
8,825
|
|
Net decrease in time deposits
|
|
|
(2,680
|
)
|
|
|
(2,689
|
)
|
Net increase (decrease) in short-term borrowings
|
|
|
3,000
|
|
|
|
(1,500
|
)
|
Net (decrease) increase to long-term borrowings
|
|
|
(3,000
|
)
|
|
|
1,500
|
|
Proceeds from stock option exercise
|
|
|
123
|
|
|
|
351
|
|
Cash dividends paid
|
|
|
(895
|
)
|
|
|
(975
|
)
|
Cash paid to repurchase common stock
|
|
|
(4,654
|
)
|
|
|
(5,006
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
$
|
14,314
|
|
|
$
|
506
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(3,833
|
)
|
|
|
9,644
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
38,467
|
|
|
|
27,589
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
34,634
|
|
|
$
|
37,233
|
|
See Notes to Unaudited Consolidated Financial Statements
AMERICAN RIVER
BANKSHARES
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2018
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion
of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of American River Bankshares (the “Company”) at September
30, 2018 and December 31, 2017, the results of its operations and statement of comprehensive income for the three-month and nine-month
periods ended September 30, 2018 and 2017, its cash flows for the nine-month periods ended September 30, 2018 and 2017 and its
statement of changes in shareholders’ equity for the nine months ended September 30, 2018 and 2017 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, 2017. The results of operations for the three-month and nine-month periods ended September 30, 2018 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. In 2000, the Board of Directors adopted and the Company’s
shareholders approved a stock option plan (the “2000 Plan”), under which 18,041 options remain outstanding at September
30, 2018. At September 30, 2018, under the 2010 Plan, there were 31,008 stock options and 41,457 restricted shares outstanding
and the total number of authorized shares that remain available for issuance was 1,290,590. The 2010 Plan provides for the following
types of stock-based awards: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock,
restricted performance stock, unrestricted Company stock, and performance units. Awards under the 2000 Plan were either incentive
stock options or nonqualified stock options. Under the 2010 Plan, the awards may be granted to employees and directors under incentive
and nonqualified option agreements, restricted stock agreements, and other awards agreements. The unvested restricted stock under
the 2010 Plan have dividend and voting rights. The 2010 Plan and the 2000 Plan (collectively the “Plans”) require
that the option price may not be less than the fair market value of the stock at the date the option is awarded. The option awards
under the Plans expire on dates determined by the Board of Directors, but not later than ten years from the date of award. The
vesting period is generally five years; however, the vesting period can be modified at the discretion of the Company’s Board
of Directors. Outstanding option awards under the Plans are exercisable until their expiration, however, no new options may be
awarded under the 2000 Plan. New shares are issued upon exercise of an option.
The
award date fair value of awards is determined by the market price of the Company’s common stock on the date of award and
is recognized ratably as compensation expense or director expense over the vesting periods. The shares of common stock awarded
pursuant to such agreements vest in increments over one to five years from the date of award. The shares awarded to employees
and directors under the restricted stock agreements vest on the applicable vesting dates only to the extent the recipient of the
shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the
shares that have not vested on the date his or her employment or service is terminated.
Equity
Compensation
For the three-month
periods ended September 30, 2018 and 2017, the compensation cost recognized for equity compensation was $83,000 and $109,000,
respectively and the recognized tax benefit for equity compensation expense was $21,000 and $40,000, respectively, for the same
three-month periods ended. For the nine-month periods ended September 30, 2018 and 2017, the compensation cost recognized for
equity compensation was $233,000 and $310,000, respectively and the recognized tax benefit for equity compensation expense was
$57,000 and $113,000, respectively, for the same nine-month periods.
At
September 30, 2018, the total unrecognized pre-tax compensation cost related to nonvested stock option awards not yet recorded
was $29,000. This amount will be recognized over the next 1.8 years and the weighted average period of recognizing these costs
is expected to be 1.4 years. At September 30, 2018, the total compensation cost related to restricted stock awards not yet recorded
was $444,000. This amount will be recognized over the next 4.7 years and the weighted average period of recognizing these costs
is expected to be 1.4 years.
Equity
Plans Activity
Stock
Options
There
were no stock options awarded during the three-month and nine-month periods ended September 30, 2018 or September 30, 2017. A
summary of option activity under the Plans as of September 30, 2018 and changes during the period then ended is presented below:
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value ($000)
|
|
Outstanding at January 1, 2018
|
|
|
97,543
|
|
|
$
|
11.26
|
|
|
|
3.1 years
|
|
|
$
|
419
|
|
Awarded
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(13,359
|
)
|
|
|
9.23
|
|
|
|
—
|
|
|
|
—
|
|
Expired, forfeited or cancelled
|
|
|
(35,135
|
)
|
|
|
15.67
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
49,049
|
|
|
$
|
8.65
|
|
|
|
3.6 years
|
|
|
$
|
327
|
|
Vested at September 30, 2018
|
|
|
41,913
|
|
|
$
|
8.54
|
|
|
|
3.2 years
|
|
|
$
|
284
|
|
Non-vested at September 30, 2018
|
|
|
7,136
|
|
|
$
|
9.29
|
|
|
|
6.2 years
|
|
|
$
|
43
|
|
Restricted
Stock
There
were no shares of restricted stock awarded during the three-month periods ended September 30, 2018 and 2017. There were 22,514
and 24,982 shares of restricted stock awarded during the nine-month periods ended September 30, 2018 and 2017, respectively.
There
were no restricted share awards that were fully vested during the three-month periods ended September 30, 2018 and 2017. There
were 25,455 restricted share awards that were fully vested during the nine-month period ended September 30, 2018 and 14,382 restricted
share awards that were fully vested during the nine-month period ended September 30, 2017. There were zero and 4,655 restricted
share awards forfeited during the three-month and nine-month periods ended September 30, 2018, respectively. There were zero and
2,950 restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2017, respectively.
The intrinsic value of nonvested restricted shares at September 30, 2018 was $635,000.
Restricted Stock
|
|
Shares
|
|
|
Weighted
Average
Award
Date Fair Value
|
|
Nonvested at January 1, 2018
|
|
|
49,053
|
|
|
$
|
12.27
|
|
Awarded
|
|
|
22,514
|
|
|
|
15.44
|
|
Less: Vested
|
|
|
(25,455
|
)
|
|
|
10.84
|
|
Less: Expired, forfeited or cancelled
|
|
|
(4,655
|
)
|
|
|
13.69
|
|
Nonvested at September 30, 2018
|
|
|
41,457
|
|
|
$
|
10.61
|
|
Other
Equity Awards
There
were no stock appreciation rights, restricted performance stock, unrestricted Company stock, or performance units awarded during
the three-month or nine-month month periods ended September 30, 2018 or 2017 or outstanding at September 30, 2018 or December
31, 2017.
The
intrinsic value used for stock options and restricted stock awards was derived from the market price of the Company’s common
stock of $15.32 as of September 30, 2018.
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 $30,266,000 and standby letters of credit of approximately $121,000 at September 30,
2018 and loan commitments of approximately $10,923,000 and standby letters of credit of approximately $121,000 at December 31,
2017. 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 2018 as some
of these are expected to expire without being fully drawn upon.
Standby letters
of credit are commitments issued to guarantee the performance or financial obligation of a client to a third party. These guarantees
are issued primarily relating to purchases of inventory, insurance programs, performance obligations to government agencies, or
as security for real estate rents by commercial clients and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to clients and accordingly, evaluation and collateral requirements similar to those for
loan commitments are used. The majority of all such commitments are collateralized. The fair value of the liability related to
these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at September
30, 2018 or December 31, 2017.
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 (5,823,345 and 5,886,977
shares for the three-month and nine-month periods ended September 30, 2018, and 6,299,914 and 6,402,647 shares for the three-month
and nine-month periods ended September 30, 2017). Diluted earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock options or restricted stock, result in the issuance of common
stock. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding for the
period plus the dilutive effect of stock based awards. There were 41,482 and 38,700, respectively, dilutive shares for the three-month
and nine-month periods ended September 30, 2018 and 66,118 and 78,922, respectively, dilutive shares for the three-month and nine-month
periods ended September 30, 2017. For the three-month periods ended September 30, 2018 and 2017, there were zero and 32,448 stock
options, respectively, that were excluded from the calculation as they were considered antidilutive. For the nine-month periods
ended September 30, 2018 and 2017, there were zero and 32,448 stock options, respectively, that were excluded from the calculation
as they were considered antidilutive. Earnings per share is retroactively adjusted for stock dividends and stock splits, if applicable,
for all periods presented.
5. INVESTMENT
SECURITIES
The amortized
cost and estimated fair values of Available-for-Sale and Held-to-Maturity investment securities at September 30, 2018 and December
31, 2017 consisted of the following (dollars in thousands):
Available-for-Sale
|
|
September 30, 2018
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Entities
|
|
$
|
256,018
|
|
|
$
|
360
|
|
|
$
|
(6,088
|
)
|
|
$
|
250,290
|
|
Obligations of states and political subdivisions
|
|
|
15,791
|
|
|
|
120
|
|
|
|
(370
|
)
|
|
|
15,541
|
|
Corporate bonds
|
|
|
6,492
|
|
|
|
51
|
|
|
|
(68
|
)
|
|
|
6,475
|
|
U.S. Treasury securities
|
|
|
4,969
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
4,963
|
|
|
|
$
|
283,270
|
|
|
$
|
531
|
|
|
$
|
(6,532
|
)
|
|
$
|
277,269
|
|
|
|
December 31, 2017
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Entities
|
|
$
|
233,956
|
|
|
$
|
1,184
|
|
|
$
|
(2,271
|
)
|
|
$
|
232,869
|
|
Obligations of states and political subdivisions
|
|
|
22,281
|
|
|
|
528
|
|
|
|
(94
|
)
|
|
|
22,715
|
|
Corporate bonds
|
|
|
6,490
|
|
|
|
160
|
|
|
|
(24
|
)
|
|
|
6,626
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate stock
|
|
|
51
|
|
|
|
61
|
|
|
|
—
|
|
|
|
112
|
|
|
|
$
|
262,778
|
|
|
$
|
1,933
|
|
|
$
|
(2,389
|
)
|
|
$
|
262,322
|
|
Net
unrealized losses on available-for-sale investment securities totaling $6,001,000 were recorded, net of $1,911,000 in tax benefits,
as accumulated other comprehensive losses within shareholders’ equity at September 30, 2018. Proceeds and gross realized
gains from the sale and call of available-for-sale investment securities totaled $10,310,000 and $8,000, respectively, for the
three-month period ended September 30, 2018 and for the nine-month period ended September 30, 2018, proceeds and gross realized
gains from the sale and call of available-for-sale investment securities totaled $26,252,000 and $19,000, respectively. There
were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2018.
Net
unrealized losses on available-for-sale investment securities totaling $456,000 were recorded, net of $135,000 in tax benefits,
as accumulated other comprehensive income within shareholders’ equity at December 31, 2017. Proceeds and gross realized
gains from the sale and call of available-for-sale investment securities totaled $22,730,000 and $19,000, respectively, for the
three-month period ended September 30, 2017 and for the nine-month period ended September 30, 2017, proceeds and gross realized
gains from the sale and call of available-for-sale investment securities totaled $31,433,000 and $161,000, respectively. There
were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2017.
Held-to-Maturity
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Entities
|
|
$
|
311
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
328
|
|
December 31, 2017
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Entities
|
|
$
|
378
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
404
|
|
There
were no sales or transfers of held-to-maturity investment securities for the periods ended September 30, 2018 and September 30,
2017. Investment securities with unrealized losses at September 30, 2018 and December 31, 2017 are summarized and classified according
to the duration of the loss period as follows (dollars in thousands):
September 30, 2018
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Entities
|
|
$
|
127,137
|
|
|
$
|
(2,321
|
)
|
|
$
|
100,217
|
|
|
$
|
(3,767
|
)
|
|
$
|
227,354
|
|
|
$
|
(6,088
|
)
|
Obligations of states and political subdivisions
|
|
|
5,554
|
|
|
|
(98
|
)
|
|
|
5,518
|
|
|
|
(272
|
)
|
|
|
11,072
|
|
|
|
(370
|
)
|
Corporate bonds
|
|
|
498
|
|
|
|
(2
|
)
|
|
|
1,926
|
|
|
|
(66
|
)
|
|
|
2,424
|
|
|
|
(68
|
)
|
U.S. Treasury securities
|
|
|
4,963
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,963
|
|
|
|
(6
|
)
|
|
|
$
|
138,152
|
|
|
$
|
(2,427
|
)
|
|
$
|
107,661
|
|
|
$
|
(4,105
|
)
|
|
$
|
245,813
|
|
|
$
|
(6,532
|
)
|
December 31, 2017
|
|
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 Entities
|
|
$
|
119,455
|
|
|
$
|
(1,148
|
)
|
|
$
|
49,258
|
|
|
$
|
(1,123
|
)
|
|
$
|
168,713
|
|
|
$
|
(2,271
|
)
|
Obligations of states and political subdivisions
|
|
|
1,130
|
|
|
|
(9
|
)
|
|
|
4,654
|
|
|
|
(85
|
)
|
|
|
5,784
|
|
|
|
(94
|
)
|
Corporate bonds
|
|
|
1,967
|
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,967
|
|
|
|
(24
|
)
|
|
|
$
|
122,552
|
|
|
$
|
(1,181
|
)
|
|
$
|
53,912
|
|
|
$
|
(1,208
|
)
|
|
$
|
176,464
|
|
|
$
|
(2,389
|
)
|
There
were no held-to-maturity investment securities with unrealized losses as of September 30, 2018 or December 31, 2017. At September
30, 2018, the Company held 218 securities of which 79 were in a loss position for less than twelve months and 71 were in a loss
position for twelve months or more. Of the 79 securities in a loss position for less than twelve months, 70 were U.S. Government
Agencies and Sponsored Entities securities, six were obligations of states or political subdivisions, two were US treasuries,
and one was a corporate bond and of the 71 securities that were in a loss position for greater than twelve months, 65 were U.S.
Government Agencies and Sponsored Entities securities, five were obligations of states or political subdivisions, and one was
a corporate bond.
At
December 31, 2017, the Company held 217 securities of which 64 were in a loss position for less than twelve months and 35 were
in a loss position for twelve months or more. Of the 35 securities in a loss position for greater than twelve months at December
31, 2017, four were municipal securities and 31 were US Government Agencies and Sponsored Agencies securities.
The
unrealized loss on the Company’s investment securities is primarily driven by interest rates. Because the decline in market
value is attributable to a change in interest rates and not credit quality, and because the Company has the ability and intent
to hold these investments until recovery of fair value, which may be until maturity, management does not consider these investments
to be other-than-temporarily impaired.
The
amortized cost and estimated fair values of investment securities at September 30, 2018 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
|
|
$
|
4,969
|
|
|
$
|
4,963
|
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
5,145
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
After five years through ten years
|
|
|
12,980
|
|
|
|
12,818
|
|
|
|
|
|
|
|
|
|
After ten years
|
|
|
4,158
|
|
|
|
4,089
|
|
|
|
|
|
|
|
|
|
|
|
|
27,252
|
|
|
|
26,979
|
|
|
|
|
|
|
|
|
|
Investment securities not due at a single maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Entities
|
|
|
256,018
|
|
|
|
250,290
|
|
|
$
|
311
|
|
|
$
|
328
|
|
|
|
$
|
283,270
|
|
|
$
|
277,269
|
|
|
$
|
311
|
|
|
$
|
328
|
|
Expected
maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay
obligations with or without call or prepayment penalties.
6.
IMPAIRED AND NONPERFORMING LOANS AND LEASES AND OTHER REAL ESTATE OWNED
At
September 30, 2018 and December 31, 2017, the recorded investment in nonperforming loans and leases was approximately $376,000
and $1,892,000, respectively. Nonperforming loans and leases include all such loans and leases that are either placed on nonaccrual
status or are 90 days past due as to principal or interest but still accrue interest because such loans are well-secured and in
the process of collection. The Company considers a loan to be impaired when, based on current information and events, it is probable
that it will be unable to collect all amounts due (principal and interest) according to the contractual terms of the original
loan agreement. At September 30, 2018, the recorded investment in loans and leases that were considered to be impaired totaled
$9,261,000, which includes $346,000 in nonaccrual loans and leases and $8,915,000 in performing loans and leases. Of the total
impaired loans of $9,261,000, loans totaling $6,348,000 were deemed to require no specific reserve and loans totaling $2,913,000
were deemed to require a related valuation allowance of $181,000. At December 31, 2017, the recorded investment in loans and leases
that were considered to be impaired totaled $13,757,000, which includes $1,892,000 in nonaccrual loans and leases and $11,865,000
in performing loans and leases. Of the total impaired loans of $13,757,000, loans totaling $7,601,000 were deemed to require no
specific reserve and loans totaling $6,156,000 were deemed to require a related valuation allowance of $355,000.
At
September 30, 2018 and December 31, 2017, the recorded investment in other real estate owned (“OREO”) was $961,000.
At September 30, 2018 the Company did not own any residential OREO properties nor were there any residential properties in the
process of foreclosure. During the first nine months of 2018, the Company did not add any new or sell any of the OREO properties,
nor did we decrease the book value on any of the properties. The September 30, 2018 OREO balance of $961,000 consisted of one
parcel of land zoned for commercial use. Nonperforming assets at September 30, 2018 and December 31, 2017 are summarized as follows:
(dollars in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Nonaccrual loans and leases that are current to terms (less than 30 days past due)
|
|
$
|
30
|
|
|
$
|
1,603
|
|
Nonaccrual loans and leases that are past due
|
|
|
346
|
|
|
|
289
|
|
Loans and leases past due 90 days and accruing interest
|
|
|
—
|
|
|
|
—
|
|
Other real estate owned
|
|
|
961
|
|
|
|
961
|
|
Total nonperforming assets
|
|
$
|
1,337
|
|
|
$
|
2,853
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans and leases to total loans and leases
|
|
|
0.12
|
%
|
|
|
0.60
|
%
|
Total nonperforming assets to total assets
|
|
|
0.20
|
%
|
|
|
0.44
|
%
|
Impaired
loans and leases as of and for the periods ended September 30, 2018 and December 31, 2017 are summarized as follows:
(dollars in thousands)
|
|
As of September 30, 2018
|
|
|
As of December 31, 2017
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,598
|
|
|
$
|
2,671
|
|
|
$
|
—
|
|
Real estate-commercial
|
|
|
5,955
|
|
|
|
6,189
|
|
|
|
—
|
|
|
|
5,674
|
|
|
|
5,907
|
|
|
|
—
|
|
Real estate-residential
|
|
|
325
|
|
|
|
412
|
|
|
|
—
|
|
|
|
329
|
|
|
|
416
|
|
|
|
—
|
|
Consumer
|
|
|
68
|
|
|
|
68
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
$
|
6,348
|
|
|
$
|
6,669
|
|
|
$
|
—
|
|
|
$
|
7,601
|
|
|
$
|
8,994
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-commercial
|
|
$
|
2,181
|
|
|
$
|
2,262
|
|
|
$
|
118
|
|
|
$
|
4,396
|
|
|
$
|
4,483
|
|
|
$
|
261
|
|
Real estate-multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
474
|
|
|
|
474
|
|
|
|
21
|
|
Real estate-residential
|
|
|
732
|
|
|
|
732
|
|
|
|
63
|
|
|
|
1,286
|
|
|
|
1,286
|
|
|
|
73
|
|
Subtotal
|
|
$
|
2,913
|
|
|
$
|
2,994
|
|
|
$
|
181
|
|
|
$
|
6,156
|
|
|
$
|
6,243
|
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,598
|
|
|
$
|
2,671
|
|
|
$
|
—
|
|
Real estate-commercial
|
|
|
8,136
|
|
|
|
8,451
|
|
|
|
118
|
|
|
|
10,070
|
|
|
|
10,390
|
|
|
|
261
|
|
Real estate-multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
474
|
|
|
|
474
|
|
|
|
21
|
|
Real estate-residential
|
|
|
1,057
|
|
|
|
1,144
|
|
|
|
63
|
|
|
|
1,615
|
|
|
|
1,702
|
|
|
|
73
|
|
Consumer
|
|
|
68
|
|
|
|
68
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
9,261
|
|
|
$
|
9,663
|
|
|
$
|
181
|
|
|
$
|
13,757
|
|
|
$
|
15,237
|
|
|
$
|
355
|
|
The
following table presents the average balance related to impaired loans and leases for the periods indicated (dollars in thousands):
|
|
Average Recorded Investments
for the three months ended
|
|
|
Average Recorded Investments
for the nine months ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
2,369
|
|
|
$
|
—
|
|
|
$
|
2,391
|
|
Real estate-commercial
|
|
|
6,289
|
|
|
|
13,139
|
|
|
|
6,010
|
|
|
|
13,220
|
|
Real estate-multi-family
|
|
|
—
|
|
|
|
477
|
|
|
|
—
|
|
|
|
479
|
|
Real estate-residential
|
|
|
326
|
|
|
|
1,973
|
|
|
|
327
|
|
|
|
2,003
|
|
Consumer
|
|
|
68
|
|
|
|
—
|
|
|
|
69
|
|
|
|
—
|
|
Total
|
|
$
|
6,683
|
|
|
$
|
17,958
|
|
|
$
|
6,406
|
|
|
$
|
18,093
|
|
The
following table presents the interest income recognized on impaired loans and leases for the periods indicated (dollars in thousands):
|
|
Interest Income Recognized
for the three months ended
|
|
|
Interest Income Recognized
for the nine months ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
114
|
|
Real estate-commercial
|
|
|
85
|
|
|
|
320
|
|
|
|
243
|
|
|
|
503
|
|
Real estate-multi-family
|
|
|
—
|
|
|
|
17
|
|
|
|
—
|
|
|
|
25
|
|
Real estate-residential
|
|
|
5
|
|
|
|
39
|
|
|
|
14
|
|
|
|
76
|
|
Consumer
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Total
|
|
$
|
91
|
|
|
$
|
493
|
|
|
$
|
259
|
|
|
$
|
720
|
|
7.
TROUBLED DEBT RESTRUCTURINGS
During
the three and nine-month periods ended September 30, 2018, there was one $18,000 commercial loan that was modified as a troubled
debt restructuring. The loan was a term out of a line of credit to an amortizing loan with a rate reduction. During the three
and nine-month periods ended September 30, 2017, there was one loan that was modified as a troubled debt restructuring. The modification
of the terms of the loan included a reduction of the stated interest rate for eighteen months according to a bankruptcy court-order
as part of a debtor-in-possession financing agreement. The loan had a pre-modification and post-modification outstanding recorded
investment of $2,692,000. After principal payments of $57,000 and charge-downs of $1,073,000, the June 30, 2018 balance was $1,562,000.
Subsequent to modification the loan went into payment default. During the third quarter of 2018 the loan was written-down by an
additional $213,000 and sold with no further loss. There were no payment defaults on troubled debt restructurings within 12 months
following the modification for the three-month and nine-month periods ended September 30, 2018 and September 30, 2017, other than
the modified loan that went into payment default mentioned above. At September 30, 2018 and December 31, 2017, there were no unfunded
commitments on those loans considered troubled debt restructures. See also “Impaired Loans and Leases” in Item 2.
8.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The
Company’s loan and lease portfolio allocated by management’s internal risk ratings as of September 30, 2018 and December
31, 2017 are summarized below:
September 30, 2018
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
24,389
|
|
|
$
|
172,951
|
|
|
$
|
61,458
|
|
|
$
|
7,486
|
|
|
$
|
15,393
|
|
Watch
|
|
|
107
|
|
|
|
16,202
|
|
|
|
3,854
|
|
|
|
—
|
|
|
|
1,304
|
|
Special mention
|
|
|
—
|
|
|
|
1,247
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Substandard
|
|
|
30
|
|
|
|
277
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
24,526
|
|
|
$
|
190,677
|
|
|
$
|
65,312
|
|
|
$
|
7,486
|
|
|
$
|
16,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
|
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
61
|
|
|
$
|
4,591
|
|
|
$
|
5,234
|
|
|
|
|
|
|
$
|
291,563
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
148
|
|
|
|
|
|
|
|
21,615
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
|
|
|
|
1,249
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
68
|
|
|
|
|
|
|
|
375
|
|
Total
|
|
$
|
61
|
|
|
$
|
4,591
|
|
|
$
|
5,452
|
|
|
|
|
|
|
$
|
314,802
|
|
December 31, 2017
|
|
Credit
Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
23,617
|
|
|
$
|
164,815
|
|
|
$
|
73,644
|
|
|
$
|
5,863
|
|
|
$
|
13,767
|
|
Watch
|
|
|
96
|
|
|
|
18,083
|
|
|
|
4,381
|
|
|
|
—
|
|
|
|
1,507
|
|
Special mention
|
|
|
66
|
|
|
|
2,265
|
|
|
|
—
|
|
|
|
—
|
|
|
|
539
|
|
Substandard
|
|
|
—
|
|
|
|
289
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Doubtful
|
|
|
1,598
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
25,377
|
|
|
$
|
185,452
|
|
|
$
|
78,025
|
|
|
$
|
5,863
|
|
|
$
|
15,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
|
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
205
|
|
|
$
|
1,713
|
|
|
$
|
713
|
|
|
|
|
|
|
$
|
284,337
|
|
Watch
|
|
|
—
|
|
|
|
—
|
|
|
|
155
|
|
|
|
|
|
|
|
24,222
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
70
|
|
|
|
|
|
|
|
2,940
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
|
|
|
|
|
296
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
1,598
|
|
Total
|
|
$
|
205
|
|
|
$
|
1,713
|
|
|
$
|
945
|
|
|
|
|
|
|
$
|
313,393
|
|
The
allocation of the Company’s allowance for loan and lease losses and by portfolio segment and by impairment methodology are
summarized below:
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-
Family
|
|
|
Construction
|
|
|
Residential
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2018
|
|
$
|
447
|
|
|
$
|
2,174
|
|
|
$
|
1,047
|
|
|
$
|
269
|
|
|
$
|
205
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
14
|
|
|
$
|
291
|
|
|
$
|
4,478
|
|
Provision for loan losses
|
|
|
300
|
|
|
|
(208
|
)
|
|
|
(307
|
)
|
|
|
89
|
|
|
|
35
|
|
|
|
(1
|
)
|
|
|
64
|
|
|
|
80
|
|
|
|
(2
|
)
|
|
|
50
|
|
Loans charged-off
|
|
|
(213
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(213
|
)
|
Recoveries
|
|
|
10
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2018
|
|
$
|
544
|
|
|
$
|
1,972
|
|
|
$
|
740
|
|
|
$
|
358
|
|
|
$
|
240
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
94
|
|
|
$
|
289
|
|
|
$
|
4,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
544
|
|
|
$
|
1,854
|
|
|
$
|
740
|
|
|
$
|
358
|
|
|
$
|
177
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
94
|
|
|
$
|
289
|
|
|
$
|
4,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
24,526
|
|
|
$
|
190,677
|
|
|
$
|
65,312
|
|
|
$
|
7,486
|
|
|
$
|
16,697
|
|
|
$
|
61
|
|
|
$
|
4,591
|
|
|
$
|
5,452
|
|
|
$
|
—
|
|
|
$
|
314,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
8,136
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
9,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
24,526
|
|
|
$
|
182,541
|
|
|
$
|
65,312
|
|
|
$
|
7,486
|
|
|
$
|
15,640
|
|
|
$
|
61
|
|
|
$
|
4,591
|
|
|
$
|
5,384
|
|
|
$
|
—
|
|
|
$
|
305,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, June 30, 2018
|
|
$
|
669
|
|
|
$
|
2,100
|
|
|
$
|
839
|
|
|
$
|
298
|
|
|
$
|
239
|
|
|
$
|
—
|
|
|
$
|
49
|
|
|
$
|
11
|
|
|
$
|
287
|
|
|
$
|
4,492
|
|
Provision for loan losses
|
|
|
87
|
|
|
|
(130
|
)
|
|
|
(99
|
)
|
|
|
60
|
|
|
|
1
|
|
|
|
—
|
|
|
|
46
|
|
|
|
83
|
|
|
|
2
|
|
|
|
50
|
|
Loans charged off
|
|
|
(213
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(213
|
)
|
Recoveries
|
|
|
1
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2018
|
|
$
|
544
|
|
|
$
|
1,972
|
|
|
$
|
740
|
|
|
$
|
358
|
|
|
$
|
240
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
94
|
|
|
$
|
289
|
|
|
$
|
4,332
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-Family
|
|
|
Construction
|
|
|
Residential
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
261
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
73
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
447
|
|
|
$
|
1,913
|
|
|
$
|
1,026
|
|
|
$
|
269
|
|
|
$
|
132
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
14
|
|
|
$
|
291
|
|
|
$
|
4,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
25,377
|
|
|
$
|
185,452
|
|
|
$
|
78,025
|
|
|
$
|
5,863
|
|
|
$
|
15,813
|
|
|
$
|
205
|
|
|
$
|
1,713
|
|
|
$
|
945
|
|
|
$
|
—
|
|
|
$
|
313,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,598
|
|
|
$
|
10,070
|
|
|
$
|
474
|
|
|
$
|
—
|
|
|
$
|
1,615
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
23,779
|
|
|
$
|
175,382
|
|
|
$
|
77,551
|
|
|
$
|
5,863
|
|
|
$
|
14,198
|
|
|
$
|
205
|
|
|
$
|
1,713
|
|
|
$
|
945
|
|
|
$
|
—
|
|
|
$
|
299,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-
Family
|
|
|
Construction
|
|
|
Residential
|
|
|
Leases
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance
for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2017
|
|
$
|
855
|
|
|
$
|
2,050
|
|
|
$
|
851
|
|
|
$
|
446
|
|
|
$
|
253
|
|
|
$
|
1
|
|
|
$
|
64
|
|
|
$
|
24
|
|
|
$
|
278
|
|
|
$
|
4,822
|
|
Provision for loan losses
|
|
|
240
|
|
|
|
(16
|
)
|
|
|
147
|
|
|
|
34
|
|
|
|
(22
|
)
|
|
|
(40
|
)
|
|
|
(35
|
)
|
|
|
(11
|
)
|
|
|
3
|
|
|
|
300
|
|
Loans charged-off
|
|
|
(673
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(673
|
)
|
Recoveries
|
|
|
5
|
|
|
|
54
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2017
|
|
$
|
427
|
|
|
$
|
2,088
|
|
|
$
|
998
|
|
|
$
|
480
|
|
|
$
|
231
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
17
|
|
|
$
|
281
|
|
|
$
|
4,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, June 30, 2017
|
|
$
|
916
|
|
|
$
|
2,091
|
|
|
$
|
789
|
|
|
$
|
457
|
|
|
$
|
268
|
|
|
$
|
1
|
|
|
$
|
59
|
|
|
$
|
19
|
|
|
$
|
281
|
|
|
$
|
4,881
|
|
Provision for loan losses
|
|
|
182
|
|
|
|
(4
|
)
|
|
|
209
|
|
|
|
23
|
|
|
|
(37
|
)
|
|
|
(40
|
)
|
|
|
(30
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
300
|
|
Loans charged off
|
|
|
(673
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(673
|
)
|
Recoveries
|
|
|
2
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2017
|
|
$
|
427
|
|
|
$
|
2,088
|
|
|
$
|
998
|
|
|
$
|
480
|
|
|
$
|
231
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
17
|
|
|
$
|
281
|
|
|
$
|
4,551
|
|
The
Company’s aging analysis of the loan and lease portfolio at September 30, 2018 and December 31, 2017 are summarized below:
September 30,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
|
|
|
|
|
|
|
Greater
Than
|
|
|
|
|
|
|
30-59
Days
|
|
|
60-89
Days
|
|
|
Greater
Than
|
|
|
Total
Past
|
|
|
|
|
|
|
|
|
90
Days and
|
|
|
|
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
90
Days
|
|
|
Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,526
|
|
|
$
|
24,526
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
278
|
|
|
|
—
|
|
|
|
—
|
|
|
|
278
|
|
|
|
190,399
|
|
|
|
190,677
|
|
|
|
—
|
|
|
|
278
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
65,312
|
|
|
|
65,312
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,486
|
|
|
|
7,486
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
3,273
|
|
|
|
499
|
|
|
|
—
|
|
|
|
3,772
|
|
|
|
12,925
|
|
|
|
16,697
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61
|
|
|
|
61
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,591
|
|
|
|
4,591
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
68
|
|
|
|
68
|
|
|
|
5,384
|
|
|
|
5,452
|
|
|
|
—
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,551
|
|
|
$
|
499
|
|
|
$
|
68
|
|
|
$
|
4,118
|
|
|
$
|
310,684
|
|
|
$
|
314,802
|
|
|
$
|
—
|
|
|
$
|
376
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
|
|
|
|
|
|
|
Greater
Than
|
|
|
|
|
|
|
30-59
Days
|
|
|
60-89
Days
|
|
|
Greater
Than
|
|
|
Total
Past
|
|
|
|
|
|
|
|
|
90
Days and
|
|
|
|
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
90
Days
|
|
|
Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,377
|
|
|
$
|
25,377
|
|
|
$
|
—
|
|
|
$
|
1,597
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
289
|
|
|
|
289
|
|
|
|
185,163
|
|
|
|
185,452
|
|
|
|
—
|
|
|
|
289
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
78,025
|
|
|
|
78,025
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,863
|
|
|
|
5,863
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
146
|
|
|
|
—
|
|
|
|
—
|
|
|
|
146
|
|
|
|
15,667
|
|
|
|
15,813
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
205
|
|
|
|
205
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,713
|
|
|
|
1,713
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
944
|
|
|
|
945
|
|
|
|
—
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
147
|
|
|
$
|
—
|
|
|
$
|
289
|
|
|
$
|
436
|
|
|
$
|
312,957
|
|
|
$
|
313,393
|
|
|
$
|
—
|
|
|
$
|
1,892
|
|
9. BORROWING ARRANGEMENTS
At
September 30, 2018, the Company had $17,000,000 of unsecured short-term borrowing arrangements with two of its correspondent banks.
There were no advances under the borrowing arrangements as of September 30, 2018 or December 31, 2017.
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 September
30, 2018, bearing interest rates ranging from 1.18% to 3.04% and maturing between November 23, 2018 and July 20, 2023. Advances
totaling $15,500,000 were outstanding from the FHLB at December 31, 2017, bearing interest rates ranging from 1.18% to 1.90% and
maturing between July 20, 2018 and April 12, 2021. Remaining amounts available under the borrowing arrangement with the FHLB at
September 30, 2018 and December 31, 2017 totaled $100,570,000 and $117,546,000, respectively. In addition, the Company has a secured
borrowing agreement with the Federal Reserve Bank of San Francisco. The borrowing can be secured by pledging selected loans and
investment securities. Borrowings generally are short-term including overnight advances as well as loans with terms up to ninety
days. Amounts available under this borrowing arrangement at September 30, 2018 and December 31, 2017 were $8,435,000 and $9,085,000,
respectively. There were no advances outstanding under this borrowing arrangement as of September 30, 2018 and December 31, 2017.
10. INCOME TAXES
The
Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents
each entity’s proportionate share of the consolidated provision for (benefit from) income taxes.
The
Company accounts for income taxes using the balance sheet method, under which deferred tax assets and liabilities are recognized
for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
The
benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable
taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described
above, if applicable, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any
associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued
interest and penalties related to unrecognized tax benefits, if applicable, as a component of interest expense in the consolidated
statement of income. There have been no unrecognized tax benefits or accrued interest and penalties for the three-month and nine-month
periods ended September 30, 2018 and 2017.
11.
FAIR VALUE MEASUREMENTS
The
following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and
nonrecurring basis as of September 30, 2018 and December 31, 2017. They indicate the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize
quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair
values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset
or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active
markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield
curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and
include situations where there is little, if any, market activity for the asset or liability. In 2018, the Company adopted the
provisions of Accounting Standard Update 2016-01 “
Recognition and Measurement of Financial Assets and Financial Liabilities
”
(“ASU 2016-01”). ASU 2016-01 requires the Company to use the exit price notion when measuring the fair value of financial
instruments. The Company used the exit price notion for valuing financial instruments in 2018 and the entry price notion for valuing
financial instruments in 2017. In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety
falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment
and considers factors specific to the asset or liability.
Estimated
fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made
at a specific point in time based on relevant market data and information about the financial instruments. These estimates do
not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial
instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.
In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in any of these estimates.
The
carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
September 30, 2018
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
24,634
|
|
|
$
|
24,634
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,634
|
|
Federal funds sold
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
Interest-bearing deposits in banks
|
|
|
1,746
|
|
|
|
—
|
|
|
|
1,746
|
|
|
|
—
|
|
|
|
1,746
|
|
Available-for-sale securities
|
|
|
277,269
|
|
|
|
4,963
|
|
|
|
273,306
|
|
|
|
—
|
|
|
|
277,269
|
|
Held-to-maturity securities
|
|
|
311
|
|
|
|
—
|
|
|
|
328
|
|
|
|
—
|
|
|
|
328
|
|
FHLB stock
|
|
|
3,932
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net loans and leases:
|
|
|
310,322
|
|
|
|
—
|
|
|
|
—
|
|
|
|
306,226
|
|
|
|
306,226
|
|
Accrued interest receivable
|
|
|
1,919
|
|
|
|
—
|
|
|
|
983
|
|
|
|
936
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
209,322
|
|
|
$
|
209,322
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
209,322
|
|
Savings
|
|
|
74,765
|
|
|
|
74,765
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74,765
|
|
Money market
|
|
|
150,050
|
|
|
|
150,050
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,050
|
|
NOW accounts
|
|
|
64,682
|
|
|
|
64,682
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,682
|
|
Time Deposits
|
|
|
77,001
|
|
|
|
—
|
|
|
|
76,687
|
|
|
|
—
|
|
|
|
76,687
|
|
Short-term borrowings
|
|
|
6,500
|
|
|
|
6,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,500
|
|
Long-term borrowings
|
|
|
9,000
|
|
|
|
—
|
|
|
|
9,124
|
|
|
|
—
|
|
|
|
9,124
|
|
Accrued interest payable
|
|
|
69
|
|
|
|
7
|
|
|
|
62
|
|
|
|
—
|
|
|
|
69
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
December 31, 2017
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
38,467
|
|
|
$
|
38,467
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38,467
|
|
Interest-bearing deposits in banks
|
|
|
1,746
|
|
|
|
—
|
|
|
|
1,750
|
|
|
|
—
|
|
|
|
1,750
|
|
Available-for-sale securities
|
|
|
262,322
|
|
|
|
66
|
|
|
|
262,256
|
|
|
|
—
|
|
|
|
262,322
|
|
Held-to-maturity securities
|
|
|
378
|
|
|
|
—
|
|
|
|
404
|
|
|
|
—
|
|
|
|
404
|
|
FHLB stock
|
|
|
3,932
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Net loans and leases:
|
|
|
308,713
|
|
|
|
—
|
|
|
|
—
|
|
|
|
317,900
|
|
|
|
317,900
|
|
Accrued interest receivable
|
|
|
1,956
|
|
|
|
—
|
|
|
|
1,124
|
|
|
|
832
|
|
|
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
215,528
|
|
|
$
|
215,528
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
215,528
|
|
Savings
|
|
|
66,130
|
|
|
|
66,130
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,130
|
|
Money market
|
|
|
130,032
|
|
|
|
130,032
|
|
|
|
—
|
|
|
|
—
|
|
|
|
130,032
|
|
Interest checking
|
|
|
64,709
|
|
|
|
64,709
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,709
|
|
Time Deposits
|
|
|
79,681
|
|
|
|
—
|
|
|
|
79,614
|
|
|
|
—
|
|
|
|
79,614
|
|
Short-term borrowings
|
|
|
3,500
|
|
|
|
3,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,500
|
|
Long-term borrowings
|
|
|
12.000
|
|
|
|
—
|
|
|
|
11,978
|
|
|
|
—
|
|
|
|
11,978
|
|
Accrued interest payable
|
|
|
65
|
|
|
|
4
|
|
|
|
61
|
|
|
|
—
|
|
|
|
65
|
|
Because
no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates
are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the fair values presented.
The
following methods and assumptions were used by the Company to estimate the fair values of its financial instruments at December
31, 2017:
Cash
and due from banks
: The carrying amounts of cash and short-term instruments, including Federal funds sold, approximate fair
values and are classified as Level 1.
Interest-bearing
deposits in banks
: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows
using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions
and are classified as Level 2.
Investment
securities
: For investment securities, fair values are based on quoted market prices, where available, and are classified
as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities
and indications of value provided by brokers and are classified as Level 2.
FHLB
stock
: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans
and leases
: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice
frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification.
Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality also resulting in a Level 3 classification.
Deposits
:
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount)
resulting in a Level 1 classification. For time deposits, the fair values for fixed rate certificates of deposit are estimated
using a discounted cash flow methodology that applies market interest rates to a schedule of aggregated expected monthly maturities
on time deposits resulting in a Level 2 classification.
Short-term
and long-term borrowings
: The fair value of short-term borrowings is estimated to be the carrying amount and is
classified as Level 1. The fair value of long-term borrowings is estimated using a discounted cash flow analysis using
interest rates currently available for similar debt instruments and are classified as Level 2.
Accrued
interest receivable and payable
: The carrying amount of accrued interest receivable approximates fair value resulting in a
Level 3 classification and the carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.
Off-balance
sheet instruments
: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit
standing. The fair value of commitments was not material at December 31, 2017.
Assets
and liabilities measured at fair value on a recurring and non-recurring basis along with any related gain or loss recognized in
the income statement due to fair value changes are presented in the following table:
Description
|
|
|
|
|
Fair Value
Measurements Using
|
|
|
Total Gains
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities
measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Government Agencies and
Sponsored Entities
|
|
$
|
250,290
|
|
|
$
|
—
|
|
|
$
|
250,290
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Obligations of states
and
political subdivisions
|
|
|
15,541
|
|
|
|
—
|
|
|
|
15,541
|
|
|
|
—
|
|
|
|
—
|
|
Corporate bonds
|
|
|
6,475
|
|
|
|
—
|
|
|
|
6,475
|
|
|
|
—
|
|
|
|
—
|
|
U.S. Treasury bonds
|
|
|
4,963
|
|
|
|
4,963
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
277,269
|
|
|
$
|
4,963
|
|
|
$
|
272,306
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities measured on
a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
5,131
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,131
|
|
|
$
|
—
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
961
|
|
|
|
—
|
|
|
|
—
|
|
|
|
961
|
|
|
|
—
|
|
Total nonrecurring
|
|
$
|
6,902
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,902
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Gains
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities measured on
a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sponsored Agencies
|
|
$
|
232,869
|
|
|
$
|
—
|
|
|
$
|
232,869
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate Debt securities
|
|
|
6,626
|
|
|
|
—
|
|
|
|
6,626
|
|
|
|
|
|
|
|
|
|
Obligations
of states and
political subdivisions
|
|
|
22,715
|
|
|
|
—
|
|
|
|
22,715
|
|
|
|
—
|
|
|
|
—
|
|
Corporate stock
|
|
|
112
|
|
|
|
66
|
|
|
|
46
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
262,322
|
|
|
$
|
66
|
|
|
$
|
262,256
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities measured on
a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,598
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,598
|
|
|
$
|
(1,073
|
)
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
178
|
|
|
|
—
|
|
|
|
—
|
|
|
|
178
|
|
|
|
—
|
|
Residential
|
|
|
329
|
|
|
|
—
|
|
|
|
—
|
|
|
|
329
|
|
|
|
—
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
961
|
|
|
|
—
|
|
|
|
—
|
|
|
|
961
|
|
|
|
—
|
|
Total nonrecurring
|
|
$
|
3,066
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,066
|
|
|
$
|
(1,073
|
)
|
There were no
significant transfers between Levels 1 and 2 during the three-month and nine-month periods ended September 30, 2018 or the twelve
months ended December 31, 2017.
The following
methods were used to estimate the fair value of each class of financial instrument above:
Available-for-sale
securities
–
Fair values for investment securities are based on quoted market prices, if available, and are considered
Level 1, or evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information
and are considered Level 2. Pricing applications apply available information, as applicable, through processes such as benchmark
curves, benchmarking to like securities, sector groupings and matrix pricing.
Impaired
loans
– The fair value of collateral dependent impaired loans adjusted for specific allocations of the allowance for
loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize
a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments
are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales
and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification
of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring impaired loans is the sales
comparison approach less a reserve for past dues taxes and selling costs ranging from 8% to 10%.
Other
real estate owned
– Certain commercial and residential real estate properties classified as OREO are measured at fair
value, less costs to sell. Fair values are based on recent real estate appraisals and/or evaluations. These appraisals and/or
evaluations may use a single valuation approach or a combination of approaches including comparable sales, cost and the income
approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between
the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level
3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring OREO is the
sales comparison approach less selling costs ranging from 8% to 10%.
12.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
May 2014, the Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board (the
“IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue
recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition
guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries
or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided
limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the
FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue
standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more
robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries,
jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure
requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity
must refer. To meet those objectives, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
“
Revenue
from Contracts with Customers.
” The standard’s core principle is that a company will recognize revenue when it
transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to
be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and
make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating
the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate
performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning
after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “
Revenue
from Contracts with Customers - Deferral of the Effective Date
” which deferred the effective date by one year (i.e.,
interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows
for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective
adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative
effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue
targeted updates to clarify specific implementation issues of ASU 2014- 09. These updates include ASU No. 2016-08,
“
Principal
versus Agent Considerations (Reporting Revenue Gross versus Net),
” ASU No. 2016-10,
“
Identifying Performance
Obligations and Licensing,
” ASU No. 2016-12,
“
Narrow-Scope Improvements and Practical Expedients,
”
and ASU No. 2016-20
“
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
”
The Company has assessed its revenue streams and reviewed its contracts that could potentially be affected by the ASU including
deposit related fees, interchange fees, and merchant income, to determine the potential impact the new guidance is expected to
have on the Company’s financial position, results of operations or cash flows. The Company adopted ASU No. 2014-09 on January
1, 2018. The effects of adopting ASU No. 2014-09 did not change the amounts of revenue recorded for the Company’s in-scope
revenue streams.
In
January 2016, the FASB issued ASU No. 2016-01, “
Recognition and Measurement of Financial Assets and Financial Liabilities.
”
This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making
targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of
accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized
in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at
cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical
or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable
fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment
exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value
of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement
for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required
to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities
to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity
to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting
from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance
with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities
by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the
accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance
on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application was
permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other
provisions mentioned above were not permitted. The Company adopted ASU No. 2016-01 on January 1, 2018. The effects of adopting
ASU No. 2016-01 resulted in the Company using the exit price notion for valuing financial instruments in 2018, but did not have
a material impact on the Company’s financial position, results of operations or cash flows.
In
February 2016, the FASB issued ASU No. 2016-02, “
Leases.
”
Under the new guidance, lessees will be
required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is
the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that
represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting
under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type
leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue
to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align
lessor accounting with the lessee accounting model and the new revenue recognition standard
.
All entities will
classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures
will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the
amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing
activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early
adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are
entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use
certain relief; full retrospective application is prohibited. The Company is currently evaluating the provisions of ASU No.
2016-02. Based on the initial evaluation of the Company’s current lease obligations, the Company
has determined that the provisions of ASU No. 2016-02 may result in an increase in assets to recognize the present value of the
lease obligations with a corresponding increase in liabilities. The Company currently leases nine of its office leases under operating
leases with future lease payments, as of January 1, 2019, of approximately $4,358,000, however, the Company does not expect this
to have a material impact on the Company’s financial position, results of operations or cash flows.
In
June 2016, the FASB issued ASU No. 2016-13, “
Measurement of Credit Losses on Financial Instruments.
”
This
ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that
aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s
guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with
an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model,
will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet
credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial
guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with
unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will
be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize
improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The
ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the
disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and
lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit
quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods
beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December
15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the
beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). While the
Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have
on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes
effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, evaluating
its current IT systems, and purchasing a software solution.
13.
REVENUE FROM CONTRACTS WITH CUSTOMERS
On
January 1, 2018 the Company adopted ASC Topic 606, as revised under ASU’s 2014-09, 2014-08 and 2016-20, using the modified
retrospective method as of January 1, 2018. Other income disclosures for periods beginning after January 1, 2018 are presented
under revised ASC Topic 606, which have not materially changed from the prior year amounts. Consistent with Topic 606, noninterest
income covered by this guidance is recognized as services are transferred to our customers in an amount that reflects the consideration
we expect to be entitled to in exchange for those services.
Deposit
Service Charges — Deposit service charges primarily consist of fees earned from our treasury management services. These
services include bill pay, ACH, positive pay, lockbox, remote deposit capture, online banking and cash vault, among others. Customers
are given the option to pay for these services in cash or by offsetting the fees for these services against an earnings credit
that is given for maintaining noninterest-bearing deposits. The Company’s performance obligations on its treasury services
are satisfied either at the time of the transaction or over the course of a month. Most customers pay deposit charges on a monthly
basis.
Merchant
and Bankcard Fees — The Company earns various types of network transaction fees from third party payment network providers
which consist of (i) interchange fees earned from the payment network as a debit card issuer and (ii) ongoing merchant fees earned
by the Company for referring our clients to the payment processing provider which allows our clients to accept credit cards as
a form of payment. The Company is an issuer of debit cards only as it relates to Merchant and Bankcard fees. Interchange income,
which is settled on a daily basis, is recognized as settlement occurs. Chargebacks have not historically been, nor are they expected
to be significant to the overall fee revenue and will be recognized upon occurrence. Referral and merchant fees are recognized
when the transaction occurs.
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, 2017 and September 30, 2018 and its income and expense accounts for the three-month
and nine-month periods ended September 30, 2018 and 2017. 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:
|
·
|
legislation promulgated
by the United States Congress and actions taken by governmental agencies that may impact the U.S. financial system;
|
|
·
|
the risks presented
by economic volatility and recession, which could adversely affect credit quality, collateral values, including real estate collateral,
investment values, liquidity and loan originations and loan portfolio delinquency rates;
|
|
·
|
variances in the actual
versus projected growth in assets and return on assets;
|
|
·
|
potential loan and
lease losses;
|
|
·
|
potential expenses
associated with resolving nonperforming assets as well as regulatory changes;
|
|
·
|
changes in the interest
rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed
funds;
|
|
·
|
inadequate internal
controls over financial reporting or disclosure controls and procedures;
|
|
·
|
potential declines
in fee and other noninterest income earned associated with economic factors, as well as regulatory changes;
|
|
·
|
general economic conditions
nationally, regionally, and within our operating markets could be less favorable than expected or could have a more direct and
pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain
the quality of our earning assets;
|
|
·
|
changes in the regulatory
environment including increased capital and regulatory compliance requirements and government intervention in the U.S. financial
system;
|
|
·
|
changes in business
conditions and inflation;
|
|
·
|
changes in securities
markets, public debt markets, and other capital markets;
|
|
·
|
potential data processing,
cybersecurity and other operational systems failures, breach or fraud;
|
|
·
|
potential decline
in real estate values in our operating markets;
|
|
·
|
the effects of uncontrollable
events such as terrorism, the threat of terrorism or the impact of military conflicts in connection with the conduct of the war
on terrorism by the United States and its allies, natural disasters (including earthquakes and wildfires), and disruption of power
supplies and communications;
|
|
·
|
changes in accounting
standards, tax laws or regulations and interpretations of such standards, laws or regulations;
|
|
·
|
projected business
increases following any future strategic expansion could be lower than expected;
|
|
·
|
the goodwill we have
recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings;
|
|
·
|
our ability to comply
with any regulatory orders or requirements we may become subject to;
|
|
·
|
the effects and costs
of litigation and other legal developments;
|
|
·
|
the reputation of
the financial services industry could experience deterioration, which could adversely affect our ability to access markets for
funding and to acquire and retain customers; and
|
|
·
|
the efficiencies we
may expect to receive from any investments in personnel and infrastructure may not be realized.
|
The
factors set forth under “Item 1A - Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should be carefully
considered and understood as being applicable to all related forward-looking statements contained in this Quarterly Report on
Form 10-Q, when evaluating the business prospects of the Company and its subsidiaries.
Forward-looking
statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results
and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not
to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the
case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation
to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances
after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention
is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange
Commission (the “SEC”) on Forms 10-K, 10-Q and 8-K.
Use of Non-GAAP
Financial Measures
This Quarterly
Report on Form 10-Q (“Form 10Q”) contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures
in addition to results presented in accordance with GAAP. These measures include tangible book value and taxable equivalent basis.
Management has presented these non-GAAP financial measures in this Form 10Q because it believes that they provide useful and comparative
information to assess trends in the Company’s financial position reflected in the current quarter and year-to-date results
and facilitate comparison of our performance with the performance of our peers.
Net Interest
Margin and Efficiency Ratio (non-GAAP financial measures)
In accordance with
industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the
calculation of net interest margin and the efficiency ratio. The Company believes the presentation of net interest margin on a
taxable equivalent basis using a 21% effective tax rate for 2018 and a 34% effective tax rate for 2017 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.
Tangible Equity
(non-GAAP financial measures)
Tangible common
stockholders’ equity (tangible book value) excludes goodwill and other intangible assets. The Company believes the exclusion
of goodwill and other intangible assets to create “tangible equity” facilitates the comparison of results for ongoing
business operations. The Company’s management internally assesses its performance based, in part, on these non-GAAP financial
measures.
Critical
Accounting Policies
General
The Company’s
financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). The financial information contained within our statements is, to a significant extent, financial information
that is based on measures of the financial effects of transactions and events that have already occurred. In addition, GAAP itself
may change from one previously acceptable method to another method. Although the economics of our transactions would be the same,
the timing of events that would impact our transactions could change.
Allowance
for Loan and Lease Losses
The allowance
for loan and lease losses is an estimate of the probable incurred credit loss risk inherent in our loan and lease portfolio as
of the balance sheet date. The allowance is based on two basic principles of accounting: (1) “Accounting for Contingencies,”
which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can
be reasonably estimated; and (2) the “Receivables” topic, which requires that losses be accrued on impaired loans
based on the differences between the value of collateral, present value of future cash flows or values that are observable in
the secondary market and the loan or lease balance.
The allowance
for loan and lease losses is determined based upon estimates that can and do change when the actual risk, loss events, or changes
in other factors, occur. The analysis of the allowance uses an historical loss view as an indicator of future losses and as a
result could differ from the actual losses incurred in the future. If the allowance for loan and lease losses falls below that
deemed adequate (by reason of loan and lease growth, actual losses, the effect of changes in risk factors, or some combination
of these), the Company has a strategy for supplementing the allowance for loan and lease losses, over the short-term. For further
information regarding our allowance for loan and lease losses, see “Allowance for Loan and Lease Losses Activity”
discussion later in this Item 2.
Stock-Based
Compensation
The Company recognizes
compensation expense over the vesting period in an amount equal to the fair value of all share-based payments which consist of
stock options and restricted stock awarded to directors and employees. The fair value of each stock option award is estimated
on the date of the award and amortized over the service period using a Black-Scholes-Merton based option valuation model that
requires the use of assumptions. Critical assumptions that affect the estimated fair value of each award include expected stock
price volatility, dividend yields, option life and the risk-free interest rate.
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 100 full-time employees as of September 30, 2018.
The Company
owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank (the “Bank”),
and American River Financial, a California corporation which has been inactive since its incorporation in 2003.
American River
Bank was incorporated and commenced business in Fair Oaks, California, in 1983 and thereafter moved its headquarters to Sacramento,
California in 1985. American River Bank operates five full service offices in Sacramento and Placer Counties including the main
office located at 1545 River Park Drive, Suite 107, Sacramento and branch offices in Sacramento, Gold River, and Roseville; two
full service offices in Sonoma County in Healdsburg and Santa Rosa; and three full service offices in Amador County in Jackson,
Pioneer, and Ione.
In 2000,
the Company acquired North Coast Bank as a separate bank subsidiary. North Coast Bank was incorporated and commenced business
in 1990 as Windsor Oaks National Bank in Windsor, California. In 1997, the name was changed to North Coast Bank. Effective December
31, 2003, North Coast Bank was merged with and into American River Bank. On December 3, 2004, the Company acquired Bank of Amador
located in Jackson, California. Bank of Amador was merged with and into American River Bank.
The
Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable
legal limits. American River Bank does not offer trust services or international banking services and does not plan to do so
in the near future. American River Bank’s primary business is serving the commercial banking needs of small to
mid-sized businesses within those counties listed above. American River Bank accepts checking and savings deposits, offers
money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and
other installment and term loans and offers other customary banking services. American River Bank also conducts lease
financing for certain types of business equipment. American River Bank owns 100% of two inactive companies, ARBCO and
American River Mortgage. ARBCO was formed in 1984 to conduct real estate development and has been inactive
since 1995. American River Mortgage has been inactive since its formation in 1994. During 2018 and 2017, 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 $1,153,000 for the quarter ended September 30, 2018, which was an increase of $44,000 compared to $1,109,000 reported
for the same period of 2017. Diluted earnings per share for the third quarter of 2018 were $0.20 compared to $0.17 recorded in
the third quarter of 2017. The return on average equity (“ROAE”) and the return on average assets (“ROAA”)
for the third quarter of 2018 were 6.37% and 0.68%, respectively, as compared to 5.37% and 0.68%, respectively, for the same period
in 2017.
Net income for
the nine months ended September 30, 2018 and 2017 was $3,775,000 and $3,590,000, respectively, with diluted earnings per share
of $0.64 in 2018 and $0.55 in 2017. For the first nine months of 2018, ROAE was 6.95% and ROAA was 0.74% compared to 5.82% and
0.74%, respectively, for the same period in 2017.
Total assets
of the Company increased by $14,372,000 (2.2%) from $655,622,000 at December 31, 2017 to $669,994,000 at September 30, 2018. Net
loans totaled $310,322,000 at September 30, 2018, an increase of $1,609,000 (0.5%) from $308,713,000 at December 31, 2017. Deposit
balances at September 30, 2018 totaled $575,820,000, an increase of $19,740,000 (3.5%) from the $556,080,000 at December 31, 2017.
The Company ended
the third quarter of 2018 with a leverage capital ratio of 9.0%, a Tier 1 capital ratio of 16.7%, and a total risk-based capital
ratio of 17.9% compared to 9.5%, 18.1%, and 19.3%, respectively, at December 31, 2017. Table One below provides a summary of the
components of net income for the periods indicated (See the “Results of Operations” section that follows for an explanation
of the fluctuations in the individual components).
Table One: Components of Net Income
(dollars in thousands)
|
|
For the three months ended
September 30,
|
|
|
For the nine months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Interest income*
|
|
$
|
5,711
|
|
|
$
|
5,180
|
|
|
$
|
16,389
|
|
|
$
|
15,553
|
|
Interest expense
|
|
|
(409
|
)
|
|
|
(279
|
)
|
|
|
(1,116
|
)
|
|
|
(773
|
)
|
Net interest income*
|
|
|
5,302
|
|
|
|
4,901
|
|
|
|
15,273
|
|
|
|
14,780
|
|
Provision for loan and lease losses
|
|
|
(50
|
)
|
|
|
(300
|
)
|
|
|
(50
|
)
|
|
|
(300
|
)
|
Noninterest income
|
|
|
377
|
|
|
|
377
|
|
|
|
1,129
|
|
|
|
1,235
|
|
Noninterest expense
|
|
|
(4,003
|
)
|
|
|
(3,312
|
)
|
|
|
(11,181
|
)
|
|
|
(10,110
|
)
|
Provision for income taxes
|
|
|
(428
|
)
|
|
|
(459
|
)
|
|
|
(1,237
|
)
|
|
|
(1,718
|
)
|
Tax equivalent adjustment
|
|
|
(45
|
)
|
|
|
(98
|
)
|
|
|
(159
|
)
|
|
|
(297
|
)
|
Net income
|
|
$
|
1,153
|
|
|
$
|
1,109
|
|
|
$
|
3,775
|
|
|
$
|
3,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
673,959
|
|
|
$
|
649,427
|
|
|
$
|
680,056
|
|
|
$
|
649,845
|
|
Net income (annualized) as a percentage of average total assets
|
|
|
0.68
|
%
|
|
|
0.68
|
%
|
|
|
0.74
|
%
|
|
|
0.74
|
%
|
*
Fully taxable equivalent basis (FTE)
Results of Operations
Net Interest Income and
Net Interest Margin
Net interest
income represents the excess of interest and fees earned on interest earning assets (loans and leases, securities, Federal funds
sold and investments in time deposits) over the interest paid on interest-bearing deposits and borrowed funds. Net interest margin
is net interest income expressed as a percentage of average earning assets. The Company’s net interest margin was 3.44% for the three months ended September 30, 2018, 3.32% for the three months ended
September 30, 2017, 3.36% for the nine months ended September 30, 2018 and 3.39% for the nine months ended September 30, 2017.
The
fully taxable equivalent interest income component for the third quarter of 2018 increased $531,000 (10.3%) to $5,711,000 compared
to $5,180,000 for the three months ended September 30, 2017. The increase in the fully taxable equivalent interest income for
the third quarter of 2018 compared to the same period in 2017 is broken down by rate (up $691,000) and volume (down $160,000).
The primary driver in this rate increase was an increase in the yield on loans which saw an increase from 4.48% in the third quarter
of 2017 to 4.71% in the third quarter of 2018 and an increase in the yield on investments, which saw an increase from 2.33% in
the third quarter of 2017 to 2.81% in the third quarter of 2018. The increased yield in 2018 compared to 2017 was due to the overall
higher interest rate environment. The yield on earning assets increased from 3.51% during the third quarter of 2017 to 3.70% during
the third quarter of 2018. The increase in yield from the loans and investments was partially offset by an increase in the balances
of Federal funds sold. Federal funds sold balances increased from zero in the third quarter of 2017 to an average balance of $24,359,000
in the third quarter of 2018. However, the yield on these lower earning Federal fund balances was 1.95%, thus reducing the overall
yield on earning assets.
The volume
decrease of $160,000 was primarily from a decrease in loans ($260,000), partially offset by an increase in investment balances
($99,000). Average loans balances decreased $22,970,000, (or 7.1%), from $322,904,000 during the third quarter of 2017 to $299,934,000
during the second quarter of 2018 and the average investment balances increased $24,845,000, (or 9.5%), from $260,859,000 during
the third quarter of 2017 to $285,704,000 during the third quarter of 2018.
Total
fully taxable equivalent interest income for the nine months ended September 30, 2018 increased $836,000 (5.4%) to $16,389,000
compared to $15,553,000 for the nine months ended September 30, 2017. The breakdown of the decrease in fully taxable equivalent
interest income for the nine months ended September 30, 2018 over the same period in 2017 resulted from an increase in rate (up
$1,092,000) and a decrease in volume (down $256,000). The primary driver in this rate increase was an increase in the yield on
loans which increased from 4.55% in 2017 to 4.70% in 2018 and an increase in yields on the investment portfolio which increased
from 2.38% in 2017 to 2.58% in 2018. The increased yield in 2018 compared to 2017 was due to the overall higher interest rate
environment. The yield on earning assets increased from 3.57% during 2017 to 3.61% during 2018. The increase in yield from the
loans and investments was partially offset by an increase in the balances of Federal funds sold. Federal funds sold balances increased
from zero in 2017 to an average balance of $20,139,000 in the nine months of 2018. The yield on these lower earning Federal fund
balances was 1.78%, thus reducing the overall yield on earning assets.
The volume
decrease of $256,000 was primarily from a decrease in loans ($540,000), partially offset by an increase in investment balances
($280,000). Average loans balances decreased $15,873,000, (or 5.0%), from $319,824,000 during 2017 to $303,951,000 during 2018
and the average investment balances increased $19,798,000, (or 9.3%), from $261,667,000 during 2017 to $281,465,000 during 2018.
Interest
expense was $130,000 (or 46.6%) higher in the third quarter of 2018 versus the prior year period, increasing from $279,000 to
$409,000. The $130,000 increase in interest expense during the third quarter of 2018 compared to the third quarter of 2017 was
due to higher rates (up $132,000) and lower volume (down $2,000). The increase in interest expense can be attributed to an increase
in rates paid on deposit and borrowing balances during a higher interest rate environment. Rates paid on interest bearing liabilities
increased 12 basis points from 0.31% to 0.43% for the third quarter of 2017 compared to the same period in 2018. The largest increase
due to rates occurred in the time deposits. Some of these time deposits are indexed to the three- or six-month treasury rates
which have increased over the past twelve months. Interest expense on time deposits increased by $93,000, (or 50.5%), from $184,000
in the third quarter of 2017 to $277,000 in the third quarter of 2018 while the average time deposit balances decreased by $2,821,000,
(or 3.5%), from $80,232,000 in the third quarter of 2017 to $77,411,000 in the third quarter of 2018.
While
average balances on interest bearing liabilities were $378,493,000 or $21,946,000 (6.2%) higher in the third quarter of 2018 compared
to $356,547,000 for the same quarter in 2017, the increased balances were in the low cost checking and savings accounts and there
was a decrease in the higher interest bearing time deposits. This resulted in a decrease in interest expense of $2,000 despite
the overall higher volume.
Interest
expense was $343,000 (or 44.4%) higher in the nine-month period ended September 30, 2018 increasing from $773,000 in 2017 to $1,116,000
in 2018. The increase is related to rates (up $345,000) and volume (down $2,000). The increase in interest expense can be attributed
to an increase in rates paid on time deposit balances. Some of these time deposits are indexed to the three- or six-month treasury
rates which have increased over the past twelve months. Rates paid on interest bearing liabilities increased ten basis points
from 0.29% in 2017 to 0.39% in 2018. Average balances on interest bearing liabilities were $384,887,000 or $26,295,000 (7.3%)
higher in 2018 compared to $358,592,000 in 2017. The increased balances were in the low cost checking and savings accounts and
there was a decrease in the higher interest bearing time deposits. This resulted in a decrease in interest expense of $2,000 based
on the overall higher volume.
Table
Two, Analysis of Net Interest Margin on Earning Assets, and Table Three, Analysis of Volume and Rate Changes on Net Interest Income
and Expenses, are provided to enable the reader to understand the components and trends of the Company’s interest income
and expenses. Table Two provides an analysis of net interest margin on earning assets setting forth average assets, liabilities
and shareholders’ equity; interest income earned and interest expense paid and average rates earned and paid; and the net
interest margin on earning assets. Table Three sets forth a summary of the changes in interest income and interest expense from
changes in average asset and liability balances (volume) and changes in average interest rates.
Table
Two: Analysis of Net Interest Margin on Earning Assets
Three Months Ended September 30,
|
|
2018
|
|
|
2017
|
|
(Taxable Equivalent Basis)
(dollars in thousands)
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield (4)
|
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield (4)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable loans and leases (1)
|
|
$
|
286,261
|
|
|
$
|
3,405
|
|
|
|
4.72
|
%
|
|
$
|
308,679
|
|
|
$
|
3,496
|
|
|
|
4.49
|
%
|
Tax-exempt loans and leases (2)
|
|
|
13,673
|
|
|
|
152
|
|
|
|
4.41
|
%
|
|
|
14,225
|
|
|
|
147
|
|
|
|
4.10
|
%
|
Taxable investment Securities
|
|
|
270,014
|
|
|
|
1,902
|
|
|
|
2.79
|
%
|
|
|
237,907
|
|
|
|
1,292
|
|
|
|
2.15
|
%
|
Tax-exempt investment securities (2)
|
|
|
15,690
|
|
|
|
122
|
|
|
|
3.08
|
%
|
|
|
22,855
|
|
|
|
241
|
|
|
|
4.18
|
%
|
Corporate stock (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97
|
|
|
|
—
|
|
|
|
—
|
|
Federal funds sold
|
|
|
24,359
|
|
|
|
120
|
|
|
|
1.95
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Investments in time deposits
|
|
|
1,746
|
|
|
|
10
|
|
|
|
2.27
|
%
|
|
|
1,248
|
|
|
|
4
|
|
|
|
1.27
|
%
|
Total earning assets
|
|
|
611,743
|
|
|
|
5,711
|
|
|
|
3.70
|
%
|
|
|
585,011
|
|
|
|
5,180
|
|
|
|
3.51
|
%
|
Cash & due from banks
|
|
|
26,272
|
|
|
|
|
|
|
|
|
|
|
|
30,229
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
40,343
|
|
|
|
|
|
|
|
|
|
|
|
39,063
|
|
|
|
|
|
|
|
|
|
Allowance for loan & lease losses
|
|
|
(4,399
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,876
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
673,959
|
|
|
|
|
|
|
|
|
|
|
$
|
649,427
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
$
|
212,872
|
|
|
|
63
|
|
|
|
0.12
|
%
|
|
$
|
195,270
|
|
|
|
34
|
|
|
|
0.07
|
%
|
Savings
|
|
|
72,580
|
|
|
|
6
|
|
|
|
0.03
|
%
|
|
|
65,458
|
|
|
|
6
|
|
|
|
0.04
|
%
|
Time deposits
|
|
|
77,411
|
|
|
|
277
|
|
|
|
1.42
|
%
|
|
|
80,232
|
|
|
|
184
|
|
|
|
0.91
|
%
|
Other borrowings
|
|
|
15,630
|
|
|
|
63
|
|
|
|
1.60
|
%
|
|
|
15,587
|
|
|
|
55
|
|
|
|
1.40
|
%
|
Total interest bearing liabilities
|
|
|
378,493
|
|
|
|
409
|
|
|
|
0.43
|
%
|
|
|
356,547
|
|
|
|
279
|
|
|
|
0.31
|
%
|
Noninterest bearing demand deposits
|
|
|
216,732
|
|
|
|
|
|
|
|
|
|
|
|
203,473
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,887
|
|
|
|
|
|
|
|
|
|
|
|
7,482
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
602,112
|
|
|
|
|
|
|
|
|
|
|
|
567,502
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
71,847
|
|
|
|
|
|
|
|
|
|
|
|
81,925
|
|
|
|
|
|
|
|
|
|
|
|
$
|
673,959
|
|
|
|
|
|
|
|
|
|
|
$
|
649,427
|
|
|
|
|
|
|
|
|
|
Net interest income & margin (3)
|
|
|
|
|
|
$
|
5,302
|
|
|
|
3.44
|
%
|
|
|
|
|
|
$
|
4,901
|
|
|
|
3.32
|
%
|
|
(1)
|
Loan interest includes loan
fees of $100,000 and $1,000, respectively, during the three months ended September 30, 2018 and September 30, 2017. Average
loan balances include nonperforming loans.
|
|
(2)
|
Includes taxable-equivalent
adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal
statutory tax rate was 21% for 2018 and 34% for 2017.
|
|
(3)
|
Net interest margin is computed
by dividing net interest income by total average earning assets.
|
|
(4)
|
Average yield is calculated
based on actual days in the period (92 days) and annualized to actual days in the year (365 days).
|
Nine Months Ended September 30,
|
|
2018
|
|
|
2017
|
|
(Taxable Equivalent Basis)
(dollars in thousands)
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield (4)
|
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield (4)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable loans and leases (1)
|
|
$
|
290,142
|
|
|
$
|
10,216
|
|
|
|
4.71
|
%
|
|
$
|
305,467
|
|
|
$
|
10,384
|
|
|
|
4.54
|
%
|
Tax-exempt loans and leases (2)
|
|
|
13,809
|
|
|
|
458
|
|
|
|
4.43
|
%
|
|
|
14,357
|
|
|
|
503
|
|
|
|
4.68
|
%
|
Taxable investment Securities
|
|
|
261,482
|
|
|
|
4,930
|
|
|
|
2.52
|
%
|
|
|
238,775
|
|
|
|
3,978
|
|
|
|
2.23
|
%
|
Tax-exempt investment securities (2)
|
|
|
19,983
|
|
|
|
494
|
|
|
|
3.31
|
%
|
|
|
22,797
|
|
|
|
663
|
|
|
|
3.89
|
%
|
Corporate stock (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
95
|
|
|
|
16
|
|
|
|
22.52
|
%
|
Federal funds sold
|
|
|
20,139
|
|
|
|
268
|
|
|
|
1.78
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing deposits in banks
|
|
|
1,744
|
|
|
|
23
|
|
|
|
1.76
|
%
|
|
|
1,209
|
|
|
|
9
|
|
|
|
1.00
|
%
|
Total earning assets
|
|
|
607,299
|
|
|
|
16,389
|
|
|
|
3.61
|
%
|
|
|
582,700
|
|
|
|
15,553
|
|
|
|
3.57
|
%
|
Cash & due from banks
|
|
|
37,537
|
|
|
|
|
|
|
|
|
|
|
|
32,902
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
39,678
|
|
|
|
|
|
|
|
|
|
|
|
39,099
|
|
|
|
|
|
|
|
|
|
Allowance for loan & lease losses
|
|
|
(4,458
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,856
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
680,056
|
|
|
|
|
|
|
|
|
|
|
$
|
649,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
$
|
219,797
|
|
|
|
196
|
|
|
|
0.12
|
%
|
|
$
|
197,606
|
|
|
|
104
|
|
|
|
0.07
|
%
|
Savings
|
|
|
70,785
|
|
|
|
19
|
|
|
|
0.04
|
%
|
|
|
64,072
|
|
|
|
16
|
|
|
|
0.03
|
%
|
Time deposits
|
|
|
78,761
|
|
|
|
730
|
|
|
|
1.24
|
%
|
|
|
81,385
|
|
|
|
501
|
|
|
|
0.82
|
%
|
Other borrowings
|
|
|
15,544
|
|
|
|
171
|
|
|
|
1.47
|
%
|
|
|
15,529
|
|
|
|
152
|
|
|
|
1.31
|
%
|
Total interest-bearing liabilities
|
|
|
384,887
|
|
|
|
1,116
|
|
|
|
0.39
|
%
|
|
|
358,592
|
|
|
|
773
|
|
|
|
0.29
|
%
|
Noninterest-bearing demand deposits
|
|
|
215,537
|
|
|
|
|
|
|
|
|
|
|
|
201,227
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,013
|
|
|
|
|
|
|
|
|
|
|
|
7,559
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
607,437
|
|
|
|
|
|
|
|
|
|
|
|
567,378
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
72,619
|
|
|
|
|
|
|
|
|
|
|
|
82,467
|
|
|
|
|
|
|
|
|
|
|
|
$
|
680,056
|
|
|
|
|
|
|
|
|
|
|
$
|
649,845
|
|
|
|
|
|
|
|
|
|
Net interest income & margin (3)
|
|
|
|
|
|
$
|
15,273
|
|
|
|
3.36
|
%
|
|
|
|
|
|
$
|
14,780
|
|
|
|
3.39
|
%
|
|
(1)
|
Loan interest includes loan fees of $474,000 and $121,000,
respectively, during the nine months ended September 30, 2018 and September 30, 2017. Average loan balances include nonperforming
loans.
|
|
(2)
|
Includes taxable-equivalent adjustments that primarily
relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was
21% for 2018 and 34% for 2017.
|
|
(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 (273 days) and annualized to actual days in the year (365 days).
|
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
|
Three
Months Ended September 30, 2018 over 2017 (dollars in thousands)
|
Increase (decrease) due to change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
Volume
|
|
|
Rate (4)
|
|
|
Net Change
|
|
Taxable loans and leases (1)
|
|
$
|
(254
|
)
|
|
$
|
163
|
|
|
$
|
(91
|
)
|
Tax-exempt loans and leases (2)
|
|
|
(6
|
)
|
|
|
11
|
|
|
|
5
|
|
Taxable investment securities
|
|
|
174
|
|
|
|
436
|
|
|
|
610
|
|
Tax exempt investment securities (3)
|
|
|
(76
|
)
|
|
|
(43
|
)
|
|
|
(119
|
)
|
Federal funds sold
|
|
|
—
|
|
|
|
120
|
|
|
|
120
|
|
Interest-bearing deposits in banks
|
|
|
2
|
|
|
|
4
|
|
|
|
6
|
|
Total
|
|
|
(160
|
)
|
|
|
691
|
|
|
|
531
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
|
3
|
|
|
|
26
|
|
|
|
29
|
|
Savings deposits
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
Time deposits
|
|
|
(6
|
)
|
|
|
99
|
|
|
|
93
|
|
Other borrowings
|
|
|
—
|
|
|
|
8
|
|
|
|
8
|
|
Total
|
|
|
(2
|
)
|
|
|
132
|
|
|
|
130
|
|
Interest differential
|
|
$
|
(158
|
)
|
|
$
|
559
|
|
|
$
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018 over 2017 (dollars in thousands)
Increase (decrease) due to change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
Volume
|
|
|
Rate (4)
|
|
|
Net Change
|
|
Taxable loans and leases (1)
|
|
$
|
(521
|
)
|
|
$
|
353
|
|
|
$
|
(168
|
)
|
Tax-exempt loans and leases (2)
|
|
|
(19
|
)
|
|
|
(26
|
)
|
|
|
(45
|
)
|
Taxable investment securities
|
|
|
378
|
|
|
|
574
|
|
|
|
952
|
|
Tax exempt investment securities (3)
|
|
|
(82
|
)
|
|
|
(87
|
)
|
|
|
(169
|
)
|
Corporate stock
|
|
|
(16
|
)
|
|
|
—
|
|
|
|
(16
|
)
|
Federal funds sold
|
|
|
—
|
|
|
|
268
|
|
|
|
268
|
|
Interest-bearing deposits in banks
|
|
|
4
|
|
|
|
10
|
|
|
|
14
|
|
Total
|
|
|
(256
|
)
|
|
|
1,092
|
|
|
|
836
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
|
12
|
|
|
|
80
|
|
|
|
92
|
|
Savings deposits
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
Time deposits
|
|
|
(16
|
)
|
|
|
245
|
|
|
|
229
|
|
Other borrowings
|
|
|
—
|
|
|
|
19
|
|
|
|
19
|
|
Total
|
|
|
(2
|
)
|
|
|
345
|
|
|
|
343
|
|
Interest differential
|
|
$
|
(254
|
)
|
|
$
|
747
|
|
|
$
|
493
|
|
|
(1)
|
The average balance of non-accruing
loans is immaterial as a percentage of total loans and, as such, has been included in net loans.
|
|
(2)
|
Loan fees of $100,000 and
$1,000, respectively, during the three months ended September 30, 2018 and September 30, 2017, and loan fees of $474,000
and $121,000, respectively, during the nine months ended September 30, 2018 and September 30, 2017, have been included in the
interest income computation.
|
|
(3)
|
Includes taxable-equivalent
adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal
statutory tax rate was 21% for 2018 and 34% for 2017.
|
|
(4)
|
The rate/volume variance
has been included in the rate variance.
|
Provision for Loan and
Lease Losses
The Company
experienced net loan and lease losses of $210,000 or 0.28% (on an annualized basis) of average loans and leases for the three
months ended September 30, 2018 compared to net loan and lease losses of $630,000 or 0.77% (on an annualized basis) of average
loans and leases for the three months ended September 30, 2017. As a result of the loan losses in 2018, the Company added $50,000
to the allowance for loan and lease losses during the third quarter. This compares to additions of $300,000 to the allowance for
loan and lease losses during the third quarter of 2017. For the first nine months of 2018, the Company added $50,000 to the loan
and lease loss allowance and net loan and lease losses were $196,000 or 0.09% (on an annualized basis) of average loans and leases
outstanding in 2018. The Company added $300,000 to the loan and lease loss allowance and net loan and lease losses were $571,000
or 0.24% (on an annualized basis) of average loans and leases outstanding in 2017. Despite a single loan charge-off of $213,000
during the third quarter of 2018, the Company continued to experience an overall improvement in the credit quality of the loan
and lease portfolio and a reduction of credit losses and loan recoveries. For additional information see the “Allowance
for Loan and Lease Losses Activity.”
Noninterest Income
Table Four
below provides a summary of the components of noninterest income for the periods indicated:
Table Four:
Components of Noninterest Income
(dollars in thousands)
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service charges on deposit accounts
|
|
$
|
119
|
|
|
$
|
117
|
|
|
$
|
352
|
|
|
$
|
348
|
|
Gain on sale of securities
|
|
|
8
|
|
|
|
19
|
|
|
|
19
|
|
|
|
161
|
|
Merchant fee income
|
|
|
105
|
|
|
|
106
|
|
|
|
324
|
|
|
|
302
|
|
Bank owned life insurance
|
|
|
77
|
|
|
|
82
|
|
|
|
228
|
|
|
|
238
|
|
Other
|
|
|
68
|
|
|
|
53
|
|
|
|
206
|
|
|
|
186
|
|
Total noninterest income
|
|
$
|
377
|
|
|
$
|
377
|
|
|
$
|
1,129
|
|
|
$
|
1,235
|
|
Noninterest income
was $377,000 for the three months ended September 30, 2018 and September 30, 2017. Noninterest income decreased $106,000 (or 8.6%)
from $1,235,000 during the first nine months of 2018 to $1,129,000 during the first nine months of 2017. The decrease from the
first nine months of 2017 compared to the same period in 2018 was primarily related to the decrease in gain on sale of securities,
which decreased $142,000 from $161,000 in 2017 to $19,000 in 2018.
Noninterest Expense
Noninterest
expense increased $691,000 (20.9%) from $3,312,000 in the third quarter of 2017 to $4,003,000 in the third quarter of 2018. Salary
and employee benefits expense increased $449,000 (21.4%) from $2,102,000 during the third quarter of 2017 to $2,551,000 during
the third quarter of 2018. The increase in salaries and benefits expense resulted from filling some vacant positions, hiring additional
relationship managers, creating a position for a Chief Lending Officer, and normal cost of living increases and promotions. Average
full-time equivalent employees was 100 during the third quarter of 2018 compared to 94 during the third quarter of 2017. Occupancy
expense increased $5,000 (1.9%) and furniture and equipment expense remained the same from the third quarter of 2017 to the third
quarter of 2018. FDIC assessments increased $1,000 (2.0%) from the third quarter of 2017 to the third quarter of 2018. OREO related
expenses increased $6,000 (150.0%) during the third quarter of 2018 compared to the third quarter of 2017. Other expenses increased
$230,000 (30.6%) to $982,000 in the third quarter of 2018 compared to $752,000 in the third quarter of 2017. The most significant
increase in other expenses relates to higher advertising and business development expenses which increased $115,000 (396.6%) from
$29,000 in the third quarter of 2017 to $144,000 during the third quarter of 2018. Telephone expense also increased $46,000 (69.7%)
from $66,000 in the third quarter of 2017 to $112,000 during the third quarter of 2018 and relates to the Company transitioning
to a new telephone system. The fully taxable equivalent efficiency ratio for the third quarter of 2018 increased to 70.5% from
62.8% for the third quarter of 2017.
Noninterest
expense for the nine-month period ended September 30, 2018 was $11,181,000 compared to $10,110,000 for the same period in 2017
for an increase of $1,071,000 (10.6%). Salaries and employee benefits expense increased $938,000 (14.8%) from $6,336,000 for the
nine months ended September 30, 2017 to $7,274,000 for the same period in 2018. The increase in salaries and benefits expense
resulted from filling some vacant positions, hiring additional relationship managers, creating a position for a Chief Lending
Officer, and normal cost of living increases and promotions. Additional costs in the first nine months of 2018 associated with
hiring the new staff include signing bonuses of $64,000 and placement fees of $190,000. Average full-time equivalent employees
was 96 during 2018 compared to 94 during 2017. Occupancy expense decreased $2,000 (0.3%) and furniture and equipment expense decreased
$24,000 (5.5%). FDIC assessments increased $2,000 (1.3%). OREO related expenses decreased $24,000 (66.7%) during 2017 to $12,000,
from $36,000 in 2017. Other expenses increased $181,000 (7.7%) from $2,350,000 for the nine months ended September 30, 2017 to
$2,531,000 for the same period in 2018. The increase in other expenses relates to higher adverting and business development expenses,
which increased $261,000 (231.0%) from $113,000 in 2017 to $374,000 during 2018, as well as an increase of $53,000 (25.8%) in
telephone expense, as described above. The overhead efficiency ratio (fully taxable equivalent) for the first nine months of 2018
was 68.2% as compared to 63.1% in the same period of 2017.
Provision for
Income Taxes
Federal
and state income taxes for the quarter ended September 30, 2018 decreased $31,000 (6.8%) from $459,000 in the third quarter of
2017 to $428,000 in the third quarter of 2018 and decreased $481,000 (28.0%) from $1,718,000 in the nine months ended September
30, 2017 to $1,237,000 for the nine months ended September 30, 2018. The combined federal and state effective tax rate for the
quarter ended September 30, 2018 was 27.1%, compared to 29.3% for the third quarter of 2017. For the nine months ended September
30, 2018, the combined federal and state effective tax rate was 24.7% compared to 32.4% for the nine months ended September 30,
2017. The lower tax expense and effective tax rate in the third quarter of 2018 resulted from the passage of “H.R.1”
commonly referred to as the “Tax Cuts and Jobs Act” which was signed into law by President Trump on December 22, 2017.
The Company’s federal income tax rate was reduced to 21% effective January 1, 2018, which was a reduction from the Company’s
2017 rate of 34%. The tax and effective tax rate are also impacted by tax benefits realized under ASU 2016-09. The Company adopted
ASU 2016-09 in 2017 and the benefit for the third quarter of 2017 was $118,000 and zero in the third quarter of 2018. The lower
provision for taxes in for the nine month period in 2018 resulted from the lower tax rate related to the Tax Cuts and Jobs Act
and from a lower level of taxable income. Taxable income decreased $296,000 (5.6%) from $5,308,000 in 2017 to $5,012,000 in 2018.
For the nine months ended September 30, 2018, the Company recognized a benefit of $135,000 compared to $186,000 in the first nine
months of 2017, related to the adoption of ASU No. 2016-09.
Balance Sheet
Analysis
The Company’s
total assets were $669,994,000 at September 30, 2018 compared to $655,622,000 at December 31, 2017, representing an increase of
$14,372,000 (or 2.2%). The average assets for the three months ended September 30, 2018 were $673,959,000, which represents an
increase of $24,532,000 (3.8%) from the average balance of $649,427,000 during the three-month period ended September 30, 2017.
The average assets for the nine months ended September 30, 2018 were $680,056,000, which represents an increase of $30,211,000
(4.6%) from the average balance of $649,845,000 during the nine-month period ended September 30, 2017.
Federal
Funds
The balance
held in correspondent banks classified as Federal funds at September 30, 2018, was $10,000,000 compared to zero at December 31,
2017. The rate paid to the Company on the Federal funds at September 30, 2018 was 2.16%. The primary reason for the increase in
Federal funds in 2018 is directly related to the increase in deposit balances during the same period.
Investment
Securities
Table
Five below summarizes the values of the Company’s investment securities held on September 30, 2018 and December 31, 2017.
Table Five: Investment Securities
Composition
(dollars in
thousands)
Available-for-sale (at fair value)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
250,290
|
|
|
$
|
232,869
|
|
Obligations of states and political subdivisions
|
|
|
15,541
|
|
|
|
22,715
|
|
Corporate bonds
|
|
|
6,475
|
|
|
|
6,626
|
|
U.S. Treasury bonds
|
|
|
4,963
|
|
|
|
—
|
|
Corporate stock
|
|
|
—
|
|
|
|
112
|
|
Total available-for-sale investment securities
|
|
$
|
277,269
|
|
|
$
|
262,322
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity (at amortized
cost)
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
311
|
|
|
$
|
378
|
|
Total held-to-maturity investment securities
|
|
$
|
311
|
|
|
$
|
378
|
|
The
Company classifies its investment securities as available-for-sale or held-to-maturity. The Company’s intent is to hold
all securities classified as held-to-maturity until maturity and management believes that it has the ability to do so. Securities
available-for-sale may be sold to implement asset/liability management strategies and in response to changes in interest rates,
prepayment rates and similar factors.
Net
unrealized losses on available-for-sale investment securities totaling $6,001,000 were recorded, net of $1,911,000 in tax benefits,
as accumulated other comprehensive income within shareholders’ equity at September 30, 2018 and net unrealized losses on
available-for-sale investment securities totaling $456,000 were recorded, net of $135,000 in tax benefits, as accumulated other
comprehensive income within shareholders’ equity at December 31, 2017.
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 as the declines in market value are driven
by the changes in interest rates and are not related to changes in credit quality.
Loans and Leases
The Company’s
historical lending activities have been in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family
real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) lease financing
receivable; (7) agriculture; and (8) consumer loans. The Company’s continuing focus in our market area, new borrowers developed
through the Company’s marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company adding
$71 million in new loans during the first nine months of 2018. This production was offset by higher than anticipated pay downs
and payoffs, and resulted in an overall net increase in net loans and leases of $1,609,000 (0.5%) from $308,713,000 at December
31, 2017 to $310,322,000 at September 30, 2018. Despite the slight increase in net loans in 2018, the market in which the Company
operates has begun to show demand for credit products as the relatively low interest rate environment and continued economic expansion
have increased refinancing as well as new loan activity. Table Six below summarizes the composition of the loan portfolio as of
September 30, 2018 and December 31, 2017.
Table
Six: Loan and Lease Portfolio Composition
(dollars in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
Change in
|
|
|
Percentage
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
dollars
|
|
|
change
|
|
Commercial
|
|
$
|
24,526
|
|
|
|
8
|
%
|
|
$
|
25,377
|
|
|
|
8
|
%
|
|
$
|
(851
|
)
|
|
|
(3.4
|
%)
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
190,677
|
|
|
|
61
|
%
|
|
|
185,452
|
|
|
|
59
|
%
|
|
|
5,225
|
|
|
|
2.8
|
%
|
Multi-family
|
|
|
65,312
|
|
|
|
21
|
%
|
|
|
78,025
|
|
|
|
25
|
%
|
|
|
(12,713
|
)
|
|
|
(16.3
|
%)
|
Construction
|
|
|
7,486
|
|
|
|
2
|
%
|
|
|
5,863
|
|
|
|
2
|
%
|
|
|
1,623
|
|
|
|
27.7
|
%
|
Residential
|
|
|
16,697
|
|
|
|
5
|
%
|
|
|
15,813
|
|
|
|
5
|
%
|
|
|
884
|
|
|
|
5.6
|
%
|
Lease financing receivable
|
|
|
61
|
|
|
|
0
|
%
|
|
|
205
|
|
|
|
—
|
%
|
|
|
(144
|
)
|
|
|
(70.2
|
%)
|
Agriculture
|
|
|
4,591
|
|
|
|
1
|
%
|
|
|
1,713
|
|
|
|
1
|
%
|
|
|
2,878
|
|
|
|
168.0
|
%
|
Consumer
|
|
|
5,452
|
|
|
|
2
|
%
|
|
|
945
|
|
|
|
—
|
%
|
|
|
4,507
|
|
|
|
476.9
|
%
|
Total loans and leases
|
|
|
314,802
|
|
|
|
100
|
%
|
|
|
313,393
|
|
|
|
100
|
%
|
|
|
1,409
|
|
|
|
0.4
|
%
|
Deferred loan and lease
fees, net
|
|
|
(148
|
)
|
|
|
|
|
|
|
(202
|
)
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Allowance for loan and
lease losses
|
|
|
(4,332
|
)
|
|
|
|
|
|
|
(4,478
|
)
|
|
|
|
|
|
|
146
|
|
|
|
|
|
Total net loans and leases
|
|
$
|
310,322
|
|
|
|
|
|
|
$
|
308,713
|
|
|
|
|
|
|
$
|
1,609
|
|
|
|
0.5
|
%
|
A significant
portion of the Company’s loans and leases are direct loans and leases made to individuals and local businesses. The Company
relies substantially on networking, local promotional activity, and personal contacts by American River Bank officers, directors
and employees to compete with other financial institutions. The Company makes loans and leases to borrowers whose applications
the Company believes include a sound purpose and a viable primary repayment source, generally supported by a secondary source
of repayment.
Commercial loans
consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products.
Consumer loans include a range of traditional consumer loan products such as personal lines of credit and homeowner equity lines
of credit and loans to finance purchases of autos, boats, recreational vehicles, mobile homes and various other consumer items.
Construction loans are generally comprised of commitments to customers within the Company’s service area for construction
of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans
consist primarily of loans secured by first trust deeds on commercial, multi-family, and residential properties typically with
maturities from 3 to 10 years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily
of vineyard loans. In general, the Company does not make long-term mortgage loans.
Risk Elements
The Company assesses
and manages credit risk on an ongoing basis through a total credit culture that emphasizes excellent credit quality, extensive
internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant
to periodically review the existing loan and lease portfolio. Management believes its ability to identify and assess risk and
return characteristics of the Company’s loan and lease portfolio is critical for profitability and growth. Management strives
to continue its emphasis on credit quality in the loan and lease approval process, through active credit administration and regular
monitoring. With this in mind, management has designed and implemented a comprehensive loan and lease review and grading system
that management believes functions to continually assess the credit risk inherent in the loan and lease portfolio.
Ultimately,
underlying trends in economic and business cycles influence credit quality. American River Bank’s business is concentrated
in the Sacramento Metropolitan Statistical Area, which is a diversified economy, but with a large State of California government
presence and employment base; in Sonoma County, which is focused on businesses within the two communities in which the Bank has
offices (Santa Rosa and Healdsburg); and in Amador County, in which the Bank is primarily focused on businesses within the three
communities in which it has offices (Jackson, Pioneer, and Ione). The economy of Sonoma County is diversified with professional
services, manufacturing, agriculture and real estate investment and construction, while the economy of Amador County is reliant
upon government, services, retail trade, manufacturing industries and Indian gaming. The Company had serviced markets in Santa
Clara, Contra Costa, and Alameda Counties through a loan production office. In the fourth quarter of 2016, the Company discontinued
operating the loan production office, however, the Company continues to have loans that were originated in these markets. The
economies of Santa Clara, Contra Costa and Alameda Counties are diversified with professional services, manufacturing, technology
related companies, real estate investment and construction.
The Company has
significant extensions of credit and commitments to extend credit that are secured by real estate. The ultimate repayment of these
loans is generally dependent on personal or business cash flows or the sale or refinancing of the real estate. The Company monitors
the effects of current and expected market conditions and other factors on the collectability of real estate loans. The more significant
factors management considers involve the following: lease rates and terms, vacancy rates, absorption and sale rates and capitalization
rates; real estate values, supply and demand factors, and rates of return; operating expenses; inflation and deflation; and sufficiency
of repayment sources independent of the real estate including, in some instances, personal guarantees.
In extending
credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security. The repayment of
such loans is expected to come from cash flows or from proceeds from the sale of selected assets of the borrowers. The Company’s
requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management’s evaluation
of the creditworthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant
and equipment, income-producing properties, residences and other real property. The Company secures its collateral by perfecting
its security interest in business assets, obtaining deeds of trust, or outright possession among other means.
In management’s
judgment, a concentration exists in real estate loans, which represented approximately 89% of the Company’s loan and lease
portfolio at September 30, 2018 and 91% as of December 31, 2017. Management believes that the residential land portion of the
Company’s loan portfolio carries a reasonable level of credit risk. As of September 30, 2018, outstanding unimproved residential
land commitments were $2,366,000 (or just 0.8% of the total real estate loans). Of the $2,366,000, $2,132,000, or 90%, was represented
by one amortizing loan, which was considered well-secured, with a favorable loan-to-value ratio. Management currently believes
that it maintains its allowance for loan and lease losses at levels adequate to reflect the loss risk inherent in its total loan
portfolio.
A decline in
the economy in general, or decline in real estate values in the Company’s market areas, in particular, could have an adverse
impact on the collectability of real estate loans and require an increase in the provision for loan and lease losses. This could
adversely affect the Company’s future prospects, results of operations, profitability and stock price. Management believes
that its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no
assurance that losses will not occur. The Company’s loan practices and underwriting standards include, but are not limited
to, the following: (1) maintaining a thorough understanding of the Company’s market area and originating a significant majority
of its loans within that area, (2) maintaining a thorough understanding of borrowers’ knowledge, capacity, and market position
in their field of expertise, (3) basing real estate loan approvals not only on market demand for the project, but also on the
borrowers’ capacity to support the project financially in the event it does not perform to expectations (whether sale or
income performance), and (4) maintaining conforming and prudent loan-to-value and loan-to-cost ratios based on independent outside
appraisals and ongoing inspection and analysis by the Company’s lending officers or contracted third-party professionals.
Nonperforming,
Past Due and Restructured Loans and Leases
At September
30, 2018, nonperforming loans and leases (those loans and leases on nonaccrual status and those loans and leases still accruing
and past due 90 days or more) were $376,000 or 0.12% of total loans and leases. The $376,000 in nonperforming loans and leases
consisted of one commercial real estate loan totaling $278,000, one commercial loan relationship with two loans totaling $30,000,
and one $68,000 consumer home equity loan. Nonperforming loans and leases were $1,892,000 or 0.60% of total loans and leases at
December 31, 2017. There were no specific reserves held on the nonperforming loans at September 30, 2018 or at December 31, 2017.
Table Seven
below sets forth nonaccrual loans and loans past due 90 days or more as of September 30, 2018 and December 31, 2017.
Table Seven: Nonperforming Loans and Leases
(dollars
in thousands)
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
Past due 90 days or more
and still accruing:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
Real
estate
|
|
|
—
|
|
|
|
—
|
|
Lease
financing receivable
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Nonaccrual:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
30
|
|
|
|
1,597
|
|
Real
estate
|
|
|
278
|
|
|
|
289
|
|
Lease
financing receivable
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
68
|
|
|
|
6
|
|
Total
nonperforming loans
|
|
$
|
376
|
|
|
$
|
1,892
|
|
In addition
to the loans on nonaccrual status, the company also had $3,772,000 in loans that were considered past due between 30 and 89 days.
This compares to loans past due between 30 and 89 days of $147,000 at December 31, 2017. The $3,772,000 represented six loans
that were matured and being evaluated for renewal. There were no loan or lease concentrations in excess of 10% of total loans
and leases not otherwise disclosed as a category of loans and leases as of September 30, 2018. Management is not aware of any
potential problem loans, which were accruing and current at September 30, 2018, where serious doubt exists as to the ability of
the borrower to comply with the present repayment terms and that would result in a significant loss to the Company.
Impaired
Loans and Leases
The Company
considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect
all amounts due (principal and interest) according to the original contractual terms of the loan or lease agreement. The measurement
of impairment may be based on (i) the present value of the expected cash flows of the impaired loan or lease discounted at
the loan’s or lease’s original effective interest rate, (ii) the observable market price of the impaired loan
or lease, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition
to smaller-balance loans or leases that are collectively evaluated for credit risk. In assessing whether a loan or lease is impaired,
the Company typically reviews loans or leases graded substandard or lower with outstanding principal balances in excess of $100,000,
as well as loans considered troubled debt restructures with outstanding principal balances in excess of $25,000. The Company identifies
troubled debt restructures by reviewing each renewal, modification, or extension of a loan with a screening document. This document
is designed to identify any characteristics of such a loan that would qualify it as a troubled debt restructure. If the characteristics
are not present that would qualify a loan as a troubled debt restructure, it is deemed to be a modification.
At September
30, 2018, the recorded investment in loans and leases that were considered to be impaired totaled $9,261,000, which includes $346,000
in nonaccrual loans and leases and $8,915,000 in performing loans and leases. Of the total impaired loans of $9,261,000, loans
totaling $6,348,000 were deemed to require no specific reserve and loans totaling $2,913,000 were deemed to require a related
valuation allowance of $181,000. Of the $6,348,000 impaired loans that did not carry a specific reserve there were $496,000 in
loans or leases that had partial charge-offs and $5,852,000 in loans or leases that were analyzed and determined not to require
a specific reserve or charge-off because the collateral value or discounted cash flow value exceeded the loan or lease balance.
The recorded investment in loans and leases that were considered to be impaired totaled $13,757,000 at December 31, 2017. Of the
total impaired loans of $13,757,000, loans totaling $7,601,000 were deemed to require no specific reserve and loans totaling $6,156,000
were deemed to require a related valuation allowance of $355,000.
The Company has
been operating in a market that has recently experienced improvement in real estate values of commercial, residential, land, and
construction properties. As such, the Company is focused on monitoring collateral values for those loans considered collateral
dependent. For collateral dependent loans in excess of $250,000, the Company performs an internal evaluation or obtains an updated
appraisal, as necessary, which is generally once every twelve months. In the third quarter of 2018, the Company had net loan losses
of $210,000 and a provision of $50,000. In the third quarter of 2017, the Company had net loan and lease losses of $630,000 and
a provision of $300,000.
During the three
and nine-month periods ended September 30, 2018, there was one $18,000 commercial loan that was modified as a troubled debt restructuring.
The loan was a term out of a line of credit to an amortizing loan with a rate reduction. During the three and nine-month periods
ended September 30, 2017, there was one loan that was modified as a troubled debt restructuring. The modification of the terms
of the loan included a reduction of the stated interest rate for eighteen months according to a bankruptcy court-order as part
of a debtor-in-possession financing agreement. The loan had a pre-modification and post-modification outstanding recorded investment
of $2,692,000. After principal payments of $57,000 and charge-downs of $1,073,000, the June 30, 2018 balance was $1,562,000. At
June 30, 2018 this loan had a $200,000 specific reserve. Subsequent to modification the loan went into payment default. During
the third quarter of 2018 the $200,000 specific reserve as well as an additional $13,000 written-off and the loan was sold with
no further loss. There were no payment defaults on troubled debt restructurings within 12 months following the modification for
the three-month and nine-month periods ended September 30, 2018 and September 30, 2017, other than the modified loan that went
into payment default mentioned above. At September 30, 2018 and December 31, 2017, there were no unfunded commitments on those
loans considered troubled debt restructures.
Allowance
for Loan and Lease Losses Activity
The
Company maintains an allowance for loan and lease losses (“ALLL”) to cover probable losses inherent in the loan
and lease portfolio, which is based upon management’s estimate of those losses. The ALLL is established through a
provision for loan and lease losses and is increased by provisions charged against current earnings and recoveries and
reduced by charge-offs. Actual losses for loans and leases can vary significantly from this estimate. The methodology and
assumptions used to calculate the allowance are continually reviewed as to their appropriateness given the most recent losses
realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are
adjusted accordingly as these factors change. Table Eight below summarizes, for the periods indicated, the activity in the
ALLL.
Table Eight:
Allowance for Loan and Lease Losses
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Average loans and leases outstanding
|
|
$
|
299,934
|
|
|
$
|
322,904
|
|
|
$
|
303,951
|
|
|
$
|
319,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses at beginning of period
|
|
$
|
4,492
|
|
|
$
|
4,881
|
|
|
$
|
4,478
|
|
|
$
|
4,822
|
|
Loans and leases charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(213
|
)
|
|
|
(673
|
)
|
|
|
(213
|
)
|
|
|
(673
|
)
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
(213
|
)
|
|
|
(673
|
)
|
|
|
(213
|
)
|
|
|
(673
|
)
|
Recoveries of loans and leases previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1
|
|
|
|
2
|
|
|
|
10
|
|
|
|
5
|
|
Real estate
|
|
|
2
|
|
|
|
1
|
|
|
|
6
|
|
|
|
54
|
|
Lease financing receivable
|
|
|
—
|
|
|
|
39
|
|
|
|
1
|
|
|
|
39
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
4
|
|
Total
|
|
|
3
|
|
|
|
43
|
|
|
|
17
|
|
|
|
102
|
|
Net loans and leases charged off
|
|
|
(210
|
)
|
|
|
(630
|
)
|
|
|
(196
|
)
|
|
|
(571
|
)
|
Additions to allowance charged to operating expenses
|
|
|
50
|
|
|
|
300
|
|
|
|
50
|
|
|
|
300
|
|
Allowance for loan and lease losses at
end of period
|
|
$
|
4,332
|
|
|
$
|
4,551
|
|
|
$
|
4,332
|
|
|
$
|
4,551
|
|
Ratio of net charge-offs to average loans and leases outstanding (annualized)
|
|
|
0.28
|
%
|
|
|
0.77
|
%
|
|
|
0.09
|
%
|
|
|
0.24
|
%
|
Provision of allowance for loan and lease losses to average loans and leases outstanding (annualized)
|
|
|
0.07
|
%
|
|
|
0.37
|
%
|
|
|
0.02
|
%
|
|
|
0.13
|
%
|
Allowance for loan and lease losses to loans and leases net of deferred fees at end of period
|
|
|
1.38
|
%
|
|
|
1.39
|
%
|
|
|
1.38
|
%
|
|
|
1.39
|
%
|
The adequacy
of the ALLL and the level of the related provision for loan and lease losses is determined based on management’s judgment
after consideration of numerous factors including, but not limited to: (i) local and regional economic conditions, (ii) the
financial condition of the borrowers, (iii) loan impairment and the related level of expected charge-offs, (iv) evaluation
of industry trends, (v) industry and other concentrations, (vi) loans and leases which are contractually current as
to payment terms but demonstrate a higher degree of risk as identified by management, (vii) continuing evaluations of the
performing loan portfolio, (viii) ongoing review and evaluation of problem loans identified as having loss potential, (ix) quarterly
review by the Board of Directors, and (x) assessments by banking regulators and other third parties. Management and the Board
of Directors evaluate the ALLL and determine its appropriate level considering objective and subjective measures, such as knowledge
of the borrower’s business, valuation of collateral, the determination of impaired loans or leases and exposure to potential
losses.
The ALLL
totaled $4,332,000 or 1.38% of total loans and leases at September 30, 2018 compared to $4,478,000 or 1.43% of total loans and
leases at December 31, 2017. The Company establishes general and specific reserves in accordance with accounting principles generally
accepted in the United States of America. The ALLL is composed of categories of the loan and lease portfolio based on loan type
and loan rating; however, the entire allowance is available to cover actual loan and lease losses. While management uses available
information to recognize possible losses on loans and leases, future additions to the allowance may be necessary, based on changes
in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Company’s ALLL. Such agencies may require the Company to provide additions to the allowance based
on their judgment of information available to them at the time of their examination.
The ALLL
as a percentage of impaired loans and leases was 46.8% at September 30, 2018 and 32.6% at December 31, 2017. Of the total nonperforming
and impaired loans and leases outstanding as of September 30, 2018, there were $848,000 in loans or leases that had been reduced
by partial charge-offs of $402,000. As these loan or lease balances are charged off, the remaining balances, following analysis,
normally do not initially require specific reserves and are not eligible for general reserves. The impact of this on credit ratios
is such that the Company’s ALLL as a percentage may be lower, because the partial charge-offs have reduced the potential
future losses related to those credits.
The Company’s
policy with regard to loan or lease charge-offs continues to be that a loan or lease is charged off against the ALLL when management
believes that the collectability of the principal is unlikely. As previously discussed in the “Impaired Loans and Leases”
section, certain loans are evaluated for impairment. Generally, if a loan is collateralized by real estate and considered collateral
dependent, the impaired portion will be charged off to the allowance for loan and lease losses unless it is in the process of
collection, in which case a specific reserve may be warranted. If the collateral is other than real estate and considered impaired,
a specific reserve may be warranted.
It is the policy
of management to maintain the allowance for loan and lease losses at a level believed to be adequate for known and inherent risks
in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing
an allowance for loan and lease losses that management believes is appropriate at each reporting date. Based on information currently
available to analyze inherent credit risk, including economic factors, overall credit quality, historical delinquencies and a
history of actual charge-offs, management believes that the provision for loan and lease losses and the allowance for loan and
lease losses are prudent and adequate. Adjustments may be made based on differences from estimated loan and lease growth, the
types of loans constituting this growth, changes in risk ratings within the portfolio, and general economic conditions. However,
no prediction of the ultimate level of loans and leases charged off in future periods can be made with any certainty.
Other Real Estate
Owned
At September
30, 2018 and December 31, 2017, the Company had one other real estate owned (“OREO”) property totaling $961,000. During
2018, 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 September 30, 2018 nor at year end 2017. The Company believes that the OREO property owned at September
30, 2018 was carried approximately at fair value.
Deposits
At September
30, 2018, total deposits were $575,820,000 representing a $19,740,000 (3.5%) increase from the December 31, 2017 balance of $556,080,000.
The Company’s deposit growth plan for 2018 is to concentrate its efforts on increasing deposit relationships that consist
of noninterest-bearing demand, interest-bearing money market and NOW accounts, and savings accounts while allowing higher cost
time deposits to mature and close or renew at lower rates. During the first nine months of 2018, the Company experienced deposit
account increases in money market accounts ($20,018,000 or 15.4%), and savings ($8,635,000 or 13.1%) and decreases in noninterest-bearing
accounts ($6,196,000 or 2.9%), interest-bearing checking ($27,000 or 0.0%), and time deposits ($2,680,000 or 3.4%).
Other
Borrowed Funds
Other
borrowings outstanding as of September 30, 2018 and December 31, 2017, consist of advances (both long-term and short-term) from
the FHLB. Table Nine below summarizes these borrowings.
Table Nine:
Other Borrowed Funds
(dollars in thousands)
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
6,500
|
|
|
|
1.34
|
%
|
|
$
|
3,500
|
|
|
|
1.39
|
%
|
Long-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
9,000
|
|
|
|
1.83
|
%
|
|
$
|
12,000
|
|
|
|
1.41
|
%
|
The
maximum amount of short-term borrowings at any month-end during the first nine months of 2018 and 2017 was $6,500,000 and $3,500,000,
respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of
rates and maturities on FHLB advances (dollars in thousands):
|
|
Short-term
|
|
Long-term
|
|
Amount
|
|
$
|
6,500
|
|
|
$
|
13,500
|
|
Maturity
|
|
|
2018
to 2019
|
|
|
|
2019
to 2023
|
|
Weighted average rates
|
|
|
1.34
|
%
|
|
|
1.83
|
%
|
Capital
Resources
The Company and
American River Bank are subject to certain regulatory capital requirements administered by the Federal Reserve Board and the Federal
Deposit Insurance Corporation (the “FDIC”). Failure to meet these minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect
on the Company’s consolidated financial statements. Under current capital adequacy guidelines and the regulatory framework
for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and American
River Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
At September
30, 2018, shareholders’ equity was $71,735,000, representing a decrease of $5,186,000 (6.7%) from $76,921,000 at December
31, 2017. The decrease resulted from repurchases of common stock ($4,654,000), the payment of cash dividends ($895,000) and the
reductions from other comprehensive income ($3,769,000), exceeding the additions from net income for the period ($3,775,000) and
stock based compensation ($357,000). The Company’s ratio of Total Risk-Based Capital to risk adjusted assets was 17.9% at
September 30, 2018 and 19.3% at December 31, 2017. Its Tier 1 Risk-Based Capital to risk-adjusted assets was 16.7% at September
30, 2018 and 18.8% at December 31, 2017. Its Leverage Ratio was 9.0% at September 30, 2018 and 10.3% at December 31, 2017. Table
Ten below lists the Company’s and American River Bank’s capital ratios at September 30, 2018 and December 31, 2017,
as well as the minimum regulatory requirements.
Table
Ten: Capital Ratios
|
|
September
30,
|
|
|
December
31,
|
|
|
Minimum
Regulatory Capital
Requirements
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
American River Bankshares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
Ratio
|
|
|
9.0
|
%
|
|
|
9.5
|
%
|
|
|
5.9
|
%
|
|
|
5.3
|
%
|
Tier 1 Risk-Based Capital
|
|
|
16.7
|
%
|
|
|
18.1
|
%
|
|
|
7.9
|
%
|
|
|
7.3
|
%
|
Total Risk-Based Capital
|
|
|
17.9
|
%
|
|
|
19.3
|
%
|
|
|
9.9
|
%
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American River Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
9.1
|
%
|
|
|
9.3
|
%
|
|
|
5.9
|
%
|
|
|
5.3
|
%
|
Common Equity Tier 1
Risk-Based Capital
|
|
|
16.6
|
%
|
|
|
17.7
|
%
|
|
|
6.4
|
%
|
|
|
5.8
|
%
|
Tier 1 Risk-Based Capital
|
|
|
16.6
|
%
|
|
|
17.7
|
%
|
|
|
7.9
|
%
|
|
|
7.3
|
%
|
Total Risk-Based Capital
|
|
|
17.9
|
%
|
|
|
19.0
|
%
|
|
|
9.9
|
%
|
|
|
9.3
|
%
|
Capital
ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory requirements and is adequate to
meet future needs. Management believes that both the Company and American River Bank met all of their capital adequacy requirements
as of September 30, 2018 and December 31, 2017.
Effective January
1, 2015, bank holding companies with consolidated assets of $1 billion or more and banks like American River Bank must comply
with new minimum capital ratio requirements to be phased-in between January 1, 2015 and January 1, 2019, which consist of the
following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total
risk weighted assets ratio of 6%; (iii) a total capital to total risk weighted assets ratio of 8%; and (iv) a Tier 1 capital to
adjusted average total assets (“leverage”) ratio of 4%.
In addition,
a “capital conservation buffer,” is established which when fully phased-in will require maintenance of a minimum of
2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements
described above. The 2.5% buffer will increase the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%,
(ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new buffer requirement will be phased-in between
January 1, 2016 and January 1, 2019. The buffer requirement for 2018 is 1.875% and will increase to 2.50% on January 1, 2019.
If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will
be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under
Tier 1 instruments; and (iv) engaging in share repurchases.
On January 24,
2018, the Company approved and authorized a 5% stock repurchase program for 2018 (the “2018 Program”). See Part II,
Item 2, for additional disclosure regarding the 2018 Program. In addition, on February 14, 2018, May 16, 2018, and August 15,
2018, the Company paid $0.05 per common share cash dividends to shareholders. These 2018 quarterly dividends follows four quarterly
cash dividends, totaling $0.20 per share in the aggregate, paid in 2017.
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 September 30, 2018 and 2017.
Liquidity
Liquidity
management refers to the Company’s ability to provide funds on an ongoing basis to meet fluctuations in deposit levels
as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company’s
liquidity position. Federal funds lines, short-term investments and securities, and loan and lease repayments contribute to
liquidity, along with deposit increases, while loan and lease funding and deposit withdrawals decrease liquidity. The Company
assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit
at September 30, 2018 were approximately $30,266,000 and $121,000, respectively. Such loan commitments relate primarily to
revolving lines of credit and other commercial loans and to real estate construction loans. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company’s sources of liquidity consist of cash and due from correspondent banks, overnight funds sold
to correspondent banks, unpledged marketable investments and loans held for sale and/or pledged for secured borrowings. At
September 30, 2018, consolidated liquid assets totaled $232.3 million or 34.7% of total assets compared to $226.3 million or
34.5% of total assets on December 31, 2017. In addition to liquid assets, the Company maintains two short-term unsecured
lines of credit in the amount of $17,000,000 with two of its correspondent banks. At September 30, 2018, the Company had
$17,000,000 available under these credit lines. Additionally, the Bank is a member of the FHLB. At September 30, 2018, the
Bank could have arranged for up to $116,070,000 in secured borrowings from the FHLB. These borrowings are secured by pledged
mortgage loans and investment securities. At September 30, 2018, the Bank had advances, borrowings and commitments (including
letters of credit) outstanding of $15,500,000, leaving $100,570,000 available under these FHLB secured borrowing
arrangements. The Bank also has a secured borrowing arrangement with the Federal Reserve Bank of San Francisco. The borrowing
can be secured by pledging selected loans and investment securities. At September 30, 2018, the Bank’s
borrowing capacity at the Federal Reserve Bank was $8,435,000. 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 September 30, 2018 and December 31, 2017,
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 $30,387,000 and $11,044,000 at September 30, 2018 and December 31, 2017, respectively.
As a percentage of net loans and leases these off-balance sheet items represent 9.8% and 3.6%, respectively.
The Company
has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results.
Website
Access
The
Company maintains a website where certain information about the Company is posted. Through the website, its Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto, as well as Section 16 Reports and amendments
thereto, are available as soon as reasonably practicable after such material is electronically filed with or furnished to the
SEC. These reports are free of charge and can be accessed through the address
www.americanriverbank.com
by accessing the
Investor Relations
link, then the
Company News
link, then the
SEC Filings
link located at that address. Once
you have selected the
SEC Filings
link you will have the option to access the Section 16 Reports or the reports filed on
Forms 10-K, 10-Q and 8-K by the Company by selecting the appropriate link.