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EX-3.1 - EXHIBIT 3.1 - AMERICAN RIVER BANKSHARESex3_1.htm
EX-32.1 - EXHIBIT 32.1 - AMERICAN RIVER BANKSHARESex32_1.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN RIVER BANKSHARESex31_2.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN RIVER BANKSHARESex31_1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________________________________ to ____________________________________
 
Commission File Number: 0-31525

AMERICAN RIVER BANKSHARES
(Exact name of registrant as specified in its charter)
     
California
 
68-0352144
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
3100 Zinfandel Drive, Suite 450, Rancho Cordova, California
 
95670
 (Address of principal executive offices)
 
(Zip Code)
     
(916) 851-0123
(Registrants telephone number, including area code)
     
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer o
 
Accelerated filer o
       
 
Non-accelerated filer x (Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:

No par value Common Stock – 9,873,437 shares outstanding at May 10, 2011.
 
 
 

 
 
AMERICAN RIVER BANKSHARES
 
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2011


Exhibit Index
   
50
 
         
3.1
 
Articles of Incorporation, as amended
 
51
31.1
 
Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
64
 
31.2
 
Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
65
 
32.1
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
66

 
2

 
 

AMERICAN RIVER BANKSHARES
CONSOLIDATED BALANCE SHEET
(Unaudited)

(dollars in thousands)
 
March 31,
   
December 31,
 
   
2011
   
2010
 
             
ASSETS
           
             
Cash and due from banks
  $ 33,678     $ 31,871  
Interest-bearing deposits in banks
     2,248        2,248  
Investment securities:
               
Available-for-sale (amortized cost: 2011--$157,031; 2010--$151,667)
    160,092       154,515  
Held-to-maturity (fair value: 2011--$5,762; 2010--$6,472)
    5,486       6,149  
Loans and leases, less allowance for loan and lease losses of $7,362 at March 31, 2011 and $7,585 at December 31, 2010
    325,647       338,533  
Premises and equipment, net
    2,057       2,026  
Federal Home Loan Bank stock
    3,348       3,486  
Goodwill and other intangible assets
    16,668       16,723  
Other real estate owned
    3,742       2,696  
Accrued interest receivable and other assets
    20,374       20,693  
    $ 573,340     $ 578,940  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
Deposits:
               
Noninterest bearing
  $ 130,152     $ 126,636  
Interest-bearing
    335,756       338,486  
Total deposits
    465,908       465,122  
                 
Short-term borrowings
    7,000       7,000  
Long-term borrowings
    5,000       10,000  
Accrued interest payable and other liabilities
    5,482       7,274  
                 
Total liabilities
    483,390       489,396  
                 
Commitments and contingencies
               
                 
Shareholders’ equity:
               
Preferred stock, no par value; 20,000,000 shares authorized; none outstanding
               
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding – 9,874,867 shares at March 31, 2011 and December 31, 2010
    71,886        71,814  
Retained earnings
    16,227       16,021  
Accumulated other comprehensive income, net of taxes
    1,837       1,709  
                 
Total shareholders’ equity
    89,950       89,544  
    $ 573,340     $ 578,940  

See Notes to Unaudited Consolidated Financial Statements
 
 
3

 

AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

(dollars in thousands, except per share data)
           
For the three months ended March 31,
           
   
2011
   
2010
 
             
Interest income:
           
Interest and fees on loans
  $ 4,997     $ 5,837  
Interest on deposits in banks
    6        
Interest and dividends on investment securities:
               
Taxable
    801       708  
Exempt from Federal income taxes
    150       169  
Total interest income
    5,954       6,714  
Interest expense:
               
Interest on deposits
    631       798  
Interest on borrowings
    94       144  
Total interest expense
    725       942  
                 
Net interest income
    5,229       5,772  
                 
Provision for loan and lease losses
    1,375       1,641  
                 
Net interest income after provision for loan and lease losses
    3,854       4,131  
                 
Noninterest income:
               
Service charges on deposit accounts
    197       233  
Gain on sale of securities
    2       2  
Other noninterest income
    234       226  
Total noninterest income
    433       461  
                 
Noninterest expense:
               
Salaries and employee benefits
    2,080       1,994  
Occupancy
    278       331  
Furniture and equipment
    187       198  
Federal Deposit Insurance Corporation assessments
    298       319  
Other expense
    1,208       1,343  
Total noninterest expense
    4,051       4,185  
                 
Income before provision for income taxes
    236       407  
                 
Provision for income taxes
    30       101  
                 
Net  income
  $ 206     $ 306  
                 
Basic earnings per share
  $ 0.02     $ 0.03  
Diluted earnings per share
  $ 0.02     $ 0.03  
                 
Cash dividends per share
  $     $  
 
See notes to Unaudited Consolidated Financial Statements
 
 
4

 
 
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

               
Accumulated
         
(dollars in thousands)
 
Common Stock
     
Other
 
Total
 
Total
 
           
Retained
 
Comprehensive
 
Shareholders’
 
Comprehensive
 
   
Shares
 
Amount
 
Earnings
 
Income
 
Equity
 
Income
 
                                   
Balance, January 1, 2010
  9,845,533   $ 71,578   $ 15,545   $ 222   $ 87,345      
                                   
Comprehensive income:
                                 
Net income
              476           476   $ 476  
Other comprehensive income, net of tax:
                                   
Net change in unrealized gains on available-for-sale investment securities
                    1,487     1,487     1,487  
                                     
Total comprehensive income
                              $ 1,963  
Restricted stock awarded and related compensation expense
  29,334     47                 47        
Stock option compensation expense
        189                 189        
                                     
Balance, December 31, 2010
  9,874,867     71,814     16,021     1,709     89,544        
                                     
Comprehensive income:
                                   
Net income
              206           206   $ 206  
Other comprehensive income, net of tax:
                                   
Net change in unrealized gains on available-for-sale investment securities
                    128     128     128  
                                     
Total comprehensive income
                              $ 334  
Restricted stock compensation expense
        28                 28        
Stock option compensation expense
        44                 44        
                                     
Balance, March 31, 2011
  9,874,867   $ 71,886   $ 16,227   $ 1,837   $ 89,950        

See Notes to Unaudited Consolidated Financial Statements
 
 
5

 
 
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

(dollars in thousands)
           
For the three months ended March 31,
           
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net income
  $ 206     $ 306  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan and lease losses
    1,375       1,641  
Decrease in deferred loan origination fees, net
    (23 )     (57 )
Depreciation and amortization
    187       210  
Gain on sale and call of investment securities
    (2 )     (2 )
Amortization of investment security premiums and discounts, net
    818       510  
Credit to accounts receivable servicing receivable allowance for losses
          (4 )
Increase in cash surrender values of life insurance policies
    (68 )     (59 )
Stock based compensation expense
    72       55  
Loss on sale and write-down of other real estate owned
    28       248  
Decrease in accrued interest receivable and other assets
    301       3,050  
Decrease in accrued interest payable and other liabilities
    (1,792 )     (1,494 )
                 
Net cash provided by operating activities
    1,102       4,404  
                 
Cash flows from investing activities:
               
Proceeds from the sale of available-for-sale investment securities
          9  
Proceeds from matured and called available-for-sale investment securities
    602       1,370  
Purchases of available-for-sale investment securities
    (13,141 )     (22,329 )
Proceeds from principal repayments for available-for-sale investment securities
    6,345       4,152  
Proceeds from principal repayments for held-to-maturity investment securities
    677       1,851  
Net increase in interest-bearing deposits in banks
           
Net decrease in loans
    9,935       10,248  
Proceeds from sale of other real estate
    526       688  
Net decrease in FHLB stock
    138        
Net decrease in accounts receivable servicing receivables
          40  
Purchases of equipment
    (163 )     (65 )
                 
Net cash provided by (used in) investing activities
    4,919       (4,036 )

 
6

 
 
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)

(dollars in thousands)
           
For the three months ended March 31,
           
   
2011
   
2010
 
               
Cash flows from financing activities:
           
Net increase in demand, interest-bearing and savings deposits
  $ 7,980     $ 4,066  
Net decrease in time deposits
    (7,194 )     (4,677 )
Net decrease in short-term borrowings
          (5,000 )
Net decrease in long-term borrowings
    (5,000 )     (5,000 )
                 
Net cash used in financing activities
  $ (4,214 )   $ (10,611 )
                 
Increase (decrease) in cash and cash equivalents
    1,807       (10,243 )
                 
Cash and cash equivalents at beginning of year
    31,871       58,493  
                 
Cash and cash equivalents at end of period
  $ 33,678     $ 48,250  

See Notes to Unaudited Consolidated Financial Statements
 
 
7

 

AMERICAN RIVER BANKSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011

1. CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, the unaudited consolidated financial statements contain all adjustments  (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of American River Bankshares (the “Company) at March 31, 2011 and December 31, 2010, and the results of its operations and its cash flows for the three-month periods ended March 31, 2011 and 2010 and its statement of changes in shareholders’ equity for the year ended December 31, 2010 and the three months ended March 31, 2011 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 2010 annual report on Form 10-K.   The results of operations for the three-month period ended March 31, 2011 may not necessarily be indicative of the operating results for the full year.

In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan and lease losses, the provision for taxes and the estimated fair value of investment securities and other real estate owned.

Management has determined that since all of the banking products and services offered by the Company are available in each branch office of American River Bank, all branch offices are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate all of the branch offices and report them as a single operating segment.  No client accounts for more than ten percent (10%) of revenues for the Company or American River Bank.

2. STOCK-BASED COMPENSATION 
 
Equity Plans
 
On March 17, 2010, the Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”).  The 2010 Plan was approved by the Company’s shareholders on May 20, 2010.  In 2000, the Board of Directors adopted and the Company’s shareholders approved a stock option plan (the “2000 Plan”), under which 379,571 options remain outstanding at March 31, 2011.  The total number of authorized shares that remain available for issuance under the 2010 Plan is 1,447,495.  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 granted 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 nonstatutory agreements and other awards agreements.  The 2010 Plan and the 2000 Plan (collectively the “Plans”) require that the option price may not be less than the fair market value of the stock at the date the option is granted.  The option awards under the Plans expire on dates determined by the Board of Directors, but not later than ten years from the date of award. The vesting period is generally five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors.  Outstanding option awards under the Plans are exercisable until their expiration, however, no new options will be awarded under the 2000 Plan.  New shares are issued upon exercise of an option.
 
 
8

 

During the third quarter of 2010, the Company awarded 29,334 shares of restricted common stock under the Company’s 2010 Equity Incentive Plan to certain employees and to directors.  Grant date fair value is determined by the market price of the Company’s common stock on the date of grant. The aggregate value of these shares at the grant date amounts to approximately $205,000 and is recognized ratably as compensation expense or director expense over the vesting periods.  The shares of common stock granted pursuant to such agreements vest in increments over one to five years from the date of grant.  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. New shares are issued upon vesting of the restricted common stock.
 
Equity Compensation
 
For the three-month periods ended March 31, 2011 and 2010, the compensation cost recognized for equity compensation was $72,000 and $55,000, respectively.  The recognized tax benefit for equity compensation expense was $20,000 and $10,000, for the three-month periods ended March 31, 2011 and 2010, respectively.
 
At March 31, 2011, the total compensation cost related to nonvested stock option awards not yet recorded is expected to be $140,000.  This amount will be recognized over the next four years and the weighted average period of recognizing these costs is expected to be 1.5 years. At March 31, 2011, the total compensation cost related to restricted stock awards not yet recorded is expected to be $130,000.  This amount will be recognized over the next four and a half 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 periods ended March 31, 2011 and 2010.  A summary of option activity under the Plans as of March 31, 2011 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, 2011
    379,571     $ 17.18    
4.7 years
    $  
Granted
                       
Exercised
                       
Cancelled
                       
Outstanding at March 31, 2011
    379,571     $ 17.18    
4.4 years
    $  
                               
Exercisable at March 31, 2011
    306,943     $ 18.10    
4.8 years
    $  

Restricted Stock

There was no restricted stock awarded during the three month periods ended March 31, 2011 or 2010.  There were no restricted awards that were fully vested, nor were there any awards that had been forfeited during the same period and the intrinsic value at March 31, 2011 was $194,000.

Other Equity Awards

There were no stock appreciation rights; restricted performance stock; unrestricted Company stock; or performance units awarded during the three month periods ended March 31, 2011 or 2010.

The intrinsic value used for stock options and restricted stock was derived from the market price of the Company’s common stock of $6.60 as of March 31, 2011.
 
 
9

 

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 $41,419,000 and standby letters of credit of approximately $10,121,000 at March 31, 2011.  Such loan 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 2011 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 or as security for real estate rents by commercial clients and are typically short-term in nature.  Credit risk is similar to that involved in extending loan commitments to clients and accordingly, evaluation and collateral requirements similar to those for loan commitments are used.  The majority of all such commitments are collateralized.  The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees was not significant at March 31, 2011 or March 31, 2010.
 
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 (9,845,533 shares for the three-month period ended March 31, 2011 and 2010).  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 (8,122 shares for the three-month period ended March 31, 2011 and zero shares for the three-month period ended March 31, 2010).  Earnings per share is retroactively adjusted for stock dividends and stock splits for all periods presented.

5. COMPREHENSIVE INCOME

Comprehensive income is reported in addition to net income for all periods presented.  Comprehensive income is comprised of net income plus other comprehensive income.  Other comprehensive income, net of taxes, was comprised of the unrealized gains on available-for-sale investment securities of $128,000 for the three-month period ended March 31, 2011 and $966,000 for the three-month period ended March 31, 2010. Comprehensive income was $334,000 for the three-month period ended March 31, 2011 and $1,272,000 for the three-month period ended March 31, 2010.  Reclassification adjustments resulting from gain or loss on sale of investment securities were not significant for all periods presented.

6. INVESTMENT SECURITIES
 
The amortized cost and estimated fair values of investment securities at March 31, 2011 and December 31, 2010 consisted of the following (dollars in thousands):

Available-for-Sale
                       
   
March 31, 2011
 
   
 
   
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Debt securities:
                       
Mortgage-backed securities
  $ 139,337     $ 3,327     $ (469 )   $ 142,195  
Obligations of states and political subdivisions
    17,617       303       (112 )     17,808  
Equity securities:
                               
Corporate stock
    77       17       (5 )     89  
    $ 157,031     $ 3,647     $ (586 )   $ 160,092  

 
10

 

    December 31, 2010  
   
 
   
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Debt securities:
                       
Mortgage-backed securities
  $ 135,915     $ 3,156     $ (427 )   $ 138,644  
Obligations of states and political subdivisions
    15,675       242       (125 )     15,792  
Equity securities:
                               
Corporate stock
    77       8       (6 )     79  
    $ 151,667     $ 3,406     $ (558 )   $ 154,515  

Net unrealized gains on available-for-sale investment securities totaling $3,061,000 were recorded, net of $1,224,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at March 31, 2011.  Proceeds and gross realized gains from the call of available-for-sale investment securities for the period ended March 31, 2011 totaled $287,000 and $2,000, respectively.  There were no sales or transfers of available-for-sale investment securities for the period ended March 31, 2011.
 
Net unrealized gains on available-for-sale investment securities totaling $1,980,000 were recorded, net of $792,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at March 31, 2010.  Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the period ended March 31, 2010 totaled $314,000 and $2,000, respectively.  There were no transfers of available-for-sale investment securities for the period ended March 31, 2010.
 
Held-to-Maturity
                       
   
March 31, 2011
 
   
 
   
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Debt securities:
                       
Mortgage-backed securities
  $ 5,486     $ 276     $     $ 5,762  
 
   
December 31, 2010
 
   
 
   
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Debt securities:
                               
Mortgage-backed securities
  $ 6,149     $ 323     $     $ 6,472  
 
There were no sales of held-to-maturity investment securities for the three months ended March 31, 2011 and the year ended December 31, 2010 and no transfers of held-to-maturity investment securities for the periods ended March 31, 2011 and December 31, 2010.
 
 
11

 
 
Investment securities with unrealized losses at March 31, 2011 and December 31, 2010 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):
 
   
2011
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
Available-for-Sale
                                   
                                     
Debt securities:
                                   
Mortgage-backed securities
  $ 22,534     $ (469 )                   $ 22,534     $ (469 )
Obligations of states and political subdivisions
    4,304       (72 )   $ 840     $ (40 )     5,144       (112 )
Equity Securities:
                                               
Corporate stock
                    6       (5 )     6       (5
    $ 26,838     $ (541 )   $ 846     $ (45 )   $ 27,684     $ (586 )
 
   
2010
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
Available-for-Sale
                                   
                                     
Debt securities:
                                   
Mortgage-backed securities
  $ 29,535     $ (427 )                   $ 29,535     $ (427 )
Obligations of states and political subdivisions
    5,169       (125 )                   5,169     (125
Equity Securities:
                                           
Corporate stock
    5       (2 )   $ 5     $ (4 )     10       (6 )
    $ 34,709     $ (554 )   $ 5     $ (4 )   $ 34,714     $ (558 )

There were no held-to-maturity investment securities with unrealized losses as of March 31, 2011 or December 31, 2010.
 
At March 31, 2011, the Company held 170 securities of which 20 were in a loss position for less than twelve months and 9 were in a loss position for twelve months or more.  Of the 29 securities in a loss position, 11 are mortgage-backed securities, 11 are obligations of states and political subdivisions and 7 are corporate stocks.  At December 31, 2010, the Company held 168 securities of which 29 were in a loss position for less than twelve months and 5 were in a loss position for twelve months or more.  Of the 34 securities in a loss position, 15 are mortgage-backed securities, 11 are obligations of states and political subdivisions and 8 are corporate stocks.
 
The unrealized loss on the Company’s investments in mortgage-backed securities and obligations of states and political subdivisions is primarily driven by interest rates.  Because the decline in market value is attributable to a change in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be until maturity, management does not consider these investments to be other-than-temporarily impaired.
 
The amortized cost and estimated fair values of investment securities at March 31, 2011 by contractual maturity are shown below (dollars in thousands).
 
 
12

 

   
Available-for-Sale
   
Held-to-Maturity
 
   
 
   
Estimated
         
Estimated
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
                         
Within one year
  $ 907     $ 915              
After one year through five years
    5,079       5,190              
After five years through ten years
    6,093       6,193              
After ten years
    5,538       5,510              
      17,617       17,808              
Investment securities not due at a single maturity date:
                           
Mortgage-backed securities
    139,337       142,195     $ 5,486     $ 5,762  
Corporate stock
    77       89                  
    $ 157,031     $ 160,092     $ 5,486     $ 5,762  
 
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.
 
7. IMPAIRED AND NONPERFORMING LOANS AND LEASES AND OTHER REAL ESTATE OWNED
 
At March 31, 2011 and December 31, 2010, the recorded investment in nonperforming loans and leases was approximately $21,595,000 and $22,571,000, 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 loan agreement.  At March 31, 2011, the recorded investment in loans and leases that were considered to be impaired totaled $38,550,000, which includes $21,338,000 in nonperforming loans and leases and $17,212,000 in performing loans and leases.  Of the total impaired loans of $38,550,000, loans totaling $21,699,000 were deemed to require no specific reserve and loans totaling $16,851,000 were deemed to require a related valuation allowance of $1,035,000.  At December 31, 2010, the recorded investment in loans and leases that were considered to be impaired totaled $40,237,000 and had a related valuation allowance of $1,619,000.  If interest had been accruing on the nonperforming loans, such income would have approximated $425,000 and $302,000 for the three months ended March 31, 2011 and 2010, respectively.
 
At March 31, 2011, there were 27 loans and leases that were considered to be troubled debt restructurings.  Of these loans and leases, 14 were modified and are currently performing (less than ninety days past due) totaling $8,215,000 and 13 are considered nonperforming (and included in the $21,595,000 noted above), totaling $6,700,000.  At March 31, 2011 and December 31, 2010, there were no unfunded commitments on those loans considered troubled debt restructures.
 
At March 31, 2011 and December 31, 2010, the recorded investment in other real estate owned (“OREO”) was  $3,742,000 and $2,696,000, respectively.  For the three months ended March 31, 2011, the Company transferred six properties from four relationships with loan balances in the amount of $1,988,000 to OREO and subsequently wrote these balances down by $222,000 to $1,766,000, and sold three properties with balances of $554,000 for a net loss of $28,000.  In addition to the $222,000 write downs, the Company also adjusted the balances, through charges to the allowance for loan and lease losses, to properties obtained in the prior quarter in the amount of $166,000.  The  March 31, 2011 OREO balance of $3,742,000 consists of 17 properties including 7 residential land properties in the amount of $513,000, 2 commercial land properties totaling $732,000, 4 commercial real estate properties in the amount of $1,717,000 and 4 are residential real estate properties in the amount of $780,000.  Nonperforming loans and leases and OREO at March 31, 2011 and December 31, 2010 are summarized as follows:
 
 
13

 

 (in thousands)
 
March 31,
2011
   
December 31,
2010
 
             
Nonaccrual loans and leases that are current to terms
  $ 1,559     $ 3,004  
Nonaccrual loans and leases that are past due
    20,036       19,567  
Loans and leases past due 90 days and accruing interest
           
Other real estate owned
    3,742       2,696  
Total nonperforming assets
  $ 25,337     $ 25,267  
                 
Nonperforming loans and leases to total loans and leases
    6.48 %     6.52 %
Total nonperforming assets to total assets
    4.42 %     4.36 %
 
Impaired loans and leases as of and for the periods ended March 31, 2011 and December 31, 2010 are summarized as follows:
 
March 31, 2011
 
 
   
Unpaid
   
 
    Average    
Interest
 
(dollars in thousands)
 
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
                               
With no related allowance recorded:
                             
Commercial:
                             
Commercial
  $ 5,460     $ 7,286           $ 5,243     $ 44  
Real estate:
                                       
Commercial
    7,301       9,186             8,183       55  
Multi-family
    2,589       2,682             1,985       9  
Construction
    4,586       6,620             4,641        
Residential
    1,478       1,776             1,571       8  
Other:
                                       
Agriculture
    129       322             129        
Consumer
    156       156             182       4  
    $ 21,699     $ 28,028     $     $ 21,934     $ 120  
                                         
With an allowance recorded:
                                       
Commercial:
                                       
Commercial
  $ 1,209     $ 1,209     $ 30     $ 2,220     $ 16  
Real estate:
                                       
Commercial
    12,880       14,169       789       12,500       81  
Multi-family
                      607        
Construction
    441       580       9       221       6  
Residential
    1,832       1,874       197       1,422       21  
Other:
                                       
Agriculture
                             
Consumer
    489       489       10       490       6  
    $ 16,851     $ 18,321     $ 1,035     $ 17,460     $ 130  
Total:
                                       
Commercial:
                                       
Commercial
  $ 6,669     $ 8,495     $ 30     $ 7,463     $ 60  
Real estate:
                                       
Commercial
    20,181       23,355       789       20,684       136  
Multi-family
    2,589       2,682             2,592       9  
Construction
    5,027       7,200       9       4,861       6  
Residential
    3,310       3,650       197       2,993       29  
Other:
                                       
Agriculture
    129       322             129        
Consumer
    645       645       10       672       10  
    $ 38,550     $ 46,349     $ 1,035     $ 39,394     $ 250  

 
14

 
 
December 31, 2010
 
 
   
Unpaid
   
 
   
Average
   
Interest
 
(dollars in thousands)
 
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
                               
With no related allowance recorded:
                             
Commercial:
                             
Commercial
  $ 5,026     $ 5,418           $ 5,042     $ 137  
Real estate:
                                       
Commercial
    9,066       12,149             14,013       424  
Multi-family
    1,382       2,382             1,383       70  
Construction
    4,695       7,064             6,545       43  
Residential
    1,663       1,835             1,593       50  
Other:
                                       
Agriculture
    129       322             206       4  
Consumer
    207       207             317       16  
    $ 22,168     $ 29,377     $     $ 29,099     $ 744  
                                         
With an allowance recorded:
                                       
Commercial:
                                       
Commercial
  $ 3,231     $ 3,231     $ 274     $ 3,452     $ 196  
Real estate:
                                       
Commercial
    12,120       12,584       1,160       9,369       456  
Multi-family
    1,214       1,214       22       1,321       44  
Residential
    1,013       1,013       152       861       51  
Other:
                                       
Consumer
    491       491       11       492       24  
    $ 18,069     $ 18,533     $ 1,619     $ 15,495     $ 771  
                                         
Total:
                                       
Commercial:
                                       
Commercial
  $ 8,257     $ 8,649     $ 274     $ 8,494     $ 333  
Real estate:
                                       
Commercial
    21,186       24,733       1,160       23,382       880  
Multi-family
    2,596       3,596       22       2,704       114  
Construction
    4,695       7,064             6,545       43  
Residential
    2,676       2,848       152       2,454       101  
Other:
                                       
Agriculture
    129       322             206       4  
Consumer
    698       698       11       809       40  
    $ 40,237     $ 47,910     $ 1,619     $ 44,594     $ 1,515  
 
8. ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company’s loan and lease portfolio allocated by management’s internal risk ratings as of March 31, 2011 and December 31, 2010 are summarized below:

March 31, 2011
 
Credit Risk Profile by Internally Assigned Grade
 
(dollars in thousands)
           
 
 
 
   
Real Estate
 
   
Commercial
   
Commercial
   
Multi-Family
   
Construction
   
Residential
 
Grade:
                             
Pass
  $ 34,636     $ 170,736     $ 6,018     $ 6,771     $ 17,761  
Watch
    3,146       11,839       1,206       1,908       55  
Special mention
    4,157       11,914             838       3,869  
Substandard
    9,403       16,679       1,382       4,898       3,181  
Doubtful
    479                   129        
Total
  $ 51,821     $ 211,168     $ 8,606     $ 14,544     $ 24,866  
 
 
15

 
 
   
Other Credit Exposure
 
   
Credit Risk Profile by Internally Assigned Grade
 
   
Leases
   
Agriculture
   
Consumer
 
Grade:
                 
Pass
  $ 2,359     $ 6,247     $ 11,563  
Watch
          985       606  
Special mention
                270  
Substandard
    25       129       224  
Doubtful
                 
Total
  $ 2,384     $ 7,361     $ 12,663  
 
December 31, 2010
 
Credit Risk Profile by Internally Assigned Grade
 
(dollars in thousands)
           
   
 
    Real Estate  
   
Commercial
   
Commercial
   
Multi-Family
   
Construction
   
Residential
 
Grade:
                             
Pass
  $ 39,335     $ 175,319     $ 4,371     $ 7,884     $ 21,928  
Watch
    3,515       11,021       1,214       1,632        
Special mention
    4,228       11,713             1,178       953  
Substandard
    11,012       18,023       1,383       5,277       3,218  
Doubtful
    171                          
Total
  $ 58,261     $ 216,076     $ 6,968     $ 15,971     $ 26,099  
 
   
Other Credit Exposure
 
   
Credit Risk Profile by Internally Assigned Grade
 
   
Leases
   
Agriculture
   
Consumer
 
                   
Grade:
                 
Pass
  $ 2,740     $ 6,484     $ 12,277  
Watch
          589       514  
Special mention
                178  
Substandard
    26       129       217  
Doubtful
                16  
Total
  $ 2,766     $ 7,202     $ 13,202  

 
16

 

The allocation of the Company’s allowance for loan and lease losses as of March 31, 2011 and December 31, 2010, by portfolio segment and by impairment methodology are summarized below:
 
March 31, 2011
                                                           
(dollars in thousands)
 
 
   
Real Estate
     Other              
   
Com-
   
Com-
   
Multi-
   
Construc-
   
 
         
Agri-
                   
   
mercial
   
mercial
   
Family
   
tion
   
Residential
   
Leases
   
culture
   
Consumer
   
Unallocated
   
Total
 
Allowance for Loan and Lease Losses
                                                           
                                                             
Beginning balance allocated to portfolio segments
  $ 2,574     $ 2,715     $ 115     $