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

June 30, 2014

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

(Registrant’s 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 x 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 issuer’s classes of common stock, as of the latest practicable date:

 

No par value Common Stock –  8,089,615 shares outstanding at August 4, 2014.

AMERICAN RIVER BANKSHARES

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2014

Part I.			Page
Item 1.	Financial Statements		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		48
Item 4.	Controls and Procedures		49
Part II.
Item 1.	Legal Proceedings		49
Item 1A.	Risk Factors		49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		49
Item 3.	Defaults Upon Senior Securities		50
Item 4.	Mine Safety Disclosures		50
Item 5.	Other Information		50
Item 6.	Exhibits		50
Signatures			55
Exhibit Index			56
31.1	Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		57
31.2	Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		58
32.1	Certification of American River Bankshares by its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		59
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Label
101.PRE	XBRL Taxonomy Extension Presentation

PART I-FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

AMERICAN RIVER BANKSHARES

CONSOLIDATED BALANCE SHEET

(Unaudited)

 

(dollars in thousands)		June 30, 2014				December 31, 2013
ASSETS
Cash and due from banks		$	19,107			$	17,948
Interest-bearing deposits in banks			1,000				1,000
Investment securities:
Available-for-sale, at fair value			279,986				272,791
Held-to-maturity, at amortized cost			1,015				1,185
Loans and leases, less allowance for loan and lease losses of $5,462 at June 30, 2014 and $5,346 at December 31, 2013			246,521				251,747
Premises and equipment, net			1,595				1,500
Federal Home Loan Bank stock			3,686				3,248
Goodwill and other intangible assets			16,321				16,321
Other real estate owned			6,864				6,621
Bank owned life insurance			12,815				12,686
Accrued interest receivable and other assets			5,824				7,706
		$	594,734			$	592,753
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing		$	149,169			$	145,516
Interest-bearing			341,689				338,174
Total deposits			490,858				483,690
Short-term borrowings			1,500				8,000
Long-term borrowings			9,500				8,000
Accrued interest payable and other liabilities			5,312				6,043
Total liabilities			507,170				505,733
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 – 8,089,615 shares at June 30, 2014 and 8,489,247 shares at December 31, 2013			57,031				61,108
Retained earnings			26,830				24,789
Accumulated other comprehensive income, net of taxes			3,703				1,123
Total shareholders’ equity			87,564				87,020
		$	594,734			$	592,753

 

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 June 30,		Three months								Six months
		2014				2013				2014				2013
Interest income:
Interest and fees on loans		$	3,520			$	3,516			$	6,975			$	7,158
Interest on deposits in banks			1				—				2				1
Interest and dividends on investment securities:
Taxable			1,340				805				2,678				1,593
Exempt from Federal income taxes			200				221				402				441
Dividends			6				9				6				9
Total interest income			5,067				4,551				10,063				9,202
Interest expense:
Interest on deposits			254				301				516				632
Interest on borrowings			37				74				79				150
Total interest expense			291				375				595				782
Net interest income			4,776				4,176				9,468				8,420
Provision for loan and lease losses			—				100				—				200
Net interest income after provision for loan and lease losses			4,776				4,076				9,468				8,220
Noninterest income:
Service charges on deposit accounts			149				147				305				298
Gain on sale of securities			17				3				17				3
Rental income from other real estate owned			105				71				212				163
Other noninterest income			237				227				476				609
Total noninterest income			508				448				1,010				1,073
Noninterest expense:
Salaries and employee benefits			2,117				2,175				4,237				4,393
Occupancy			296				301				603				602
Furniture and equipment			188				191				366				385
Federal Deposit Insurance Corporation assessments			91				(16	)			194				110
Expenses related to other real estate owned			123				195				122				500
Other expense			884				766				1,830				1,624
Total noninterest expense			3,699				3,612				7,352				7,614
Income before provision for income taxes			1,585				912				3,126				1,679
Provision for income taxes			550				260				1,085				405
Net income		$	1,035			$	652			$	2,041			$	1,274
Basic earnings per share		$	0.13			$	0.07			$	0.25			$	0.14
Diluted earnings per share		$	0.13			$	0.07			$	0.25			$	0.14
Cash dividends per share		$	0.00			$	0.00			$	0.00			$	0.00

 

See notes to Unaudited Consolidated Financial Statements

 AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

(dollars in thousands, except per share data)
For the periods ended June 30,		Three months								Six months
		2014				2013				2014				2013
Net income		$	1,035			$	652			$	2,041			$	1,274
Other comprehensive income (loss):
Unrealized holding gains (losses) on investment securities arising during the period			2,479				(4,517	)			4,316				(4,949	)
Deferred tax (expense) benefit			(992	)			1,807				(1,726	)			1,980
Unrealized holding gains (losses) on investment securities arising during the period, net of tax			1,487				(2,710	)			2,590				(2,969	)
Reclassification adjustment for realized gains included in net income			(17	)			(3	)			(17	)			(3	)
Tax effect			7				1				7				1
Realized gains, net of tax			(10	)			(2	)			(10	)			(2	)
Total other comprehensive income (loss)			1,477				(2,712	)			2,580				(2,971	)
Comprehensive income (loss)		$	2,512			$	(2,060	)		$	4,621			$	(1,697	)

 

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

														Accumulated
(dollars in thousands)		Common Stock												Other				Total
										Retained				Comprehensive				Shareholders’
		Shares				Amount				Earnings				Income				Equity
Balance, January 1, 2013			9,327,203				67,977				21,732				4,285				93,994
Net income											3,057								3,057
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities															(3,162	)			(3,162	)
Net restricted stock awarded and related compensation expense			11,448				111												111
Stock option compensation expense							20												20
Retirement of common stock			(849,404	)			(7,000	)											(7,000	)
Balance, December 31, 2013			8,489,247				61,108				24,789				1,123				87,020
Net income											2,041								2,041
Other comprehensive loss, net of tax:
Net change in unrealized gains on available-for-sale investment securities															2,580				2,580
Net restricted stock award activity and related compensation expense			24,830				63												63
Stock option compensation expense							8												8
Retirement of common stock			(424,462	)			(4,148	)											(4,148	)
Balance, June 30, 2014			8,089,615			$	57,031			$	26,830			$	3,703			$	87,564

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

 

(dollars in thousands)
For the six months ended June 30,
		2014				2013
Cash flows from operating activities:
Net income		$	2,041			$	1,274
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses			—				200
(Decrease) increase in deferred loan origination fees, net			(65	)			16
Depreciation and amortization			226				266
Gain on sale and call of investment securities			(17	)			(3	)
Amortization of investment security premiums and discounts, net			2,451				2,915
Gain on life insurance death benefit			—				(118	)
Increase in cash surrender values of life insurance policies			(129	)			(5	)
Stock based compensation expense			71				63
(Gain) loss on sale and write-down of other real estate owned			(106	)			208
Decrease in accrued interest receivable and other assets			162				2,518
Decrease in accrued interest payable and other liabilities			(731	)			(705	)
Net cash provided by operating activities			3,903				6,629
Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment securities			2,632				5,822
Proceeds from matured available-for-sale investment securities			105				185
Proceeds from called available-for-sale investment securities			270				—
Purchases of available-for-sale investment securities			(27,600	)			(68,408	)
Proceeds from principal repayments for available-for-sale investment securities			19,262				31,731
Proceeds from principal repayments for held-to-maturity investment securities			171				621
Net increase in interest-bearing deposits in banks			—				(250	)
Net decrease in loans			5,103				3,692
Proceeds from sale of other real estate			106				4,529
Capitalized additions to other real estate			(54	)			(187	)
Death benefit from life insurance policy			—				419
Net (increase) decrease in FHLB stock			(438	)			6
Purchases of equipment			(321	)			(51	)
Net cash used in investing activities			(764	)			(21,891	)

 

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)

 

(dollars in thousands)
For the six months ended June 30,
		2014				2013
Cash flows from financing activities:
Net increase (decrease) in demand, interest-bearing and savings deposits		$	10,604			$	(10,067	)
Net decrease in time deposits			(3,436	)			(532	)
Net(decrease) increase in short-term borrowings			(6,500	)			6,000
Net increase (decrease) in long-term borrowings			1,500				(8,000	)
Cash paid to repurchase common stock			(4,148	)			(3,906	)
Net cash used in financing activities		$	(1,980	)		$	(16,505	)
Increase (decrease) in cash and cash equivalents			1,159				(31,767	)
Cash and cash equivalents at beginning of year			17,948				55,461
Cash and cash equivalents at end of period		$	19,107			$	23,694

  

See Notes to Unaudited Consolidated Financial Statements 

AMERICAN RIVER BANKSHARES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

 

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 June 30, 2014 and December 31, 2013, the results of its operations and statement of comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013, its cash flows for the six-month periods ended June 30, 2014 and 2013 and its statement of changes in shareholders’ equity for the year ended December 31, 2013 and the six months ended June 30, 2014 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 2013 annual report on Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 2014 may not necessarily be indicative of the operating results for the full year.

 

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

 

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

 

2. STOCK-BASED COMPENSATION 

Equity Plans

On March 17, 2010, the Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan was approved by the Company’s shareholders on May 20, 2010. In 2000, the Board of Directors adopted and the Company’s shareholders approved a stock option plan (the “2000 Plan”), under which 221,666 options remain outstanding at June 30, 2014. At June 30, 2014, there were 50,034 stock options and 36,110 restricted shares outstanding and the total number of authorized shares that remain available for issuance under the 2010 Plan was 1,419,602. 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 awarded 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 awarded. The option awards under the Plans expire on dates determined by the Board of Directors, but not later than ten years from the date of award. The vesting period is generally five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding option awards under the Plans are exercisable until their expiration, however, no new options will be awarded under the 2000 Plan. New shares are issued upon exercise of an option.

The award date fair value of awards is determined by the market price of the Company’s common stock on the date of award and is recognized ratably as compensation expense or director expense over the vesting periods. The shares of common stock awarded pursuant to such agreements vest in increments over one to five years from the date of award. The shares awarded to employees and directors under the restricted stock agreements vest on the applicable vesting dates only to the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated.

Equity Compensation

For the three-month periods ended June 30, 2014 and 2013, the compensation cost recognized for equity compensation was $38,000 and $36,000, respectively. The recognized tax benefit for equity compensation expense was $13,000 and $14,000, respectively, for the three-month periods ended June 30, 2014 and 2013. For the six-month periods ended June 30, 2014 and 2013, the compensation cost recognized for equity compensation was $71,000 and $69,000, respectively. The recognized tax benefit for equity compensation expense was $25,000 and $22,000, respectively, for the six-month periods ended June 30, 2014 and 2013.

At June 30, 2014, the total compensation cost related to nonvested stock option awards not yet recorded was $102,000. This amount will be recognized over the next 5.0 years and the weighted average period of recognizing these costs is expected to be 2.7 years. At June 30, 2014, the total compensation cost related to restricted stock awards not yet recorded was $253,000. This amount will be recognized over the next 5.0 years and the weighted average period of recognizing these costs is expected to be 1.5 years.

Equity Plans Activity

Stock Options

There were 32,705 stock options awarded during the three-month and six-month periods ended June 30, 2014 at an average exercise price of $8.85. There were no stock options awarded during the three-month and six-month periods ended June 30, 2013. The weighted average award date fair value of options awarded for the three-month and six-month periods ended June 30, 2014 was $2.44. A summary of option activity under the Plans as of June 30, 2014 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, 2014			277,923			$	17.21				3.1 years			$	82
Awarded			32,705				8.85				—				—
Exercised			—				—				—				—
Cancelled			38,928				16.79				—				—
Outstanding at June 30, 2014			271,700			$	16.27				3.9 years			$	39
Vested at June 30, 2014			228,582			$	17.75				2.9 years			$	22
Non-vested at June 30, 2014			43,118			$	8.42				9.4 years			$	17

 

Restricted Stock

 

There were 24,830 shares of restricted stock awarded during the three-month and six-month periods ended June 30, 2014. There were 11,448 shares of restricted stock awarded during the three-month and six-month periods ended June 30, 2013. Of the restricted shares awarded in 2014, 13,560 restricted common shares will vest one year from the date of the award and 11,270 vest over five years at 20% per year from the date of the award. The 11,448 restricted shares awarded in 2013 vested one year from the date of the award. Award date fair value is determined by the market price of the Company’s common stock on the date of award ($8.85 on May 22, 2014 and $7.86 on May 16, 2013).

There were 12,710 restricted awards that were fully vested during the three-month and six-month periods ended June 30, 2014 and there were 11,158 restricted awards that were fully vested during the three-month and six-month periods ended June 30, 2013. There were zero awards that had been forfeited during the three-month and six-month periods ended June 30, 2014 and June 30, 2013. The intrinsic value of nonvested restricted stock at June 30, 2014 was $316,000.

 

Restricted Stock		Shares				Weighted Average Award Date Fair Value
Nonvested at January 1, 2014			23,990			$	7.22
Awarded			24,830				8.85
Less:  Vested			12,710				7.78
Less:  Cancelled			—				—
Nonvested at June 30, 2014			36,110			$	8.14

 

Other Equity Awards

 

There were no stock appreciation rights; restricted performance stock; unrestricted Company stock; or performance units awarded during the three-month or six-month month periods ended June 30, 2014 or 2013.

 

The intrinsic value used for stock options and restricted stock was derived from the market price of the Company’s common stock of $8.74 as of June 30, 2014.

 

3. COMMITMENTS AND CONTINGENCIES

 

In the normal course of business there are outstanding various commitments to extend credit which are not reflected in the financial statements, including loan commitments of approximately $32,616,000 and standby letters of credit of approximately $6,285,000 at June 30, 2014 and loan commitments of approximately $31,681,000 and standby letters of credit of approximately $6,363,000 at December 31, 2013. 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 2014 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 June 30, 2014 or December 31, 2013.

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 (8,082,638 and 8,201,383 shares for the three-month and six-month periods ended June 30, 2014, and 8,893,367 and 9,050,669 for the three-month and six-month periods ended June 30, 2013). 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 9,276 and 10,515, respectively, dilutive shares for the three-month and six-month periods ended June 30, 2014 and 4,758 and 3,983, respectively, dilutive shares for the three-month and six-month periods ended June 30, 2013. For the three-month periods ended June 30, 2014 and 2013, there were 217,247 and 278,850 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. For the six-month periods ended June 30, 2014 and 2013, there were 211,024 and 278,850 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 investment securities at June 30, 2014 and December 31, 2013 consisted of the following (dollars in thousands):

 

Available-for-Sale

		June 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Debt securities:
Mortgage-backed securities		$	246,459			$	5,218			$	(645	)		$	251,032
Obligations of states and political subdivisions			25,797				1,426				(36	)			27,187
Corporate bonds			1,505				125				—				1,630
Equity securities:
Corporate stock			54				83				—				137
		$	273,815			$	6,852			$	(681	)		$	279,986

 

		December 31, 2013
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Debt securities:
Mortgage-backed securities		$	243,058			$	3,429			$	(2,327	)		$	244,160
Obligations of states and political subdivisions			26,302				775				(174	)			26,903
Corporate bonds			1,505				104				—				1,609
Equity securities:
Corporate stock			54				65				—				119
		$	270,919			$	4,373			$	(2,501	)		$	272,791

  

Net unrealized gains on available-for-sale investment securities totaling $6,171,000 were recorded, net of $2,468,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at June 30, 2014. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended June 30, 2014 totaled $2,615,000 and $17,000, respectively, and for the six-month period ended June 30, 2014 totaled $2,885,000 and $17,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and six-month periods ended June 30, 2014.

Net unrealized gains on available-for-sale investment securities totaling $1,872,000 were recorded, net of $749,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2013. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended June 30, 2013 totaled zero and zero, respectively, and for the six-month period ended June 30, 2013 totaled $5,822,000 and $3,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and six-month periods ended June 30, 2013.

Held-to-Maturity

June 30, 2014

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

Mortgage-backed securities

$

1,015

$

72

$

—

$

1,087

 

December 31, 2013

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

Mortgage-backed securities

$

1,185

$

78

$

—

$

1,263

 

There were no sales or transfers of held-to-maturity investment securities for the periods ended June 30, 2014 and June 30, 2013. Investment securities with unrealized losses at June 30, 2014 and December 31, 2013 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):

		2014
		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		$	31,902			$	(228	)		$	31,053			$	(417	)		$	62,955			$	(645	)
Obligations of states and political subdivisions			—				—				1,409				(36	)			1,409				(36	)
		$	31,902			$	(228	)		$	32,462			$	(453	)		$	64,364			$	(681	)

 

		2013
		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		$	10,047			$	(147	)		$	98,723			$	(2,180	)		$	108,770			$	(2,327	)
Obligations of states and political subdivisions			4,223				(174	)			—				—				4,223				(174	)
		$	14,270			$	(321	)		$	98,723			$	(2,180	)		$	112,993			$	(2,501	)

There were no held-to-maturity investment securities with unrealized losses as of June 30, 2014 or December 31, 2013.

At June 30, 2014, the Company held 221 securities of which 16 were in a loss position for less than twelve months and 15 were in a loss position for twelve months or more.  Of the 31 securities in a loss position, 29 are mortgage-backed securities and two are obligations of states and political subdivisions.  At December 31, 2013, the Company held 216 securities of which 49 were in a loss position for less than twelve months and five were in a loss position for twelve months or more. Of these securities in a loss position for less than twelve months, 44 are mortgage-backed securities and five are obligations of states and political subdivisions. All securities in a loss position for greater than twelve months were mortgage-backed securities.

The unrealized loss on the Company’s investments in mortgage-backed securities, obligations of states and political subdivisions, and corporate bonds, 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 June 30, 2014 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		$	240			$	241
After one year through five years			3,532				3,710
After five years through ten years			12,134				12,891
After ten years			11,396				11,975
			27,302				28,817
Investment securities not due at a single maturity date:
Mortgage-backed securities			246,459				251,032			$	1,015			$	1,087
Corporate stock			54				137				—				—
		$	273,815			$	279,986			$	1,015			$	1,087

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 June 30, 2014 and December 31, 2013, the recorded investment in nonperforming loans and leases was approximately $1,506,000 and $1,979,000, 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 June 30, 2014, the recorded investment in loans and leases that were considered to be impaired totaled $26,157,000, which includes $1,411,000 in nonaccrual loans and leases and $24,746,000 in performing loans and leases. Of the total impaired loans of $26,157,000, loans totaling $11,542,000 were deemed to require no specific reserve and loans totaling $14,615,000 were deemed to require a related valuation allowance of $1,541,000. At December 31, 2013, the recorded investment in loans and leases that were considered to be impaired totaled $27,034,000 and had a related valuation allowance of $1,598,000. If interest had been accruing on the nonperforming loans, such income would have approximated $15,000 and $109,000 for the three months ended June 30, 2014 and 2013, respectively, and approximated $54,000 and $168,000 for the six months ended June 30, 2014 and 2013, respectively.

At June 30, 2014 and December 31, 2013, the recorded investment in other real estate owned (“OREO”) was $6,864,000 and $6,621,000, respectively. For the three months ended March 31, 2014, the Company sold two parcels of land in El Dorado County that abutted an existing OREO property for a $106,000 net gain without any adjustment required to the value of the existing OREO property. The Company continues to own the OREO office building and land upon which the building is located but no longer owns the adjoining land. For the three months ended June 30, 2014, the Company added a single property with an OREO value of $243,000.

 

The Company periodically obtains property valuations to determine whether the recorded book value is considered fair value. During the second quarter of 2014, this valuation process did not result in the Company adjusting any book values. 

 

The June 30, 2014 OREO balance of $6,864,000 consists of ten properties including four commercial real estate properties in the total amount of $3,988,000, four commercial land properties in the total amount of $1,729,000 and two residential land properties in the total amount of $1,147,000.

Nonperforming loans and leases and OREO at June 30, 2014 and December 31, 2013 are summarized as follows:

(in thousands)		June 30, 2014				December 31, 2013
Nonaccrual loans and leases that are current to terms (less than 30 days past due)		$	651			$	379
Nonaccrual loans and leases that are past due			855				1,520
Loans and leases past due 90 days and accruing interest			—				80
Other assets			878				878
Other real estate owned			6,864				6,621
Total nonperforming assets		$	9,248			$	9,478
Nonperforming loans and leases to total loans and leases			0.60	%			0.77	%
Total nonperforming assets to total assets			1.55	%			1.60	%

Impaired loans and leases as of and for the periods ended June 30, 2014 and December 31, 2013 are summarized as follows:

(in thousands)		As of June 30, 2014												As of December 31, 2013
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Commercial		$	493			$	493			$	—			$	577			$	577			$	—
Real estate-commercial			10,771				10,969				—				10,921				11,119				—
Real estate-construction			241				241				—				248				248				—
Consumer			37				37				—				37				37				—
Subtotal		$	11,542			$	11,740			$	—			$	11,783			$	11,981			$	—
With an allowance recorded:
Commercial		$	943			$	943			$	260			$	1,159			$	1,159			$	392
Real estate-commercial			8,635				8,635				761				8,998				8,998				792
Real estate-multi-family			1,634				1,727				177				1,650				1,743				108
Real estate-residential			2,892				2,892				305				3,316				3,316				276
Agriculture			386				386				16				—				—				—
Consumer			125				125				22				128				128				30
Subtotal		$	14,615			$	14,708			$	1,541			$	15,251			$	15,344			$	1,598
Total:
Commercial		$	1,436			$	1,436			$	260			$	1,736			$	1,736			$	392
Real estate-commercial			19,406				19,604				761				19,919				20,117				792
Real estate-multi-family			1,634				1,727				177				1,650				1,743				108
Real estate-construction			241				241				—				248				248				—
Real estate-residential			2,892				2,892				305				3,316				3,316				276
Agriculture			386				386				16				—				—				—
Consumer			162				162				22				165				165				30
		$	26,157			$	26,448			$	1,541			$	27,034			$	27,325			$	1,598

The following table presents the average balance related to impaired loans and leases for the periods indicated (in thousands):

 

		Average Recorded Investments for the three months ended								Average Recorded Investments for the six months ended
		June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
Commercial		$	1,610			$	2,388			$	1,517			$	2,339
Real estate-commercial			19,218				15,877				19,029				14,146
Real estate-multi-family			1,644				1,675				1,642				1,673
Real estate-construction			246				260				245				259
Real estate-residential			2,912				2,403				2,908				2,400
Agriculture			194				—				389				—
Consumer			164				210				164				175
Total		$	25,988			$	22,813			$	25,894			$	20,992

The following table presents the interest income recognized on impaired loans and leases for the periods indicated (in thousands):

		Interest Income Recognized for the three months ended								Interest Income Recognized for the six months ended
		June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
Commercial		$	9			$	16			$	22			$	32
Real estate-commercial			237				85				484				293
Real estate-multi-family			19				20				38				39
Real estate-construction			3				4				6				7
Real estate-residential			29				29				67				52
Agriculture			10				—				10				—
Consumer			—				1				2				2
Total		$	307			$	155			$	629			$	425

 

7. TROUBLED DEBT RESTRUCTURINGS

At June 30, 2014, there were 15 loans and leases that were considered to be troubled debt restructurings. Of these loans and leases, 11 are currently performing (less than ninety days past due) totaling $13,898,000 and four are considered nonperforming (and included in the $1,506,000 discussed in Note 6), totaling $756,000. Of the four TDRs considered nonperforming, two are current to the modified terms. At June 30, 2014 and December 31, 2013, there were no unfunded commitments on those loans considered troubled debt restructures. See also “Impaired Loans and Leases” in “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company has allocated $828,000 and $817,000 of specific reserves to loans whose terms have been modified as troubled debt restructurings as of June 30, 2014 and December 31, 2013.

 

During the six-month period ended June 30, 2014, the terms of five loans were modified as a troubled debt restructuring. The modifications of the terms of these loans were a line of credit converted to a term loan, extensions of the maturity date and/or interest rates lower than the original loan rate.

The following table presents loans by class modified as troubled debt restructurings during the three months ended June 30, 2014 (dollars in thousands): 

 

						Pre-				Post-
						Modification				Modification
						Outstanding				Outstanding
		Number				Recorded				Recorded
		of Loans				Investment				Investment
Troubled debt restructurings:
Real estate – commercial			1			$	213			$	213
Consumer			1				46				46
Total			2			$	259			$	259

 

The following table presents loans by class modified as troubled debt restructurings during the six months ended June 30, 2014 (dollars in thousands): 

 

						Pre-				Post-
						Modification				Modification
						Outstanding				Outstanding
		Number				Recorded				Recorded
		of Loans				Investment				Investment
Troubled debt restructurings:
Real estate –  commercial			5			$	5,109			$	5,109
Consumer			1				46				46
Total			6			$	5,155			$	5,155

 

The troubled debt restructurings described above increased the allowance for loan and lease losses by $151,000 and resulted in no charge-offs during the six months ended June 30, 2014.  

 

The following table presents loans by class modified as troubled debt restructurings during the three months ended June 30, 2013 (dollars in thousands):

 

						Pre-				Post-
						Modification				Modification
						Outstanding				Outstanding
		Number				Recorded				Recorded
		of Loans				Investment				Investment
Troubled debt restructurings:
Real estate – commercial			3			$	762			$	722
Total			3			$	762			$	722

 

The following table presents loans by class modified as troubled debt restructurings during the six months ended June 30, 2013 (dollars in thousands):

 

						Pre-				Post-
						Modification				Modification
						Outstanding				Outstanding
		Number				Recorded				Recorded
		of Loans				Investment				Investment
Troubled debt restructurings:
Real estate – commercial			4			$	1,200			$	1,160
Total			4			$	1,200			$	1,160

 

The troubled debt restructurings described above increased the allowance for loan and lease losses by $100,000 and resulted in charge-offs of $40,000 during the six months ended June 30, 2013.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period indicated (dollars in thousands):

 

Six months ended June 30, 2013		Number				Recorded
		of Loans				Investment
Troubled debt restructurings that subsequently defaulted:
Commercial			1			$	513
Total			1			$	513

There were no payment defaults on troubled debt restructurings within 12 months following the modification for the three-month and six-month periods ended June 30, 2014, as well as for the three-month period ending June 30, 2013.

8. ALLOWANCE FOR LOAN AND LEASE LOSSES

 

The Company’s loan and lease portfolio allocated by management’s internal risk ratings as of June 30, 2014 and December 31, 2013 are summarized below:

 

June 30, 2014		Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)						Real Estate
		Commercial				Commercial				Multi-family				Construction				Residential
Grade:
Pass		$	19,178			$	150,193			$	8,169			$	2,093			$	9,364
Watch			1,339				12,025				1,143				3,260				3,788
Special mention			362				19,473				411				574				1,329
Substandard			3,899				3,683				501				—				2,114
Doubtful			—				—				—				—				—
Total		$	24,778			$	185,374			$	10,224			$	5,927			$	16,595
						Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
						Leases				Agriculture				Consumer				Total
Grade:
Pass						$	1,262			$	2,576			$	4,835			$	197,670
Watch							—				—				44				21,599
Special mention											386				83				22,618
Substandard							—				—				147				10,344
Doubtful							—				—				—				—
Total						$	1,262			$	2,962			$	5,109			$	252,231
December 31, 2013		Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)						Real Estate
		Commercial				Commercial				Multi-family				Construction				Residential
Grade:
Pass		$	20,728			$	147,995			$	9,509			$	5,778			$	11,706
Watch			1,556				12,567				1,156				3,270				2,530
Special mention			491				19,253				420				585				1,281
Substandard			1,770				4,389				—				—				2,186
Doubtful			—				—				—				—				—
Total		$	24,545			$	184,204			$	11,085			$	9,633			$	17,703
						Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
						Leases				Agriculture				Consumer				Total
Grade:
Pass						$	1,344			$	2,728			$	5,486			$	205,274
Watch							—				—				21				21,100
Special mention							—				392				111				22,533
Substandard							—				—				154				8,499
Doubtful							—				—				—				—
Total						$	1,344			$	3,120			$	5,772			$	257,406

The allocation of the Company’s allowance for loan and lease losses and by portfolio segment and by impairment methodology are summarized below:

June 30, 2014
(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, 2014		$	885			$	2,401			$	242			$	542			$	825			$	4			$	80			$	161			$	206			$	5,346
Provision for loan losses			365				(291	)			20				(103	)			(122	)			(5	)			(11	)			44				103				—
Loans charged off			—				—				—				—				—				—				—				(74	)			—				(74	)
Recoveries			141				39				—				2				5				3				—				—				—				190
Ending balance, June 30, 2014		$	1,391			$	2,149			$	262			$	441			$	708			$	2			$	69			$	131			$	309			$	5,462
Ending balance:
Individually evaluated for impairment		$	260			$	761			$	177			$	—			$	305			$	—			$	16			$	22			$	—			$	1,541
Ending balance:
Collectively evaluated for impairment		$	1,131			$	1,388			$	85			$	441			$	403			$	2			$	53			$	109			$	309			$	3,921
Loans
Ending balance		$	24,778			$	185,374			$	10,224			$	5,927			$	16,595			$	1,262			$	2,962			$	5,109			$	—			$	252,231
Ending balance:
Individually evaluated for impairment		$	1,436			$	19,406			$	1,634			$	241			$	2,892			$	—			$	386			$	162			$	—			$	26,157
Ending balance:
Collectively evaluated for impairment		$	23,342			$	165,968			$	8,590			$	5,686			$	13,703			$	1,262			$	2,576			$	4,947			$	—			$	226,074
Allowance for Loan and Lease Losses
Beginning balance, March 31, 2014		$	781			$	2,476			$	241			$	485			$	883			$	3			$	73			$	156			$	275			$	5,373
Provision for loan losses			489				(365	)			21				(45	)			(177	)			(1	)			(4	)			48				34				—
Loans charged off			—				—				—				—				—				—				—				(73	)			—				(73	)
Recoveries			121				38				—				1				2				—				—				—				—				162
Ending balance, June 30, 2014		$	1,391			$	2,149			$	262			$	441			$	708			$	2			$	69			$	131			$	309			$	5,462

December 31, 2013
(dollars in thousands)						Real Estate																Other
		Commercial				Commercial				Multi-Family				Construction				Residential				Leases				Agriculture				Consumer				Unallocated				Total
Ending balance:
Individually evaluated for impairment		$	392			$	792			$	108			$	—			$	276			$	—			$	—			$	30			$	—			$	1,598
Ending balance:
Collectively evaluated for impairment		$	493			$	1,609			$	134			$	542			$	549			$	4			$	80			$	131			$	206			$	3,748
Loans
Ending balance		$	24,545			$	184,204			$	11,085,			$	9,633			$	17,703			$	1,344			$	3,120			$	5,772			$	—			$	257,406
Ending balance:
Individually evaluated for impairment		$	1,736			$	19,919			$	1,650,			$	248			$	3,316			$	—			$	—			$	165			$	—			$	27,034
Ending balance:
Collectively evaluated for impairment		$	22,809			$	164,285			$	9,435,			$	9,385			$	14,387			$	1,344			$	3,120			$	5,607			$	—			$	230,372
June 30, 2013
(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, 2013		$	1,351			$	2,526			$	238			$	594			$	477			$	3			$	87			$	262			$	243			$	5,781
Provision for loan losses			(158	)			402				9				(172	)			115				—				4				(87	)			87				200
Loans charged off			(11	)			(355	)			—				—				(38	)			—				—				(5	)			—				(409	)
Recoveries			97				11				—				—				—				—				—				—				—				108
Ending balance, June 30, 2013		$	1,279			$	2,584			$	247			$	422			$	554			$	3			$	91			$	170			$	330			$	5,680
Allowance for Loan and Lease Losses
Beginning balance, March 31, 2013		$	1,331			$	2,667			$	256			$	430			$	501			$	3			$	91			$	249			$	375			$	5,903
Provision for loan losses			(74	)			262				(9	)			(8	)			53				—				—				(79	)			(45	)			100
Loans charged off			(1	)			(355	)			—				—				—				—				—				—				—				(356	)
Recoveries			23				10				—				—				—				—				—				—				—				33
Ending balance, June 30, 2013		$	1,279			$	2,584			$	247			$	422			$	554			$	3			$	91			$	170			$	330			$	5,680

The Company’s aging analysis of the loan and lease portfolio at June 30, 2014 and December 31, 2013 are summarized below:

 

June 30, 2014
(dollars in thousands)										Past Due																Greater Than
		30-59 Days				60-89 Days				Greater Than				Total Past				Past Due								90 Days and
		Past Due				Past Due				90 Days				Due				Current				Total Loans				Accruing				Nonaccrual
Commercial:
Commercial		$	—			$	—			$	666			$	666			$	24,112			$	24,778				—			$	701
Real estate:
Commercial			845				—				145				990				184,384				185,374				—				654
Multi-family			—				—				—				—				10,224				10,224				—				—
Construction			—				—				—				—				5,927				5,927				—				—
Residential			—				—				—				—				16,595				16,595				—				—
Other:
Leases			—				—				—				—				1,262				1,262				—				—
Agriculture			—				—				—				—				2,962				2,962				—				—
Consumer			257				—				—				257				4,852				5,109				—				151
Total		$	1,102			$	—			$	811			$	1,913			$	250,318			$	252,231			$	—			$	1,506
December 31, 2013
(dollars in thousands)										Past Due																Greater Than
		30-59 Days				60-89 Days				Greater Than				Total Past				Past Due								90 Days and
		Past Due				Past Due				90 Days				Due				Current				Total Loans				Accruing				Nonaccrual
Commercial:
Commercial		$	—			$	—			$	798			$	798			$	23,747			$	24,545				—			$	766
Real estate:
Commercial			1,598				336				713				2,647				181,557				184,204				80				977
Multi-family			—				—				—				—				11,085				11,085				—				—
Construction			—				—				—				—				9,633				9,633				—				—
Residential			—				—				—				—				17,703				17,703				—				—
Other:
Leases			—				—				—				—				1,344				1,344				—				—
Agriculture			—				—				—				—				3,120				3,120				—				—
Consumer			25				1				90				116				5,656				5,772				—				156
Total		$	1,623			$	337			$	1,601			$	3,561			$	253,845			$	257,406			$	80			$	1,899

9. BORROWING ARRANGEMENTS

 

At June 30, 2014, 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 June 30, 2014 or December 31, 2013.

 

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 $11,000,000 were outstanding from the FHLB at June 30, 2014, bearing interest rates ranging from 0.24% to 1.91% and maturing between March 16, 2015 and July 12, 2019. Advances totaling $16,000,000 were outstanding from the FHLB at December 31, 2013, bearing interest rates ranging from 1.19% to 2.73% and maturing between January 13, 2014 and July 12, 2019. Remaining amounts available under the borrowing arrangement with the FHLB at June 30, 2014 and December 31, 2013 totaled $69,941,000 and $56,230,000, 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 June 30, 2014 and December 31, 2013 were $19,842,000 and $21,358,000, respectively. There were no advances outstanding under this borrowing arrangement as of June 30, 2014 and December 31, 2013.

 

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 tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above, 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 six-month periods ended June 30, 2014 and 2013.

The combined federal and state effective tax rate for the quarter ended June 30, 2014 was 34.7%, an increase from 28.5% for the second quarter of 2013. For the six months ended June 30, 2014, the combined federal and state effective tax rate was 34.7% compared to 24.1% for the six months ended June 30, 2013. The higher combined federal and state effective tax rate in 2014 for the three-month and six-month periods resulted from higher pretax income in 2014 and significantly less benefits of Enterprise Zone credits on our State tax return as the program has been significantly reduced effective January 1, 2014. In addition, the 2013 tax provision benefited from the tax-free income related to the bank owned life insurance benefit.

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 June 30, 2014 and December 31, 2013. They indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

 

		Carrying				Fair Value Measurements Using:
June 30, 2014		Amount				Level 1				Level 2				Level 3				Total
Financial assets:
Cash and due from banks		$	19,107			$	19,107											$	19,107
Interest-bearing deposits in banks			1,000							$	1,003								1,003
Available-for-sale securities			279,986				88				279,898								279,986
Held-to-maturity securities			1,015								1,087								1,087
FHLB stock			3,686				N/A				N/A				N/A				N/A
Net loans and leases:			246,521											$	249,738				249,738
Accrued interest receivable			1,840								1,165				675				1,840
Financial liabilities:
Deposits:
Noninterest-bearing		$	149,169			$	149,169											$	149,169
Savings			53,546				53,546												53,546
Money market			139,592				139,592												139,592
NOW accounts			59,757				59,757												59,757
Time, $100,000 or more			66,031							$	66,659								66,659
Other time			22,763								22,922								22,922
Short-term borrowings			1,500				1,500												1,500
Long-term borrowings			9,500								9,702								9,702
Accrued interest payable			55								55								55

		Carrying				Fair Value Measurements Using:
December 31, 2013		Amount				Level 1				Level 2				Level 3				Total
Financial assets:
Cash and due from banks		$	17,948			$	17,948											$	17,948
Interest-bearing deposits in banks			1,000							$	1,000								1,000
Available-for-sale securities			272,791				70				272,721								272,791
Held-to-maturity securities			1,185								1,263								1,263
FHLB stock			3,248				N/A				N/A				N/A				N/A
Net loans and leases:			251,747											$	249,931				249,931
Accrued interest receivable			1,930								1,170				760				1,930
Financial liabilities:
Deposits:
Noninterest-bearing		$	145,516			$	145,516											$	145,516
Savings			51,733				51,733												51,733
Money market			135,169				135,169												135,169
NOW accounts			59,042				59,042												59,042
Time, $100,000 or more			68,990							$	69,763								69,763
Other time			23,240								23,426								23,426
Short-term borrowings			8,000				8,000												8,000
Long-term borrowings			8,000								8,110								8,110
Accrued interest payable			125								125								125

  

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 June 30, 2014 and December 31, 2013:

Cash and due from banks: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Interest-bearing deposits in banks: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions and are classified as Level 2.

Investment securities: For investment securities, fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers and are classified as Level 2.

Loans and leases: Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality also resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FHLB stock: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

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 June 30, 2014 and December 31, 2013.

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)
June 30, 2014
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
Mortgage-backed securities		$	251,032							$	251,032
Obligations of states and political subdivisions			27,187								27,187
Corporate bonds			1,630								1,630
Corporate stock			137			$	88				49
Total recurring		$	279,986			$	88			$	279,898			$	—			$	—
Assets and liabilities measured on a nonrecurring basis:
Impaired loans:
Commercial		$	—			$	—			$	—			$	—			$	—
Real estate:
Commercial			294				—				—				294				—
Multi-family			—				—				—				—				—
Construction			—				—				—				—				—
Residential			—				—				—				—				—
Other:
Agriculture			—				—				—				—				—
Consumer			—				—				—				—				—
Other real estate owned			6,864				—				—				6,864				(106	)
Total nonrecurring		$	7,158			$	—			$	—			$	7,158			$	(106	)

Description						Fair Value Measurements Using												Total Gains
(dollars in thousands)		Fair Value				Level 1				Level 2				Level 3				(Losses)
December 31, 2013
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
Mortgage-backed securities		$	244,160			$	—			$	244,160			$	—			$	—
Corporate Debt securities			1,609				—				1,609
Obligations of states and political subdivisions			26,903				—				26,903				—