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EXCEL - IDEA: XBRL DOCUMENT - AMERICAN RIVER BANKSHARESFinancial_Report.xls
EX-31.1 - EXHIBIT 31.1 - AMERICAN RIVER BANKSHARESex31_1.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN RIVER BANKSHARESex31_2.htm
EX-32.1 - EXHIBIT 32.1 - AMERICAN RIVER BANKSHARESex32_1.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended             June 30, 2014

or

 

oTRANSITION 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

2
 

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

3
 

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

4
 

 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

5
 

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

6
 

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

7
 

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 

8
 

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.

9
 

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).

10
 

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.

11
 

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.

12
 
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.

13
 

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.

14
 

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 

15
 

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.

16
 

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.

17
 

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.

18
 

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 

19
 

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 
20
 
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 

21
 

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 
22
 

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.

23
 

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 
24
 
   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.

25
 

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)
26
 
 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         
Corporate stock   119    70    49         
Total recurring  $272,791   $70   $272,721   $   $