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EXCEL - IDEA: XBRL DOCUMENT - AMERICAN RIVER BANKSHARESFinancial_Report.xls
EX-32.1 - EXHIBIT 32.1 - AMERICAN RIVER BANKSHARESex32_1.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN RIVER BANKSHARESex31_1.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN RIVER BANKSHARESex31_2.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             September 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 November 5, 2014.

 
 

AMERICAN RIVER BANKSHARES

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

 

Part I.      Page
       
Item 1. Financial Statements     3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
Item 3. Quantitative and Qualitative Disclosures About Market Risk   47
Item 4. Controls and Procedures   48
       
Part II.      
       
Item 1. Legal Proceedings   48
Item 1A. Risk Factors   48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   48
Item 3. Defaults Upon Senior Securities   49
Item 4. Mine Safety Disclosures   49
Item 5. Other Information   49
Item 6. Exhibits   49
       
Signatures   54
     

Exhibit Index

  55
     
31.1

Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

56

31.2

Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

57

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  

 

58

       
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) 

September 30,
2014

   December 31,
2013
 
           
ASSETS           
           
Cash and due from banks  $41,997   $17,948 
Interest-bearing deposits in banks    1,000    1,000 
Investment securities:          
Available-for-sale, at fair value   276,912    272,791 
Held-to-maturity, at amortized cost   935    1,185 
Loans and leases, less allowance for loan and lease losses of $5,460 at September 30, 2014 and $5,346 at December 31, 2013   247,686    251,747 
Premises and equipment, net   1,531    1,500 
Federal Home Loan Bank stock   3,686    3,248 
Goodwill and other intangible assets   16,321    16,321 
Other real estate owned   5,201    6,621 
Bank owned life insurance   14,238    12,686 
Accrued interest receivable and other assets   6,099    7,706 
   $615,606   $592,753 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits:          
    Noninterest bearing   $159,863   $145,516 
    Interest-bearing   350,532    338,174 
             Total deposits   510,395    483,690 
           
Short-term borrowings   3,500    8,000 
Long-term borrowings   7,500    8,000 
Accrued interest payable and other liabilities   6,032    6,043 
           
             Total liabilities    527,427    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 September 30, 2014 and 8,489,247 shares at December 31, 2013   57,079    61,108 
Retained earnings   27,954    24,789 
Accumulated other comprehensive income, net of taxes   3,146    1,123 
           
            Total shareholders’ equity   88,179    87,020 
   $615,606   $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 September 30,  Three months   Nine months 
   2014   2013   2014   2013 
Interest income:                    
Interest and fees on loans  $3,355   $3,541   $10,330   $10,699 
Interest on deposits in banks   1    1    3    2 
Interest and dividends on investment securities:                    
Taxable   1,406    1,004    4,084    2,597 
Exempt from Federal income taxes   198    210    600    652 
Dividends   6    1    12    9 
Total interest income   4,966    4,757    15,029    13,959 
Interest expense:                    
Interest on deposits   253    286    769    918 
Interest on borrowings   34    75    113    225 
Total interest expense   287    361    882    1,143 
                     
Net interest income   4,679    4,396    14,147    12,816 
                     
Provision for loan and lease losses   (200)       (200)   200 
                     
Net interest income after provision for loan and lease losses   4,879    4,396    14,347    12,616 
                     
Noninterest income:                    
Service charges on deposit accounts   129    140    434    438 
Gain on sale of securities   83    16    100    19 
Income from other real estate owned properties   78    79    290    242 
Other noninterest income   230    227    706    836 
Total noninterest income   520    462    1,530    1,535 
                     
Noninterest expense:                    
Salaries and employee benefits   2,242    2,020    6,479    6,413 
Occupancy   295    301    898    897 
Furniture and equipment   190    194    556    579 
Federal Deposit Insurance Corporation assessments   94    109    288    220 
Expenses related to other real estate owned   34    137    156    637 
Other expense   807    775    2,637    2,404 
Total noninterest expense   3,662    3,536    11,014    11,150 
                     
Income before provision for income taxes   1,737    1,322    4,863    3,001 
                     
Provision for income taxes   613    429    1,698    834 
                     
Net income  $1,124   $893   $3,165   $2,167 
                     
Basic earnings per share  $0.14   $0.10   $0.39   $0.24 
Diluted earnings per share  $0.14   $0.10   $0.39   $0.24 
                     
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 COMPRENENSIVE INCOME (LOSS)

(Unaudited)

 

(dollars in thousands, except per share data)                
For the periods ended September 30,  Three months   Nine months 
   2014   2013   2014   2013 
                 
Net income  $1,124   $893   $3,165   $2,167 
Other comprehensive (loss) income:                    
Unrealized holding (losses) gains on investment securities arising during the period   (844)   666    3,472    (4,283)
Deferred tax benefit (expense)   338    (266)   (1,389)   1,713 
Unrealized holding (losses) gains on investment securities arising during the period, net of tax   (506)   400    2,083    (2,570)
                     
Reclassification adjustment for realized gains included in net income   (83)   (16)   (100)   (19)
Tax effect   33    6    40    8 
Realized gains, net of tax   (50)   (10)   (60)   (11)
                     
Total other comprehensive (loss) income   (556)   390    2,023    (2,581)
Comprehensive income (loss)  $568   $1,283   $5,188   $(414)

 

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             3,165         3,165 
Other comprehensive loss, net of tax:                         
Net change in unrealized gains on available-for-sale investment securities                  2,023    2,023 
                          
Net restricted stock award activity and related compensation expense   24,830    105              105 
Stock option compensation expense        14              14 
Retirement of common stock   (424,462)   (4,148)             (4,148)
                          
Balance, September 30, 2014   8,089,615   $57,079   $27,954   $3,146   $88,179 
                          

See Notes to Unaudited Consolidated Financial Statements

6
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

 

(dollars in thousands)        
For the nine months ended September 30,        
   2014   2013 
         
Cash flows from operating activities:          
Net income  $3,165  $2,167 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan and lease losses   (200)   200 
(Decrease) increase in deferred loan origination fees, net   (53)   11 
Depreciation and amortization   339    397 
Gain on sale and call of investment securities   (100)   (19)
Amortization of investment security premiums and discounts, net   3,562    4,386 
Gain on life insurance death benefit       (118)
Increase in cash surrender values of life insurance policies   (202)   (61)
Stock based compensation expense   119    97 
(Gain) loss on sale and write-down of other real estate owned   (195)   102 
Decrease in accrued interest receivable and other assets   257    2,216 
Decrease in accrued interest payable and other liabilities   (11)   (253)
Net cash provided by operating activities   6,681    9,125 
           
Cash flows from investing activities:          
Proceeds from the sale of available-for-sale investment securities   11,288    6,159 
Proceeds from matured available-for-sale investment securities   105    875 
Proceeds from called available-for-sale investment securities   270    590 
Purchases of available-for-sale investment securities   (45,752)   (99,420)
Proceeds from principal repayments for available- for-sale investment securities   29,877    46,350 
Proceeds from principal repayments for held-to- maturity investment securities   251    816 
Purchases of bank owned life insurance   (1,350)    
Net increase in interest-bearing deposits in banks       (250)
Net decrease in loans   4,150    1,573 
Proceeds from sale of other real estate   1,834    7,303 
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   (370)   (90)
           
Net cash used in investing activities   (189)   (35,856)

7
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)

 

(dollars in thousands)        
For the nine months ended September 30,        
   2014   2013 
         
Cash flows from financing activities:          
Net increase in demand, interest-bearing and savings deposits  $31,232   $15,850 
Net decrease in time deposits   (4,527)   (3,522)
Net (decrease) increase in short-term borrowings   (4,500)   6,000 
Net decrease in long-term borrowings   (500)   (8,000)
Cash paid to repurchase common stock   (4,148)   (3,906)
           
Net cash provided by financing activities  $17,557   $6,422 
           
Increase (decrease) in cash and cash equivalents   24,049    (20,309)
           
Cash and cash equivalents at beginning of year   17,948    55,461 
           
Cash and cash equivalents at end of period  $41,997   $35,152 

 

See Notes to Unaudited Consolidated Financial Statements

8
 

AMERICAN RIVER BANKSHARES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2014 and December 31, 2013, the results of its operations and statement of comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013, its cash flows for the nine-month periods ended September 30, 2014 and 2013 and its statement of changes in shareholders’ equity for the year ended December 31, 2013 and the nine months ended September 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 nine-month periods ended September 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 September 30, 2014. At September 30, 2014, there were 50,034 stock options and 32,838 restricted shares outstanding. 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. At September 30, 2014, the total number of authorized shares that remain available for issuance under the 2010 Plan was 1,413,330. Awards under the 2000 Plan were either incentive stock options or nonqualified stock options. Under the 2010 Plan, the awards may be granted to employees and directors under incentive and nonqualified option agreements 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 September 30, 2014 and 2013, the compensation cost recognized for equity compensation was $48,000 and $34,000, respectively. The recognized tax benefit for equity compensation expense was $17,000 and $13,000, respectively, for the three-month periods ended September 30, 2014 and 2013. For the nine-month periods ended September 30, 2014 and 2013, the compensation cost recognized for equity compensation was $119,000 and $97,000, respectively. The recognized tax benefit for equity compensation expense was $42,000 and $35,000, respectively, for the nine-month periods ended September 30, 2014 and 2013.

At September 30, 2014, the total compensation cost related to nonvested stock option awards not yet recorded was $94,000. This amount will be recognized over the next 4.8 years and the weighted average period of recognizing these costs is expected to be 2.4 years. At September 30, 2014, the total compensation cost related to restricted stock awards not yet recorded was $213,000. This amount will be recognized over the next 4.8 years and the weighted average period of recognizing these costs is expected to be 1.5 years.

Equity Plans Activity

Stock Options

There were no stock options awarded during the three-month period ended September 30, 2014. There were 32,705 stock options awarded during the nine-month period ended September 30, 2014 at a weighted average exercise price of $8.85. There were no stock options awarded during the three-month and nine-month periods ended September 30, 2013. The weighted average award date fair value of options awarded for the nine-month period ended September 30, 2014 was $2.44. A summary of option activity under the Plans as of September 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 September 30, 2014   271,700   $16.27    3.6 years   $74 
Vested at September 30, 2014   228,582   $17.75    2.6 years   $43 
Non-vested at September 30, 2014   43,118   $8.42    9.2 years   $31 

 

Restricted Stock

 

There were no shares of restricted stock awarded during the three-month period ended September 30, 2014 and 24,830 shares of restricted stock awarded during the nine-month period ended September 30, 2014. There were no shares of restricted stock awarded during the three-month period ended September 30, 2013 and 11,448 shares of restricted stock awarded during the nine-month period ended September 30, 2013. Of the restricted shares awarded in 2014, 13,560 restricted 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 3,272 restricted awards that were fully vested during the three-month period ended September 30, 2014 and 15,982 restricted share awards that were fully vested during the nine-month period ended September 30, 2014. There were 3,269 restricted share awards that were fully vested during the three-month period ended September 30, 2013 and 14,427 restricted share awards that were fully vested during the nine-month period ended September 30, 2013. There were no restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2014 and 2013. The intrinsic value of nonvested restricted shares at September 30, 2014 was $300,000.

 

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   15,982    7.52 
Less: Cancelled        
Nonvested at September 30, 2014   32,838   $8.31 

 

Other Equity Awards

 

There were no stock appreciation rights; restricted performance stock; unrestricted Company stock; or performance units awarded during the three-month or nine-month month periods ended September 30, 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 $9.15 as of September 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 $34,371,000 and standby letters of credit of approximately $6,285,000 at September 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 September 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 (8,063,589 and 8,154,947 shares for the three-month and nine-month periods ended September 30, 2014, and 8,808,585 and 8,969,088 for the three-month and nine-month periods ended September 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 12,934 and 11,835, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2014 and 8,702 and 5,715, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2013. For the three-month periods ended September 30, 2014 and 2013, there were 211,024 and 217,247 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. For the nine-month periods ended September 30, 2014 and 2013, there were 211,024 and 277,923 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 September 30, 2014 and December 31, 2013 consisted of the following (dollars in thousands):

 

Available-for-Sale

   September 30, 2014 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
 
Debt securities:                    
Mortgage-backed securities  $244,267   $4,590   $(976)  $247,881 
Obligations of states and political subdivisions   25,843    1,484    (28)   27,299 
Corporate bonds   1,504    106        1,610 
Equity securities:                    
Corporate stock   54    68        122 
   $271,668   $6,248   $(1,004)  $276,912 

 

   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 $5,244,000 were recorded, net of $2,098,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at September 30, 2014. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended September 30, 2014 totaled $8,656,000 and $83,000, respectively, and for the nine-month period ended September 30, 2014 totaled $11,288,000 and $100,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 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 September 30, 2013 totaled zero and zero, respectively, and for the nine-month period ended September 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 nine-month periods ended September 30, 2013.

12
 

Held-to-Maturity

 

September 30, 2014                
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
Debt securities:                    
Mortgage-backed securities  $935   $65   $   $1,000 

 

December 31, 2013                
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
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 September 30, 2014 and September 30, 2013. Investment securities with unrealized losses at September 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  $50,056   $(506)  $22,443   $(470)  $72,499   $(976)
Obligations of states and political subdivisions   693    (5)   649    (23)   1,342    (28)
   $50,749   $(511)  $23,092   $(493)  $73,841   $(1,004)

 

   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 September 30, 2014 or December 31, 2013.

At September 30, 2014, the Company held 219 securities of which 24 were in a loss position for less than twelve months and 11 were in a loss position for twelve months or more.  Of the 35 securities in a loss position, 33 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 September 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  $415   $417           
After one year through five years   4,203    4,409           
After five years through ten years   12,176    12,935           
After ten years   10,553    11,148           
    27,347    28,909           
Investment securities not due at a single maturity date:                    
Mortgage-backed securities   244,267    247,881   $935   $1,000 
Corporate stock   54    122         
   $271,668   $276,912   $935   $1,000 

Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

6. IMPAIRED AND NONPERFORMING LOANS AND LEASES AND OTHER REAL ESTATE OWNED

At September 30, 2014 and December 31, 2013, the recorded investment in nonperforming loans and leases was approximately $1,811,000 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 September 30, 2014, the recorded investment in loans and leases that were considered to be impaired totaled $27,185,000, which includes $1,745,000 in nonaccrual loans and leases and $25,440,000 in performing loans and leases. Of the total impaired loans of $27,185,000, loans totaling $11,583,000 were deemed to require no specific reserve and loans totaling $15,602,000 were deemed to require a related valuation allowance of $1,694,000. 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 $31,000 and $101,000 for the three months ended September 30, 2014 and 2013, respectively, and approximated $85,000 and $269,000 for the nine months ended September 30, 2014 and 2013, respectively.

At September 30, 2014 and December 31, 2013, the recorded investment in other real estate owned (“OREO”) was $5,201,000 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. During the third quarter of 2014, the Company sold two OREO properties and one lot from a three-lot parcel (of which the other two lots remain) for a $98,000 gain. The Company did not add any new properties during the third quarter of 2014.

 

The Company periodically obtains property valuations to determine whether the recorded book value is considered fair value. During the third quarter of 2014, this valuation process resulted in the Company reducing the book value of one property by $9,000. 

14
 

The September 30, 2014 OREO balance of $5,201,000 consists of eight properties including two commercial real estate properties in the total amount of $2,395,000, four commercial land properties in the total amount of $1,729,000 and two residential land properties in the total amount of $1,077,000.

 

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

(in thousands)  September 30,   December 31, 
   2014   2013 
         
Nonaccrual loans and leases that are current to terms (less than 30 days past due)          
   $212   $379 
Nonaccrual loans and leases that are past due   1,599    1,520 
Loans and leases past due 90 days and accruing interest       80 
Other assets   878    878 
Other real estate owned   5,201    6,621 
Total nonperforming assets  $7,890   $9,478 
           
Nonperforming loans and leases to total loans and leases   0.72%   0.77%
Total nonperforming assets to total assets   1.28%   1.60%

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

(in thousands)  As of September 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   $330   $330   $   $577   $577   $ 
Real estate-commercial   10,690    10,888        10,921    11,119     
Real estate-construction   188    188        248    248     
Real estate-residential   338    338                 
Consumer   37    37        37    37     
Subtotal  $11,583   $11,781   $   $11,783   $11,981   $ 
                               
With an allowance recorded:                              
Commercial   $732   $732   $267   $1,159   $1,159   $392 
Real estate-commercial   10,199    10,199    950    8,998    8,998    792 
Real estate-multi-family   1,626    1,719    188    1,650    1,743    108 
Real estate-residential   2,540    2,540    249    3,316    3,316    276 
Agriculture   384    384    13             
Consumer   121    121    27    128    128    30 
Subtotal  $15,602   $15,695   $1,694   $15,251   $15,344   $1,598 
                               
Total:                              
Commercial   $1,062   $1,062   $267   $1,736   $1,736   $392 
Real estate-commercial   20,889    21,087    950    19,919    20,117    792 
Real estate-multi-family   1,626    1,719    188    1,650    1,743    108 
Real estate-construction   188    188        248    248     
Real estate-residential   2,878    2,878    249    3,316    3,316    276 
Agriculture   384    384    13             
Consumer   158    158    27    165    165    30 
   $27,185   $27,476   $1,694   $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 nine months ended
 
   September 30,
2014
   September 30,
2013
   September 30,
2014
   September 30,
2013
 
                 
Commercial   $1,455   $2,302   $1,053   $2,265 
Real estate-commercial   19,735    16,782    20,581    19,417 
Real estate-multi-family   1,643    1,671    1,638    1,669 
Real estate-construction   237    130    218     
Real estate-residential   2,910    2,683    2,901    2,966 
Agriculture   194        388     
Consumer   163    175    162    174 
Total  $26,337   $23,743   $26,941   $26,491 
                     

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 nine months ended
 
   September 30,
2014
   September 30,
2013
   September 30,
2014
   September 30,
2013
 
                 
Commercial   $5   $16   $14   $48 
Real estate-commercial   259    393    826    686 
Real estate-multi-family   19    19    57    58 
Real estate-construction   3    3    9    10 
Real estate-residential   30    56    97    108 
Agriculture   3        14     
Consumer   1    1    3    3 
Total  $320   $488   $1,020   $913 
                     

7. TROUBLED DEBT RESTRUCTURINGS

At September 30, 2014, there were 19 loans and leases that were considered to be troubled debt restructurings. Of these loans and leases, 13 are currently performing (less than ninety days past due) totaling $14,248,000 and six are considered nonperforming (and included in the $1,811,000 discussed in Note 6), totaling $1,237,000. Of the six TDRs considered nonperforming, two are current to the modified terms. At September 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 $890,000 and $817,000 of specific reserves to loans whose terms have been modified as troubled debt restructurings as of September 30, 2014 and December 31, 2013.

 

During the nine-month period ended September 30, 2014, the terms of 10 loans were modified as troubled debt restructurings; five were renewals of previously reported loans and five were new TDRs. The modifications of the terms of these loans consisted of a line of credit converted to a term loan and 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 September 30, 2014 (dollars in thousands): 

 

       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number   Recorded   Recorded 
   of Loans   Investment   Investment 
Troubled debt restructurings:               
Real estate – commercial   3   $890   $890 
Consumer   1    7    7 
Total   4   $897   $897 

 

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

             
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number   Recorded   Recorded 
   of Loans   Investment   Investment 
Troubled debt restructurings:               
Real estate – commercial   8   $5,925   $5,925 
Consumer   2    52    52 
Total   10   $5,976   $5,976 

 

The troubled debt restructurings described above increased the allowance for loan and lease losses by $93,000 and resulted in no charge-offs during the three months ended September 30, 2014 and increased the allowance for loan and lease losses by $246,000 and resulted in no charge-offs during the nine months ended September 30, 2014.

 

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

 

       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number   Recorded   Recorded 
   of Loans   Investment   Investment 
Troubled debt restructurings:               
Real estate – commercial   2   $348   $348 
Total   2   $348   $348 

 

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

             
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number   Recorded   Recorded 
   of Loans   Investment   Investment 
Troubled debt restructurings:               
Real estate – residential   1   $566   $566 
Real estate – commercial   5    1,003    984 
Total   6   $1,569   $1,550 

 

The troubled debt restructurings described above increased the allowance for loan and lease losses by $23,000 and resulted in no charge-offs during the three months ended September 30, 2013 and increased the allowance for loan and lease losses by $92,000 and resulted in charge-offs of $40,000 during the nine months ended September 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 nine months ended September 30, 2013 (dollars in thousands):

 

   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 nine-month periods ended September 30, 2014, as well as for the three-month period ending September 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 September 30, 2014 and December 31, 2013 are summarized below:

 

September 30, 2014  Credit Risk Profile by Internally Assigned Grade 
(dollars in thousands)      Real Estate 
   Commercial   Commercial   Multi-family   Construction   Residential 
Grade:                         
Pass  $19,121   $153,302   $8,054   $4,194   $10,981 
Watch   1,693    10,417    1,137    3,283    3,115 
Special mention   63    17,015    902    810    357 
Substandard   3,652    5,228            854 
Doubtful                    
Total  $24,529   $185,962   $10,093   $8,287   $15,307 
                          
           Credit Risk Profile by Internally Assigned Grade Other Credit Exposure     
           Leases   Agriculture   Consumer   Total 
Grade:                            
Pass          $1,279   $2,496   $3,562   $202,989 
Watch                   1,050    20,695 
Special mention                384    270    19,801 
Substandard                   187    9,921 
Doubtful                        
Total          $1,279   $2,880   $5,069   $253,406 
                             
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 
18
 

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

September 30, 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   317    (175)   26    22    (396)   (5)   (16)   (103)   130    (200)
Loans charged off                               (74)       (74)
Recoveries   176    40        2    17    3        150        388 
                                                   
Ending balance, September 30, 2014  $1,378   $2,266   $268   $566   $446   $2   $64   $134   $336   $5,460 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $267   $950   $188   $   $249   $   $13   $27   $   $1,694 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $1,111   $1,316   $80   $566   $197   $2   $51   $107   $336   $3,766 
                                                   
Loans                                                  
                                                   
Ending balance  $24,529   $185,962   $10,093   $8,287   $15,307   $1,279   $2,880   $5,069   $   $253,406 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $1,062   $20,889   $1,626   $188   $2,878   $   $384   $158   $   $27,185 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $23,467   $165,073   $8,467   $8,099   $12,429   $1,279   $2,496   $4,911   $   $226,221 
                                                   
Allowance for Loan and Lease Losses                                                  
                                                   
Beginning balance, June 30, 2014  $1,391   $2,149   $262   $441   $708   $2   $69   $131   $309   $5,462 
Provision for loan losses   (48)   116    6    125    (274)       (5)   (147)   27    (200)
Loans charged off                                        
Recoveries   35    1            12            150        198 
                                                   
Ending balance, September 30, 2014  $1,378   $2,266   $268   $566   $446   $2   $64   $134   $336   $5,460 

19
 

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 

  

September 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   (247)   586    16    (70)   104    (1)   (11)   (94)   (83)   200 
Loans charged off   (39)   (476)           (58)           (5)       (578)
Recoveries   100    23            41                    164 
                                                   
Ending balance, September 30, 2013  $1,165   $2,659   $254   $524   $564   $2   $76   $163   $160   $5,567 
                                                   
Allowance for Loan and Lease Losses                                                  
                                                   
Beginning balance, June 30, 2013  $1,279   $2,584   $247   $422   $554   $3   $91   $170   $330   $5,680 
Provision for loan losses   (89)   184    7    102    (11)   (1)   (15)   (7)   (170)    
Loans charged off   (28)   (121)           (20)                   (169)
Recoveries   3    12            41                    56 
                                                   
Ending balance, September 30, 2013  $1,165   $2,659   $254   $524   $564   $2   $76   $163   $160   $5,567 
20
 

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

 

September 30, 2014                          Past Due     
(dollars in thousands)          Past Due               Greater Than     
   30-59 Days   60-89 Days   Greater Than   Total Past           90 Days and     
   Past Due   Past Due   90 Days   Due   Current   Total Loans   Accruing   Nonaccrual 
Commercial:                                        
Commercial  $   $225   $666   $891   $23,638   $24,529       $673 
Real estate:                                        
Commercial   508            508    185,454    185,962        655 
Multi-family                   10,093    10,093         
Construction                   8,287    8,287         
Residential   258    338        596    14,711    15,307        338 
Other:                                        
Leases                   1,279    1,279         
Agriculture                   2,880    2,880         
Consumer   116            116    4,953    5,069        145 
Total  $882   $563   $666   $2,111   $251,295   $253,406   $   $1,811 
                                         
December 31, 2013                          Past Due     
(dollars in thousands)          Past Due               Greater Than     
   30-59 Days   60-89 Days   Greater Than   Total Past           90 Days and     
   Past Due   Past Due   90 Days   Due   Current   Total Loans   Accruing   Nonaccrual 
Commercial:                                        
Commercial  $   $   $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 
21
 

9. BORROWING ARRANGEMENTS

 

At September 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 September 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 September 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 September 30, 2014 and December 31, 2013 totaled $61,786,000 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 September 30, 2014 and December 31, 2013 were $17,826,000 and $21,358,000, respectively. There were no advances outstanding under this borrowing arrangement as of September 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 respective tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above, if applicable, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties related to unrecognized tax benefits, if applicable, as a component of interest expense in the consolidated statement of income. There have been no unrecognized tax benefits or accrued interest and penalties for the three-month and nine-month periods ended September 30, 2014 and 2013.

The combined federal and state effective tax rate for the quarter ended September 30, 2014 was 35.3%, an increase from 32.5% for the third quarter of 2013. For the nine months ended September 30, 2014, the combined federal and state effective tax rate was 34.9% compared to 27.8% for the nine months ended September 30, 2013. The higher combined federal and state effective tax rate in 2014 for the three-month and nine-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.

22
 

11. FAIR VALUE MEASUREMENTS

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 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:     
September 30, 2014  Amount   Level 1   Level 2   Level 3   Total 
                     
Financial assets:                         
Cash and due from banks  $41,997   $41,997             $41,997 
Interest-bearing deposits in banks   1,000        $1,000         1,000 
Available-for-sale securities   276,912    73    276,839         276,912 
Held-to-maturity securities   935         1,000         1,000 
FHLB stock   3,686    N/A    N/A    N/A    N/A 
Net loans and leases:   247,686              249,925    249,925 
Accrued interest receivable   1,737         1,076    661    1,737 
                          
Financial liabilities:                         
Deposits:                         
Noninterest-bearing  $159,863   $159,863             $159,863 
Savings   52,339    52,339              52,339 
Money market   148,863    148,863              148,863 
NOW accounts   61,627    61,627              61,627 
Time, $100,000 or more   65,260         65,861         65,861 
Other time   22,443         22,601         22,601 
Short-term borrowings   3,500    3,500              3,500 
Long-term borrowings   7,500         7,580         7,580 
Accrued interest payable   60         60         60 
23
 
   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 September 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.

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

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

24
 

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 September 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) 
                     
September 30, 2014                         
Assets and liabilities measured on a recurring basis:                         
Available-for-sale securities:                         
Mortgage-backed securities  $247,881        $247,881           
Obligations of states and political subdivisions   27,299         27,299           
Corporate bonds   1,610         1,610           
Corporate stock   122   $73    49           
Total recurring  $276,912   $73   $276,839   $   $ 
                          
Assets and liabilities measured on a nonrecurring basis:                         
Impaired loans:                         
Commercial  $666   $   $   $666   $94 
Real estate:                         
Commercial   290            290     
Multi-family                    
Construction                    
Residential                    
Other:                         
Agriculture                    
Consumer                    
Other real estate owned   5,201            5,201    170 
Total nonrecurring  $6,157   $   $   $6,157   $264 
25
 
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   $   $ 
                          
Assets and liabilities measured on a nonrecurring basis:                         
Impaired loans:                         
Real estate:                         
Commercial  $306   $   $   $306   $6 
Other real estate owned   6,621            6,621    (250)
Total nonrecurring  $6,927   $   $   $6,927   $(244)

 

There were no significant transfers between Levels 1 and 2 during the three-month and nine-month periods ended September 30, 2014 or the twelve months ended December 31, 2013.

 

The following methods were used to estimate the fair value of each class of financial instrument above:

Available-for-sale securitiesFair values for investment securities are based on quoted market prices, if available, and are considered as Level 1, or evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and are considered as Level 2. Pricing applications apply available information, as applicable, through processes such as benchmark curves, benchmarking to like securities, sector groupings and matrix pricing.

 

Impaired loans – The fair value of collateral dependent impaired loans adjusted for specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring loans consists of the appraised value less a reserve for past dues taxes and selling costs ranging from 8% to 10%.

 

Other real estate owned – Certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring OREO consists of the appraised value less selling costs ranging from 8% to 10%.

26
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is management’s discussion and analysis of the significant changes in American River Bankshares’ (the “Company”) balance sheet accounts between December 31, 2013 and September 30, 2014 and its income and expense accounts for the three-month and nine-month periods ended September 30, 2014 and 2013. The discussion is designed to provide a better understanding of significant trends related to the Company’s financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. This discussion and supporting tables and the consolidated financial statements and related notes appearing elsewhere in this report are unaudited. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within management’s discussion and analysis. Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q including, but not limited to, matters described in “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as amended, and subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,” “should,” “could,” “would,” and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ significantly from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following:

·the duration of financial and economic instability and actions taken by the United States Congress and governmental agencies, including the United States Department of the Treasury, to deal with challenges to the U.S. financial system;
·the risks presented by a continued economic recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
·variances in the actual versus projected growth in assets and return on assets;
·potential continued or increasing loan and lease losses;
·potential increasing levels of expenses associated with resolving nonperforming assets as well as regulatory changes;
·changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds;
·competitive effects;
·potential declines in fee and other noninterest income earned associated with economic factors, as well as regulatory changes;
·general economic conditions nationally, regionally, and within our operating markets could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets;
·changes in the regulatory environment including government intervention in the U.S. financial system;
·changes in business conditions and inflation;
·changes in securities markets, public debt markets, and other capital markets;
·potential data processing and other operational systems failures or fraud;
·potential decline in real estate values in our operating markets;
·the effects of uncontrollable events such as terrorism, the threat of terrorism or the impact of the military conflicts in Afghanistan and Iraq and the conduct of the war on terrorism by the United States and its allies, worsening financial and economic conditions, natural disasters, and disruption of power supplies and communications;
·changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations;
·projected business increases following any future strategic expansion could be lower than expected;
·the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings;
·the reputation of the financial services industry could experience further deterioration, which could adversely affect our ability to access markets for funding and to acquire and retain customers;
·the efficiencies we may expect to receive from any investments in personnel and infrastructure may not be realized; and
·downgrades in the credit rating of the United States by credit rating agencies.
27
 

The factors set forth under “Item 1A - Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should be carefully considered and understood as being applicable to all related forward-looking statements contained in this Quarterly Report on Form 10-Q, when evaluating the business prospects of the Company and its subsidiaries.

Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission (the “SEC”) on Forms 10-K, 10-Q and 8-K.

Critical Accounting Policies

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is an estimate of the probable incurred credit loss risk inherent in our loan and lease portfolio as of the balance sheet date. The allowance is based on two basic principles of accounting: (1) “Accounting for Contingencies,” which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) the “Receivables” topic, which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan or lease balance.

The allowance for loan and lease losses is determined based upon estimates that can and do change when the actual risk, loss events, or changes in other factors, occur. The analysis of the allowance uses an historical loss view as an indicator of future losses and as a result could differ from the actual losses incurred in the future. If the allowance for loan and lease losses falls below that deemed adequate (by reason of loan and lease growth, actual losses, the effect of changes in risk factors, or some combination of these), the Company has a strategy for supplementing the allowance for loan and lease losses, over the short-term. For further information regarding our allowance for loan and lease losses, see “Allowance for Loan and Lease Losses Activity” discussion later in this Item 2.

Stock-Based Compensation

The Company recognizes compensation expense over the vesting period in an amount equal to the fair value of all share-based payments which consist of stock options and restricted stock awarded to directors and employees. The fair value of each stock option award is estimated on the date of the award and amortized over the service period using a Black-Scholes-Merton based option valuation model that requires the use of assumptions.  Critical assumptions that affect the estimated fair value of each award include expected stock price volatility, dividend yields, option life and the risk-free interest rate.

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Goodwill  

 

Business combinations involving the Company’s acquisition of equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisition and is not deductible for tax purposes. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment on an annual basis. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The most recent annual assessment was performed as of December 31, 2013, and at that time, the Company’s reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment.

 

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 is, if applicable, 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 were no unrecognized tax benefits or accrued interest and penalties at September 30, 2014 or 2013 or for the three-month and nine-month periods then ended.

General Development of Business

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California in 1995. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. Its principal office is located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and its telephone number is (916) 854-0123. The Company employed an equivalent of 101 full-time employees as of September 30, 2014.

The Company owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank (the “Bank”), and American River Financial, a California corporation which has been inactive since its incorporation in 2003.

American River Bank was incorporated and commenced business in Fair Oaks, California, in 1983 and thereafter moved its headquarters to Sacramento, California in 1985. American River Bank operates five full service offices in Sacramento and Placer Counties including the main office located at 1545 River Park Drive, Suite 107, Sacramento and branch offices in Sacramento, Gold River, and Roseville; two full service offices in Sonoma County in Healdsburg and Santa Rosa; and three full service banking offices in Amador County in Jackson, Pioneer, and Ione.

In addition, American River Bank operates loan production offices in Santa Clara County, in the city of San Jose, and serves the Contra Costa and Alameda County markets through a loan production office in the city of Pleasanton.

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In 2000, the Company acquired North Coast Bank as a separate bank subsidiary. North Coast Bank was incorporated and commenced business in 1990 as Windsor Oaks National Bank in Windsor, California. In 1997, the name was changed to North Coast Bank. Effective December 31, 2003, North Coast Bank was merged with and into American River Bank. On December 3, 2004, the Company acquired Bank of Amador located in Jackson, California. Bank of Amador was merged with and into American River Bank.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act includes a permanent increase to $250,000 as the maximum FDIC insurance limit per depositor retroactive to January 1, 2008 and the extension of unlimited FDIC insurance for noninterest-bearing transaction accounts effective December 31, 2010 through December 31, 2012. On November 9, 2010, the FDIC implemented a final rule to permanently increase the maximum insurance limit to $250,000 under the Dodd-Frank Act. The unlimited insurance coverage for noninterest bearing transaction accounts was not extended and terminated on December 31, 2012. The $250,000 maximum deposit insurance amount per depositor remains in effect.

American River Bank does not offer trust services or international banking services and does not plan to do so in the near future. American River Bank’s primary business is serving the commercial banking needs of small to mid-sized businesses within those counties listed above. American River Bank accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services. American River Bank also conducts lease financing for certain types of business equipment. American River Bank owns 100% of two inactive companies, ARBCO and American River Mortgage. ARBCO was formed in 1984 to conduct real estate development and has been inactive since 1995. American River Mortgage has been inactive since its formation in 1994. During 2014, the Company conducted no significant activities other than holding the shares of its subsidiaries. However, it is authorized, with the prior approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Company’s principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking. The common stock of the Company is registered under the Securities Exchange Act of 1934, as amended, and is listed and traded on the Nasdaq Global Select Market under the symbol “AMRB.”

Overview

The Company recorded net income of $1,124,000 for the quarter ended September 30, 2014, which was an increase of $231,000 compared to $893,000 reported for the same period of 2013. Diluted earnings per share for the third quarter of 2014 were $0.14 compared to $0.10 recorded in the third quarter of 2013. The return on average equity (“ROAE”) and the return on average assets (“ROAA”) for the third quarter of 2014 were 5.09% and 0.74%, respectively, as compared to 4.01% and 0.60%, respectively, for the same period in 2013.

 

Net income for the nine months ended September 30, 2014 and 2013 was $3,165,000 and $2,167,000, respectively, with diluted earnings per share of $0.39 in 2014 and $0.24 in 2013. For the first nine months of 2014, ROAE was 4.86% and ROAA was 0.71% compared to 3.19% and 0.49%, respectively, for the same period in 2013.

 

Total assets of the Company increased by $22,853,000 (3.9%) from $592,753,000 at December 31, 2013 to $615,606,000 at September 30, 2014. Net loans totaled $247,686,000 at September 30, 2014, down $4,061,000 (1.6%) from $251,747,000 at December 31, 2013. Deposit balances at September 30, 2014 totaled $510,395,000, up $27,705,000 (5.5%) from the $483,690,000 at December 31, 2013.

 

The Company ended the third quarter of 2014 with a leverage capital ratio of 11.7%, a Tier 1 capital ratio of 21.6%, and a total risk-based capital ratio of 22.9% compared to 11.9%, 22.0%, and 23.2%, respectively, at December 31, 2013. Table One below provides a summary of the components of net income for the periods indicated (see also the “Results of Operations” section that follows for an explanation of the fluctuations in the individual components).

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Table One: Components of Net Income

(dollars in thousands)  For the three months ended
September 30,
   For the nine months ended
September 30,
 
   2014   2013   2014   2013 
Interest income*  $5,034   $4,829   $15,233   $14,180 
Interest expense   (287)   (361)   (882)   (1,143)
Net interest income*   4,747    4,468    14,351    13,037 
Provision for loan and lease losses   200        200    (200)
Noninterest income   520    462    1,530    1,535 
Noninterest expense   (3,662)   (3,536)   (11,014)   (11,150)
Provision for income taxes   (613)   (429)   (1,698)   (834)
Tax equivalent adjustment   (68)   (72)   (204)   (221)
Net income  $1,124   $893   $3,165   $2,167 
                     
Average total assets  $605,790   $587,719   $599,341   $585,767 
Net income (annualized) as a percentage of average total assets   0.74%   0.60%   0.71%   0.49%

* Fully taxable equivalent basis (FTE)

 

Results of Operations

Net Interest Income and Net Interest Margin

Net interest income represents the excess of interest and fees earned on interest earning assets (loans and leases, securities, Federal funds sold and investments in time deposits) over the interest paid on interest-bearing deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. The Company’s net interest margin was 3.49% for the three months ended September 30, 2014, 3.44% for the three months ended September 30, 2013, 3.58% for the nine months ended September 30, 2014 and 3.46% for the nine months ended September 30, 2013.

The fully taxable equivalent interest income component for the third quarter of 2014 increased $205,000 (4.2%) to $5,034,000 compared to $4,829,000 for the three months ended September 30, 2013. The increase in the fully taxable equivalent interest income for the third quarter of 2014 compared to the same period in 2013 is broken down by rate (up $93,000) and volume (up $112,000). The rate increase primarily occurred in the investment portfolio which can be attributed to a slowdown in the mortgage refinance market. As mortgage refinancing slows it also reduces the principal prepayments that the Company receives on the mortgage backed securities, which reduces the premium amounts amortized on the bonds. A lower amount of amortized premium results in higher interest income. Investment securities added $300,000 in additional interest income related to rate. The average yield on investments increased from 1.95% from the third quarter of 2013 to 2.34% during the third quarter of 2014. The volume increase of $112,000 was also related to the investments. When compared to the third quarter of 2013, average investment balances were up $22,208,000 (8.5%) to $284,964,000 for the third quarter of 2014. In addition, average loans increased by $1,500,000 (0.6%) from $252,243,000 in the third quarter of 2013 to $253,743,000 in the third quarter of 2014.

Total fully taxable equivalent interest income for the nine months ended September 30, 2014 increased $1,053,000 (7.4%) to $15,233,000 compared to $14,180,000 for the nine months ended September 30, 2013. The breakdown of the fully taxable equivalent interest income for the nine months ended September 30, 2014 over the same period in 2013 resulted from an increase in rate (up $628,000) and an increase in volume (up $425,000). Average earning assets increased $32,159,000 (6.4%) from $503,849,000 during the first nine months of 2014 compared to $536,008,000 during the same period in 2013. During the nine month periods, the Company also experienced an increase in interest income due to the rates on investments (up $1,086,000) but this was partially offset by a reduction in rates on loans. While average loan balances increased by $2,114,000 (0.8%) from $252,129,000 during 2013 to $254,243,000 during 2014, the Company did experience a drop in rates on these loans from 5.67% in 2013 to 5.43% in 2014. This decrease is caused by proceeds of principal pay downs and loan prepayments invested in loans yielding lower rates. The volume increase of $425,000 is primarily related to an increase in investment balances of $29,909,000 (11.9%) from $250,856,000 in 2013 to $280,765,000 in 2014.

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Interest expense was $74,000 (20.5%) lower in the third quarter of 2014 versus the prior year period, decreasing from $361,000 to $287,000. The average balances on interest bearing liabilities were $357,110,000 (or $7,187,000 and 2.1% higher) in the third quarter of 2014 compared to $349,923,000 in the same quarter in 2013. The higher balances did not significantly impact the overall interest expense, as these higher balances occurred in the lower cost checking and savings products while the Company experienced decreases in the average balances of time deposits and other borrowings. The Company focused its marketing efforts on replacing higher cost time deposits and borrowings with lower cost checking, savings, and money market accounts. Average time deposit balances were $87,960,000 (down $7,449,000 or 7.8%) during the third quarter of 2014 compared to $95,409,000 during the third quarter of 2013 and average borrowings were $11,092,000 (down $5,011,000 or 31.1%) compared to $16,103,000 during the same time period in 2013. Average interest checking, money market, and savings accounts increased $19,647,000 (8.2%) from $238,411,000 in the third quarter of 2013 to $258,058,000 during the third quarter of 2014. Rates paid on interest bearing liabilities decreased 9 basis points from 0.41% to 0.32% for the third quarter of 2013 compared to the third quarter of 2014.

Interest expense was $882,000 in the nine-month period ended September 30, 2014 (or $261,000 and 22.8% lower) compared to $1,143,000 in the prior year period. The average balances on interest-bearing liabilities were $353,422,000 (up $6,807,000 or 2.0% higher) in the nine-month period ended September 30, 2014 compared to $346,615,000 in the same period in 2013. Although the average balances where higher, the increases occurred in the lower cost checking and savings products while the Company experienced decreases in the average balances of time deposits and other borrowings. Average time deposit balances were $89,922,000 (down $6,463,000 or 6.7%) during the nine-month period ended September 30, 2014 compared to $96,385,000 during the same period in 2013 and average borrowings were $11,350,000 (down $5,734,000 or 33.6%) during the nine-month period ended September 30, 2014 from $17,084,000 during the same time period in 2013. Average interest checking, money market, and savings accounts increased $19,004,000 (8.2%) from $233,146,000 during the nine-month period ended September 30, 2013 to $252,150,000 during the same period in 2014. Rates paid on interest bearing liabilities decreased 11 basis points from 0.44% in the first nine months of 2013 to 0.33% for the first nine months of 2014.

Table Two, Analysis of Net Interest Margin on Earning Assets, and Table Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are provided to enable the reader to understand the components and trends of the Company’s interest income and expenses. Table Two provides an analysis of net interest margin on earning assets setting forth average assets, liabilities and shareholders’ equity; interest income earned and interest expense paid and average rates earned and paid; and the net interest margin on earning assets. Table Three sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates.

32
 

Table Two: Analysis of Net Interest Margin on Earning Assets

Three Months Ended September 30,  2014   2013 
(Taxable Equivalent Basis)
(dollars in thousands)
 

Avg

Balance

  

 

Interest

  

Avg

Yield (4)

  

Avg

Balance

  

 

Interest

  

Avg

Yield (4)

 
Assets                              
Earning assets:                              
Loans and leases (1)  $253,743   $3,355    5.25%  $252,243   $3,541    5.57%
Taxable investment Securities   257,673    1,406    2.16%   234,714    1,004    1.70%
Tax-exempt investment securities (2)   27,201    264    3.85%   28,004    282    4.00%
Corporate stock (2)   90    8    35.27%   38    1    10.44%
Federal funds sold                        
Investments in time deposits   1,000    1    0.40%   1,000    1    0.40%
Total earning assets   539,707    5,034    3.70%   515,999    4,829    3.71%
Cash & due from banks   28,694              32,045           
Other assets   43,006              45,410           
Allowance for loan & lease losses   (5,617)             (5,735)          
   $605,790             $587,719           
                               
Liabilities & Shareholders’ Equity                              
Interest bearing liabilities:                              
Interest checking and money market  $205,410    107    0.21%  $186,685    113    0.24%
Savings   52,648    10    0.08%   51,726    13    0.10%
Time deposits   87,960    136    0.61%   95,409    160    0.67%
Other borrowings   11,092    34    1.22%   16,103    75    1.85%
Total interest bearing liabilities   357,110    287    0.32%   349,923    361    0.41%
Noninterest bearing demand deposits   155,167              143,607           
Other liabilities   5,818              5,864           
Total liabilities   518,095              499,394           
Shareholders’ equity   87,695              88,325           
   $605,790             $587,719           
Net interest income & margin (3)       $4,747    3.49%       $4,468    3.44%

 

(1)Loan interest includes loan fees of $32,000 and $40,000, respectively, during the three months ended September 30, 2014 and September 30, 2013. Average loan balances include nonperforming loans.
(2)Includes taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% for 2014 and 2013.
(3)Net interest margin is computed by dividing net interest income by total average earning assets.
(4)Average yield is calculated based on actual days in the period (92 days) and annualized to actual days in the year (365 days).

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Nine Months Ended September 30,  2014   2013 
(Taxable Equivalent Basis)
(dollars in thousands)
 

Avg

Balance

  

 

Interest

  

Avg

Yield (4)

  

Avg

Balance

  

 

Interest

  

Avg

Yield (4)

 
Assets                              
Earning assets:                              
Loans and leases (1)  $254,243   $10,330    5.43%  $252,129   $10,699    5.67%
Taxable investment Securities   253,523    4,084    2.15%   221,724    2,597    1.57%
Tax-exempt investment securities (2)   27,154    801    3.94%   29,100    870    4.00%
Corporate stock (2)   88    15    22.79%   32    12    50.14%
Federal funds sold                        
Interest-bearing deposits in banks   1,000    3    0.40%   864    2    0.31%
Total earning assets   536,008    15,233    3.80%   503,849    14,180    3.76%
Cash & due from banks   26,102              39,682           
Other assets   42,765              48,093           
Allowance for loan & lease losses   (5,534)             (5,857)          
   $599,341             $585,767           
                               
Liabilities & Shareholders’ Equity                              
Interest-bearing liabilities:                              
Interest checking and money market  $199,272    316    0.21%  $182,022    361    0.27%
Savings   52,878    31    0.08%   51,124    55    0.14%