Attached files

file filename
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)

 

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

 

For the quarterly period ended   September 30, 2015
or

  

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

 

For the transition period from       to   

 

Commission File Number: 0-31525

 

AMERICAN RIVER BANKSHARES

 

(Exact name of registrant as specified in its charter)

  

California   68-0352144
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
    3100 Zinfandel Drive, Suite 450, Rancho Cordova, California   95670
(Address of principal executive offices)   (Zip Code)

(916) 851-0123

 

(Registrant’s telephone number, including area code)

 

Not Applicable

 

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

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

 

No par value Common Stock – 7,343,649 shares outstanding at November 4, 2015.

 

 

 AMERICAN RIVER BANKSHARES

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015

 

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,
2015
   December 31,
2014
 
ASSETS
          
Cash and due from banks  $21,638   $22,449 
Interest-bearing deposits in banks
   1,000    1,000 
Investment securities:          
Available-for-sale, at fair value   266,740    289,064 
Held-to-maturity, at amortized cost   674    862 
Loans and leases, less allowance for loan and lease losses of $4,929 at September 30, 2015 and $5,301 at December 31, 2014   289,774    258,057 
Premises and equipment, net   1,435    1,518 
Federal Home Loan Bank stock   3,779    3,686 
Goodwill and other intangible assets   16,321    16,321 
Other real estate owned   3,781    4,647 
Bank owned life insurance   14,406    14,167 
Accrued interest receivable and other assets   5,646    5,983 
   $625,194   $617,754 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits:          
     Noninterest bearing   $178,038   $155,698 
     Interest-bearing   343,331    354,995 
             Total deposits   521,369    510,693 
           
Short-term borrowings   3,500    3,500 
Long-term borrowings   7,500    7,500 
Accrued interest payable and other liabilities   6,547    6,414 
           
             Total liabilities    538,916    528,107 
           
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 – 7,343,649 shares at September 30, 2015 and 8,089,615 shares at December 31, 2014   49,483    57,126 
Retained earnings   32,961    29,150 
Accumulated other comprehensive income, net of taxes   3,834    3,371 
           
            Total shareholders’ equity   86,278    89,647 
   $625,194   $617,754 

 

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 
   2015   2014   2015   2014 
Interest income:                    
Interest and fees on loans:                    
Taxable  $3,319   $3,348   $10,140   $10,320 
Exempt from Federal income taxes   92    7    222    10 
Interest on deposits in banks   2    1    4    3 
Interest and dividends on investment securities:                    
Taxable   1,633    1,406    4,706    4,084 
Exempt from Federal income taxes   190    198    571    600 
Dividends       6    10    12 
Total interest income   5,458    4,966    15,643    15,029 
Interest expense:                    
Interest on deposits   202    253    624    769 
Interest on borrowings   38    34    108    113 
Total interest expense   240    287    732    882 
                     
Net interest income   5,218    4,679    14,911    14,147 
                     
Provision for loan and lease losses       (200)       (200)
                     
Net interest income after provision for                    
loan and lease losses   5,218    4,879    14,911    14,347 
                     
Noninterest income:                    
Service charges on deposit accounts   132    129    376    434 
Gain on sale of securities   33    83    251    100 
Income from other real estate owned properties   87    78    248    290 
Other noninterest income   238    230    707    706 
Total noninterest income   490    520    1,582    1,530 
                     
Noninterest expense:                    
Salaries and employee benefits   2,185    2,242    6,500    6,479 
Occupancy   294    295    888    898 
Furniture and equipment   171    190    527    556 
Federal Deposit Insurance Corporation assessments   83    94    239    288 
Expenses related to other real estate owned   58    34    260    156 
Other expense   641    807    2,246    2,637 
Total noninterest expense   3,432    3,662    10,660    11,014 
                     
Income before provision for income taxes   2,276    1,737    5,833    4,863 
                     
Provision for income taxes   807    613    2,022    1,698 
                     
Net income  $1,469   $1,124   $3,811   $3,165 
                     
Basic earnings per share  $0.20   $0.14   $0.50   $0.39 
Diluted earnings per share  $0.20   $0.14   $0.50   $0.39 
                     
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

(Unaudited)

 

(dollars in thousands, except per share data)                
For the periods ended September 30,  Three months   Nine months 
   2015   2014   2015   2014 
Net income  $1,469   $1,124   $3,811   $3,165 
Other comprehensive income (loss):                    
Unrealized holding gains (losses) on investment securities arising during the period   769    (844)   1,023    3,472 
Deferred tax (expense) benefit   (308)   338    (409)   (1,389)
Unrealized holding gains (losses) on investment securities arising during the period, net of tax   461    (506)   614    2,083 
                     
Reclassification adjustment for realized gains included in net income   (33)   (83)   (251)   (100)
Tax effect   13    33    100    40 
Realized gains, net of tax   (20)   (50)   (151)   (60)
                     
Total other comprehensive income (loss)   441    (556)   463    2,023 
Comprehensive income  $1,910   $568   $4,274   $5,188 

 

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, 2014   8,489,247    61,108    24,789    1,123    87,020 
Net income             4,361         4,361 
Other comprehensive income, net of tax:                         
Net change in unrealized gains on available-for-sale investment securities                  2,248    2,248 
                          
Net restricted stock awarded and related compensation expense   24,830    147              147 
Stock option compensation expense        19              19 
Retirement of common stock   (424,462)   (4,148)           (4,148
Balance, December 31, 2014   8,089,615    57,126    29,150    3,371    89,647 
Net income             3,811         3,811 
Other comprehensive income, net of tax:                         
Net change in unrealized gains on available-for-sale investment securities                  463    463 
                          
Net restricted stock award activity and related compensation expense   45,023    175              175 
Stock option compensation expense       25              25 
Retirement of common stock   (790,989)   (7,843)             (7,843)
                          
Balance, September 30, 2015   7,343,649   $49,483   $32,961   $3,834   $86,278 

 

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,        
   2015   2014 
Cash flows from operating activities:          
Net income  $3,811   $3,165 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan and lease losses       (200)
Decrease in deferred loan origination fees, net   (48)   (53)
Depreciation and amortization   324    339 
Gain on sale and call of investment securities   (251)   (100)
Amortization of investment security premiums and discounts, net   2,470    3,562 
Increase in cash surrender values of life insurance policies   (239)   (202)
Stock based compensation expense   200    119 
Loss (gain) on sale and write-down of other real estate owned   68    (195)
Decrease in accrued interest receivable and other assets   27    257 
Increase (decrease) in accrued interest payable and other liabilities   133    (11)
Net cash provided by operating activities   6,495    6,681 
           
Cash flows from investing activities:          
Proceeds from the sale of available-for-sale investment securities   23,764    11,228 
Proceeds from matured available-for-sale investment securities   175    105 
Proceeds from called available-for-sale investment securities       270 
Purchases of available-for-sale investment securities   (41,254)   (45,752)
Proceeds from principal repayments for available-for-sale investment securities   38,193    29,877 
Proceeds from principal repayments for held-to-maturity investment securities   188    251 
Purchases of bank owned life insurance       (1,350)
Net increase in interest-bearing deposits in banks        
Net (increase) decrease in loans   (31,669)   4,150 
Proceeds from sale of other real estate   924    1,834 
Capitalized additions to other real estate   (126)   (54)
Net increase in FHLB stock   (93)   (438)
Purchases of equipment   (241)   (370)
           
Net cash used in investing activities   (10,139)   (189)
7
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)

 

(dollars in thousands)        
For the nine months ended September 30,        
   2015   2014 
Cash flows from financing activities:          
Net increase in demand, interest-bearing and savings deposits  $12,200   $31,232 
Net decrease in time deposits   (1,524)   (4,527)
Net decrease increase in short-term borrowings       (4,500)
Net decrease in long-term borrowings       (500)
Cash paid to repurchase common stock   (7,843)   (4,148)
           
Net cash provided by financing activities  $2,833   $17,557 
           
(Decrease) increase in cash and cash equivalents   (811)   24,049 
           
Cash and cash equivalents at beginning of year   22,449    17,948 
           
Cash and cash equivalents at end of period  $21,638   $41,997 

 

See Notes to Unaudited Consolidated Financial Statements

8
 

AMERICAN RIVER BANKSHARES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

 

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, 2015 and December 31, 2014, the results of its operations and statement of comprehensive income for the three-month and nine-month periods ended September 30, 2015 and 2014, its cash flows for the nine-month periods ended September 30, 2015 and 2014 and its statement of changes in shareholders’ equity for the year ended December 31, 2014 and the nine months ended September 30, 2015 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 2014 annual report on Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2015 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 176,321 options remain outstanding at September 30, 2015. At September 30, 2015, under the 2010 Plan, there were 76,461 stock options and 57,516 restricted shares outstanding and the total number of authorized shares that remain available for issuance was 1,395,985. The 2010 Plan provides for the following types of stock-based awards: incentive stock options; nonqualified stock options; stock appreciation rights; restricted stock; restricted performance stock; unrestricted Company stock; and performance units. Awards under the 2000 Plan were either incentive stock options or nonqualified stock options. Under the 2010 Plan, the awards may be granted to employees and directors under incentive and nonqualified option agreements, restricted stock agreements, and other awards agreements. The 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, 2015 and 2014, the compensation cost recognized for equity compensation was $73,000 and $48,000, respectively. The recognized tax benefit for equity compensation expense was $25,000 and $17,000, respectively, for the three-month periods ended September 30, 2015 and 2014. For the nine-month periods ended September 30, 2015 and 2014, the compensation cost recognized for equity compensation was $200,000 and $119,000, respectively. The recognized tax benefit for equity compensation expense was $70,000 and $42,000, respectively, for the nine-month periods ended September 30, 2015 and 2014.

At September 30, 2015, the total compensation cost related to nonvested stock option awards not yet recorded was $149,000.  This amount will be recognized over the next 4.75 years and the weighted average period of recognizing these costs is expected to be 2.25 years. At September 30, 2015, the total compensation cost related to restricted stock awards not yet recorded was $424,000.  This amount will be recognized over the next 4.75 years and the weighted average period of recognizing these costs is expected to be 1.89 years.

Equity Plans Activity

Stock Options

There were no stock options awarded during the three-month period ended September 30, 2015. There were 26,427 stock options awarded during the nine-month period ended September 30, 2015 at a weighted average exercise price of $9.56. 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. The weighted average award date fair value of options awarded for the nine-month period ended September 30, 2015 was $3.24. 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, 2015 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, 2015   271,700   $16.27    3.1 years   $82 
Awarded   26,427    9.56         
Exercised                
Cancelled   45,345    18.17         
Outstanding at September 30, 2015   252,782   $15.23    3.9 years   $120 
Vested at September 30, 2015   193,246   $17.16    2.4 years   $80 
Non-vested at September 30, 2015   59,536   $8.96    8.9 years   $40 
10
 

Restricted Stock

 

There were no shares of restricted stock awarded during the three-month period ended September 30, 2015 and 45,023 shares of restricted stock awarded during the nine-month period ended September 30, 2015. 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. Of the restricted shares awarded in 2015, 12,552 restricted shares will vest one year from the date of the award, 11,939 vest over five years at 20% per year from the date of the award, and 20,532 are performance based awards that must meet minimum performance criteria before they begin to vest. If the performance metrics are not met, up to 100% of the award may be forfeited and if the performance metrics are exceeded, the awards may be increased by up to 150% of the original award. Of the restricted shares awarded in 2014, 13,560 restricted shares vested one year from the date of the award and 11,270 shares vest over five years at 20% per 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 ($9.41 on March 18, 2015, $9.56 on May 22, 2015 and $8.85 on May 22, 2014).

There were 3,274 restricted share awards that were fully vested during the three-month period ended September 30, 2015 and 20,345 restricted share awards that were fully vested during the nine-month period ended September 30, 2015. There were 3,272 restricted share 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 no restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2015 and 2014. The intrinsic value of nonvested restricted shares at September 30, 2015 was $553,000.

 

Restricted Stock  Shares   Weighted
Average Award
Date Fair Value
 
Nonvested at January 1, 2015   32,838   $8.31 
Awarded   45,023    9.49 
Less:  Vested   20,345    8.36 
Less:  Cancelled        
Nonvested at September 30, 2015   57,516   $9.21 

 

Other Equity Awards

 

There were no stock appreciation rights; unrestricted Company stock; or performance units awarded during the three-month or nine-month month periods ended September 30, 2015 or 2014.

 

The intrinsic value used for stock options and restricted stock was derived from the market price of the Company’s common stock of $9.62 as of September 30, 2015.

 

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 $29,150,000 and standby letters of credit of approximately $363,000 at September 30, 2015 and loan commitments of approximately $32,639,000 and standby letters of credit of approximately $356,000 at December 31, 2014. 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 2015 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 September 30, 2015 or December 31, 2014.

11
 

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 (7,481,529 and 7,653,109 shares for the three-month and nine-month periods ended September 30, 2015, and 8,063,589 and 8,154,947 for the three-month and nine-month periods ended September 30, 2014). 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 19,930 and 14,878, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2015 and 11,934 and 11,835, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2014. For the three-month periods ended September 30, 2015 and 2014, there were 192,106 and 211,024 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. For the nine-month periods ended September 30, 2015 and 2014, there were 192,106 and 211,024 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. Earnings per share is retroactively adjusted for stock dividends and stock splits, if applicable, for all periods presented.

 

5. INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities at September 30, 2015 and December 31, 2014 consisted of the following (dollars in thousands):

 

Available-for-Sale

   September 30, 2015 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Estimated Fair
Value
 
Debt securities:                    
U.S. Government Agencies and Sponsored Agencies  $234,938   $5,058   $(175)  $239,821 
Obligations of states and political subdivisions   23,858    1,406        25,264 
Corporate bonds   1,503    68        1,571 
Equity securities:                    
Corporate stock   51    33        84 
   $260,350   $6,565   $(175)  $266,740 

 

   December 31, 2014 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Estimated Fair
Value
 
Debt securities:                    
U.S. Government Agencies and Sponsored Agencies  $257,002   $4,715   $(602)  $261,115 
Obligations of states and political subdivisions   24,886    1,423    (20)   26,289 
Corporate bonds   1,504    79        1,583 
Equity securities:                    
Corporate stock   54    23        77 
   $283,446   $6,240   $(622)  $289,064 

Net unrealized gains on available-for-sale investment securities totaling $6,390,000 were recorded, net of $2,565,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at September 30, 2015. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended September 30, 2015 totaled $8,381,000 and $33,000, respectively, and for the nine-month period ended September 30, 2015 totaled $23,764,000 and $251,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2015.

Net unrealized gains on available-for-sale investment securities totaling $5,618,000 were recorded, net of $2,247,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 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.

12
 
Held-to-Maturity                
                 
September 30, 2015                
      Gross   Gross   Estimated  
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
Debt securities:                    
U.S. Government Agencies and Sponsored Agencies  $674   $52   $   $726 

 

                     
December 31, 2014     Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
Debt securities:                    
U.S. Government Agencies and Sponsored Agencies  $862   $60   $   $922 

 

There were no sales or transfers of held-to-maturity investment securities for the periods ended September 30, 2015 and September 30, 2014. Investment securities with unrealized losses at September 30, 2015 and December 31, 2014 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):

September 30, 2015  Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
Available-for-Sale                              
                               
Debt securities:                              
U.S. Government Agencies and Sponsored Agencies  $21,090   $(164)   2,268    (11)  $23,358   $(175)
   $21,090   $(164)  $2,268   $(11)  $23,358   $(175)

 

December 31, 2014  Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
Available-for-Sale                              
                               
Debt securities:                              
U.S. Government Agencies and Sponsored Agencies  $57,145   $(503)  $10,006   $(99)  $67,151   $(602)
Obligations of states and political subdivisions           649    (20)   649    (20)
   $57,145   $(503)  $10,655   $(119)  $67,800   $(622)

There were no held-to-maturity investment securities with unrealized losses as of September 30, 2015 or December 31, 2014.

At September 30, 2015, the Company held 217 securities of which 13 were in a loss position for less than twelve months and one was in a loss position for twelve months or more.  Of the 13 securities in a loss position for less than twelve months and the single security that was in a loss position for greater than twelve months, all were U.S. Government Agencies and Sponsored Agencies securities. 

13
 

At December 31, 2014, the Company held 223 securities of which 25 were in a loss position for less than twelve months and six were in a loss position for twelve months or more.  Of the 25 securities in a loss position for less than twelve months, 22 were U.S. Government Agencies and Sponsored Agencies securities and three were obligations of states or political subdivisions. The six securities that were in a loss position for greater than twelve months consisted of five U.S. Government Agencies and Sponsored Agencies securities and one obligation of states or political subdivisions.

 

The unrealized loss on the Company’s U.S. Government Agencies and Sponsored Agencies securities is primarily driven by interest rates. Because the decline in market value is attributable to a change in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be until maturity, management does not consider these investments to be other-than-temporarily impaired.

 

The amortized cost and estimated fair values of investment securities at September 30, 2015 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  $   $           
After one year through five years   4,386    4,541           
After five years through ten years   15,173    16,157           
After ten years   5,802    6,137           
    25,361    26,835           
Investment securities not due at a single maturity date:                    
Mortgage-backed securities   234,938    239,821   $674   $726 
Corporate stock   51    84         
   $260,350   $266,740   $674   $726 

Expected maturities may differ from contractual maturities because the issuers of some of the securities 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, 2015 and December 31, 2014, the recorded investment in nonperforming loans and leases was approximately $1,932,000 and $1,653,000, 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, 2015, the recorded investment in loans and leases that were considered to be impaired totaled $23,110,000, which includes $1,725,000 in nonaccrual loans and leases and $21,385,000 in performing loans and leases. Of the total impaired loans of $23,110,000, loans totaling $13,178,000 were deemed to require no specific reserve and loans totaling $9,932,000 were deemed to require a related valuation allowance of $966,000. At December 31, 2014, the recorded investment in loans and leases that were considered to be impaired totaled $25,120,000 and had a related valuation allowance of $1,603,000.

At September 30, 2015 and December 31, 2014, the recorded investment in other real estate owned (“OREO”) was $3,781,000 and $4,647,000, respectively. At September 30, 2015, the Company did not own any residential OREO properties and there were $338,000 of residential properties in the process of foreclosure. During the first quarter of 2015, the Company sold two adjoining parcels of land in Sacramento County that did not result in a gain or loss at the time of sale; however, prior to sale, the book value of this property was adjusted by $76,000 with a charge to expense during the first quarter of 2015. The Company did not add any properties to OREO during the first quarter of 2015. During the second quarter of 2015, the Company did not foreclose on any property and an OREO property in Amador County consisting of unimproved land was sold. No gain or loss was recorded as a result of the sale. During the third quarter of 2015, the Company did not foreclose on any property or sell any OREO property.

14
 

The Company periodically obtains property valuations to determine whether the recorded book value is considered fair value. During the third quarter of 2015, this valuation process did not result in the Company adjusting any book values. 

 

The September 30, 2015 OREO balance of $3,781,000 consisted of four properties including two commercial real estate properties in the total amount of $2,522,000 and two commercial unimproved land properties totaling $1,259,000.

 

Nonperforming loans and leases and OREO at September 30, 2015 and December 31, 2014 are summarized as follows:

(in thousands)  September 30,   December 31, 
   2015   2014 
         
Nonaccrual loans and leases that are current to terms (less than 30 days past due)  $123   $13 
Nonaccrual loans and leases that are past due   1,685    1,640 
Loans and leases past due 90 days and accruing interest   124     
Other assets   878    878 
Other real estate owned   3,781    4,647 
Total nonperforming assets  $6,591   $7,178 
           
Nonperforming loans and leases to total loans and leases   0.66%   0.63%
Total nonperforming assets to total assets   1.05%   1.16%

Impaired loans and leases as of and for the periods ended September 30, 2015 and December 31, 2014 are summarized as follows:

(in thousands)  As of September 30, 2015   As of December 31, 2014 
  

 

Recorded

Investment

  

Unpaid Principal

Balance

  

 

Related

Allowance

  

 

Recorded

Investment

  

Unpaid Principal

Balance

  

 

Related

Allowance

 
With no related allowance recorded:                              
Commercial   $   $   $   $   $   $ 
Real estate-commercial   12,840    13,473        10,684    11,398     
Real estate-residential   338    338        338    425     
Consumer               37    37     
Subtotal  $13,178   $13,811   $   $11,059   $11,860   $ 
                               
With an allowance recorded:                              
Commercial   $131   $131   $32   $769   $769   $344 
Real estate-commercial   6,739    6,837    647    9,773    9,857    949 
Real estate-multi-family   490    490    6    496    496    38 
Real estate-residential   2,129    2,215    213    2,524    2,637    237 
Agriculture   373    373    39    381    381    13 
Consumer   70    70    29    118    118    22 
Subtotal  $9,932   $10,116   $966   $14,061   $14,258   $1,603 
                               
Total:                              
Commercial   $131   $131   $32   $769   $769   $344 
Real estate-commercial   19,579    20,310    647    20,457    21,255    949 
Real estate-multi-family   490    490    6    496    496    38 
Real estate-residential   2,467    2,553    213    2,862    3,062    237 
Agriculture   373    373    39    381    381    13 
Consumer   70    70    29    155    155    22 
   $23,110   $23,927   $966   $25,120   $26,118   $1,603 
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, 2015   September 30, 2014   September 30, 2015   September 30, 2014 
Commercial   $125   $1,455   $145   $1,053 
Real estate-commercial   19,336    19,735    19,750    20,581 
Real estate-multi-family   491    1,643    493    1,638 
Real estate-construction       237        218 
Real estate-residential   2,473    2,910    2,511    2,901 
Agriculture   375    194    377    388 
Consumer   91    163    77    162 
     Total  $22,890   $26,337   $23,352   $26,941 

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,
2015
   September 30,
2014
   September 30,
2015
   September 30,
2014
 
                 
Commercial  $ 2   $ 5   $ 7   $ 14 
Real estate-commercial   259    259    728    826 
Real estate-multi-family   8    19    21    57 
Real estate-construction       3        9 
Real estate-residential   14    30    69    97 
Agriculture   5    3    13    14 
Consumer       1        3 
     Total  $288   $320   $838   $1,020 

 

7. TROUBLED DEBT RESTRUCTURINGS

At September 30, 2015, there were 15 loans and leases that were considered to be troubled debt restructurings. Of these loans and leases, 11 are currently performing (less than ninety days past due) totaling $9,093,000 and four are considered nonperforming (and included in the $1,932,000 discussed in Note 6), totaling $1,226,000. Of the four TDRs considered nonperforming, two are current to the modified terms. At September 30, 2015 and December 31, 2014, 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 $262,000 and $829,000, respectively, as specific reserves for loans whose terms have been modified as troubled debt restructurings as of September 30, 2015 and December 31, 2014.

During the nine-month period ended September 30, 2015, the terms of six loans were modified as troubled debt restructurings. Three of these loans were renewals of previously reported loans and three were new TDRs. The modifications of the terms of these loans consisted of extensions of the maturity date and/or interest rates lower than the original loan rate.

 

There were no loans modified as troubled debt restructurings during the three months ended September 30, 2015. 

16
 

The following table presents loans by class modified as troubled debt restructurings during the nine months ended September 30, 2015 (dollars in thousands):

 

      Pre-   Post-  
      Modification   Modification 
      Outstanding   Outstanding  
   Number   Recorded   Recorded 
   of Loans   Investment   Investment 
Troubled debt restructurings:               
Commercial   1   $47   $47 
Real estate - commercial   2    1,645    1,645 
Real estate - residential   2    416    416 
Consumer   1    23    23 
Total   6   $2,131   $2,131 

 

The troubled debt restructurings described above increased the allowance for loan and lease losses by $151,000 and resulted in no charge-offs during the nine months ended September 30, 2015.

 

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   $5,977   $5,977 

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.

 

There were no payment defaults on troubled debt restructurings within twelve months following the modification for the three-month and nine-month periods ended September 30, 2015 or September 30, 2014.

17
 

 

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, 2015 and December 31, 2014 are summarized below:

 

September 30, 2015  Credit Risk Profile by Internally Assigned Grade 
(dollars in thousands)      Real Estate 
   Commercial   Commercial   Multi-family   Construction   Residential 
Grade:                         
   Pass  $30,106   $175,756   $21,482   $4,490   $12,642 
   Watch   1,227    13,202    496    6,445    2,122 
   Special mention       13,605        323    729 
   Substandard   2,936    1,782            814 
   Doubtful                    
          Total  $34,269   $204,345   $21,978   $11,258   $16,307 

 

   Credit Risk Profile by Internally Assigned Grade Other Credit Exposure     
   Leases   Agriculture   Consumer   Total 
Grade:                    
   Pass  $837   $1,986   $2,411   $249,710 
   Watch           772    24,264 
   Special mention        372    229    15,258 
   Substandard           178    5,710 
   Doubtful                
          Total  $837   $2,358   $3,590   $294,942 

 

December 31, 2014  Credit Risk Profile by Internally Assigned Grade 
(dollars in thousands)      Real Estate 
   Commercial   Commercial   Multi-family   Construction   Residential 
Grade:                         
   Pass  $20,179   $163,091   $13,663   $3,327   $9,364 
   Watch   1,280    13,724    504    4,372    2,504 
   Special mention   101    13,583        329    603 
   Substandard   3,626    3,473            838 
   Doubtful or loss                    
          Total  $25,186   $193,871   $14,167   $8,028   $13,309 

 

   Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure
     
   Leases   Agriculture   Consumer   Total 
Grade:                    
   Pass  $1,286   $2,501   $3,424   $216,835 
   Watch           1,041    23,425 
   Special mention       381    268    15,265 
   Substandard           183    8,120 
   Doubtful                
          Total  $1,286   $2,882   $4,916   $263,645 
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, 2015                                        
(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, 2015  $1,430   $2,317   $130   $583   $399   $2   $62   $124   $254   $5,301 
Provision for loan losses   38    (58)   27    160    (133)       14    (24)   (24)    
Loans charged off   (609)                   (1)       (6)       (616)
Recoveries   88    41            113            2        244 
                                                   
Ending balance, September 30, 2015  $947   $2,300   $157   $743   $379   $1   $76   $96   $230   $4,929 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $32   $647   $6   $   $213   $   $39   $29   $   $966 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $915   $1,653   $151   $743   $166   $1   $37   $67   $230   $3,963 
                                                   
Loans                                                  
                                                   
Ending balance  $34,269   $204,345   $21,978   $11,258   $16,307   $837   $2,358   $3,590   $   $294,942 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $131   $19,579   $490   $   $2,467   $   $373   $70   $   $23,110 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $34,138   $184,766   $21,488   $11,258   $13,840   $837   $1,985   $3,520   $   $271,832 
                                                   
Allowance for Loan and Lease Losses                                                  
                                                   
Beginning balance, June 30, 2015  $1,652   $1,968   $107   $807   $385   $1   $50   $122   $267   $5,359 
Provision for loan losses   (161)   331    50    (64)   (119