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

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

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

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

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

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	)

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

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.

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

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.

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.

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. 

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.

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

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. 

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.

 

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

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