UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended

June 30, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 – 6,391,520 shares outstanding at August 8, 2017.

AMERICAN RIVER BANKSHARES

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2017

Part I.			Page
Item 1.	Financial Statements		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49
Item 4.	Controls and Procedures		49
Part II.
Item 1.	Legal Proceedings		50
Item 1A.	Risk Factors		50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 3.	Defaults Upon Senior Securities		50
Item 4.	Mine Safety Disclosures		50
Item 5.	Other Information		50
Item 6.	Exhibits		51
Signatures			56
Exhibit Index			57
31.1	Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		58
31.2	Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		59
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		60

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Label
101.PRE	XBRL Taxonomy Extension Presentation

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

 

AMERICAN RIVER BANKSHARES

CONSOLIDATED BALANCE SHEET

(Unaudited)

(dollars in thousands)		June 30, 2017				December 31, 2016
ASSETS
Cash and due from banks		$	22,004			$	27,589
Interest-bearing deposits in banks			1,248				999
Investment securities:
Available-for-sale, at fair value			257,471				254,020
Held-to-maturity, at amortized cost			429				483
Loans and leases, less allowance for loan and lease losses of $4,881 at June 30, 2017 and $4,822 at December 31, 2016			316,146				324,086
Premises and equipment, net			1,275				1,362
Federal Home Loan Bank stock			3,932				3,779
Goodwill and other intangible assets			16,321				16,321
Other real estate owned			1,348				1,348
Bank owned life insurance			14,962				14,805
Accrued interest receivable and other assets			6,469				6,658
		$	641,605			$	651,450
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing		$	196,212			$	201,113
Interest-bearing			341,668				343,693
Total deposits			537,880				544,806
Short-term borrowings			2,000				3,500
Long-term borrowings			13,500				12,000
Accrued interest payable and other liabilities			6,852				7,294
Total liabilities			560,232				567,600
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 – 6,357,767 shares at June 30, 2017 and 6,661,726 shares at December 31, 2016			37,739				42,484
Retained earnings			42,646				40,822
Accumulated other comprehensive income, net of taxes			988				544
Total shareholders’ equity			81,373				83,850
		$	641,605			$	651,450

 

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

(dollars in thousands, except per share data)
For the periods ended June 30,		Three months								Six months
		2017				2016				2017				2016
Interest income:
Interest and fees on loans:
Taxable		$	3,458			$	3,445			$	6,888			$	6,807
Exempt from Federal income taxes			133				173				266				345
Interest on deposits in banks			3				2				5				3
Interest and dividends on investment securities:
Taxable			1,363				1,441				2,686				2,993
Exempt from Federal income taxes			159				162				316				346
Dividends			5				6				13				11
Total interest income			5,121				5,229				10,174				10,505
Interest expense:
Interest on deposits			203				182				397				366
Interest on borrowings			49				39				97				89
Total interest expense			252				221				494				455
Net interest income			4,869				5,008				9,680				10,050
Provision for loan and lease losses			—				—				—				—
Net interest income after provision for loan and lease losses			4,869				5,008				9,680				10,050
Noninterest income:
Service charges on deposit accounts			114				127				231				256
Gain (loss) on sale, call, or impairment of securities			86				(1	)			142				281
Rental income from other real estate owned			—				—				—				106
Other noninterest income			239				237				485				474
Total noninterest income			439				363				858				1,117
Noninterest expense:
Salaries and employee benefits			2,064				2,101				4,234				4,261
Occupancy			262				292				531				590
Furniture and equipment			147				163				298				328
Federal Deposit Insurance Corporation assessments			52				76				105				156
Expenses related to other real estate owned			12				20				32				360
Other expense			831				763				1,598				1,511
Total noninterest expense			3,368				3,415				6,798				7,206
Income before provision for income taxes			1,940				1,956				3,740				3,961
Provision for income taxes			643				652				1,259				1,285
Net income		$	1,297			$	1,304			$	2,481			$	2,676
Basic earnings per share		$	0.20			$	0.19			$	0.38			$	0.39
Diluted earnings per share		$	0.20			$	0.19			$	0.38			$	0.39
Cash dividends per share		$	0.05			$	0.00			$	0.10			$	0.00

 

See notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

(dollars in thousands, except per share data)
For the periods ended June 30,		Three months								Six months
		2017				2016				2017				2016
Net income		$	1,297			$	1,304			$	2,481			$	2,676
Other comprehensive income:
Increase in net unrealized gains on investment securities			412				810				873				3,712
Deferred tax expense			(166	)			(324	)			(344	)			(1,485	)
Increase in net unrealized gains on investment securities, net of tax			246				486				529				2,227
Reclassification adjustment for realized (gains) losses included in net income			(86	)			1				(142	)			(281	)
Tax effect			35				—				57				112
Realized (gains) losses, net of tax			(51	)			1				(85	)			(169	)
Total other comprehensive gain income			195				487				444				2,058
Comprehensive income		$	1,492			$	1,791			$	2,925			$	4,734

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

		Common Stock												Accumulated Other				Total
(dollars in thousands)		Shares				Amount				Retained Earnings				Comprehensive Income				Shareholders’ Equity
Balance, January 1, 2016			7,343,649			$	49,554			$	34,418			$	2,103			$	86,075
Net income											2,676								2,676
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities															2,058				2,058
Net restricted stock award activity and related compensation expense			28,728				147												147
Stocks option exercised and compensation expense			500				24												24
Retirement of common stock			(716,897	)			(7,414	)											(7,414	)
Balance, June 30, 2016			6,655,980			$	42,311			$	37,094			$	4,161			$	83,566
Balance, January 1, 2017			6,661,726			$	42,484			$	40,822			$	544			$	83,850
Net income											2,481								2,481
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities															444				444
Cash dividends ($0.10 per share)											(657	)							(657	)
Net restricted stock award activity and related compensation expense			22,032				181												181
Stock options exercised			7,095				60												60
Stock option compensation expense			—				20												20
Retirement of common stock			(333,086	)			(5,006	)											(5,006	)
Balance, June 30, 2017			6,357,767			$	37,739			$	42,646			$	988			$	81,373

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

(dollars in thousands)
For the six months ended June 30,
		2017				2016
Cash flows from operating activities:
Net income		$	2,481			$	2,676
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses			—				—
Increase in deferred loan origination fees, net			3				26
Depreciation and amortization			173				220
Gain on sale, call, and impairment of investment securities, net			(142	)			(281	)
Amortization of investment security premiums and discounts, net			1,648				1,422
Increase in cash surrender values of life insurance policies			(157	)			(160	)
Stock based compensation expense			201				167
Loss on sale or write-down of other real estate owned			—				259
(Increase) decrease in accrued interest receivable and other assets			(98	)			621
Decrease in accrued interest payable and other liabilities			(442	)			(1,563	)
Net cash provided by operating activities			3,667				3,387
Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment securities			17,605				8,287
Proceeds from matured available-for-sale investment securities			1,930				600
Proceeds from called available-for-sale investment Securities			145
Purchases of available-for-sale investment securities			(45,419	)			(8,875	)
Proceeds from principal repayments for available-for-sale investment securities			21,513				21,612
Proceeds from principal repayments for held-to-maturity investment securities			54				83
Net increase in interest-bearing deposits in banks			(249	)			(249	)
Net decrease (increase) in loans			7,937				(14,326	)
Proceeds from sale of other real estate			—				710
Net increase in FHLB stock			(153	)			—
Purchases of equipment			(86	)			(118	)
Net cash provided by investing activities			3,277				7,724

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)

(dollars in thousands)
For the six months ended June 30,
		2017				2016
Cash flows from financing activities:
Net decrease in demand, interest-bearing and savings deposits		$	(4,771	)		$	(2,785	)
Net decrease in time deposits			(2,155	)			(1,972	)
Net (decrease) increase in short-term borrowings			(1,500	)			1,500
Net increase (decrease) in long-term borrowings			1,500				(1,500	)
Proceeds from stock option exercise			60				4
Cash dividends paid			(657	)			—
Cash paid to repurchase common stock			(5,006	)			(7,414	)
Net cash used in financing activities		$	(12,529	)		$	(12,167	)
Decrease in cash and cash equivalents			(5,585	)			(1,056	)
Cash and cash equivalents at beginning of year			27,589				23,727
Cash and cash equivalents at end of period		$	22,004			$	22,671

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

1. CONSOLIDATED FINANCIAL STATEMENTS

 

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of American River Bankshares (the “Company”) at June 30, 2017 and December 31, 2016, the results of its operations and statement of comprehensive income for the three-month and six-month periods ended June 30, 2017 and 2016, its cash flows for the six-month periods ended June 30, 2017 and 2016 and its statement of changes in shareholders’ equity for the six months ended June 30, 2017 and 2016 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 annual report on Form 10-K for the year ended December 31, 2016. The results of operations for the three-month and six-month periods ended June 30, 2017 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 64,134 options remain outstanding at June 30, 2017. At June 30, 2017, under the 2010 Plan, there were 76,461 stock options and 79,474 restricted shares outstanding and the total number of authorized shares that remain available for issuance was 1,362,437. 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 unvested restricted stock under the 2010 Plan have dividend and voting rights. The 2010 Plan and the 2000 Plan (collectively the “Plans”) require that the option price may not be less than the fair market value of the stock at the date the option is awarded. The option awards under the Plans expire on dates determined by the Board of Directors, but not later than ten years from the date of award. The vesting period is generally five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding option awards under the Plans are exercisable until their expiration, however, no new options will be awarded under the 2000 Plan. New shares are issued upon exercise of an option.

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

 

Equity Compensation

 

For the three-month periods ended June 30, 2017 and 2016, the compensation cost recognized for equity compensation was $100,000 and $85,000, respectively. The recognized tax benefit for equity compensation expense was $36,000 and $30,000, respectively, for the three-month periods ended June 30, 2017 and 2016. For the six-month periods ended June 30, 2017 and 2016, the compensation cost recognized for equity compensation was $201,000 and $167,000, respectively. The recognized tax benefit for equity compensation expense was $73,000 and $59,000, respectively, for the six-month periods ended June 30, 2017 and 2016.

At June 30, 2017, the total unrecognized pre-tax compensation cost related to nonvested stock option awards was $79,000. This amount will be recognized over the next 3.0 years and the weighted average period of recognizing these costs is expected to be 1.7 years. At June 30, 2017, the total unrecognized pre-tax compensation cost related to restricted stock awards was $579,000. This amount will be recognized over the next 4.9 years and the weighted average period of recognizing these costs is expected to be 1.6 years.

Equity Plans Activity

Stock Options

There were no stock options awarded during the three-month and six-month periods ended June 30, 2017 and June 30, 2016. A summary of option activity under the Plans as of June 30, 2017 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, 2017			186,023			$	12.92				3.7 years			$	741
Awarded			—				—				—				—
Exercised			(7,095	)			8.50				—				—
Expired, forfeited or cancelled			(38,333	)			21.70				—				—
Outstanding at June 30, 2017			140,595			$	10.42				4.2 years			$	629
Vested at June 30, 2017			111,648			$	10.73				3.4 years			$	477
Non-vested at June 30, 2017			28,947			$	9.24				7.4 years			$	153

 

Restricted Stock

 

There were 9,949 and 24,982 shares of restricted stock awarded during the three-month and six-month periods ended June 30, 2017, respectively. There were 11,923 and 29,756 shares of restricted stock awarded during the three-month and six-month periods ended June 30, 2016, respectively.

Restricted Stock		Shares				Weighted Average Award Date Fair Value
Nonvested at January 1, 2017			71,824			$	9.69
Awarded			24,982				14.65
Less:  Vested			14,387				9.76
Less:  Expired, forfeited or cancelled			2,949				10.01
Nonvested at June 30, 2017			79,474			$	11.22

 

Other Equity Awards

 

There were no stock appreciation rights; restricted performance stock; unrestricted Company stock; or performance units awarded during the three-month or six-month month periods ended June 30, 2017 or 2016 or outstanding at June 30, 2017 or December 31, 2016.

 

The intrinsic value used for stock options and restricted stock awards was derived from the market price of the Company’s common stock of $14.51 as of June 30, 2017.

 

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 $10,658,000 and standby letters of credit of approximately $191,000 at June 30, 2017 and loan commitments of approximately $19,728,000 and standby letters of credit of approximately $238,000 at December 31, 2016. 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 2017 as some of these are expected to expire without being fully drawn upon.

 

Standby letters of credit are commitments issued to guarantee the performance or financial obligation of a client to a third party. These guarantees are issued primarily relating to purchases of inventory, insurance programs, performance obligations to government agencies, or as security for real estate rents by commercial clients and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to clients and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The majority of all such commitments are collateralized. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at June 30, 2017 or December 31, 2016.

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 (6,346,650 and 6,454,864 shares for the three-month and six-month periods ended June 30, 2017 and 6,717,456 and 6,906,620 shares for the three-month and six-month periods ended June 30, 2016). Using the treasury stock method, 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 81,372 and 85,801, respectively, dilutive shares for the three-month and six-month periods ended June 30, 2017 and 28,643 and 26,818, respectively, dilutive shares for the three-month and six-month periods ended June 30, 2016.  For the three-month periods ended June 30, 2017 and 2016, there were 32,448 and 105,844 stock options, respectively, that were excluded from the calculation as they were considered antidilutive.  For the six-month periods ended June 30, 2017 and 2016, there were 32,448 and 138,549 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.

Accounting Standards Codification (“ASC”) 260, Earnings per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends as a separate class of securities in calculating earnings per share.  The Company has granted and expects to continue to grant to directors and employees restricted stock grants that contain non-forfeitable rights to dividends.  Such grants are considered participating securities under ASC 260.  As such, the Company is required to include these grants in the calculation of basic earnings per share and calculate basic earnings per share using the two-class method.  The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings.  The Company has calculated earnings per share using the two-class method and has determined that there was no difference in earnings per share using the two-class method versus the treasury stock method and therefore the two-class method will not be presented.

 

5. INVESTMENT SECURITIES

The amortized cost and estimated fair values of Available-for-Sale and Held-to-Maturity investment securities at June 30, 2017 and December 31, 2016 consisted of the following (dollars in thousands):

Available-for-Sale

		June 30, 2017
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Debt securities:
U.S. Government Agencies and Sponsored Entities		$	227,252			$	2,078			$	(1,065	)		$	228,265
Obligations of states and political subdivisions			22,032				664				(171	)			22,525
Corporate bonds			6,489				113				(13	)			6,589
Equity securities:
Corporate stock			51				41				—				92
		$	255,824			$	2,896			$	(1,249	)		$	257,471

 

		December 31, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Debt securities:
U.S. Government Agencies and Sponsored Entities		$	229,118			$	2,150			$	(1,483	)		$	229,785
Obligations of states and political subdivisions			22,436				559				(383	)			22,612
Corporate bonds			1,501				18				—				1,519
Equity securities:
Corporate stock			49				55				—				104
		$	253,104			$	2,782			$	(1,866	)		$	254,020

Net unrealized gains on available-for-sale investment securities totaling $1,647,000 were recorded, net of $659,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at June 30, 2017. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended June 30, 2017 totaled $9,133,000 and $86,000, respectively, and for the six-month period ended June 30, 2017 proceeds and gross realized gains from the sale and call of available-for-sale investment securities totaled $17,605,000 and $142,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and six-month periods ended June 30, 2017.

Net unrealized gains on available-for-sale investment securities totaling $916,000 were recorded, net of $372,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2016. There were no sales or calls of available-for-sale investment securities for the three-month period ended June 30, 2016, however, there was an impairment loss of one security resulting in the write-down of the remaining balance of $1,000, and for the six-month period ended June 30, 2016 proceeds and gross realized gains from the sale, call, and impairment of available-for-sale investment securities totaled $8,287,000 and $281,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and six-month periods ended June 30, 2016.

Held-to-Maturity

June 30, 2017

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

U.S. Government Agencies and Sponsored Entities

$

429

$

33

$

—

$

462

December 31, 2016

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

U.S. Government Agencies and Sponsored Entities

$

483

$

38

$

—

$

521

There were no sales or transfers of held-to-maturity investment securities for the periods ended June 30, 2017 and June 30, 2016. Investment securities with unrealized losses at June 30, 2017 and December 31, 2016 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):

June 30, 2017		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 Entities		$	101,497			$	(1,023	)			4,817				(42	)		$	106,314			$	(1,065	)
Obligations of states and political subdivisions			4,646				(130	)			985				(41	)			5,631				(171	)
Corporate bonds			1,976				(13	)											1,976				(13	)
		$	108,119			$	(1,166	)		$	5,802			$	(83	)		$	113,921			$	(1,249	)

 

December 31, 2016		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:
US Government Agencies and Sponsored Entities		$	111,870			$	(1,415	)		$	5,010			$	(68	)		$	116,880			$	(1,483	)
Obligations of states and political subdivisions			8,319				(383	)			—				—				8,319				(383	)
		$	120,189			$	(1,798	)		$	5,010			$	(68	)		$	125,199			$	(1,866	)

 

There were no held-to-maturity investment securities with unrealized losses as of June 30, 2017 or December 31, 2016.

At June 30, 2017, the Company held 222 securities of which 67 were in a loss position for less than twelve months and four were in a loss position for twelve months or more.  Of the 67 securities in a loss position for less than twelve months, 62 were U.S. Government Agencies and Sponsored Entities securities, four were obligations of states or political subdivisions, and one was a corporate bond and of the four securities that were in a loss position for greater than twelve months, three were U.S. Government Agencies and Sponsored Entities securities and one was an obligation of states or political subdivisions. 

 

At December 31, 2016, the Company held 219 securities of which 70 were in a loss position for less than twelve months and three were in a loss position for twelve months or more.  Of the three securities that were in a loss position for greater than twelve months, all were US Government Agencies and Sponsored Entities.  

  

The unrealized loss on the Company’s investment 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 June 30, 2017 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			4,974				5,026
After five years through ten years			18,268				18,839
After ten years			5,279				5,249
			28,521				29,114
Investment securities not due at a single maturity date:
US Government Agencies and Sponsored Entities			227,252				228,265			$	429			$	462
Corporate stock			51				92				—				—
		$	255,824			$	257,471			$	429			$	462

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

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

At June 30, 2017 and December 31, 2016, the recorded investment in nonperforming loans and leases was approximately $12,000 and $19,000, respectively. Nonperforming loans and leases include all such loans and leases that are either placed on nonaccrual status or are 90 days past due as to principal or interest but still accrue interest because such loans are well-secured and in the process of collection. The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the contractual terms of the original loan agreement. At June 30, 2017, the recorded investment in loans and leases that were considered to be impaired totaled $16,998,000, which includes $12,000 in nonaccrual loans and leases and $16,986,000 in performing loans and leases. Of the total impaired loans of $16,998,000, loans totaling $9,088,000 were deemed to require no specific reserve and loans totaling $7,910,000 were deemed to require a related valuation allowance of $505,000. At December 31, 2016, the recorded investment in loans and leases that were considered to be impaired totaled $17,297,000 with a related valuation allowance of $421,000.

At June 30, 2017 and December 31, 2016, the balance in other real estate owned (“OREO”) was $1,348,000. During the first and second quarters of 2017, the Company did not add any new, impair, or sell any of the OREO properties. The June 30, 2017 OREO balance of $1,348,000 consists of two properties, one of which is commercial real estate in the amount of $386,000 and the other is commercial land in the amount of $962,000.

Nonperforming assets at June 30, 2017 and December 31, 2016 are summarized as follows:

(dollars in thousands)		June 30, 2017				December 31, 2016
Nonaccrual loans and leases that are current to terms (less than 30 days past due)		$	12			$	19
Nonaccrual loans and leases that are past due			—				—
Loans and leases past due 90 days and accruing interest			—				—
Other real estate owned			1,348				1,348
Total nonperforming assets		$	1,360			$	1,367
Nonperforming loans and leases to total loans and leases			0.00	%			0.01	%
Total nonperforming assets to total assets			0.21	%			0.21	%

Impaired loans and leases as of and for the periods ended June 30, 2017 and December 31, 2016 are summarized as follows:

(dollars in thousands)		As of June 30, 2017												As of December 31, 2016
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Real estate-commercial		$	8,757			$	9,337			$	—			$	10,910			$	11,540			$	—
Real estate-residential			331				417				—				334				421				—
Subtotal		$	9,088			$	9,754			$	—			$	11,244			$	11,961			$	—
With an allowance recorded:
Commercial		$	—			$	—			$	—			$	157			$	157			$	11
Real estate-commercial			4,975				5,064				317				3,244				3,336				246
Real estate-multi-family			478				478				20				482				482				2
Real estate-residential			2,106				2,106				140				1,813				1,813				133
Agriculture			351				351				28				357				357				29
Subtotal		$	7,910			$	7,999			$	505			$	6,053			$	6,145			$	421
Total:
Commercial		$	—			$	—			$	—			$	157			$	157			$	11
Real estate-commercial			13,732				14,401				317				14,154				14,876				246
Real estate-multi-family			478				478				20				482				482				2
Real estate-residential			2,437				2,523				140				2,147				2,234				133
Agriculture			351				351				28				357				357				29
		$	16,998			$	17,753			$	505			$	17,297			$	18,106			$	421

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

			Average Recorded Investments for the three months ended								Average Recorded Investments for the six months ended
			June 30, 2017				June 30, 2016				June 30, 2017				June 30, 2016
Commercial			$	16			$	80			$	—			$	100
Real estate-commercial				14,067				16,878				13,732				17,021
Real estate-multi-family				481				491				478				495
Real estate-residential				2,296				2,216				2,437				2,236
Agriculture				357				373				351				378
Consumer				—				76				—				77
Total			$	17,217			$	20,114			$	16,998			$	20,307

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

			Interest Income Recognized for the three months ended								Interest Income Recognized for the six months ended
			June 30, 2017				June 30, 2016				June 30, 2017				June 30, 2016
Commercial			$	—			$	2			$	1			$	3
Real estate-commercial				179				259				356				444
Real estate-multi-family				8				2				16				10
Real estate-residential				37				31				63				52
Agriculture				4				5				9				10
Consumer				—				—				—				—
Total			$	228			$	299			$	445			$	519

7. TROUBLED DEBT RESTRUCTURINGS

During the three and six-month periods ended June 30, 2017 and 2016, there were no loans that were modified as troubled debt restructurings.

 

There were no payment defaults on troubled debt restructurings within 12 months following the modification for the three-month and six-month periods ended June 30, 2017 and June 30, 2016. At June 30, 2017 and December 31, 2016, there were no unfunded commitments on those loans considered troubled debt restructures. See also “Impaired Loans and Leases” in Item 2.

8. ALLOWANCE FOR LOAN AND LEASE LOSSES

 

The Company’s loan and lease portfolio allocated by management’s internal risk ratings as of June 30, 2017 and December 31, 2016 are summarized below:

June 30, 2017		Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)						Real Estate
		Commercial				Commercial				Multi-family				Construction				Residential
Grade:
Pass		$	24,647			$	163,362			$	66,608			$	7,479			$	14,864
Watch			123				24,782				478				2,373				1,463
Special mention			1,267				2,197				3,945				—				720
Substandard			2,719				—				—				—				456
Doubtful			—				—				—				—				—
Total		$	28,756			$	190,341			$	71,031			$	9,852			$	17,503

 

		Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
		Leases				Agriculture				Consumer				Total
Grade:
Pass		$	297			$	1,762			$	972			$	279,991
Watch			—				351				240				29,810
Special mention			—				—				133				8,262
Substandard			—				—				14				3,189
Doubtful			—				—				—				—
Total		$	297			$	2,113			$	1,359			$	321,252

 

December 31, 2016		Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)						Real Estate
		Commercial				Commercial				Multi-family				Construction				Residential
Grade:
Pass		$	31,733			$	166,769			$	68,615			$	6,770			$	12,773
Watch			157				21,328				4,758				2,410				1,773
Special mention			721				3,032				—				—				710
Substandard			2,763				—				—				—				462
Doubtful or loss			—				—				—				—				—
Total		$	35,374			$	191,129			$	73,373			$	9,180			$	15,718

 

		Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
		Leases				Agriculture				Consumer				Total
Grade:
Pass		$	404			$	1,945			$	1,093			$	290,102
Watch			—				357				316				31,099
Special mention			—				—				219				4,682
Substandard			—				—				22				3,247
Doubtful or loss			—				—				—				—
Total		$	404			$	2,302			$	1,650			$	329,130

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

June 30, 2017
(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, 2017		$	855			$	2,050			$	851			$	446			$	253			$	1			$	64			$	24			$	278			$	4,822
Provision for loan losses			58				(12	)			(62	)			11				15				—				(5	)			(8	)			3				—
Loans charged-off			—				—				—				—				—				—				—				—				—				—
Recoveries			3				53				—				—				—				—				—				3				—				59
Ending balance, June 30, 2017		$	916			$	2,091			$	789			$	457			$	268			$	1			$	59			$	19			$	281			$	4,881
Ending balance:
Individually evaluated for impairment		$	—			$	317			$	20			$	—			$	140			$	—			$	28			$	—			$	—			$	505
Ending balance:
Collectively evaluated for impairment		$	916			$	1,774			$	769			$	457			$	128			$	1			$	31			$	19			$	281			$	4,376
Loans
Ending balance		$	28,756			$	190,341			$	71,031			$	9,852			$	17,503			$	297			$	2,113			$	1,359			$	—			$	321,252
Ending balance:
Individually evaluated for impairment		$	—			$	13,732			$	478			$	—			$	2,437			$	—			$	351			$	—			$	—			$	16,998
Ending balance:
Collectively evaluated for impairment		$	28,756			$	176,609			$	70,553			$	9,852			$	15,066			$	297			$	1,762			$	1,359			$	—			$	304,254
Allowance for Loan and Lease Losses
Beginning balance, March 31, 2017		$	836			$	2,107			$	836			$	479			$	232			$	1			$	62			$	21			$	259			$	4,833
Provision for loan losses			78				(60	)			(47	)			(22	)			36				—				(3	)			(4	)			22				—
Loans charged off			—				—				—				—				—				—				—				—				—				—
Recoveries			2				44				—				—				—				—				—				2				—				48
Ending balance, June 30, 2017		$	916			$	2,091			$	789			$	457			$	268			$	1			$	59			$	19			$	281			$	4,881

December 31, 2016
(dollars in thousands)						Real Estate																Other
		Commercial				Commercial				Multi-Family				Construction				Residential				Leases				Agriculture				Consumer				Unallocated				Total
Ending balance:
Individually evaluated for impairment		$	11			$	246			$	2			$	—			$	133			$	—			$	29			$	—			$	—			$	421
Ending balance:
Collectively evaluated for impairment		$	844			$	1,804			$	849			$	446			$	120			$	1			$	35			$	24			$	278			$	4,401
Loans
Ending balance		$	35,374			$	191,129			$	73,373			$	9,180			$	15,718			$	404			$	2,302			$	1,650			$	—			$	329,130
Ending balance:
Individually evaluated for impairment		$	157			$	14,154			$	482			$	—			$	2,147			$	—			$	357			$	—			$	—			$	17,297
Ending balance:
Collectively evaluated for impairment		$	35,217			$	176,975			$	72,891			$	9,180			$	13,571			$	404			$	1,945			$	1,650			$	—			$	311,833

June 30, 2016
(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, 2016		$	860			$	2,369			$	228			$	813			$	319			$	1			$	77			$	78			$	230			$	4,975
Provision for loan losses			(125	)			266				101				(88	)			(36	)			—				(4	)			(90	)			(24	)			—
Loans charged-off			—				—				—				—				—				—				—				—				—				—
Recoveries			73				12				—				—				—				—				—				72				—				157
Ending balance, June 30, 2016		$	808			$	2,647			$	329			$	725			$	283			$	1			$	73			$	60			$	206			$	5,132
Allowance for Loan and Lease Losses
Beginning balance, March 31, 2016		$	813			$	2,513			$	270			$	625			$	298			$	2			$	77			$	65			$	419			$	5,082
Provision for loan losses			(44	)			123				59				100				(15	)			(1	)			(4	)			(5	)			(213	)			—
Loans charged off			—				—				—				—				—				—				—				—				—				—
Recoveries			39				11				—				—				—				—				—				—				—				50
Ending balance, June 30, 2016		$	808			$	2,647			$	329			$	725			$	283			$	1			$	73			$	60			$	206			$	5,132

The Company’s aging analysis of the loan and lease portfolio at June 30, 2017 and December 31, 2016 are summarized below:

June 30, 2017
(dollars in thousands)
		30-59 Days Past Due				60-89 Days Past Due				Past Due Greater Than 90 Days				Total Past Due				Current				Total Loans				Past Due Greater Than 90 Days and Accruing				Nonaccrual
Commercial:
Commercial		$	—			$	—			$	—			$	—			$	28,756			$	28,756				—			$	—
Real estate:
Commercial			—				—				—				—				190,341				190,341				—				—
Multi-family			—				—				—				—				71,031				71,031				—				—
Construction			—				—				—				—				9,852				9,852				—				—
Residential			—				—				—				—				17,503				17,503				—				—
Other:
Leases			—				—				—				—				297				297				—				—
Agriculture			—				—				—				—				2,113				2,113				—				—
Consumer			—				—				—				—				1,359				1,359				—				12
Total		$	—			$	—			$	—			$	—			$	321,252			$	321,252			$	—			$	12

 

December 31, 2016
(dollars in thousands)
		30-59 Days Past Due				60-89 Days Past Due				Past Due Greater Than 90 Days				Total Past Due				Current				Total Loans				Past Due Greater Than 90 Days and Accruing				Nonaccrual
Commercial:
Commercial		$	—			$	—			$	—			$	—			$	35,374			$	35,374			$	—			$	—
Real estate:
Commercial			—				—				—				—				191,129				191,129				—				—
Multi-family			—				—