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EX-32.1 - EXHIBIT 32.1 - AMERICAN RIVER BANKSHARESex32_1.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN RIVER BANKSHARESex31_2.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN RIVER BANKSHARESex31_1.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended           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

2
 

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

3
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

(dollars in thousands, except per share data)                
For the periods ended June 30,  Three months   Six months 
   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

4
 

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

5
 

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

6
 

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 
7
 

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

8
 

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.

9
 

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

 

Equity Compensation

 

For the three-month periods ended June 30, 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.

10
 

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.

11
 

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.

12
 

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.

13
 

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.

14
 

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 
15
 

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.

16
 

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 

17
 

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 
18
 
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 
19
 

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