AMERICAN RIVER BANKSHARES - FORM 10-Q - November 6, 2017

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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           September 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 – 6,377,023 shares outstanding at November 3, 2017.

 
 

AMERICAN RIVER BANKSHARES

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 50
     
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 51
   Item 4. Mine Safety Disclosures 51
   Item 5. Other Information 51
   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)  September 30,   December 31, 
   2017   2016 
         
ASSETS          
           
Cash and due from banks  $37,233   $27,589 
Interest-bearing deposits in banks    1,248     999 
Investment securities:        
Available-for-sale, at fair value   249,879    254,020 
Held-to-maturity, at amortized cost   404    483 
Loans and leases, less allowance for loan and lease losses of $4,551 at September 30, 2017 and $4,822 at December 31, 2016   322,238    324,086 
Premises and equipment, net   1,226    1,362 
Federal Home Loan Bank stock   3,932    3,779 
Goodwill and other intangible assets   16,321    16,321 
Other real estate owned   961    1,348 
Bank owned life insurance   15,043    14,805 
Accrued interest receivable and other assets   7,159    6,658 
   $655,644   $651,450 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits:          
Noninterest bearing  $205,938   $201,113 
Interest-bearing   345,004    343,693 
Total deposits   550,942    544,806 
           
Short-term borrowings   2,000    3,500 
Long-term borrowings   13,500    12,000 
Accrued interest payable and other liabilities   6,947    7,294 
           
Total liabilities   573,389    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 – 6,392,570 shares at September 30, 2017 and 6,661,726 shares at December 31, 2016   38,139    42,484 
 Retained earnings   43,437    40,822 
 Accumulated other comprehensive income, net of taxes   679    544 
           
Total shareholders’ equity   82,255    83,850 
   $655,644   $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 September 30,  Three months   Nine months 
   2017   2016   2017   2016 
Interest income:                    
Interest and fees on loans:                    
Taxable  $3,496   $3,617   $10,384   $10,424 
Exempt from Federal income taxes   110    189    376    534 
Interest on deposits in banks   4    2    9    5 
Interest and dividends on investment securities:                    
Taxable   1,292    1,340    3,978    4,333 
Exempt from Federal income taxes   180    156    496    502 
Dividends   —     —     13    11 
Total interest income   5,082    5,304    15,256    15,809 
Interest expense:                    
Interest on deposits   224    179    621    545 
Interest on borrowings   55    44    152    133 
Total interest expense   279    223    773    678 
                     
Net interest income   4,803    5,081    14,483    15,131 
Provision for loan and lease losses   300    (668)   300    (668)
                     
Net interest income after provision for loan and lease losses   4,503    5,749    14,183    15,799 
Noninterest income:                    
Service charges on deposit accounts   117    124    348    381 
Gain on sale, call, or impairment of securities   19    33    161    314 
Rental income from other real estate owned   —    —    —    106 
Other noninterest income   241    242    726    715 
Total noninterest income   377    399    1,235    1,516 
                     
Noninterest expense:                    
Salaries and employee benefits   2,102    2,073    6,336    6,334 
Occupancy   262    295    793    885 
Furniture and equipment   141    165    439    493 
Federal Deposit Insurance Corporation assessments   51    77    156    233 
Expenses related to other real estate owned   4    (30)   36    330 
Other expense   752    766    2,350    2,277 
Total noninterest expense   3,312    3,346    10,110    10,552 
                     
Income before provision for income taxes   1,568    2,802    5,308    6,763 
                     
Provision for income taxes   459    989    1,718    2,274 
                     
Net income  $1,109   $1,813   $3,590   $4,489 
                     
Basic earnings per share  $0.18   $0.28   $0.56   $0.66 
Diluted earnings per share  $0.17   $0.27   $0.55   $0.66 
                     
Cash dividends per share  $0.05   $0.00   $0.15   $0.00 

See notes to Unaudited Consolidated Financial Statements

4
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF COMPRENENSIVE INCOME

(Unaudited)

 

(dollars in thousands, except per share data)                
For the periods ended September 30,  Three months   Nine months 
   2017   2016   2017   2016 
                 
Net income  $1,109   $1,813   $3,590   $4,489 
Other comprehensive (loss) income:                    
(Decrease) increase in net unrealized gains on
investment securities		   (497)   (1,306)   376    2,406 
Deferred tax benefit (expense)   199    522    (144)   (963)
(Decrease) increase in net unrealized gains on investment securities, net of tax   (298)   (784)   232    1,443 
                     
Reclassification adjustment for realized gains included in net income   (19)   (33)   (161)   (314)
Tax effect   8    13    64    125 
Realized gains, net of tax   (11)   (20)   (97)   (189)
Total other comprehensive (loss) income   (309)   (804)   135    1,254 
Comprehensive income  $800   $1,009   $3,725   $5,743 

 

See Notes to Unaudited Consolidated Financial Statements

5
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

               Accumulated     
(dollars in thousands)  Common Stock       Other   Total 
           Retained   Comprehensive   Shareholders’ 
   Shares   Amount   Earnings   Income   Equity 
Balance, January 1, 2016   7,343,649   $49,554   $34,418   $2,103   $86,075 
Net income             4,489         4,489 
Other comprehensive income, net of tax:                         
Net change in unrealized gains on available-for-sale investment securities                  1,254    1,254 
Net restricted stock award activity and related compensation expense   28,342    219              219 
Stocks option exercised and compensation expense   1,500    43              43 
Retirement of common stock   (716,897)   (7,414)            (7,414)
                          
Balance, September 30, 2016   6,656,594   $42,402   $38,907   $3,357   $84,666 
                          
Balance, January 1, 2017   6,661,726   $42,484   $40,822   $544   $83,850 
Net income             3,590         3,590 
Other comprehensive income, net of tax:                         
Net change in unrealized gains on available-for-sale investment securities                  135    135 
                          
Cash dividends ($0.15 per share)             (975)        (975)
Net restricted stock award activity and related compensation expense   22,032    282              282 
Stock options exercised   41,898    351              351 
Stock option compensation expense   —    28              28 
Retirement of common stock   (333,086)   (5,006)           (5,006)
                          
Balance, September 30, 2017   6,392,570   $38,139   $43,437   $679   $82,255 

 

See Notes to Unaudited Consolidated Financial Statements

6
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

 

(dollars in thousands)        
For the nine months ended September 30,  2017   2016 
         
Cash flows from operating activities:          
Net income  $3,590   $4,489 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan and lease losses   300    (668)
Increase in deferred loan origination fees, net   5    27 
Depreciation and amortization   255    326 
Gain on sale, call, and impairment of investment securities, net   (161)   (314)
Amortization of investment security premiums and discounts, net   2,447    2,159 
Increase in cash surrender values of life insurance policies   (238)   (239)
Stock based compensation expense   310    249 
(Gain) loss on sale/write-down of other real estate owned   (8)   207 
(Increase) decrease in accrued interest receivable and other assets   (581)   535 
(Decrease) increase in accrued interest payable and other liabilities   (347)   2,140 
Net cash provided by operating activities   5,572    8,911 
           
Cash flows from investing activities:          
Proceeds from the sale of available-for-sale investment securities   31,288    12,656 
Proceeds from matured available-for-sale investment securities   1,930    600 
Proceeds from called available-for-sale investment securities   145    1,165 
Purchases of available-for-sale investment securities   (63,061)   (27,608)
Proceeds from principal repayments for available-for-sale investment securities   31,768    33,749 
Proceeds from principal repayments for held-to-maturity investment securities   79    115 
Net increase in interest-bearing deposits in banks   (249)   (249)
Net decrease (increase) in loans   1,543    (21,873)
Proceeds from sale of other real estate   395    1,005 
Net increase in FHLB stock   (153)   — 
Purchases of equipment   (119)   (178)
           
Net cash provided by (used in) investing activities   3,566    (618)
7
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)

 

(dollars in thousands)        
For the nine months ended September 30,  2017   2016 
         
Cash flows from financing activities:          
Net increase in demand, interest-bearing and savings deposits  $8,825   $17,125 
Net decrease in time deposits   (2,689)   (1,650)
Net (decrease) increase in short-term borrowings   (1,500)   1,500 
Additions to long-term borrowings   3,500    5,000 
Transfers from long-term to short-term borrowings   (2,000)   (3,500)
Proceeds from stock option exercise   351    13 
Cash dividends paid   (975)   — 
Cash paid to repurchase common stock   (5,006)   (7,414)
           
Net cash provided by financing activities  $506   $11,074 
           
Increase in cash and cash equivalents   9,644    19,367 
           
Cash and cash equivalents at beginning of year   27,589    23,727 
           
Cash and cash equivalents at end of period  $37,233   $43,094 

 

See Notes to Unaudited Consolidated Financial Statements

8
 

AMERICAN RIVER BANKSHARES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2017 and December 31, 2016, the results of its operations and statement of comprehensive income for the three-month and nine-month periods ended September 30, 2017 and 2016, its cash flows for the nine-month periods ended September 30, 2017 and 2016 and its statement of changes in shareholders’ equity for the nine months ended September 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 nine-month periods ended September 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.

 

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 54,470 options remain outstanding at September 30, 2017. At September 30, 2017, under the 2010 Plan, there were 51,322 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 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.

9
 

Equity Compensation

For the three-month periods ended September 30, 2017 and 2016, the compensation cost recognized for equity compensation was $109,000 and $83,000, respectively. The recognized tax benefit for equity compensation expense was $40,000 and $29,000, respectively, for the three-month periods ended September 30, 2017 and 2016. For the nine-month periods ended September 30, 2017 and 2016, the compensation cost recognized for equity compensation was $310,000 and $249,000, respectively. The recognized tax benefit for equity compensation expense was $113,000 and $88,000, respectively, for the nine-month periods ended September 30, 2017 and 2016.

At September 30, 2017, the total compensation cost related to nonvested stock option awards not yet recorded was $71,000. This amount will be recognized over the next 2.75 years and the weighted average period of recognizing these costs is expected to be 1.4 years. At September 30, 2017, the total compensation cost related to restricted stock awards not yet recorded was $474,000. This amount will be recognized over the next 4.6 years and the weighted average period of recognizing these costs is expected to be 1.3 years.

Equity Plans Activity

Stock Options

There were no stock options awarded during the three-month and nine-month periods ended September 30, 2017 or September 30, 2016. A summary of option activity under the Plans as of September 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   41,898    8.38    —    — 
Expired, forfeited or cancelled   38,333    22.88    —    — 
Outstanding at September 30, 2017   105,792   $11.10    3.7 years   $366 
Vested at September 30, 2017   76,845   $11.80    2.2 years   $233 
Non-vested at September 30, 2017   28,947   $9.24    7.0 years   $133 

 

Restricted Stock

 

There were no shares of restricted stock awarded during the three-month periods ended September 30, 2017 and 2016. There were 24,982 and 29,756 shares of restricted stock awarded during the nine-month periods ended September 30, 2017 and 2016, respectively. Award date fair value is determined by the market price of the Company’s common stock on the date of award ($10.17 on February 17, 2016, $10.40 on May 19, 2016, $14.76 on February 16, 2017, and $13.83 on May 18, 2017).

There were no restricted share awards that were fully vested during the three-month period ended September 30, 2017 and 14,382 restricted share awards that were fully vested during the nine-month period ended September 30, 2017. There were 947 restricted share awards that were fully vested during the three-month period ended September 30, 2016 and 19,166 restricted share awards that were fully vested during the nine-month period ended September 30, 2016. There were zero and 2,950 restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2017, respectively. There were 386 and 1,414 restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2016, respectively. The intrinsic value of nonvested restricted shares at September 30, 2017 was $1,100,000.

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   14,382    9.76 
Less:  Expired, forfeited or cancelled   2,950    10.01 
Nonvested at September 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 nine-month month periods ended September 30, 2017 or 2016 or outstanding at September 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 $13.84 as of September 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 $11,321,000 and standby letters of credit of approximately $191,000 at September 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 September 30, 2017 or December 31, 2016.

11
 

4. EARNINGS PER SHARE COMPUTATION

 

Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period (6,299,914 and 6,402,647 shares for the three-month and nine-month periods ended September 30, 2017, and 6,589,125 and 6,800,016 shares for the three-month and nine-month periods ended September 30, 2016). 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 66,118 and 78,922, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2017 and 32,515 and 28,108, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2016. For the three-month periods ended September 30, 2017 and 2016, there were 32,448 and 99,308 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. For the nine-month periods ended September 30, 2017 and 2016, there were 32,448 and 99,308 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. Earnings per share is retroactively adjusted for stock dividends and stock splits, if applicable, for all periods presented.

 

5. INVESTMENT SECURITIES

 

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

Available-for-Sale

   September 30, 2017 
   Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Estimated
Fair
Value		 
Debt securities:                    
U.S. Government Agencies and Sponsored Entities  $219,853   $1,768   $(1,338)  $220,283 
Obligations of states and political subdivisions   22,354    618    (144)   22,828 
Corporate bonds   6,490    185    (7)   6,668 
Equity securities:                    
Corporate stock   51    49    —    100 
   $248,748   $2,620   $(1,489)  $249,879 

 

   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 $1,131,000 were recorded, net of $452,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at September 30, 2017. Proceeds and gross realized gains from the sale, call, and impairment of available-for-sale investment securities totaled $22,730,000 and $19,000, respectively, for the three-month period ended September 30, 2017 and for the nine-month period ended September 30, 2017, proceeds and gross realized gains from the sale, call, and impairment of available-for-sale investment securities totaled $31,433,000 and $161,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2017.

12
 

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. Proceeds and gross realized gains from the sale, call, and impairment of available-for-sale investment securities totaled $5,534,000 and $33,000, respectively, for the three-month period ended September 30, 2016 and for the nine-month period ended September 30, 2016, proceeds and gross realized gains from the sale, call, and impairment of available-for-sale investment securities totaled $13,821,000 and $314,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2016.

Held-to-Maturity                
                 
September 30, 2017                
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
Debt securities:                    
U.S. Government Agencies and Sponsored Entities  $404   $31   $—   $435 
                     
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 September 30, 2017 and September 30, 2016. Investment securities with unrealized losses at September 30, 2017 and December 31, 2016 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):

September 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  $107,598   $(1,045)   18,644    (293)  $126,242   $(1,338)
Obligations of states and political subdivisions   1,136    (7)   4,627    (137)   5,763    (144)
Corporate bonds   1,983    (7)   —    —    1,983    (7)
   $110,717   $(1,059)  $23,271   $(430)  $133,988   $(1,489)
                               
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)

13
 

There were no held-to-maturity investment securities with unrealized losses as of September 30, 2017 or December 31, 2016.  At September 30, 2017, the Company held 212 securities of which fifteen were in a loss position for twelve months or more.  Of the fifteen securities in a loss position for greater than twelve months, eleven were U.S. Government Agencies and Sponsored Entities securities and four were obligations 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 September 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   5,450    5,536           
After five years through ten years   18,140    18,704           
After ten years   5,254    5,256           
    28,844    29,496           
Investment securities not due at a single maturity date:                    
US Government Agencies and Sponsored Entities   219,853    220,283   $404   $435 
Corporate stock   51    100    —    — 
   $248,748   $249,879   $404   $435 
                     

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

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

At September 30, 2017 and December 31, 2016, the recorded investment in nonperforming loans and leases was approximately $2,317,000 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 September 30, 2017, the recorded investment in loans and leases that were considered to be impaired totaled $17,562,000, which includes $2,317,000 in nonaccrual loans and leases and $15,245,000 in performing loans and leases. Of the total impaired loans of $17,562,000, loans totaling $11,354,000 were deemed to require no specific reserve and loans totaling $6,208,000 were deemed to require a related valuation allowance of $404,000. 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 September 30, 2017 and December 31, 2016, the balance in other real estate owned (“OREO”) was $961,000 and $1,348,000, respectively. At September 30, 2017, the Company did not own any residential OREO properties nor were there any residential properties in the process of foreclosure. During the first and second quarters of 2017, the Company did not add any new or sell any of the OREO properties, nor did we decrease the book value on any of the properties. During the third quarter of 2017, the Company did not add any properties to OREO and sold one single commercial property in Sacramento County with a book value of $387,000 for a gain of $8,000. The September 30, 2017 OREO balance of $961,000 consisted of one parcel of land zoned for commercial use. Nonperforming assets at September 30, 2017 and December 31, 2016 are summarized as follows:

14
 

(dollars in thousands)  September 30,
2017		   December 31,
2016		 
         
Nonaccrual loans and leases that are current to terms (less
than 30 days past due)		  $2,027   $19 
Nonaccrual loans and leases that are past due   290    — 
Loans and leases past due 90 days and accruing interest   —    — 
Other assets   —    — 
Other real estate owned   961    1,348 
Total nonperforming assets  $3,278   $1,367 
           
Nonperforming loans and leases to total loans and leases   0.71%   0.01%
Total nonperforming assets to total assets   0.50%   0.21%
           

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

(dollars in thousands)   As of September 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:                                                
Commercial   $ 2,019     $ 2,692     $ —     $ —     $ —     $ —  
Real estate-commercial     9,004       9,583       —       10,910       11,540       —  
Real estate-residential     331       418       —       334       421       —  
Subtotal   $ 11,354     $ 12,693     $ —     $ 11,244     $ 11,961     $ —  
                                                 
With an allowance recorded:                                                
Commercial   $ —     $ —     $ —     $ 157     $ 157     $ 11  
Real estate-commercial     4,098       4,186       284       3,244       3,336       246  
Real estate-multi-family     476       476       20       482       482       2  
Real estate-residential     1,634       1,634       100       1,813       1,813       133  
Agriculture     —       —       —       357       357       29  
Subtotal   $ 6,208     $ 6,296     $ 404     $ 6,053     $ 6,145     $ 421  
                                                 
Total:                                                
Commercial   $ 2,019     $ 2,692     $ —     $ 157     $ 157     $ 11  
Real estate-commercial     13,102       13,769       283       14,154       14,876       246  
Real estate-multi-family     476       476       20       482       482       2  
Real estate-residential     1,965       2,052       101       2,147       2,234       133  
Agriculture     —       —       —       357       357       29  
    $ 17,562     $ 18,989     $ 404     $ 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 nine months ended		 
   September 30,
2017		   September 30,
2016		   September 30,
2017		   September 30,
2016		 
                 
Commercial   $2,369   $32   $2,391   $33 
Real estate-commercial   13,139    15,369    13,220    15,202 
Real estate-multi-family   477    484    479    486 
Real estate-residential   1,973    2,169    2,003    2,182 
Agriculture   —    362    —    365 
Consumer   —    35    —    36 
     Total  $17,958   $18,451   $18,093   $18,304 
                     

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 nine months ended		 
   September 30,
2017		   September 30,
2016		   September 30,
2017		   September 30,
2016		 
                 
Commercial   $115   $—   $114   $2 
Real estate-commercial   320    123    503    567 
Real estate-multi-family   17    15    25    25 
Real estate-residential   39    24    76    76 
Agriculture   —    6    —    16 
Consumer   2    —    2    — 
     Total  $493   $168   $720   $686 
                     

7. TROUBLED DEBT RESTRUCTURINGS

During the three and nine-month periods ended September 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 nine-month periods ended September 30, 2017 and September 30, 2016. At September 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 September 30, 2017 and December 31, 2016 are summarized below:

September 30, 2017  Credit Risk Profile by Internally Assigned Grade 
(dollars in thousands)      Real Estate 
   Commercial   Commercial   Multi-family   Construction   Residential 
Grade:                         
   Pass  $23,617   $163,916   $74,619   $10,548   $15,169 
   Watch   106    23,738    4,402    —    1,447 
   Special mention   1,011    2,302    —    —    712 
   Substandard   —    290    —    —    — 
   Doubtful   2,019    —    —    —    — 
          Total  $26,753   $190,246   $79,021   $10,548   $17,328 
                          
   Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure		     
   Leases   Agriculture   Consumer   Total 
Grade:                    
   Pass  $249   $1,685   $869   $290,672 
   Watch   —    —    237    29,930 
   Special mention   —    —    70    4,095 
   Substandard   —    —    10    300 
   Doubtful   —    —    —    2,019 
          Total  $249   $1,685   $1,186   $327,016 
                     

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:

September 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   240    (16)   147    34    (22)   (40)   (35)   (11)   3    300 
Loans charged-off   (673)   —    —    —    —    —    —    —    —    (673)
Recoveries   5    54    —    —    —    39    —    4    —    102 
                                                   
Ending balance, September 30, 2017  $427   $2,088   $998   $480   $231   $—   $29   $17   $281   $4,551 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $—   $284   $20   $—   $100   $—   $—   $—   $—   $404 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $427   $1,804   $978   $480   $131   $—   $29   $17   $281   $4,147 
                                                   
Loans                                                  
                                                   
Ending balance  $26,753   $190,246   $79,021   $10,548   $17,328   $249   $1,685   $1,186   $—   $327,016 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $2,019   $13,102   $476   $—   $1,965   $—   $—   $—   $—   $17,562 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $24,734   $177,144   $78,545   $10,548   $15,363   $249   $1,685   $1,186   $—   $309,454 
                                                   
Allowance for Loan and Lease Losses                                                  
                                                   
Beginning balance, June 30, 2017  $916   $2,091   $789   $457   $268   $1   $59   $19   $281   $4,881 
Provision for loan losses   182    (4)   209    23    (37)   (40)   (30)   (3)   —    300 
Loans charged off   (673)   —    —    —    —    —    —    —    —    (673)
Recoveries   2    1    —    —    —    39    —    1    —    43 
                                                   
Ending balance, September 30, 2017  $427   $2,088   $998   $480   $231   $—