Attached files
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EX-32.1 - EXHIBIT 32.1 - AMERICAN RIVER BANKSHARES | ex32_1.htm |
EX-31.2 - EXHIBIT 31.2 - AMERICAN RIVER BANKSHARES | ex31_2.htm |
EX-31.1 - EXHIBIT 31.1 - AMERICAN RIVER BANKSHARES | ex31_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
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
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 | $ | — |