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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)

 

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

 

For the quarterly period ended            September 30, 2018

or

 

oTRANSITION 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 every Interactive Data File required to be submitted 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 x
Non-accelerated filer o 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 – 5,868,637 shares outstanding at November 6, 2018.

 
 

AMERICAN RIVER BANKSHARES

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2018

Part I.     Page
       
Item 1. Financial Statements   3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   28
Item 3. Quantitative and Qualitative Disclosures About Market Risk   46
Item 4. Controls and Procedures   47
       
Part II.      
       
Item 1. Legal Proceedings   48
Item 1A. Risk Factors   48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   48
Item 3. Defaults Upon Senior Securities   48
Item 4. Mine Safety Disclosures   48
Item 5. Other Information   49
Item 6. Exhibits   49
       
Signatures     50
       
Exhibit Index   51
       
31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   52
31.2 Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   53
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   54
       
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,
2018

  

December 31,
2017

 
ASSETS           
           
Cash and due from banks  $24,634   $38,467 
Federal funds sold   10,000     
Total cash and cash equivalents   34,634    38,467 
Interest-bearing deposits in banks    1,746    1,746 
Investment securities:          
Available-for-sale, at fair value   277,269    262,322 
Held-to-maturity, at amortized cost   311    378 
Loans and leases, less allowance for loan and lease losses of $4,332 at September 30, 2018 and $4,478 at December 31, 2017   310,322    308,713 
Premises and equipment, net   1,072    1,158 
Federal Home Loan Bank stock   3,932    3,932 
Goodwill and other intangible assets   16,321    16,321 
Other real estate owned   961    961 
Bank owned life insurance   15,350    15,122 
Accrued interest receivable and other assets   8,076    6,502 
   $669,994   $655,622 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits:          
Noninterest bearing   $209,322   $215,528 
Interest-bearing   366,498    340,552 
Total deposits   575,820    556,080 
           
Short-term borrowings   6,500    3,500 
Long-term borrowings   9,000    12,000 
Accrued interest payable and other liabilities   6,939    7,121 
           
Total liabilities    598,259    578,701 
           
Shareholders’ equity:          
Preferred stock, no par value; 10,000,000 shares authorized; none Outstanding          
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding – 5,864,802 shares at September 30, 2018 and 6,132,362 shares at December 31, 2017   30,165    34,463 
Retained earnings   45,660    42,779 
Accumulated other comprehensive loss, net of taxes   (4,090)   (321)
           
Total shareholders’ equity   71,735    76,921 
   $669,994   $655,622 

 

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 
   2018   2017   2018   2017 
Interest income:                    
Interest and fees on loans:                    
Taxable  $3,405   $3,496   $10,216   $10,384 
Exempt from Federal income taxes   127    110    383    376 
Interest on Federal funds sold   120        268     
Interest on deposits in banks   10    4    23    9 
Interest and dividends on investment securities:                    
Taxable   1,902    1,292    4,930    3,978 
Exempt from Federal income taxes   102    180    410    496 
Dividends               13 
Total interest income   5,666    5,082    16,230    15,256 
Interest expense:                    
Interest on deposits   346    224    945    621 
Interest on borrowings   63    55    171    152 
Total interest expense   409    279    1,116    773 
                     
Net interest income   5,257    4,803    15,114    14,483 
Provision for loan and lease losses   50    300    50    300 
                     
Net interest income after provision for loan and lease losses   5,207    4,503    15,064    14,183 
                     
Noninterest income:                    
Service charges on deposit accounts   119    117    352    348 
Gain on sale or call of securities   8    19    19    161 
Other noninterest income   250    241    758    726 
Total noninterest income   377    377    1,129    1,235 
                     
Noninterest expense:                    
Salaries and employee benefits   2,551    2,102    7,274    6,336 
Occupancy   267    262    791    793 
Furniture and equipment   141    141    415    439 
Federal Deposit Insurance Corporation assessments   52    51    158    156 
Expenses related to other real estate owned   10    4    12    36 
Other expense   982    752    2,531    2,350 
Total noninterest expense   4,003    3,312    11,181    10,110 
                    
Income before provision for income taxes   1,581    1,568    5,012    5,308 
                     
Provision for income taxes   428    459    1,237    1,718 
                     
Net income  $1,153   $1,109   $3,775   $3,590 
                     
Basic earnings per share  $0.20   $0.18   $0.64   $0.56 
Diluted earnings per share  $0.20   $0.17   $0.64   $0.55 
                     
Cash dividends per share  $0.05   $0.05   $0.15   $0.15 

 

See notes to Unaudited Consolidated Financial Statements

4
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

(dollars in thousands, except per share data)                
For the periods ended September 30,  Three months   Nine months 
   2018   2017   2018   2017 
                 
Net income  $1,153   $1,109   $3,775   $3,590 
Other comprehensive (loss) income:                    
(Decrease) increase in net unrealized gains on investment securities   (1,606)   (497)   (5,516)   376 
Deferred tax benefit (expense)   511    199    1,760    (144)
(Decrease) increase in net unrealized gains (losses) on investment securities, net of tax   (1,095)   (298)   (3,756)   232 
                     
Reclassification adjustment for realized gains included in net income   (8)   (19)   (19)   (161)
Tax effect   3    8    6    64 
                     
Realized gains, net of tax   (5)   (11)   (13)   (97)
                     
Total other comprehensive (loss) income   (1,100)   (309)   (3,769)   135 
                     
Comprehensive income  $53   $800   $6   $3,725 

 

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 (Loss)   Equity 
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 
                          
Balance, January 1, 2018   6,132,362    34,463    42,779    (321)   76,921 
Net income             3,775         3,775 
Other comprehensive loss, net of tax:                         
Net change in unrealized gains on available-for-sale investment securities                  (3,769)   (3,769)
                          
Cash dividends ($0.15 per share)             (895)        (895)
Net restricted stock award activity and related compensation expense   17,859    212    1         213 
Stock options exercised   13,359    123              123 
Stock option compensation expense       21              21 
Retirement of common stock   (298,778)   (4,654)             (4,654)
                          
Balance, September 30, 2018   5,864,802   $30,165   $45,660   $(4,090)  $71,735 

 

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,        
   2018   2017 
         
Cash flows from operating activities:          
Net income  $3,775   $3,590 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan and lease losses   50    300 
(Decrease) increase in deferred loan origination fees, net   (53)   5 
Depreciation and amortization   201    255 
Gain on sale and call of investment securities, net   (19)   (161)
Amortization of investment security premiums and discounts, net   1,969    2,447 
Increase in cash surrender values of life insurance policies   (228)   (238)
Stock based compensation expense   234    310 
Gain on sale of other real estate owned       (8)
Decrease (increase) in accrued interest receivable and other assets   163    (581)
Decrease in accrued interest payable and other liabilities   (182)   (347)
           
Net cash provided by operating activities   5,910    5,572 
           
Cash flows from investing activities:          
Proceeds from the sale of available-for-sale investment securities   24,753    31,288 
Proceeds from matured available-for-sale investment securities       1,930 
Proceeds from called available-for-sale investment securities   1,499    145 
Purchases of available-for-sale investment securities   (81,850)   (63,061)
Proceeds from principal repayments for available- for-sale investment securities   33,196    31,768 
Proceeds from principal repayments for held-to- maturity investment securities   67    79 
Net increase in interest-bearing deposits in banks       (249)
Net (increase) decrease in loans   (2,956)   1,543 
Proceed from sale of loans   1,349     
Proceeds from sale of other real estate       395 
Net increase in FHLB stock       (153)
Purchases of equipment   (115)   (119)
           
Net cash (used in) provided by investing activities   (24,057)   3,566 
7
 

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)

 

(dollars in thousands)        
For the nine months ended September 30,        
   2018   2017 
         
Cash flows from financing activities:          
Net increase in demand, interest-bearing and savings deposits  $22,420   $8,825 
Net decrease in time deposits   (2,680)   (2,689)
Net increase (decrease) in short-term borrowings   3,000    (1,500)
Net (decrease) increase to long-term borrowings   (3,000)   1,500 
Proceeds from stock option exercise   123    351 
Cash dividends paid   (895)   (975)
Cash paid to repurchase common stock   (4,654)   (5,006)
           
Net cash provided by financing activities  $14,314   $506 
           
(Decrease) increase in cash and cash equivalents   (3,833)   9,644 
           
Cash and cash equivalents at beginning of year   38,467    27,589 
           
Cash and cash equivalents at end of period  $34,634   $37,233 

 

See Notes to Unaudited Consolidated Financial Statements                

8
 

AMERICAN RIVER BANKSHARES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

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, 2018 and December 31, 2017, the results of its operations and statement of comprehensive income for the three-month and nine-month periods ended September 30, 2018 and 2017, its cash flows for the nine-month periods ended September 30, 2018 and 2017 and its statement of changes in shareholders’ equity for the nine months ended September 30, 2018 and 2017 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, 2017. The results of operations for the three-month and nine-month periods ended September 30, 2018 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 18,041 options remain outstanding at September 30, 2018. At September 30, 2018, under the 2010 Plan, there were 31,008 stock options and 41,457 restricted shares outstanding and the total number of authorized shares that remain available for issuance was 1,290,590. The 2010 Plan provides for the following types of stock-based awards: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted performance stock, unrestricted Company stock, and performance units. Awards under the 2000 Plan were either incentive stock options or nonqualified stock options. Under the 2010 Plan, the awards may be granted to employees and directors under incentive and nonqualified option agreements, restricted stock agreements, and other awards agreements. The unvested restricted stock under the 2010 Plan have dividend and voting rights. The 2010 Plan and the 2000 Plan (collectively the “Plans”) require that the option price may not be less than the fair market value of the stock at the date the option is awarded. The option awards under the Plans expire on dates determined by the Board of Directors, but not later than ten years from the date of award. The vesting period is generally five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding option awards under the Plans are exercisable until their expiration, however, no new options may be awarded under the 2000 Plan. New shares are issued upon exercise of an option.

9
 

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

 

Equity Compensation

 

For the three-month periods ended September 30, 2018 and 2017, the compensation cost recognized for equity compensation was $83,000 and $109,000, respectively and the recognized tax benefit for equity compensation expense was $21,000 and $40,000, respectively, for the same three-month periods ended. For the nine-month periods ended September 30, 2018 and 2017, the compensation cost recognized for equity compensation was $233,000 and $310,000, respectively and the recognized tax benefit for equity compensation expense was $57,000 and $113,000, respectively, for the same nine-month periods.

At September 30, 2018, the total unrecognized pre-tax compensation cost related to nonvested stock option awards not yet recorded was $29,000. This amount will be recognized over the next 1.8 years and the weighted average period of recognizing these costs is expected to be 1.4 years. At September 30, 2018, the total compensation cost related to restricted stock awards not yet recorded was $444,000. This amount will be recognized over the next 4.7 years and the weighted average period of recognizing these costs is expected to be 1.4 years.

Equity Plans Activity

Stock Options

There were no stock options awarded during the three-month and nine-month periods ended September 30, 2018 or September 30, 2017. A summary of option activity under the Plans as of September 30, 2018 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, 2018   97,543   $11.26    3.1 years   $419 
Awarded                
Exercised   (13,359)   9.23         
Expired, forfeited or cancelled   (35,135)   15.67         
Outstanding at September 30, 2018   49,049   $8.65    3.6 years   $327 
Vested at September 30, 2018   41,913   $8.54    3.2 years   $284 
Non-vested at September 30, 2018   7,136   $9.29    6.2 years   $43 

 

Restricted Stock

 

There were no shares of restricted stock awarded during the three-month periods ended September 30, 2018 and 2017. There were 22,514 and 24,982 shares of restricted stock awarded during the nine-month periods ended September 30, 2018 and 2017, respectively.

There were no restricted share awards that were fully vested during the three-month periods ended September 30, 2018 and 2017. There were 25,455 restricted share awards that were fully vested during the nine-month period ended September 30, 2018 and 14,382 restricted share awards that were fully vested during the nine-month period ended September 30, 2017. There were zero and 4,655 restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2018, respectively. There were zero and 2,950 restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2017, respectively. The intrinsic value of nonvested restricted shares at September 30, 2018 was $635,000.

10
 
Restricted Stock  Shares   Weighted
Average Award
Date Fair Value
 
Nonvested at January 1, 2018   49,053   $12.27 
Awarded   22,514    15.44 
Less: Vested   (25,455)   10.84 
Less: Expired, forfeited or cancelled   (4,655)   13.69 
Nonvested at September 30, 2018   41,457   $10.61 

 

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, 2018 or 2017 or outstanding at September 30, 2018 or December 31, 2017.

 

The intrinsic value used for stock options and restricted stock awards was derived from the market price of the Company’s common stock of $15.32 as of September 30, 2018.

 

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 $30,266,000 and standby letters of credit of approximately $121,000 at September 30, 2018 and loan commitments of approximately $10,923,000 and standby letters of credit of approximately $121,000 at December 31, 2017. 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 2018 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, 2018 or December 31, 2017.

 

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 (5,823,345 and 5,886,977 shares for the three-month and nine-month periods ended September 30, 2018, and 6,299,914 and 6,402,647 shares for the three-month and nine-month periods ended September 30, 2017). 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 41,482 and 38,700, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2018 and 66,118 and 78,922, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2017. For the three-month periods ended September 30, 2018 and 2017, there were zero and 32,448 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. For the nine-month periods ended September 30, 2018 and 2017, there were zero and 32,448 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. Earnings per share is retroactively adjusted for stock dividends and stock splits, if applicable, for all periods presented.

11
 

5. INVESTMENT SECURITIES

 

The amortized cost and estimated fair values of Available-for-Sale and Held-to-Maturity investment securities at September 30, 2018 and December 31, 2017 consisted of the following (dollars in thousands):

 

Available-for-Sale

   September 30, 2018 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
 
Debt securities:                    
U.S. Government Agencies and Sponsored Entities  $256,018   $360   $(6,088)  $250,290 
Obligations of states and political subdivisions   15,791    120    (370)   15,541 
Corporate bonds   6,492    51    (68)   6,475 
U.S. Treasury securities   4,969        (6)   4,963 
   $283,270   $531   $(6,532)  $277,269 

 

   December 31, 2017 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair
Value
 
Debt securities:                    
U.S. Government Agencies and Sponsored Entities  $233,956   $1,184   $(2,271)  $232,869 
Obligations of states and political subdivisions   22,281    528    (94)   22,715 
Corporate bonds   6,490    160    (24)   6,626 
Equity securities:                    
Corporate stock   51    61        112 
   $262,778   $1,933   $(2,389)  $262,322 

 

Net unrealized losses on available-for-sale investment securities totaling $6,001,000 were recorded, net of $1,911,000 in tax benefits, as accumulated other comprehensive losses within shareholders’ equity at September 30, 2018. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities totaled $10,310,000 and $8,000, respectively, for the three-month period ended September 30, 2018 and for the nine-month period ended September 30, 2018, proceeds and gross realized gains from the sale and call of available-for-sale investment securities totaled $26,252,000 and $19,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2018.

Net unrealized losses on available-for-sale investment securities totaling $456,000 were recorded, net of $135,000 in tax benefits, as accumulated other comprehensive income within shareholders’ equity at December 31, 2017. Proceeds and gross realized gains from the sale and call 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 and call 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
 

Held-to-Maturity

September 30, 2018                
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
Debt securities:                    
U.S. Government Agencies and Sponsored Entities  $311   $17   $   $328 

December 31, 2017      Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
Debt securities:                    
U.S. Government Agencies and Sponsored Entities  $378   $26   $   $404 

 

There were no sales or transfers of held-to-maturity investment securities for the periods ended September 30, 2018 and September 30, 2017. Investment securities with unrealized losses at September 30, 2018 and December 31, 2017 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):

September 30, 2018  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  $127,137   $(2,321)  $100,217   $(3,767)  $227,354   $(6,088)
Obligations of states and political subdivisions   5,554    (98)   5,518    (272)   11,072    (370)
Corporate bonds   498    (2)   1,926    (66)   2,424    (68)
U.S. Treasury securities   4,963    (6)           4,963    (6)
   $138,152   $(2,427)  $107,661   $(4,105)  $245,813   $(6,532)

 

December 31, 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:                              
US Government Agencies and Sponsored Entities  $119,455   $(1,148)  $49,258   $(1,123)  $168,713   $(2,271)
Obligations of states and political subdivisions   1,130    (9)   4,654    (85)   5,784    (94)
Corporate bonds   1,967    (24)           1,967    (24)
   $122,552   $(1,181)  $53,912   $(1,208)  $176,464   $(2,389)

 

There were no held-to-maturity investment securities with unrealized losses as of September 30, 2018 or December 31, 2017. At September 30, 2018, the Company held 218 securities of which 79 were in a loss position for less than twelve months and 71 were in a loss position for twelve months or more. Of the 79 securities in a loss position for less than twelve months, 70 were U.S. Government Agencies and Sponsored Entities securities, six were obligations of states or political subdivisions, two were US treasuries, and one was a corporate bond and of the 71 securities that were in a loss position for greater than twelve months, 65 were U.S. Government Agencies and Sponsored Entities securities, five were obligations of states or political subdivisions, and one was a corporate bond.

13
 

At December 31, 2017, the Company held 217 securities of which 64 were in a loss position for less than twelve months and 35 were in a loss position for twelve months or more. Of the 35 securities in a loss position for greater than twelve months at December 31, 2017, four were municipal securities and 31 were US Government Agencies and Sponsored Agencies securities.

 

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, 2018 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  $4,969   $4,963           
After one year through five years   5,145    5,109           
After five years through ten years   12,980    12,818           
After ten years   4,158    4,089           
    27,252    26,979           
Investment securities not due at a single maturity date:                    
US Government Agencies and Sponsored Entities   256,018    250,290   $311   $328 
   $283,270   $277,269   $311   $328 

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, 2018 and December 31, 2017, the recorded investment in nonperforming loans and leases was approximately $376,000 and $1,892,000, 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, 2018, the recorded investment in loans and leases that were considered to be impaired totaled $9,261,000, which includes $346,000 in nonaccrual loans and leases and $8,915,000 in performing loans and leases. Of the total impaired loans of $9,261,000, loans totaling $6,348,000 were deemed to require no specific reserve and loans totaling $2,913,000 were deemed to require a related valuation allowance of $181,000. At December 31, 2017, the recorded investment in loans and leases that were considered to be impaired totaled $13,757,000, which includes $1,892,000 in nonaccrual loans and leases and $11,865,000 in performing loans and leases. Of the total impaired loans of $13,757,000, loans totaling $7,601,000 were deemed to require no specific reserve and loans totaling $6,156,000 were deemed to require a related valuation allowance of $355,000.

At September 30, 2018 and December 31, 2017, the recorded investment in other real estate owned (“OREO”) was $961,000. At September 30, 2018 the Company did not own any residential OREO properties nor were there any residential properties in the process of foreclosure. During the first nine months of 2018, 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. The September 30, 2018 OREO balance of $961,000 consisted of one parcel of land zoned for commercial use. Nonperforming assets at September 30, 2018 and December 31, 2017 are summarized as follows:

14
 
(dollars in thousands)  September 30,
2018
   December 31,
2017
 
         
Nonaccrual loans and leases that are current to terms (less than 30 days past due)  $30   $1,603 
Nonaccrual loans and leases that are past due   346    289 
Loans and leases past due 90 days and accruing interest        
Other real estate owned   961    961 
Total nonperforming assets  $1,337   $2,853 
           
Nonperforming loans and leases to total loans and leases   0.12%   0.60%
Total nonperforming assets to total assets   0.20%   0.44%

Impaired loans and leases as of and for the periods ended September 30, 2018 and December 31, 2017 are summarized as follows:

(dollars in thousands)   As of September 30, 2018     As of December 31, 2017  
     Recorded
Investment
    Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
    Unpaid
Principal
Balance
     Related
Allowance
 
With no related allowance recorded:                                                
Commercial   $     $     $     $ 1,598     $ 2,671     $  
Real estate-commercial     5,955       6,189             5,674       5,907        
Real estate-residential     325       412             329       416        
Consumer     68       68                          
Subtotal   $ 6,348     $ 6,669     $     $ 7,601     $ 8,994     $  
                                                 
With an allowance recorded:                                                
Real estate-commercial   $ 2,181     $ 2,262     $ 118     $ 4,396     $ 4,483     $ 261  
Real estate-multi-family                       474       474       21  
Real estate-residential     732       732       63       1,286       1,286       73  
Subtotal   $ 2,913     $ 2,994     $ 181     $ 6,156     $ 6,243     $ 355  
                                                 
Total:                                                
Commercial   $     $     $     $ 1,598     $ 2,671     $  
Real estate-commercial     8,136       8,451       118       10,070       10,390       261  
Real estate-multi-family                       474       474       21  
Real estate-residential     1,057       1,144       63       1,615       1,702       73  
Consumer     68       68                          
    $ 9,261     $ 9,663     $ 181     $ 13,757     $ 15,237     $ 355  
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,
2018
   September 30,
2017
   September 30,
2018
   September 30,
2017
 
                 
Commercial   $   $2,369   $   $2,391 
Real estate-commercial   6,289    13,139    6,010    13,220 
Real estate-multi-family       477        479 
Real estate-residential   326    1,973    327    2,003 
Consumer   68        69     
Total  $6,683   $17,958   $6,406   $18,093 

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,
2018
   September 30,
2017
   September 30,
2018
   September 30,
2017
 
                 
Commercial   $   $115   $   $114 
Real estate-commercial   85    320    243    503 
Real estate-multi-family       17        25 
Real estate-residential   5    39    14    76 
Consumer   1    2    2    2 
Total  $91   $493   $259   $720 

 

7. TROUBLED DEBT RESTRUCTURINGS

During the three and nine-month periods ended September 30, 2018, there was one $18,000 commercial loan that was modified as a troubled debt restructuring. The loan was a term out of a line of credit to an amortizing loan with a rate reduction. During the three and nine-month periods ended September 30, 2017, there was one loan that was modified as a troubled debt restructuring. The modification of the terms of the loan included a reduction of the stated interest rate for eighteen months according to a bankruptcy court-order as part of a debtor-in-possession financing agreement. The loan had a pre-modification and post-modification outstanding recorded investment of $2,692,000. After principal payments of $57,000 and charge-downs of $1,073,000, the June 30, 2018 balance was $1,562,000. Subsequent to modification the loan went into payment default. During the third quarter of 2018 the loan was written-down by an additional $213,000 and sold with no further loss. 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, 2018 and September 30, 2017, other than the modified loan that went into payment default mentioned above. At September 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017 are summarized below:

 

September 30, 2018  Credit Risk Profile by Internally Assigned Grade 
(dollars in thousands)     Real Estate 
   Commercial   Commercial   Multi-family   Construction   Residential 
Grade:                         
Pass  $24,389   $172,951   $61,458   $7,486   $15,393 
Watch   107    16,202    3,854        1,304 
Special mention       1,247             
Substandard   30    277             
Total  $24,526   $190,677   $65,312   $7,486   $16,697 
                          
  

Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure

          
   Leases   Agriculture   Consumer       Total 
Grade:                         
Pass  $61   $4,591   $5,234      $291,563 
Watch           148        21,615 
Special mention           2        1,249 
Substandard           68        375 
Total  $61   $4,591   $5,452      $314,802 

 

December 31, 2017  Credit Risk Profile by Internally Assigned Grade 
(dollars in thousands)      Real Estate 
   Commercial   Commercial   Multi-family   Construction   Residential 
Grade:                         
Pass  $23,617   $164,815   $73,644   $5,863   $13,767 
Watch   96    18,083    4,381        1,507 
Special mention   66    2,265            539 
Substandard       289             
Doubtful   1,598                 
Total  $25,377   $185,452   $78,025   $5,863   $15,813 
                          
  

Credit Risk Profile by Internally Assigned Grade Other Credit Exposure

           
   Leases   Agriculture   Consumer       Total 
Grade:                         
Pass  $205   $1,713   $713      $284,337 
Watch           155        24,222 
Special mention           70        2,940 
Substandard           7        296 
Doubtful                   1,598 
Total  $205   $1,713   $945      $313,393 
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, 2018                                        
(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, 2018  $447   $2,174   $1,047   $269   $205   $   $31   $14   $291   $4,478 
Provision for loan losses   300    (208)   (307)   89    35    (1)   64    80    (2)   50 
Loans charged-off   (213)                                   (213)
Recoveries   10    6                1                17 
                                                   
Ending balance, September 30, 2018  $544   $1,972   $740   $358   $240   $   $95   $94   $289   $4,332 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $   $118   $   $   $63   $   $   $   $   $181 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $544   $1,854   $740   $358   $177   $   $95   $94   $289   $4,151 
                                                   
Loans                                                  
                                                   
Ending balance  $24,526   $190,677   $65,312   $7,486   $16,697   $61   $4,591   $5,452   $   $314,802 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $   $8,136   $   $   $1,057   $   $   $68   $   $9,261 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $24,526   $182,541   $65,312   $7,486   $15,640   $61   $4,591   $5,384   $   $305,541 
                                                   
Allowance for Loan and Lease Losses                                                  
                                                   
Beginning balance, June 30, 2018  $669   $2,100   $839   $298   $239   $   $49   $11   $287   $4,492 
Provision for loan losses   87    (130)   (99)   60    1        46    83    2    50 
Loans charged off   (213)                                   (213)
Recoveries   1    2                                3 
                                                   
Ending balance, September 30, 2018  $544   $1,972   $740   $358   $240   $   $95   $94   $289   $4,332 
18
 

December 31, 2017                                        
(dollars in thousands)     Real Estate   Other         
   Commercial   Commercial   Multi-Family   Construction   Residential   Leases   Agriculture   Consumer   Unallocated   Total 
Ending balance:                                                  
Individually evaluated for impairment  $   $261   $21   $   $73   $   $   $   $   $355 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $447   $1,913   $1,026   $269   $132   $   $31   $14   $291   $4,123 
                                                   
Loans                                                  
                                                   
Ending balance  $25,377   $185,452   $78,025   $5,863   $15,813   $205   $1,713   $945   $   $313,393 
                                                   
Ending balance:                                                  
Individually evaluated for impairment  $1,598   $10,070   $474   $   $1,615   $   $   $   $   $13,757 
                                                   
Ending balance:                                                  
Collectively evaluated for impairment  $23,779   $175,382   $77,551   $5,863   $14,198   $205   $1,713   $945   $   $299,636 
                                                   
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 
                                                   
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   $   $29   $17   $281   $4,551 
19
 

The Company’s aging analysis of the loan and lease portfolio at September 30, 2018 and December 31, 2017 are summarized below:

 

September 30, 2018                          Past Due     
(dollars in thousands)          Past Due               Greater Than     
   30-59 Days   60-89 Days   Greater Than   Total Past           90 Days and     
   Past Due   Past Due   90 Days   Due   Current   Total Loans   Accruing   Nonaccrual 
Commercial:                                        
Commercial  $   $   $   $   $24,526   $24,526   $   $30 
Real estate:                                        
Commercial   278            278    190,399    190,677        278 
Multi-family                   65,312    65,312         
Construction                   7,486    7,486         
Residential   3,273    499        3,772    12,925    16,697         
                                         
Other:                                        
Leases                   61    61         
Agriculture                   4,591    4,591         
Consumer           68    68    5,384    5,452        68 
                                         
Total  $3,551   $499   $68   $4,118   $310,684   $314,802   $   $376 

 

December 31, 2017                          Past Due     
(dollars in thousands)          Past Due               Greater Than     
   30-59 Days   60-89 Days   Greater Than   Total Past           90 Days and     
   Past Due   Past Due   90 Days   Due   Current   Total Loans   Accruing   Nonaccrual 
Commercial:                                        
Commercial  $   $   $   $   $25,377   $25,377   $   $1,597 
Real estate:                                        
Commercial           289    289    185,163    185,452        289 
Multi-family                   78,025    78,025         
Construction                   5,863    5,863         
Residential   146            146    15,667    15,813         
                                         
Other:                                        
Leases                   205    205         
Agriculture                   1,713    1,713         
Consumer   1            1    944    945        6 
                                         
Total  $147   $   $289   $436   $312,957   $313,393   $   $1,892 
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9. BORROWING ARRANGEMENTS

 

At September 30, 2018, the Company had $17,000,000 of unsecured short-term borrowing arrangements with two of its correspondent banks. There were no advances under the borrowing arrangements as of September 30, 2018 or December 31, 2017.

 

The Company has a line of credit available with the Federal Home Loan Bank of San Francisco (the “FHLB”) which is secured by pledged mortgage loans and investment securities. Borrowings may include overnight advances as well as loans with terms of up to thirty years. Advances (both short-term and long-term) totaling $15,500,000 were outstanding from the FHLB at September 30, 2018, bearing interest rates ranging from 1.18% to 3.04% and maturing between November 23, 2018 and July 20, 2023. Advances totaling $15,500,000 were outstanding from the FHLB at December 31, 2017, bearing interest rates ranging from 1.18% to 1.90% and maturing between July 20, 2018 and April 12, 2021. Remaining amounts available under the borrowing arrangement with the FHLB at September 30, 2018 and December 31, 2017 totaled $100,570,000 and $117,546,000, respectively. In addition, the Company has a secured borrowing agreement with the Federal Reserve Bank of San Francisco. The borrowing can be secured by pledging selected loans and investment securities. Borrowings generally are short-term including overnight advances as well as loans with terms up to ninety days. Amounts available under this borrowing arrangement at September 30, 2018 and December 31, 2017 were $8,435,000 and $9,085,000, respectively. There were no advances outstanding under this borrowing arrangement as of September 30, 2018 and December 31, 2017.

 

10. INCOME TAXES

 

The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for (benefit from) income taxes.

The Company accounts for income taxes using the balance sheet method, under which deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above, if applicable, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties related to unrecognized tax benefits, if applicable, as a component of interest expense in the consolidated statement of income. There have been no unrecognized tax benefits or accrued interest and penalties for the three-month and nine-month periods ended September 30, 2018 and 2017.

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11. FAIR VALUE MEASUREMENTS

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2018 and December 31, 2017. They indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In 2018, the Company adopted the provisions of Accounting Standard Update 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires the Company to use the exit price notion when measuring the fair value of financial instruments. The Company used the exit price notion for valuing financial instruments in 2018 and the entry price notion for valuing financial instruments in 2017. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

 

   Carrying   Fair Value Measurements Using:     
September 30, 2018  Amount   Level 1   Level 2   Level 3   Total 
                     
Financial assets:                         
Cash and due from banks  $24,634   $24,634   $   $   $24,634 
Federal funds sold   10,000    10,000            10,000 
Interest-bearing deposits in banks   1,746        1,746        1,746 
Available-for-sale securities   277,269    4,963    273,306        277,269 
Held-to-maturity securities   311        328        328 
FHLB stock   3,932    N/A    N/A    N/A    N/A 
Net loans and leases:   310,322            306,226    306,226 
Accrued interest receivable   1,919        983    936    1,919 
                          
 Financial liabilities:                         
Deposits:                         
Noninterest-bearing  $209,322   $209,322   $   $   $209,322 
Savings   74,765    74,765            74,765 
Money market   150,050    150,050            150,050 
NOW accounts   64,682    64,682            64,682 
Time Deposits   77,001        76,687        76,687 
Short-term borrowings   6,500    6,500            6,500 
Long-term borrowings   9,000        9,124        9,124 
Accrued interest payable   69    7    62        69 
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   Carrying   Fair Value Measurements Using:     
December 31, 2017  Amount   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and due from banks  $38,467   $38,467   $   $   $38,467 
Interest-bearing deposits in banks   1,746        1,750        1,750 
Available-for-sale securities   262,322    66    262,256        262,322 
Held-to-maturity securities   378        404        404 
FHLB stock   3,932    N/A    N/A    N/A    N/A 
Net loans and leases:   308,713            317,900    317,900 
Accrued interest receivable   1,956        1,124    832    1,956 
                          
Financial liabilities:                         
Deposits:                         
Noninterest-bearing  $215,528   $215,528   $   $   $215,528 
Savings   66,130    66,130            66,130 
Money market   130,032    130,032            130,032 
Interest checking   64,709    64,709            64,709 
Time Deposits   79,681        79,614        79,614 
Short-term borrowings   3,500    3,500            3,500 
Long-term borrowings   12.000        11,978        11,978 
Accrued interest payable   65    4    61        65 

 

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.

 

The following methods and assumptions were used by the Company to estimate the fair values of its financial instruments at December 31, 2017:

Cash and due from banks: The carrying amounts of cash and short-term instruments, including Federal funds sold, approximate fair values and are classified as Level 1.

Interest-bearing deposits in banks: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions and are classified as Level 2.

Investment securities: For investment securities, fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers and are classified as Level 2.

FHLB stock: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans and leases: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality also resulting in a Level 3 classification.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. For time deposits, the fair values for fixed rate certificates of deposit are estimated using a discounted cash flow methodology that applies market interest rates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term and long-term borrowings: The fair value of short-term borrowings is estimated to be the carrying amount and is classified as Level 1. The fair value of long-term borrowings is estimated using a discounted cash flow analysis using interest rates currently available for similar debt instruments and are classified as Level 2.

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Accrued interest receivable and payable: The carrying amount of accrued interest receivable approximates fair value resulting in a Level 3 classification and the carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments was not material at December 31, 2017.

Assets and liabilities measured at fair value on a recurring and non-recurring basis along with any related gain or loss recognized in the income statement due to fair value changes are presented in the following table:

 

Description     Fair Value Measurements Using   Total Gains 
(dollars in thousands)  Fair Value   Level 1   Level 2   Level 3   (Losses) 
September 30, 2018                              
Assets and liabilities measured on a recurring basis:                         
Available-for-sale securities:                         
US Government Agencies and Sponsored Entities   $250,290   $   $250,290   $   $ 
Obligations of states and political subdivisions   15,541        15,541         
Corporate bonds   6,475        6,475         
U.S. Treasury bonds   4,963    4,963             
Total recurring  $277,269   $4,963   $272,306   $   $