UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the fiscal year ended | December 31, 2019 |
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 | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
3100 Zinfandel Drive, Rancho Cordova, California 95670
(Address of principal executive offices) (Zip code)
(916) 851-0123
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, no par value | AMRB | Nasdaq Global Select Market |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
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 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 x |
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 Act). Yes o No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $64,593,000.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
As of February 20, 2020, the registrant’s no par value Common Stock totaled 5,918,375 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K: Part III, Items 10 through 14 from Registrant’s definitive proxy statement for the 2020 annual meeting of shareholders.
AMERICAN RIVER BANKSHARES
INDEX
TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2019
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Cautionary Statements Regarding Forward-Looking Statements
Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as amended, and subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,” “should,” “could,” “would,” and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ significantly from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following:
| · | Current and future legislation and regulation promulgated by the United States Congress and actions taken by governmental agencies that may impact the U.S. financial system; |
| · | the risks presented by economic volatility and recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates; |
| · | variances in the actual versus projected growth in assets and return on assets; |
| · | potential loan and lease losses; |
| · | potential expenses associated with resolving nonperforming assets; |
| · | changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds; |
| · | competitive effects; |
| · | inadequate internal controls over financial reporting or disclosure controls and procedures; |
| · | changes in accounting policies and practices and the effects of adopting ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“CECL”); |
| · | potential declines in fee and other noninterest income earned associated with economic factors; |
| · | general economic conditions nationally, regionally, and within our operating markets could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets; |
| · | changes in the regulatory environment including increased capital and regulatory compliance requirements and government intervention in the U.S. financial system; |
| · | changes in business conditions and inflation; |
| · | changes in securities markets, public debt markets, and other capital markets; |
| · | potential data processing, cybersecurity and other operational systems failures, breach or fraud; |
| · | potential decline in real estate values in our operating markets; |
| · | the effects of uncontrollable events such as terrorism, the threat of terrorism or the impact of military conflicts in connection with the conduct of the war on terrorism by the United States and its allies, natural disasters (including earthquakes and wildfires), pandemic disease and viruses, and disruption of power supplies and communications; |
| · | changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations; |
| · | projected business increases following any future strategic expansion could be lower than expected; |
| · | the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings; |
| · | our ability to comply with any regulatory orders or requirements we may become subject to; |
| · | the effects and costs of litigation and other legal developments; |
| · | the reputation of the financial services industry could experience deterioration, which could adversely affect our ability to access markets for funding and to acquire and retain customers; and |
| · | the efficiencies we may expect to receive from any investments in personnel and infrastructure may not be realized. |
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The factors set forth under “Item 1A-Risk Factors” in this report and other cautionary statements and information set forth in this report should be carefully considered and understood as being applicable to all related forward-looking statements contained in this report, when evaluating the business prospects of the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission (the “SEC”) on Forms 10-K, 10-Q and 8-K.
Introduction
American River Bankshares (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California in 1995. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. Its principal office is located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and its telephone number is (916) 851-0123.
The Company owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank, and American River Financial, a California corporation which has been inactive since its incorporation in 2003.
American River Bank was incorporated and commenced business in Fair Oaks, California, in 1983 and thereafter moved its headquarters to Sacramento, California in 1985. American River Bank operates four full service offices in Sacramento County including the main office located at 1545 River Park Drive, Suite 107, Sacramento and branch offices in Sacramento and Gold River; one full service office in Placer County, located in Roseville; two full service offices in Sonoma County in Healdsburg and Santa Rosa; and three full service offices in Amador County in Jackson, Pioneer, and Ione.
American River Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable legal limits. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act includes an increase to $250,000 as the maximum FDIC insurance limit per depositor retroactive to January 1, 2008. On November 9, 2010, the FDIC implemented a final rule to permanently increase the maximum insurance limit to $250,000 under the Dodd-Frank Act.
American River Bank does not offer trust services or international banking services and does not plan to do so in the near future. American River Bank’s primary business is serving the commercial banking needs of small to mid-sized businesses within those counties listed above. American River Bank accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services. American River Bank also conducts lease financing for most types of business equipment, from computer software to heavy earth-moving equipment. American River Bank owns 100% of two inactive companies, ARBCO and American River Mortgage. ARBCO was formed in 1984 to conduct real estate development and has been inactive since 1995. American River Mortgage has been inactive since its formation in 1994.
During 2019, the Company conducted no significant activities other than holding the shares of its subsidiaries. However, it is authorized, with the prior approval of the Board of Governors of the Federal Reserve System (the “Board of Governors”), the Company’s principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking.
The common stock of the Company is registered under the Securities Exchange Act of 1934, as amended, and is listed and traded on the Nasdaq Global Select Market under the symbol “AMRB.”
At December 31, 2019, the Company had consolidated assets of $720 million, net loans of $394 million, deposits of $605 million and shareholders’ equity of $83 million.
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General
The Company is a regional bank holding company headquartered in Sacramento County, California. The principal communities served are located in Sacramento, Placer, Yolo, El Dorado, Sonoma, and Amador counties. The Company generates most of its revenue by providing a wide range of products and services to small and middle-market businesses and individuals. The Company’s principal source of revenue comes from interest income. Interest income is derived from interest and fees on loans and leases, interest on investments (principally government securities), and Federal funds sold (funds loaned on a short-term basis to other banks). For the year ended December 31, 2019, these sources comprised 68.6%, 31.4%, and 0.0%, respectively, of the Company’s interest income.
American River Bank’s deposits are not received from a single depositor or group of affiliated depositors, the loss of any one of which would have a materially adverse effect on the business of the Company. A material portion of American River Bank’s deposits are not concentrated within a single industry or group of related industries.
As of December 31, 2019 and December 31, 2018, American River Bank held $29,000,000 in certificates of deposit for the State of California. In connection with these deposits, American River Bank is generally required to pledge securities to secure such deposits, except for the first $250,000 insured by the FDIC.
Based on the most recent information made available by the FDIC through June 30, 2019, American River Bank competes with approximately 31 other banking or savings institutions in Sacramento County, 25 in Placer County, 19 in Sonoma County and 6 in Amador County, in which American River Bank’s market share of FDIC insured deposits was approximately 0.94% in the service areas of Sacramento County, 0.41% in Placer County, 0.51% in Sonoma County, and 15.08% in Amador County.
Employees
At December 31, 2019, the Company and its subsidiaries employed 102 persons on a full-time equivalent basis. The Company believes its employee relations are good.
Website Access
The Company maintains a website where certain information about the Company is posted. Through the website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto, as well as Section 16 Reports and amendments thereto, are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. These reports are free of charge and can be accessed through the address www.americanriverbank.com by accessing the Investor Relations link, then the Company News link, then the SEC Filings link located at that address. Once you have selected the SEC Filings link you will have the option to access the Section 16 Reports or the reports filed on Forms 10-K, 10-Q and 8-K by the Company by selecting the appropriate link.
Competition
General Competitive Factors
In order to compete with the major financial institutions in its primary service areas, American River Bank uses to the fullest extent possible the flexibility which is accorded by their community bank status. This includes an emphasis on specialized services, local promotional activity, and personal contacts by their respective officers, directors and employees. American River Bank also seeks to provide special services and programs for individuals in their primary service area who are employed in the agricultural, professional and business fields, such as loans for equipment, furniture, tools of the trade or expansion of practices or businesses. In the event there are customers whose loan demands exceed their respective lending limits, they seek to arrange for such loans on a participation basis with other financial institutions. Furthermore, American River Bank also assists those customers requiring services not offered by either bank to obtain such services from correspondent banks.
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Commercial banks compete with savings and loan associations, credit unions, other financial institutions and other entities for funds. For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with savings and loan associations, credit unions, consumer finance companies, mortgage companies and other lending institutions.
Banking is a business that depends on interest rate differentials. In general, the difference between the interest rate paid by a bank to obtain their deposits and other borrowings and the interest rate received by a bank on loans extended to customers and on securities held in a bank’s portfolio comprise the major portion of a bank’s revenues.
The interest rate differentials of a bank, and therefore their revenues, are affected not only by general economic conditions, both domestic and foreign, but also by the monetary and fiscal policies of the United States as set by statutes and as implemented by federal agencies, particularly the Federal Reserve Board. The Federal Reserve Board can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States government securities, adjustments in the amount of interest free reserves that banks and other financial institutions are required to maintain, and adjustments to the discount rates applicable to borrowing by banks from the Federal Reserve Board. These activities influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and timing of any future changes in monetary policies and their impact on American River Bank is not predictable.
Competitive Data
At June 30, 2019, based on the most recent “Data Book Summary of Deposits in FDIC Insured Commercial and Savings Banks” report at that date, the competing commercial and savings banks had 168 offices in the cities of Rancho Cordova, Roseville and Sacramento, California, where American River Bank has its five Sacramento area offices, 58 offices in the cities of Healdsburg and Santa Rosa, California, where American River Bank has its two Sonoma County offices, and three offices in the cities of Jackson, Pioneer and Ione, California, where American River Bank has its three Amador County offices. Additionally, American River Bank competes with thrifts and, to a lesser extent, credit unions, finance companies and other financial service providers for deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending limits and major advertising and marketing campaigns. They also perform services, such as trust services, international banking, discount brokerage and insurance services, which American River Bank is neither authorized nor prepared to offer currently. American River Bank has made arrangements with its correspondent banks and with others to provide some of these services for its customers. For borrowers requiring loans in excess of American River Bank’s legal lending limits, American River Bank has offered, and intends to offer in the future, such loans on a participating basis with its correspondent banks and with other community banks, retaining the portion of such loans which is within its lending limits. As of December 31, 2019, American River Bank’s aggregate legal lending limits to a single borrower and such borrower’s related parties were $13,323,000 on an unsecured basis and $22,205,000 on a fully secured basis based on capital and allowable reserves of $88,818,000.
American River Bank’s business is concentrated in its service area, which primarily encompasses Sacramento County, South Western Placer County, Sonoma County, and Amador County. The economy of American River Bank’s service area is dependent upon government, manufacturing, tourism, retail sales, agriculture, population growth and smaller service oriented businesses.
Based upon the most recent “Data Book Summary of Deposits in FDIC Insured Commercial and Savings Banks” report dated June 30, 2019, there were 212 operating commercial and savings bank offices in Sacramento County with total deposits of $37,312,467,000. This was an increase of $2,216,156,000 compared to the June 30, 2018 balances. American River Bank held a total of $348,877,000 in deposits, representing approximately 0.94% of total commercial and savings banks deposits in Sacramento County as of June 30, 2019.
Based upon the most recent “Data Book Summary of Deposits in FDIC Insured Commercial and Savings Banks” report dated June 30, 2019, there were 94 operating commercial and savings bank offices in Placer County with total deposits of $10,956,527,000. This was a decrease of $257,823,000 compared to the June 30, 2018 balances. American River Bank held a total of $44,847,000 in deposits, representing approximately 0.41% of total commercial and savings banks deposits in Placer County as of June 30, 2019.
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Based upon the most recent “Data Book Summary of Deposits in FDIC Insured Commercial and Savings Banks” report dated June 30, 2019, there were 119 operating commercial and savings bank offices in Sonoma County with total deposits of $14,562,757,000. This was a decrease of $229,860,000 compared to the June 30, 2018 balances. American River Bank held a total of $73,908,000 in deposits, representing approximately 0.51% of total commercial and savings banks deposits in Sonoma County as of June 30, 2019.
Based upon the most recent “Data Book Summary of Deposits in FDIC Insured Commercial and Savings Banks” report dated June 30, 2019, there were 13 operating commercial and savings bank offices in Amador County with total deposits of $753,635,000. This was a decrease of $20,806,000 compared to the June 30, 2018 balances. American River Bank held a total of $113,624,000 in deposits, representing approximately 15.08% of total commercial and savings bank deposits in Amador County as of June 30, 2019.
Supervision and Regulation
General
American River Bankshares is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), and is registered as such with, and subject to the supervision of, the Board of Governors. The Company is required to obtain the approval of the Board of Governors before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would own or control more than 5% of the voting shares of such bank. The Bank Holding Company Act prohibits the Company from acquiring any voting shares of, or interest in, all or substantially all of the assets of, a bank located outside the State of California unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. Any acquisition is also subject to applicable California and other provisions of federal law.
The common stock of the Company is subject to the registration requirements of the Securities Act of 1933, as amended, and the qualification requirements of the California Corporate Securities Law of 1968, as amended. The Company is also subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, filing annual, quarterly and other current reports with the SEC.
The Company and any of its subsidiaries are deemed to be “affiliates” within the meaning of that term as defined in the Federal Reserve Act. This means, for example, that there are limitations (a) on loans by American River Bank to affiliates, (b) on investments by American River Bank in affiliates’ stock as collateral for loans to any borrower, and (c) other transactions between any bank subsidiary and the Company. The Company and its subsidiaries are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
American River Bank is licensed by the California Commissioner (the “Commissioner”) of the Department of Business Oversight (the “DBO”), and its deposits are insured by the FDIC up to the applicable legal limits. American River Bankshares and American River Bank are required to file reports with the Board of Governors, the Commissioner, and the FDIC and provide any additional information that the Board of Governors, the Commissioner, and the FDIC may require.
Capital Standards
Federal regulations require FDIC insured depository institutions, including state-chartered banks, to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).
The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). We exercised the opt-out election regarding the treatment of AOCI. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
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In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, a bank’s assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by the regulations based on perceived risks inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien 1 – 4 family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. While the new capital rules set higher regulatory capital standards, bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the minimum requirements. The implementation of the capital rules or more stringent requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity, restrict the ability to pay dividends or executive bonuses and require the raising of additional capital.
Management believes that American River Bank is in compliance with the minimum capital requirements, including the fully phased-in capital conservation buffer requirement, based upon its capital position at December 31, 2019.
In accordance with the Dodd-Frank Act and long-standing Federal Reserve policy, the Company must act as a source of financial and managerial strength to American River Bank. Under this policy, the Company must commit resources to support the Bank, including at times when the Company may not be in a financial position to provide it. The Company could be required to guarantee the capital plan of American River Bank if it becomes undercapitalized for purposes of banking regulations, as described below. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. The Bank Holding Company Act provides that, in the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment.
Safety and Soundness Standards
Each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and information security standards. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal stockholder. The FDIC also has issued guidance on risks banks may face from third party relationships (e.g. relationships under which the third party provides services to the bank). The guidance generally requires the bank to perform adequate due diligence on the third party, appropriately document the relationship, and perform adequate oversight and auditing, in order to the limit the risks to the bank.
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Prompt Corrective Regulatory Action
Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
State banks that have insufficient capital are subject to certain mandatory and discretionary supervisory measures. For example, a bank that is “undercapitalized” (i.e. fails to comply with any regulatory capital requirement) is subject to growth limitations and is required to submit a capital restoration plan; a holding company that controls such a bank is required to guarantee that the bank complies with the restoration plan. A “significantly undercapitalized” bank is subject to additional restrictions. State banks deemed by the FDIC to be “critically undercapitalized” are subject to the appointment of a receiver or conservator.
The final rule that increased regulatory capital standards also adjusted the prompt corrective action tiers as of January 1, 2015 to conform to the new capital standards. The various categories now incorporate the newly adopted common equity Tier 1 capital requirement, an increase in the Tier 1 to risk-based assets requirement and other changes. Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (1) a common equity Tier 1 risk-based capital ratio of 6.5% (new standard); (2) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (3) a total risk-based capital ratio of 10% (unchanged) and (4) a Tier 1 leverage ratio of 5% (unchanged). The federal banking agencies also may require banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to be deemed well-capitalized, in which case institutions may no longer be deemed to be well-capitalized and may therefore be subject to certain restrictions such as taking brokered deposits or limitations on growth.
Additional Regulations
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal financial institution agencies have adopted regulations which require institutions to establish and maintain comprehensive written real estate policies which address certain lending considerations, including loan-to-value limits, loan administrative policies, portfolio diversification standards, and documentation, approval and reporting requirements. The FDICIA further generally prohibits an insured state bank from engaging as a principal in any activity that is impermissible for a national bank, absent FDIC determination that the activity would not pose a significant risk to the Bank Insurance Fund, and that the bank is, and will continue to be, within applicable capital standards.
The federal financial institution agencies have established bases for analysis and standards for assessing a financial institution’s capital adequacy in conjunction with the risk-based and Basel III capital guidelines including analysis of interest rate risk, concentrations of credit risk, risk posed by non-traditional activities, and factors affecting overall safety and soundness. The safety and soundness standards for insured financial institutions include analysis of (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees and benefits; and (7) excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. If an agency determines that an institution fails to meet any standard, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require the institution to correct the deficiency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution.
Community Reinvestment Act (“CRA”) regulations evaluate banks’ lending to low and moderate income individuals and businesses across a four-point scale from “outstanding” to “substantial noncompliance,” and are a factor in regulatory review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in “substantial noncompliance” with the CRA regulations may be subject to enforcement proceedings. In its most recent exam for CRA compliance, American River Bank received a “satisfactory” rating.
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Limitations on Dividends, Repurchases and Redemptions
The Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from its subsidiaries. The payment of cash dividends and/or management fees by American River Bank is subject to restrictions set forth in the California Financial Code, as well as restrictions established by the FDIC. On January 25, 2017, the Board of Directors resumed the payment of cash dividends. The Company relies on distributions from American River Bank in the form of cash dividends in order to pay cash dividends to our shareholders. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for more information regarding cash dividends. We cannot provide any assurance that we will be able to pay dividends in the future.
American River Bank is a legal entity that is separate and distinct from its holding company. The Company relies on dividends received from American River Bank for use in the operation of the Company and the ability of the Company to pay dividends to shareholders. Future cash dividends by American River Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors. Capital rules may restrict dividends by American River Bank if the additional capital conservation buffer is not achieved.
The ability of American River Bank to declare a cash dividend to the Company is subject to California law, which restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the Commissioner, in an amount not exceeding the greatest of (1) retained earnings of the bank; (2) the net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year
It is an essential principle of safety and soundness that a banking organization’s redemption and repurchases of regulatory capital instruments, including common stock, from investors be consistent with the organization’s current and prospective capital needs. Consultation with the Federal Reserve before redeeming any equity or other capital instrument included in Tier 1 or Tier 2 capital is generally advisable in all circumstances and is required if such redemption could have a material effect on the level or composition of the organization’s capital base. Bank holding companies that are experiencing financial weaknesses, or that are at significant risk of developing financial weaknesses, must consult with the appropriate Federal Reserve supervisory staff before redeeming or repurchasing common stock or other regulatory capital instruments for cash or other valuable consideration. Similarly, any bank holding company considering expansion, whether through acquisitions or through organic growth and new activities, generally also must consult with the appropriate Federal Reserve supervisory staff before redeeming or repurchasing common stock or other regulatory capital instruments for cash or other valuable consideration. In evaluating the appropriateness of a bank holding company’s proposed redemption or repurchase of capital instruments, the Federal Reserve will consider the potential losses that the holding company may suffer from the prospective need to increase reserves and write down assets from continued asset deterioration and the holding company’s ability to raise additional common stock and other Tier 1 capital to replace capital instruments that are redeemed or repurchased. A bank holding company must inform the Federal Reserve of a redemption or repurchase of common stock or perpetual preferred stock for cash or other value resulting in a net reduction of the bank holding company’s outstanding amount of common stock or perpetual preferred stock below the amount of such capital instrument outstanding at the beginning of the quarter in which the redemption or repurchase occurs. In addition, a bank holding company must advise the Federal Reserve sufficiently in advance of such redemptions and repurchases to provide reasonable opportunity for supervisory review and possible objection should the Federal Reserve determine a transaction raises safety and soundness concerns.
Bank holding company that are not well capitalized or well managed, or that are subject to any unresolved supervisory issues, must provide prior notice to the Federal Reserve for any repurchase or redemption of its equity securities for cash or other value that would reduce by 10% or more the holding company’s consolidated net worth aggregated over the preceding 12-month period.
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FDIC Insurance
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the Deposit Insurance Fund (“DIF”) up to prescribed limits for each depositor. The Dodd-Frank Act revised the FDIC’s DIF management authority by setting requirements for the Designated Reserve Ratio (the DIF balance divided by estimated insured deposits) and redefining the assessment base, which is used to calculate banks’ quarterly assessments. The amount of FDIC assessments paid by each DIF member institution is based on its asset size and relative risk of default as measured by regulatory capital ratios and other supervisory factors. The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for a bank would also result in the revocation of the bank’s charter by the DBO.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance, which can be affected by the cost of bank failures to the FDIC among other factors. The FDIC is an independent federal agency that insures deposits through the DIF up to prescribed statutory limits of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The Dodd-Frank Act revised the FDIC’s DIF management authority by setting requirements for the Designated Reserve Ratio (the “DRR”, calculated as the DIF balance divided by estimated insured deposits) and redefining the assessment base which is used to calculate banks’ quarterly assessments. The amount of FDIC assessments paid by each DIF member institution is based on its asset size and its relative risk of default as measured by regulatory capital ratios and other supervisory factors.
On September 30, 2018, the DRR reached 1.36%. Because the reserve ratio has exceeded 1.35%, two deposit insurance assessment changes occurred under the FDIC regulations: 1) surcharges on large banks (total consolidated assets of $10 billion or more) ended; the last surcharge on large banks was collected on December 28, 2018. and 2) small banks, like American River Bank (total consolidated assets of less than $10 billion) were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%, to be applied when the reserve ratio is at least 1.38%. As a result of the reserve ratio reaching 1.38%, American River Bank was awarded an assessment of $166,543 of which $95,287 was used in 2019.
The FDIC will, at least semi-annually, update its income and loss projections for the Deposit Insurance Fund and, if necessary, propose rules to further increase assessment rates. Any future increases in FDIC insurance premiums may have a material and adverse effect on our earnings and could have a material adverse effect on the value of, or market for, our common stock.
Impact of Certain Legislation and Regulation
Gramm-Leach-Bliley Act. In 1999, the Gramm-Leach-Bliley Act (the “GLB Act”) was signed into law. The GLB Act eliminated most of the remaining depression-era “firewalls” between banks, securities firms and insurance companies which were established by The Banking Act of 1933, also known as the Glass-Steagall Act (“Glass-Steagall”). Glass-Steagall sought to insulate banks as depository institutions from the perceived risks of securities dealing and underwriting, and related activities. The GLB Act permitted bank holding companies that could qualify as “financial holding companies” to acquire securities firms or create them as subsidiaries, and securities firms could acquire banks or start banking activities through a financial holding company. Prior to the GLB Act, banks were also (with minor exceptions) prohibited from engaging in insurance activities or affiliating with insurers. The GLB Act removed these restrictions and substantially eliminated the prohibitions under the Bank Holding Company Act on affiliations between banks and insurance companies. Consequently, the common ownership of banks, securities firms and insurance firms was possible, in addition to the conduct of commercial banking, merchant banking, investment management, securities underwriting and insurance within a single financial institution using a “financial holding company” structure authorized by the GLB Act.
A bank holding company could qualify as a financial holding company if (i) its banking subsidiaries are “well capitalized” and “well managed” and (ii) it files with the Board of Governors a certification to such effect and a declaration that it elects to become a financial holding company. The Bank Holding Company Act was amended to permit financial holding companies to engage in activities, and acquire companies engaged in activities, that are financial in nature or incidental to such financial activities. Financial holding companies were also permitted to engage in activities that were complementary to financial activities if the Board of Governors determined that the activity did not pose a substantial risk to the safety or soundness of depository institutions or the financial system in general.
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These standards expanded upon the list of activities “closely related to banking” which have defined the permissible activities of bank holding companies under the Bank Holding Company Act. Neither the Company nor American River Bank has determined whether or when to seek to acquire and exercise powers or activities under the GLB Act.
Volcker Rule. On December 10, 2013, the federal banking agencies jointly issued a final rule implementing the so-called “Volcker Rule” (set forth in Section 619 of the Dodd-Frank Act). The Volcker Rule prohibits depository institutions, companies that control such institutions, bank holding companies, and the affiliates and subsidiaries of such banking entities, from engaging as principal for the trading account of the banking entity in any purchase or sale of one or more covered financial instruments (so-called “proprietary trading”) and imposes limitations upon retaining ownership interests in, sponsoring, investing in and transacting with certain investment funds, including hedge funds and private equity funds. Under the Economic Growth, Regulatory Reform and Consumer Protection Act, which was signed into law by President Trump in 2018, depository institutions and their holding companies with less than $10 billion in assets are now excluded from the prohibitions of the Volcker Rule. Accordingly, institutions under $10 billion, such as American River Bank may, so long as consistent with general safety and soundness concerns, engage in proprietary trading and in making investments in covered funds so long as it that has (i) $10 billion or less than assets and (ii) trading assets of 5% or less. American River Bank does not currently engage in proprietary trading or have any investments in covered funds.
Change in Bank Control Act. Subject to various exceptions, the Bank Holding Company Act (“BHC Act”) and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person’s or company’s acquiring “control” of a bank holding company. Under a rebuttable presumption established by the Federal Reserve pursuant to the Change in Bank Control Act, the acquisition of 10% or more of a class of voting stock of a bank holding company would constitute acquisition of control of the bank holding company if no other person will own, control, or hold the power to vote a greater percentage of that class of voting stock immediately after the transaction or the bank holding company has registered securities under the Exchange Act. In addition, any person or group of persons acting in concert must obtain the approval of the Federal Reserve under the BHC Act before acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the outstanding voting stock of a bank holding company, the right to control in any manner the election of a majority of the company’s directors, or otherwise obtaining control or a “controlling influence” over the bank holding company. The California Financial Code has similar regulations applicable to acquisition of securities of a California-chartered bank holding company and bank, such as the Company and American River Bank.
Patriot Act. On October 26, 2001, President Bush signed the USA Patriot Act (the “Patriot Act”), which includes provisions pertaining to domestic security, surveillance procedures, border protection, and terrorism laws to be administered by the Secretary of the Treasury. Title III of the Patriot Act entitled, “International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001” includes amendments to the Bank Secrecy Act which expand the responsibilities of financial institutions in regard to anti-money laundering activities with particular emphasis upon international money laundering and terrorism financing activities through designated correspondent and private banking accounts.
The Patriot Act contains various provisions that affect the operations of financial institutions by encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. The Company and American River Bank are not currently aware of any account relationships between American River Bank and any foreign bank or other person or entity which would not be in compliance with the Patriot Act.
The effects which the Patriot Act and any amendments to the Patriot Act or additional legislation enacted by Congress may have upon financial institutions is uncertain; however, such legislation could increase compliance costs and thereby potentially may have an adverse effect upon the Company’s results of operations.
Sarbanes-Oxley Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”) which responded to issues in corporate governance and accountability. Among other matters, key provisions of the Act and rules promulgated by the SEC pursuant to the Act include enhancement of financial disclosures and related certification requirements, rules related to audit committees, auditor independence, ethics requirements, securities trading prohibitions, securities reporting requirements, and securities listing requirements.
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The Company’s securities are listed on the Nasdaq Global Select Market. Consequently, in addition to the rules promulgated by the SEC pursuant to the Act, the Company must also comply with the listing standards applicable to Nasdaq listed companies. The Nasdaq listing standards applicable to the Company include standards related to (i) director independence, (ii) executive session meetings of the board, (iii) requirements for audit, nominating and compensation committee charters, membership qualifications and procedures, (iv) shareholder approval of equity compensation arrangements, and (v) code of conduct requirements that comply with the code of ethics under the Act.
The Company has incurred and it is anticipated that it will continue to incur increased costs to comply with the Act and the rules and regulations promulgated pursuant to the Act by the SEC, Nasdaq and other regulatory agencies having jurisdiction over the Company or the issuance and listing of its securities. The Company does not currently anticipate, however, that compliance with the Act and such rules and regulations will have a material adverse effect upon its financial position or results of its operations or its cash flows.
Fair and Accurate Credit Transactions Act. Under the Fair and Accurate Credit Transactions Act financial institutions and other creditors are required to develop and implement a written identity theft prevention program. The program must include reasonable policies and procedures for detecting, preventing, and mitigating identity theft in connection with certain new and existing covered accounts. Covered accounts are defined as (i) an account primarily for personal, family, or household purposes (i.e., consumer accounts), or (ii) any other account for which there is a reasonably foreseeable risk to customers or the safety and soundness of the financial institution or creditor from identity theft. The program must be appropriate to the size and complexity of the financial institution or creditor and the nature and scope of its activities and should be designed to:
| · | identify relevant patterns, practices, and specific forms of activity that are “red flags” of possible identity theft and incorporate those red flags into the program; |
| · | detect the occurrence of red flags incorporated into the program; |
| · | respond appropriately to any red flags that are detected to prevent and mitigate identity theft; and |
| · | ensure that the program is updated periodically to reflect changes in risks to customers or to the safety and soundness of the financial institution or creditor from identity theft. |
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, foreign nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Department of the Treasury Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. American River Bank is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputational consequences.
The Dodd-Frank Act. On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act is intended to restructure the regulation of the financial services sector by, among other things, (i) establishing a framework to identify systemic risks in the financial system implemented by a newly created Financial Stability Oversight Council and other federal banking agencies; (ii) expanding the resolution authority of the federal banking agencies over troubled financial institutions; (iii) authorizing changes to capital and liquidity requirements; (iv) changing deposit insurance assessments; and (v) enhancing regulatory supervision to improve the safety and soundness of the financial services sector. Below is a summary of certain provisions of the Dodd-Frank Act which, directly or indirectly, may affect us.
| · | Changes to Capital Requirements. The federal banking agencies are required to establish revised minimum leverage and risk-based capital requirements for banks and bank holding companies. The Dodd-Frank Act requires capital requirements to be counter cyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction consistent with safety and soundness. |
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| · | Enhanced Regulatory Supervision. The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. |
| · | Consumer Protection. The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve System. The CFPB is responsible for establishing and implementing rules and regulations under various federal consumer protection laws governing certain consumer products and services. The CFPB has primary enforcement authority over large financial institutions with assets of $10 Billion or more, while smaller institutions will be subject to the CFPB’s rules and regulations through the enforcement authority of the federal banking agencies. States are permitted to adopt consumer protection laws and regulations that are more stringent than those laws and regulations adopted by the CFPB and state attorneys general are permitted to enforce consumer protection laws and regulations adopted by the CFPB. |
| · | Deposit Insurance. The Dodd-Frank Act permanently increased the deposit insurance limit for insured deposits to $250,000 per depositor. Other deposit insurance changes under the Dodd-Frank Act include (i) amendment of the assessment base used to calculate an insured depository institution’s deposit insurance premiums paid to the DIF by elimination of deposits and substitution of average consolidated total assets less average tangible equity during the assessment period as the revised assessment base; (ii) increasing the minimum designated reserve ratio of the DIF from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits; (iii) eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds; and (iv) repeal of the prohibition upon the payment of interest on demand deposits to be effective one year after the date of enactment of the Dodd-Frank Act. The FDIC has proposed further changes to the deposit insurance assessments applicable to small insured depository institutions with assets less than $10 Billion and additional DIF recapitalization obligations for insured depository institutions with more than $10 Billion in assets. See the discussion of these changes in “Supervision and Regulation - FDIC Insurance.” |
| · | Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained. |
| · | Transactions with Insiders. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors. |
| · | Enhanced Lending Limitations. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions. |
| · | Debit Card Interchange Fees. The Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. The Federal Reserve Board was required to establish standards for reasonable and proportional fees which may take into account the costs of preventing fraud. The restrictions on interchange fees, however, do not apply to banks, like us, that, together with their affiliates, have assets of less than $10 Billion. |
| · | Interstate Branching. The Dodd-Frank Act authorizes national and state banks to establish branch offices in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branch offices in other states if the host state expressly permitted out-of-state banks to establish branch offices in that state. Accordingly, banks may be able to enter new markets more freely. |
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Compensation Practices. The Dodd-Frank Act provides that the appropriate federal banking regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm. In June 2016, several federal financial agencies (including the Federal Reserve and FDIC) re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion or more in total consolidated assets. For institutions with at least $1 billion but less than $50 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation. Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the institution (i) by providing an executive officer, employee, director, principal shareholder or individuals who are “significant risk takers” with excessive compensation, fees or benefits, or (ii) that could lead to material financial loss to the institution. Depending upon the outcome of the rule making process, the application of this rule to us if we were to cross the $1 billion threshold could require us to revise our compensation strategy, increase our administrative costs and adversely affect our ability to recruit and retain qualified associates.
In June 2010, prior to the enactment of the Dodd-Frank Act, the federal bank regulatory agencies jointly issued the Interagency Guidance on Sound Incentive Compensation Policies (“Guidance”), which requires that financial institutions establish metrics for measuring the risk to the financial institution of such loss from incentive compensation arrangements and implement policies to prohibit inappropriate risk taking that may lead to material financial loss to the institution. Together, the Dodd-Frank Act and the Guidance may impact our compensation policies and arrangements.
Requirements under the Dodd-Frank Act are anticipated to be implemented over an extended period of time, unless the implementation is changed as the result of additional legislation promulgated by Congress or as a result of actions taken by the administration of President Trump. Therefore, the nature and extent of regulations that will be issued by various regulatory agencies and the impact such regulations will have on the operations of financial institutions such as ours is unclear. Such regulations resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
Cybersecurity and Data Privacy
Federal regulators have issued multiple statements regarding cybersecurity and that financial institutions need to design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. In addition, a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations in the event of a cyber-attack. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to a cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states, notably including California where we conduct substantially all our banking business, have adopted laws and/or regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many such states (including California) have also recently implemented or modified their data breach notification and data privacy requirements, including in California with the adoption of the California Consumer Privacy Act. We expect this trend of state-level activity in those areas to continue, and we continue to monitor relevant legislative and regulatory developments in California where nearly all our customers are located. Failure to comply with the applicable requirements of these laws and failure to protect our customers information could result in enforcement actions and litigation against us, any of which could have a material adverse effect on our business, financial condition or results of operations.
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In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ a layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity.
2017 Tax Reform Law
On December 22, 2017, President Trump signed into law “H.R.1” commonly referred to as the Tax Cuts and Jobs Act, which among other matters reduced the federal corporate income tax rate to 21%, effective January 1, 2018. The lowering of the tax rate caused banks that carry net deferred tax assets on their balance-sheets (i.e., tax positions carried forward to offset against future taxes) to take charges against the valuation of their net deferred tax assets because the higher the tax rate, the more these net deferred tax assets are worth. Hence, the reduction of the federal corporate-tax rate from the Company’s 2017 rate of 34% to the projected future rate of 21%, reduced the value of these net deferred tax assets. Charges of $1,220,000 against the Company’s net deferred tax assets were recorded as additional income tax expense in the fourth quarter of 2017.
Future Legislation and Regulation
In addition to legislative changes, the various federal and state financial institution regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such rules or regulations will be enacted or the effect that such regulations may have on American River Bankshares or American River Bank. The Company anticipates that additional regulations would likely increase the Company’s expenses, which may adversely impact the Company’s results of operations, financial condition, future prospects, profitability, and stock price.
The Company and its subsidiary, American River Bank, conduct business in an environment that includes certain risks described below any of which could have a material adverse effect on the Company’s business, results of operations, financial condition, future prospects and stock price. You are also referred to the matters described under the heading “Cautionary Statements Regarding Forward-Looking Statements,” in Part I, Item 1 and Part II, Item 7 of this report on Form 10-K for additional information regarding factors that may affect the Company’s business.
| · | Deterioration of economic conditions could adversely affect our business. |
Our business and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States and in Northern California, in particular. If the U.S. or California economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained or impeded. Uncertainty about the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal government, and future tax rates is always a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries, including uncertainty over the stability of the euro currency, could affect the stability of global financial markets, which could hinder U.S. economic growth and affect our business and the businesses of our customers.
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The Company’s operating market has begun to show demand for credit products as the continued low rate environment and expectations for economic expansion have increased refinancing as well as new loan activity. However, deterioration in economic conditions locally, regionally or nationally could result in an economic downturn in Northern California with the following consequences, any of which could adversely affect our business:
| § | loan delinquencies and defaults may increase; |
| § | problem assets and foreclosures may increase; |
| § | demand for loans and other products and services may decline; |
| § | low cost or noninterest bearing deposits may decrease; |
| § | collateral for loans may decline in value, in turn reducing clients’ borrowing power, and reducing the value of assets and collateral as sources of repayment of existing loans; |
| § | foreclosed assets may not be able to be sold; |
| § | volatile securities market conditions could adversely affect valuations of investment portfolio assets; and |
| § | reputational risk may increase due to public sentiment regarding the banking industry. |
| · | Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition. |
At December 31, 2019, we had no nonperforming loans and leases. At December 31, 2019, our nonperforming assets (which include foreclosed real estate and other repossessed assets) to total assets had decreased to 0.19%. While these nonperforming loans and leases and nonperforming assets have decreased since 2008, there is no guarantee that these levels will continue into the future, which could adversely affect our results of operations, financial condition and stock price.
Nonperforming assets adversely affect our net income in various ways. We generally do not record interest income on nonperforming loans or other real estate owned, thereby adversely affecting our income and increasing our loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile, which could result in a request to reduce our level of nonperforming assets and/or raise additional capital. When we reduce problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities. We may experience increases in nonperforming assets and the disposition of such nonperforming assets may adversely affect our profitability.
| · | Tightening of credit markets and liquidity risk could adversely affect our business, financial condition and results of operations. |
A tightening of the credit markets or any inability to obtain adequate funds for asset growth at an acceptable cost could adversely affect our asset growth and liquidity position and, therefore, our earnings capability. In addition to core deposit growth, maturity of investment securities and loan and lease payments, we also rely on alternative funding sources including unsecured borrowing lines with correspondent banks, secured borrowing lines with the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Francisco, and public time certificates of deposits. Our ability to access these sources could be impaired by deterioration in our financial condition as well as factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations for the financial services industry or serious dislocation in the general credit markets. In the event such a disruption should occur, our ability to access these sources could be adversely affected, both as to price and availability, which would limit or potentially raise the cost of the funds available to us.
| · | We have a concentration risk in real estate related loans. |
At December 31, 2019, $323.8 million, or 81.0% of our total loan and lease portfolio, consisted of real estate related loans. Of that amount, $214.6 million, or 66.3%, consisted of commercial real estate, $23.2 million, or 7.2% consisted of commercial and residential construction loans (including land acquisition and development loans) and $86.0 million, or 26.5%, consisted of residential mortgages and residential multi-family real estate. The majority of our real property collateral is located in our operating markets in Northern California. If there is a substantial decline in commercial and residential real estate values in our primary operating markets as a result of any deterioration in economic conditions or other events including natural disasters such as earthquakes, droughts, floods, fires, and similar adverse weather occurrences. Such a decline in values could have an adverse impact on us by limiting repayment of defaulted loans through sale of commercial and residential real estate collateral and by a likely increase in the number of defaulted loans to the extent that the financial condition of our borrowers is adversely affected by such a decline in values.
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| · | We may take title to real estate that exposes us to the risk of environmental liabilities. |
Our loan and lease portfolio may include loans secured by real estate which could be subject to environmental liabilities. In the event that we foreclose upon and take title to such real estate, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and cash flows could be materially adversely affected.
| · | Our allowance for loan and lease losses may not be adequate to cover actual losses. |
Like all financial institutions, the Bank maintains an allowance for loan and lease losses to provide for loan defaults and nonperformance, but its allowance for loan and lease losses may not be adequate to cover actual loan and lease losses. In addition, future provisions for loan and lease losses could materially and adversely affect the Bank’s and therefore our Company’s operating results. The adequacy of the Bank’s allowance for loan and lease losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of realizable future losses is susceptible to changes in economic, operating and other conditions, including changes in the local and general California real estate market and operating environment, as well as interest rates, employment levels and other economic factors that may be beyond our control, and these losses may exceed current estimates.
Federal regulatory agencies, as an integral part of the examination process, review the Bank’s loans and leases and allowance for loan and lease losses, as well as management’s policies and procedures for determining the adequacy of the allowance for loan and lease losses. We believe that our allowance for loan and lease losses policies are effective and that our allowance for loan and lease losses is adequate to cover current probable incurred losses. However, the Bank may have to further increase the allowance for loan and lease losses as a result of the effects of deterioration of economic conditions nationally and in the operating markets in which the Bank conducts business and/or as a result of changes in regulation or accounting methodologies.
| · | Our focus on lending to small to mid-sized community-based businesses may increase our credit risk. |
As of December 31, 2019, our largest outstanding commercial business loan and largest outstanding commercial real estate loan amounted to $4.9 million and $7.3 million, respectively. At such date, our commercial real estate loans amounted to $214.6 million, or 53.8% of our total loan and lease portfolio, and our commercial business loans amounted to $43.0 million, or 10.8% of our total loan and lease portfolio. Commercial real estate and commercial business loans generally are considered riskier than single-family residential loans because they have larger balances to a single borrower or group of related borrowers. Commercial real estate and commercial business loans involve risks because the borrowers’ ability to repay the loans typically depends primarily on the successful operation of the businesses or the properties securing the loans. Most of the Bank’s commercial real estate and commercial business loans are made to small business or middle market customers who may have a heightened vulnerability to economic conditions. Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle. Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could adversely affect our results of operations.
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| · | Our business is subject to interest rate risk, and variations in interest rates may negatively affect our financial performance. |
Changes in the interest rate environment may reduce our net interest income. It is expected that we will continue to realize income from the differential or “margin” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest margins are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. We may be unable to minimize our interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest margin, asset quality, and loan origination volume.
| · | We are subject to extensive governmental regulation, which could adversely affect our business. |
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change.
The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise insurance premiums. The Dodd-Frank Act also established the Consumer Financial Protection Bureau as an independent entity within the Federal Reserve Board (FRB), which has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards and contains provisions on mortgage-related matters, such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties. Although the applicability of certain elements of the Dodd-Frank Act is limited to institutions with more than $10 billion in assets, there can be no guarantee that such applicability will not be extended in the future or that regulators or other third parties will not seek to impose such requirements on institutions with less than $10 billion in assets, such as the Company. Compliance with the Dodd-Frank Act and its implementing regulations has and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Failure to comply with the Dodd-Frank Act and any other federal, state and local governmental regulation could also result in financial penalties and regulatory enforcement actions which could limit or restrict our ability to conduct our operations, require us to raise capital, increase our compliance costs and expose us to reputational risk.
In addition, new proposals for legislation continue to be introduced in the U.S. Congress and in California that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have a material adverse effect on our business, financial condition and results of operations.
| · | Governmental fiscal and monetary policies may affect our business and are beyond our control. |
The business of banking is affected significantly by the fiscal and monetary policies of the federal government and its agencies. Such policies are beyond our control. We are particularly affected by the policies established by the Federal Reserve Board in relation to the supply of money and credit in the United States. The instruments of monetary policy available to the Federal Reserve Board can be used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits, and this can and does have a material adverse effect on our business. Any deterioration of economic conditions could result in further intervention and legislation beyond our control. Such deterioration could also limit our access to capital or sources of liquidity in amounts and at times necessary to conduct operations in compliance with applicable regulatory requirements.
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| · | The Bank faces strong competition from banks, financial service companies and other companies that offer banking services, which could adversely affect our business. |
Increased competition in our market areas may result in reduced loans and deposits or the rates charged or paid on these instruments and adversely affect our net interest margin. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer similar banking services compared to those that are offered by the Bank. These competitors include national and super-regional banks, finance companies, investment banking and brokerage firms, credit unions, government-assisted farm credit programs, other community banks and technology-oriented financial institutions offering online services. In particular, the Bank’s competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits than we do and are thereby better able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain loans and deposits, as well as the range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances, such as Internet-based banking services that cross traditional geographic bounds, enable more companies to provide financial services. If the Bank is unable to attract and retain banking customers, we may be unable to maintain our historical levels of loans and leases and deposits or our net interest margin, which would have a material adverse effect on our business and financial condition.
| · | Our operations are dependent upon key personnel. |
Our future prospects are and will remain highly dependent on our directors, executive officers and other key personnel. From time to time, we have experienced changes in the membership of our board of directors and changes among the personnel serving as our executive officers. Our success will, to some extent, depend on the continued service of our directors and executive officers, in addition to our ability to continue to attract and retain experienced banking professionals to serve us and the Bank as directors, executive officers and in other key positions. The unexpected loss of the services of any of these individuals could have a detrimental effect on our business and future operations.
| · | Technology implementation problems or computer system failures could adversely affect us. |
Our future growth prospects will be highly dependent on the ability of the Bank to implement changes in technology that affect the delivery of banking services such as the increased demand for computer access to bank accounts and the availability to perform banking transactions electronically. The Bank’s ability to compete will depend upon its ability to continue to adapt technology on a timely and cost-effective basis to meet such demands. In addition, our business and operations and those of the Bank could be susceptible to adverse effects from computer failures, communication and energy disruption, and activities such as fraud of unethical individuals with the technological ability to cause disruptions or failures of the Bank’s data processing system.
| · | Cybersecurity or datasecurity breaches and failures or other technological difficulties could adversely affect us. |
We cannot be certain that the continued implementation of safeguards will eliminate the risk of vulnerability to technological difficulties or failures or ensure the absence of a breach of information security, including as a result of cybersecurity breach. The FDIC cited cybersecurity as a critical challenge facing the financial services industry and stated that the frequency and sophistication of cyber-attacks are increasing. If our information security is compromised or other technology difficulties or failures occur at the Bank or with one of our vendors, information may be lost or misappropriated, services and operations may be interrupted and the Bank could be exposed to claims from its customers as a result. In addition, we could become subject to governmental enforcement actions and litigation (including private party litigation) in the event we experience a data privacy breach or we fail to comply with federal and state data privacy requirements (including the California Consumer Privacy Act) relating to information on our customers and others with whom we do business, the results of which could have a material adverse effect on our business, financial condition, reputation and results of operations.
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| · | Our controls over financial reporting and related governance procedures may fail or be circumvented. |
Management regularly reviews and updates our internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. We maintain controls and procedures to mitigate risks such as processing system failures or errors and customer or employee fraud, and we maintain insurance coverage for certain of these risks. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and provides only reasonable, not absolute, certainty that the objectives of the system will be met. Events could occur which are not prevented or detected by our internal controls, are not insured against, or are in excess of our insurance limits. Any failure or circumvention of our controls and procedures, or failure to comply with regulations related to controls and procedures, could have a material adverse effect on our business.
| · | We may not be successful in raising additional capital needed in the future. |
If additional capital is needed in the future as a result of losses, our business strategy (including any acquisitions we may make) or regulatory requirements, our efforts to raise such additional capital may be unsuccessful or shares sold in the future may be sold at prices or on terms that are not equal to or better than the current market price. The inability to raise additional capital when needed or at prices and terms acceptable to us could adversely affect our ability to implement our business strategies.
| · | The effects of legislation in response to credit conditions may adversely affect us. |
Legislation that has or may be passed at the federal level and/or by the State of California in response to conditions affecting credit markets could cause us to experience higher credit losses if such legislation reduces the amount that the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts. Such legislation could also result in the imposition of limitations upon the Bank’s ability to foreclose on property or other collateral or make foreclosure less economically feasible. Such events could result in increased loan and lease losses and require a material increase in the allowance for loan and lease losses.
| · | The effects of changes to FDIC insurance coverage limits and assessments are uncertain and increased premiums may adversely affect us. |
FDIC insurance premium assessments are uncertain and increased premium assessments may adversely affect our earnings. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund (the “DIF”). Bank failures increased significantly during the economic downturn causing the FDIC to take control of failed institutions and guarantee payment from the DIF up to the insured limit for deposits held at such failed institutions. Any deterioration of economic conditions may cause losses which require premium increases to replenish the DIF.
| · | In the future we may be required to recognize impairment with respect to investment securities, including the FHLB stock we hold. |
Our securities portfolio currently includes securities with unrecognized losses. We may continue to observe declines in the fair market value of these securities. We evaluate the securities portfolio for any other than temporary impairment each reporting period, as required by generally accepted accounting principles, and as of December 31, 2019, we did not recognize any securities as other than temporarily impaired. Future evaluations of the securities portfolio may require us to recognize an impairment charge with respect to these and other holdings. In addition, as a condition to membership in the Federal Home Loan Bank of San Francisco (the “FHLB”), we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB. At December 31, 2019, we held stock in the FHLB totaling $4.3 million. The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. The FHLB currently distributes cash dividends on its shares, however, past dividend paying practices are not a guarantee of future dividends. To date, we have not recognized any impairment charges related to our FHLB stock holdings. Any future negative changes to the financial condition of the FHLB may require us to recognize an impairment charge with respect to such holdings.
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| · | If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected. |
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing shareholder value. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including credit, liquidity, operational, regulatory compliance and reputational. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business and results of operations could be materially adversely affected.
| · | Our modest size makes it more difficult for us to compete. |
Our modest size makes it more difficult to compete with other financial institutions which are generally larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. As a smaller institution, we are also disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.
| · | We face risks related to our operational, technological and organizational infrastructure. |
Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure as we expand. Similar to other corporations, operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or outside persons and exposure to external events. As discussed below, we are dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the strength and capability of our technology systems which we use both to interface with our customers and to manage our internal financial records and other systems. Our ability to develop and deliver new products that meet the needs of our existing customers and attract new ones depends on the functionality of our technology systems. Additionally, our ability to run our business in compliance with applicable laws and regulations is dependent on these infrastructures.
We monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so. In some instances, we may build and maintain these capabilities ourselves. Specifically, we provide our own core systems processing and essential web hosting. We also outsource some of these functions to third parties. If we experience difficulties, fail to comply with banking regulations or keep up with increasingly sophisticated technologies, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps materially. Even if we are able to replace them, it may be at a higher cost to us, which could materially adversely affect our business, financial condition and results of operations.
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| · | We are dependent upon relationships with various third parties with respect to the operations of American River Bank, and our relationships with such third parties, some of which are material to us, could adversely affect our business. |
The Bank has entered into numerous arrangements with third parties with respect to the operations of its business. Upon the expiration of the then-current term, any such agreements may not be renewed by the third party or may be renewed on terms less favorable to the Bank. In some cases, such agreements may permit the third party to unilaterally prescribe certain business practices and procedures with respect to the Bank. To the extent any agreement with a service provider is terminated, we may not be able to secure alternate service providers, and, even if we do, the terms with alternate providers may not be as favorable as those currently in place. In addition, were we to lose any of our significant third-party providers, it could cause a material disruption in our ability to service our customers, which also could have an adverse material impact on us. Moreover, significant disruptions in our ability to provide services could negatively affect the perception of our business, which could result in a loss of confidence and other adverse effects on our business. In addition, if any of our counterparties is unable to or otherwise does not fulfill (or does not timely fulfill) its obligations to us for any reason (including, but not limited to, bankruptcy, computer or other technological interruptions or failures, personnel loss, negative regulatory actions, or acts of God) or engages in fraud or other misconduct during the course of such relationship, we may need to seek alternative third party service providers, or discontinue certain products or programs in their entirety. We may experience situations where we could be held directly or indirectly responsible, or were otherwise subject to liability, for the inability of our third party service providers to perform services for our customers on a timely basis or at all or for actions of third parties undertaken on behalf of the Bank or otherwise in connection with the Bank’s arrangement with such third parties. Any such responsibility or liability in the future may have a material adverse effect on our business, including the operations of the Bank and its divisions, and financial results.
| · | Adherence to our internal policies and procedures by our employees is critical to our performance and how we are perceived by our regulators. |
Our internal policies and procedures are a critical component of our corporate governance and, in some cases, compliance with applicable regulations. We adopt internal policies and procedures to guide management and employees regarding the operation and conduct of our business. Any deviation or non-adherence to these internal policies and procedures, whether intentional or unintentional, could have a material adverse effect on our management, operations or financial condition.
| · | Existing insurance policies may not adequately protect us and our subsidiaries. |
Fidelity, business interruption, cybersecurity, and property insurance policies are in place with respect to our operations. Should any event triggering such policies occur, however, it is possible that our policies would not fully reimburse us for the losses we could sustain due to deductible limits, policy limits, coverage limits, or other factors. We generally renew our insurance policies on an annual basis. If the cost of coverage becomes too high, we may need to reduce our policy limits, increase the deductibles or agree to certain exclusions from our coverage in order to reduce the premiums to an acceptable amount.
| · | We must keep pace with technological change to remain competitive and introduce new products and services. |
Financial products and services have become increasingly technologically driven. Our ability to meet the needs of our customers competitively and introduce new products in a cost-efficient manner is dependent on the ability to keep pace with technological advances, to invest in new technology as it becomes available, and to obtain and maintain related essential personnel. Many of our competitors have already implemented critical technologies and have greater resources to invest in technology than we do and may be better equipped to market new technologically driven products and services. In addition, we may not have the same ability to rapidly respond to technological innovations as our competitors do. Furthermore, the introduction of new technologies and products by financial technology companies and “fintech” platforms may adversely affect our ability to obtain new customers and successfully grow our business. The ability to keep pace with technological change is important, and the failure to do so, due to cost, proficiency or otherwise, could have a material adverse impact on our business and therefore on our financial condition and results of operations.
| · | Our reputation and financial condition may be harmed by system failures, computer viruses and other technological interruptions to our operations. |
We rely heavily upon information systems and other operating technologies to efficiently operate and manage our business, including to process transactions through the Internet. Were there to be a failure or a significant impairment in the operation of any of such systems, we may need to develop alternative processes, including to comply with customer safeguard protocols, during which time revenues and profitability may be lower, and there can be no assurance that we could develop or find such an alternative on terms acceptable to us or at all. Any such disruption in the information systems and other operating technologies utilized by the Bank including due to infiltration by hackers or other intruders, could also result in negative publicity and have a material adverse effect on our financial condition and results of operations.
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| · | We may incur losses due to fraudulent and negligent acts, as well as errors, by third parties or our employees. |
We may incur losses due to fraudulent or negligent acts, misconduct or errors on the part of third parties with which we do business, our employees and individuals and entities unaffiliated with us, including unauthorized wire and automated clearinghouse transactions, the theft of customer data, customer fraud concerning the value of any relevant collateral, identity theft, the counterfeiting of cards and “skimming” (whereby a skimmer reads a debit card’s encoded mag stripe and a camera records the PIN that is entered by a customer). Additionally, our employees could hide unauthorized activities from us, engage in improper or unauthorized activities on behalf of our customers, or improperly use confidential information. There can be no assurances that the Bank’s program to monitor fraud and other activities will be able to detect all instances of such conduct or that, even if such conduct is detected, we, the Bank, our customers or the third parties with which we do business, including the ATM networks in which the Bank participates, will not be the victims of such activities. Even a single significant instance of fraud, misconduct or other error could result in reputational damage to us, which could reduce the use and acceptance of our cards and other products and services, cause retail distributors or their customers to cease doing business with us or them, or could lead to greater regulation that would increase our compliance costs. Such activities could also result in the imposition of regulatory sanctions, including significant monetary fines, and civil claims which could adversely affect our business, operating results and financial condition.
| · | Changes in accounting standards could materially impact our financial statements. |
From time to time, the Financial Accounting Standards Board (“FASB”) or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators, outside auditors or management) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict, and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements.
| · | If the goodwill we have recorded in connection with our acquisition of Bank of Amador or any future acquisitions we could make becomes impaired, it could have an adverse impact on our earnings and capital. |
At December 31, 2019, we had approximately $16.3 million of goodwill on our balance sheet attributable to our merger with Bank of Amador in December 2004. In accordance with accounting principles generally accepted in the United States of America, our goodwill is not amortized but rather evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Such evaluation is based on a variety of factors, including the quoted price of our common stock, market prices of the common stock of other banking organizations, common stock trading multiples, discounted cash flows, and data from comparable acquisitions. Future evaluations of goodwill may result in findings of impairment and write-downs, which could have a material adverse effect on our financial condition and results of operations.
| · | We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. |
The Bank Secrecy Act, the Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file timely reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan.
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Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
| · | We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties. |
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, the United States Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.
| · | Federal regulators periodically examine our business, and we may be required to remediate adverse examination findings. |
The FDIC and DBO periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a federal banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, interest rate risk and liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. If we become subject to any regulatory actions, including memorandums of understanding or cease and desist orders, it could have a material adverse effect on our business, results of operations, financial condition and growth prospects.
| · | As a result of the Dodd-Frank Act and recent rulemaking, we are subject to more stringent capital requirements. |
In July 2013, the U.S. federal banking authorities approved new regulatory capital rules implementing the Basel III regulatory capital reforms effecting certain changes required by the Dodd-Frank Act. The new regulatory capital rules not only increase most of the required minimum regulatory capital ratios, but also introduce a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. The new regulatory capital rules also expand the current definition of capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 and Tier 2 capital. In order to be a “well capitalized” depository institution under the new regime, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital. The regulatory capital rules became effective as applied to American River Bank on January 1, 2015 with a phase-in period that generally extended through January 1, 2019 for many of the changes. The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could materially adversely affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally.
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| · | The FASB has recently issued an accounting standard update that will result in a significant change in how we provide for credit losses and may have a material impact on our financial condition or results of operations. |
In June 2016, the FASB issued an accounting standard update, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan and lease losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
The new CECL standard will become effective for us for the fiscal year beginning January 1, 2023 and for interim periods thereafter. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan and lease losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The one-time cumulative effect adjustment to allowance for loan and lease losses will be offset by a charge to retained earnings and therefore reduce equity capital. We have not yet determined the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations.
| · | The effects of terrorism and other events beyond our control, including natural disasters and pandemic disease or viruses, may adversely affect our customers and our results of operations. |
The terrorist actions on September 11, 2001 and thereafter, as well as the military conflicts in the Middle East, have had significant adverse effects upon the United States economy. Whether terrorist activities in the future and the actions of the United States and its allies in combating terrorism on a worldwide basis will adversely impact us and the extent of such impact is uncertain. Similar events beyond our control including, but not limited to, financial and economic instability and governmental actions in response, natural disasters such as earthquakes, droughts, floods, fires, and similar adverse weather occurrences, disruption of power and energy supplies and communications equipment such as telephones, cellular phones, computers, and other forms of electronic equipment or media, and widespread, adverse public health occurrences including pandemic disease or viruses, may adversely affect our future results of operations by, among other things, disrupting the conduct of our operations and those of our customers, which could result in a reduction in the demand for loans and other products and services offered by the Bank, increase nonperforming loans and the amounts reserved for loan and lease losses, or cause significant declines in our level of deposits.
| · | Future acquisitions and expansion activities may disrupt our business and adversely affect our operating results. |
We periodically evaluate potential acquisitions and expansion opportunities. To the extent that we grow through acquisitions, we cannot ensure that we will be able to adequately or profitably manage this growth. Acquiring other banks, branches or other assets, as well as other expansion activities, involves various risks including the risks of incorrectly assessing the credit quality of acquired assets, encountering greater than expected costs of incorporating acquired banks or branches into the Bank, executing cost savings measures, and being unable to profitably deploy funds in an acquisition.
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| · | We may raise additional capital, which could have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock. |
Our articles of incorporation, as amended, provide the authority to issue without further shareholder approval, 20,000,000 shares of common stock, no par value per share, of which 5,898,878 shares were issued and outstanding at December 31, 2019. Pursuant to the Company’s 2010 Equity Incentive Plan, at December 31, 2019, employees and directors of the Company had outstanding options to purchase 29,958 shares of common stock. As of December 31, 2019, 1,269,229 shares of common stock remained available for awards under the 2010 Equity Incentive Plan.
We are not restricted from issuing additional shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. We frequently evaluate opportunities to access the capital markets taking into account our regulatory capital ratios, financial condition and other relevant considerations, and subject to market conditions, we may take further capital actions. Such actions could include, among other things, the issuance of additional shares of common stock in public or private transactions in order to further increase our capital levels above the requirements for a well-capitalized institution established by the federal bank regulatory agencies as well as other regulatory targets or in connection with any acquisitions we may make.
The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities including, without limitation, securities issued upon exercise of outstanding equity awards under our 2010 Equity Incentive Plan (or any future equity incentive plans we may adopt), could be substantially dilutive to shareholders of our common stock. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our shareholders. The market price of our common stock could decline as a result of sales of shares of our common stock or the perception that such sales could occur.
| · | Our common stock is subordinate to our existing and future indebtedness and preferred stock. |
Shares of our common stock are equity interests and do not constitute indebtedness. As such, our common stock ranks junior to all our customer deposits and indebtedness, whether now existing or hereafter incurred, and other non-equity claims on us, with respect to assets available to satisfy claims. Additionally, holders of common stock are subject to the prior liquidation rights of the holders of any debt we may issue in the future and may be subject to the prior dividend and liquidation rights of any series of preferred stock we may issue in the future.
| · | The price of our common stock may fluctuate significantly, and this may make it difficult for shareholders to resell shares of common stock they own at times or at prices they find attractive. |
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. In some cases, the markets have produced downward pressure on stock prices for certain issuers without regard to those issuers’ underlying financial strength. As a result, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. This may make it difficult for shareholders to resell shares of common stock they own at times or at prices they find attractive. The low trading volume in our common shares on the NASDAQ Global Select Market means that our shares may have less liquidity than other publicly traded companies. We cannot ensure that the volume of trading in our common shares will be maintained or will increase in the future.
The trading price of the shares of our common stock will depend on many factors, which may change from time to time and which may be beyond our control, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales or offerings of our equity or equity related securities, and other factors identified above in the forward-looking statement discussion in Part I, Item 1 of this Annual Report on Form 10-K under the heading “Cautionary Statements Regarding Forward-Looking Statements” and below. These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
| § | actual or anticipated quarterly fluctuations in our operating results and financial condition; |
| § | changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our common stock or those of other financial institutions; |
| § | failure to meet analysts’ revenue or earnings estimates; |
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| § | speculation in the press or investment community generally or relating to our reputation, our market area, our competitors or the financial services industry in general; |
| § | strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings; |
| § | actions by our current shareholders, including sales of common stock by existing shareholders and/or directors and executive officers; |
| § | fluctuations in the stock price and operating results of our competitors; |
| § | future sales of our equity, equity-related or debt securities; |
| § | changes in the frequency or amount of dividends or share repurchases; |
| § | proposed or adopted regulatory changes or developments; |
| § | anticipated or pending investigations, proceedings, or litigation that involves or affects us; |
| § | trading activities in our common stock, including short-selling; |
| § | domestic and international economic factors unrelated to our performance; and |
| § | general U.S. and international market conditions and, in particular, developments related to market conditions for the financial services industry. |
A significant decline in our stock price could result in substantial losses for our shareholders.
| · | We may be unable or choose not to pay cash dividends in the foreseeable future. |
Our ability to pay dividends on our common stock depends on a variety of factors. The Company relies on distributions from the Bank in the form of cash dividends in order to pay cash dividends to our shareholders. Cash dividends may or may not be paid in the future since they are subject to regulatory restrictions and to evaluation by our Board of Directors of financial factors including, but not limited to, our earnings, financial condition and capital requirements.
| · | Anti-takeover provisions in our articles of incorporation and bylaws and California law could make a third party acquisition of us difficult. |
Our articles of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire us (even if doing so would be beneficial to our shareholders) and for holders of our common stock to receive any related takeover premium for their common stock, including advance notice procedures for shareholder proposals and the authorization of 10,000,000 shares of blank-check preferred stock. We are also subject to certain provisions of California law and federal law that would delay, deter or prevent a change in control of the Company. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.
Item 1B. Unresolved Staff Comments.
None.
The Company and American River Bank lease nine and own two of their respective premises. The leases expire on various dates through 2029 and generally contain renewal option periods for periods ranging from three to five years. For additional information relating to lease rental expense and commitments as of December 31, 2019, see Note 12 to the Consolidated Financial Statements under “Part II, Item 8. Financial Statements and Supplementary Data.”
There are no material legal proceedings adverse to the Company and its subsidiaries to which any director, officer, affiliate of the Company, or 5% shareholder of the Company or its subsidiaries, or any associate of any such director, officer, affiliate or 5% shareholder of the Company or its subsidiaries are a party, and none of the above persons has a material interest adverse to the Company or its subsidiaries.
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From time to time, the Company and/or its subsidiaries may be a party to claims and legal proceedings arising in the ordinary course of business. The Company’s management is not aware of any pending legal proceedings to which either it or its subsidiaries may be a party or has recently been a party, which will have a material adverse effect on the financial condition or results of operations of the Company or its subsidiaries.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company’s common stock began trading on the NASDAQ National Stock Market (“Nasdaq”) under the symbol “AMRB” on October 26, 2000. Effective July 3, 2006, the Company’s common stock became listed and traded on the Nasdaq Global Select Market. The closing price for the Company’s common stock on February 20, 2020 was $14.70.
Holders
As of February 6, 2020, there were approximately 2,544 shareholders of record of the Company’s common stock.
Dividends
On January 25, 2017, the Board reinstated our quarterly cash dividend and in each of 2018 and 2017 the Company paid four cash dividends per year in the aggregate amount of $0.20 per common share. During 2019, the Company paid four cash dividends in the aggregate amount of $0.24 per common share. The Company relies on distributions from the Bank in the form of cash dividends in order to pay cash dividends to our shareholders. We cannot provide any assurance as to whether any dividends will continue to be paid in the future since they are subject to regulatory and statutory restrictions and the evaluation by the Company’s Board of Directors of financial factors including, but not limited to earnings, financial condition and capital requirements of the Company and its subsidiaries.
As a California corporation, the Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law (the “Corporation Law”). The Corporation Law provides that neither a corporation nor any of its subsidiaries shall make a distribution to the corporation’s shareholders unless the board of directors has determined in good faith either of the following: (1) the amount of retained earnings of the corporation immediately prior to the distribution equals or exceeds the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount; or (2) immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount. The good faith determination of the board of directors may be based upon (1) financial statements prepared on the basis of reasonable accounting practices and principles, (2) a fair valuation, or (3) any other method reasonable under the circumstances; provided, that a distribution may not be made if the corporation or subsidiary making the distribution is, or is likely to be, unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature.
The Board of Governors generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. The Board of Governors’ policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income available to shareholder for the past four quarters, net of dividends previously paid during that period, is sufficient to fully fund the dividend, and its prospective rate of earnings retention appears consistent with its capital needs and overall current and prospective financial condition.
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The payment of cash dividends by American River Bank is subject to restrictions set forth in the California Financial Code (the “Financial Code”). The Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of (a) the bank’s retained earnings; or (b) the bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the Commissioner, make a distribution to its shareholders in an amount not exceeding the greater of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its net income for its current fiscal year. In the event that the Commissioner determines that the shareholders’ equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the Commissioner may order the bank to refrain from making a proposed distribution.
The FDIC may also restrict the payment of dividends by a subsidiary bank if such payment would be deemed unsafe or unsound or if after the payment of such dividends, the bank would be included in one of the “undercapitalized” categories for capital adequacy purposes pursuant to the FDIC Improvement Act of 1991.
Stock Repurchases
On January 24, 2018, the Company approved and authorized a stock repurchase program for 2018 (the “2018 Program”). The 2018 Program authorized the repurchase during 2018 of up to 5% of the outstanding shares of the Company’s common stock, or approximately 306,618 shares based on the 6,132,362 shares outstanding as of December 31, 2017. During 2018, the Company repurchased 308,618 shares of its common stock at an average price of $15.52 per share and repurchased 574,748 shares of its common stock at an average price of $14.99 per share during 2017.
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Item 6. Selected Financial Data.
FINANCIAL SUMMARY-The following table presents certain consolidated financial information concerning the business of the Company and its subsidiaries. This information should be read in conjunction with the Consolidated Financial Statements, the notes thereto, and Management’s Discussion and Analysis included in this report.
As of and for the Years Ended December 31,
(In thousands, except per share amounts and ratios)
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Operations Data: | ||||||||||||||||||||
| Net interest income | $ | 23,209 | $ | 20,646 | $ | 19,353 | $ | 20,243 | $ | 20,007 | ||||||||||
| Provision for loan and lease losses | 660 | 175 | 450 | (1,344 | ) | — | ||||||||||||||
| Noninterest income | 1,688 | 1,513 | 1,596 | 2,045 | 2,015 | |||||||||||||||
| Noninterest expenses | 16,846 | 15,510 | 14,049 | 13,836 | 14,080 | |||||||||||||||
| Income before income taxes | 7,391 | 6,474 | 6,450 | 9,796 | 7,942 | |||||||||||||||
| Income tax expense | 1,891 | 1,574 | 3,252 | 3,392 | 2,674 | |||||||||||||||
| Net income | $ | 5,500 | $ | 4,900 | $ | 3,198 | $ | 6,404 | $ | 5,268 | ||||||||||
| Share Data: | ||||||||||||||||||||
| Earnings per share – basic | $ | 0.94 | $ | 0.83 | $ | 0.50 | $ | 0.95 | $ | 0.70 | ||||||||||
| Earnings per share – diluted | $ | 0.94 | $ | 0.83 | $ | 0.50 | $ | 0.94 | $ | 0.70 | ||||||||||
| Cash dividends per share (1) | $ | 0.24 | $ | 0.20 | $ | 0.20 | $ | 0.00 | $ | 0.00 | ||||||||||
| Book value per share | $ | 14.06 | $ | 12.75 | $ | 12.54 | $ | 12.59 | $ | 11.72 | ||||||||||
| Tangible book value per share | $ | 11.29 | $ | 9.97 | $ | 9.88 | $ | 10.14 | $ | 9.50 | ||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Assets | $ | 720,353 | $ | 688,092 | $ | 655,622 | $ | 651,450 | $ | 634,640 | ||||||||||
| Loans and leases, net | 393,802 | 318,516 | 308,713 | 324,086 | 289,102 | |||||||||||||||
| Deposits | 604,837 | 590,674 | 556,080 | 544,806 | 530,690 | |||||||||||||||
| Shareholders’ equity | 82,909 | 74,721 | 76,921 | 83,850 | 86,075 | |||||||||||||||
| Financial Ratios: | ||||||||||||||||||||
| Return on average equity | 6.92 | % | 6.77 | % | 3.91 | % | 7.60 | % | 6.03 | % | ||||||||||
| Return on average tangible equity | 8.71 | % | 8.74 | % | 4.88 | % | 9.43 | % | 7.42 | % | ||||||||||
| Return on average assets | 0.78 | % | 0.72 | % | 0.49 | % | 1.00 | % | 0.85 | % | ||||||||||
| Efficiency ratio (2) | 67.09 | % | 69.35 | % | 65.84 | % | 60.81 | % | 62.87 | % | ||||||||||
| Net interest margin (2) | 3.60 | % | 3.41 | % | 3.39 | % | 3.62 | % | 3.63 | % | ||||||||||
| Net loans and leases to deposits | 65.11 | % | 53.92 | % | 55.52 | % | 59.49 | % | 54.48 | % | ||||||||||
| Net (recoveries) charge-offs to average loans & leases | (0.02 | %) | 0.08 | % | 0.25 | % | (0.39 | %) | 0.12 | % | ||||||||||
| Nonperforming loans and leases to total loans and leases (3) | 0.00 | % | 0.01 | % | 0.60 | % | 0.01 | % | 0.56 | % | ||||||||||
| Allowance for loan and lease losses to total loans and leases | 1.29 | % | 1.36 | % | 1.43 | % | 1.47 | % | 1.69 | % | ||||||||||
| Average equity to average assets | 11.30 | % | 10.62 | % | 12.53 | % | 13.20 | % | 14.02 | % | ||||||||||
| Dividend payout ratio (1) | 26 | % | 24 | % | 40 | % | 0 | % | 0 | % | ||||||||||
| Capital Ratios: | ||||||||||||||||||||
| Leverage capital ratio | 9.16 | % | 8.94 | % | 9.45 | % | 10.50 | % | 10.97 | % | ||||||||||
| Tier 1 risk-based capital ratio | 14.77 | % | 16.11 | % | 18.08 | % | 19.02 | % | 19.34 | % | ||||||||||
| Total risk-based capital ratio | 15.94 | % | 17.29 | % | 19.34 | % | 20.27 | % | 20.59 | % | ||||||||||
| (1) | On January 25, 2017, the Company reinstated the payment of quarterly cash dividends. |
| (2) | Fully taxable equivalent. |
| (3) | Nonperforming loans and leases consist of loans and leases past due 90 days or more and still accruing and nonaccrual loans and leases. |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with “Item 1. Business-Cautionary Statements Regarding Forward-Looking Statements,” “Item 1A. Risk Factors,” and “Item 8. Financial Statements and Supplementary Data” of this report.
Use of Non-GAAP Financial Measures
This Annual Report on Form 10-K (“Form 10K”) contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP. These measures include tangible book value and taxable equivalent basis used in the computation of the net interest margin and efficiency ratio. Management has presented these non-GAAP financial measures in this Form 10K because it believes that they provide useful and comparative information to assess trends in the Company’s financial position reflected in the results and facilitate comparison of our performance with the performance of our peers.
Tangible Equity (non-GAAP financial measures)
Tangible common stockholders’ equity (tangible book value) excludes goodwill and other intangible assets. The Company believes the exclusion of goodwill and other intangible assets to create “tangible equity” facilitates the comparison of results for ongoing business operations. The Company’s management internally assesses its performance based, in part, on these non-GAAP financial measures. The following table sets forth a reconciliation of total shareholders’ equity to tangible shareholder’s equity for the periods presented.
Reconciliation to Tangible Common Shareholders’ Equity:
| December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Total shareholders’ equity | $ | 82,909 | $ | 74,721 | $ | 76,921 | ||||||
| Less: | ||||||||||||
| Other intangible assets (goodwill) | (16,321 | ) | (16,321 | ) | (16,321 | ) | ||||||
| Tangible common shareholders’ equity | $ | 66,588 | $ | 58,400 | $ | 60,600 | ||||||
Net Interest Margin and Efficiency Ratio (non-GAAP financial measures)
In accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation of net interest margin and the efficiency ratio. The Company believes the presentation of net interest margin on a taxable equivalent basis using a 21% effective tax rate for 2019 and 2018 and a 34% effective tax rate for 2017, allows comparability of net interest margin with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and tax-exempt loans and investments. The efficiency ratio is a measure of a banking company’s overhead as a percentage of its revenue. The Company derives this ratio by dividing total noninterest expense by the sum of the taxable equivalent net interest income and the total noninterest income.
Reconciliation of Annualized Net Interest Margin, Fully Tax Equivalent (non-GAAP)
| (dollars in thousands) | December 31, | |||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net interest income (GAAP) | $ | 23,209 | $ | 20,646 | $ | 19,353 | ||||||
| Tax equivalent adjustment | 214 | 207 | 390 | |||||||||
| Net interest income - tax equivalent adjusted (non-GAAP) | $ | 23,423 | $ | 20,853 | $ | 19,743 | ||||||
| Average earning assets | $ | 650,627 | $ | 611,696 | $ | 582,443 | ||||||
| Net interest margin (GAAP) | 3.57 | % | 3.38 | % | 3.32 | % | ||||||
| Net interest margin (non-GAAP) | 3.60 | % | 3.41 | % | 3.39 | % | ||||||
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Reconciliation of Non-GAAP Measure – Efficiency Ratio
| (dollars in thousands) | December 31, | |||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net interest income (GAAP) | $ | 23,209 | $ | 20,646 | $ | 19,353 | ||||||
| Tax equivalent adjustment | 214 | 207 | 390 | |||||||||
| Net interest income – tax-equivalent adjusted (non-GAAP) | $ | 23,423 | $ | 20,853 | $ | 19,743 | ||||||
| Noninterest income | 1,688 | 1,513 | 1,596 | |||||||||
| Total income | 25,111 | 22,366 | 21,339 | |||||||||
| Total noninterest expense | 16,846 | 15,510 | 14,049 | |||||||||
| Efficiency ratio, fully tax-equivalent (non-GAAP) | 67.09 | % | 69.35 | % | 65.84 | % | ||||||
Critical Accounting Policies
General
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. We use historical loss data and the economic environment as factors, among others, in determining the inherent loss that may be present in our loan and lease portfolio. Actual losses could differ significantly from the factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of probable credit losses inherent in the Company’s credit portfolio that have been incurred as of the balance-sheet date. The allowance is based on two basic principles of accounting: (1) “Accounting for Contingencies,” which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) the “Receivables” topic, which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
The allowance for loan and lease losses is determined based upon estimates that can and do change when the actual risk, loss events, or changes in other factors, occur. The analysis of the allowance uses a historical loss view as an indicator of future losses and as a result could differ from the actual losses incurred in the future. If the allowance for loan and lease losses falls below that deemed adequate (by reason of loan and lease growth, actual losses, the effect of changes in risk factors, or some combination of these), the Company has a strategy for supplementing the allowance for loan and lease losses, over the short-term. For further information regarding our allowance for loan and lease losses, see “Allowance for Loan and Lease Losses Activity.”
Stock-Based Compensation
The Company recognizes compensation expense over the service period in an amount equal to the fair value of all share-based payments which consist of stock options and restricted stock awarded to directors and employees. The fair value of each stock option award is estimated on the date of grant and amortized over the service period using a Black-Scholes-Merton based option valuation model that requires the use of assumptions. Critical assumptions that affect the estimated fair value of each award include expected stock price volatility, dividend yields, option life and the risk-free interest rate. The fair value of each restricted award is estimated on the date of award and amortized over the service period.
Overview
The Company recorded net income in 2019 of $5,500,000, an increase of $600,000 (12.2%) from $4,900,000 in 2018. Diluted earnings per share were $0.94 for 2019 and $0.83 for 2018. For 2019, the Company realized a return on average equity of 6.92% and a return on average assets of 0.78%, compared to 6.77% and 0.72%, respectively, in 2018.
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Net income for 2018 increased $1,702,000 (53.2%) from $3,198,000 in 2017. Diluted earnings per share for 2017 were $0.50. For 2017, the Company realized a return on average equity of 3.91% and return on average assets of 0.49%. Table One below provides a summary of the components of net income for the years indicated (dollars in thousands):
Table One: Components of Net Income
| 2019 | 2018 | 2017 | ||||||||||
| Interest income* | $ | 25,884 | $ | 22,449 | $ | 20,804 | ||||||
| Interest expense | (2,461 | ) | (1,596 | ) | (1,061 | ) | ||||||
| Net interest income* | 23,423 | 20,853 | 19,743 | |||||||||
| Provision for loan and lease losses (expense) income | (660 | ) | (175 | ) | (450 | ) | ||||||
| Noninterest income | 1,688 | 1,513 | 1,596 | |||||||||
| Noninterest expense | (16,846 | ) | (15,510 | ) | (14,049 | ) | ||||||
| Provision for income taxes | (1,891 | ) | (1,574 | ) | (3,252 | ) | ||||||
| Tax equivalent adjustment | (214 | ) | (207 | ) | (390 | ) | ||||||
| Net income | $ | 5,500 | $ | 4,900 | $ | 3,198 | ||||||
| Average total assets | $ | 703,205 | $ | 681,630 | $ | 652,720 | ||||||
| Net income as a percentage of average total assets | 0.78 | % | 0.72 | % | 0.49 | % | ||||||
* Fully taxable equivalent basis (FTE)
During 2019, total assets of the Company increased $32,261,000 (4.7%) from $688,092,000 at December 31, 2018 to $720,353,000 at December 31, 2019. At December 31, 2019, net loans totaled $393,802,000, an increase of $75,286,000 (23.6%) from the ending balance of $318,516,000 at December 31, 2018. Deposits increased $14,163,000 or 2.4% from $590,674,000 at December 31, 2018 to $604,837,000 at December 31, 2019. Shareholders’ equity increased $8,188,000 or 11.0% from $74,721,000 at December 31, 2018 to $82,909,000 at December 31, 2019. The Company ended 2019 with a leverage capital ratio of 9.2% and a total risk-based capital ratio of 15.9% compared to a leverage capital ratio of 8.9% and a total risk-based capital ratio of 17.3% at the end of 2018.
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned on interest earning assets (loans, securities, Federal funds sold and interest-bearing deposits in other banks) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets.
The Company’s fully taxable equivalent net interest margin was 3.60% in 2019, 3.41% in 2018, and 3.39% in 2017. The fully taxable equivalent net interest income increased $2,570,000 (12.3%), from $20,853,000 in 2018 to $23,423,000 in 2019. The fully taxable equivalent net interest income increased $1,110,000 (5.6%), from $19,743,000 in 2017 to $20,853,000 in 2018.
The fully taxable equivalent interest income component increased $3,435,000 (15.3%) from $22,449,000 in 2018 to $25,884,000 in 2019. The increase in the fully taxable equivalent interest income for 2019 compared to the same period in 2018 is comprised of two components - rate (up $1,335,000) and volume (up $2,100,000). The primary driver in this rate increase was an increase in the yield on loans which saw an increase from 4.72% in 2018 to 4.95% in 2019 and an increase in the yield on investments, which saw an increase from 2.66% in 2018 to 2.81% in 2019. The increased yield in 2019 compared to 2018 was due to the overall higher interest rate environment. The yield on earning assets increased from 3.67% during 2018 to 3.98% during 2019. The volume increase of $2,100,000 was primarily from an increase in loans ($2,394,000) and interest-bearing deposits in banks ($153,000), partially offset by a decrease in investment balances ($103,000) and Federal funds ($345,000). Average loans balances increased $50,964,000, (or 16.5%), from $308,365,000 during 2018 to $359,329,000 during 2019, average interest-bearing deposits in banks increased $168,000, (or 509.1%), from $33,000 during 2018 to $201,000 during 2019 average investment balances decreased $1,602,000, (or 0.6%), from $282,898,000 during 2018 to $281,296,000 in 2019, and average Federal funds decreased $18,515,000, (or 99.1%), from $18,688,000 during 2018 to $173,000 in 2019.
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The fully taxable equivalent interest income component increased $1,645,000 (7.9%) from $20,804,000 in 2017 to $22,449,000 in 2018. The increase in the fully taxable equivalent interest income for 2018 compared to the same period in 2017 is comprised of two components - rate (up $1,764,000) and volume (down $119,000). The primary driver in this rate increase was an increase in the yield on loans which saw an increase from 4.57% in 2017 to 4.72% in 2018 and an increase in the yield on investments, which saw an increase from 2.36% in 2017 to 2.66% in 2018. The increased yield in 2018 compared to 2017 was due to the overall higher interest rate environment. The yield on earning assets increased from 3.57% during 2017 to 3.67% during 2018. The increase in yield from the loans and investments was partially offset by an increase in the balances of Federal funds sold. Federal funds sold balances increased from zero in 2017 to an average balance of $18,688,000 in 2018. However, the yield on these lower earning Federal fund balances was 1.86%, thus partially reducing the overall yield on earning assets. The volume decrease of $119,000 was primarily from a decrease in loans ($515,000), partially offset by an increase in investment balances ($391,000). Average loans balances decreased $11,266,000, (or 3.5%), from $319,631,000 during 2017 to $308,365,000 during 2018 and the average investment balances increased $21,344,000, (or 8.2%), from $261,554,000 during 2017 to $282,898,000 in 2018.
Interest expense was $865,000 (or 54.2%) higher in 2019 compared to 2018, increasing from $1,596,000 to $2,461,000. The $865,000 increase in interest expense during 2019 compared to 2018 was due to higher rates (up $745,000) and higher volume (up $120,000). The increase in interest expense can be attributed to an increase in rates paid on deposit and borrowing balances during a higher interest rate environment. Rates paid on interest bearing liabilities increased 22 basis points from 0.41% to 0.63% for 2018 compared to 2019. The largest increase due to rates occurred in interest checking and money market accounts and in the time deposits. The rate paid on interest checking and money market accounts increased from 0.14% during 2018 to 0.34% during 2019 and accounted for $300,000 of the $745,000 increase attributed to rates. The rate paid on time deposit accounts increased from 1.86% during 2018 to 2.89% during 2019 and accounted for $342,000 of the $745,000 increase attributed to rates. The volume increase of $120,000 was attributed to an increase in average time deposit balances which increased from $79,422,000 during 2018 to $85,723,000 during 2019 and accounted for $84,000 of the $120,000 increase and an increase in average other borrowings which increased from $15,533,000 during 2018 to $18,430,000 during 2019 and accounted for $44,000 of the $120,000 increase.
Interest expense was $535,000 (or 50.4%) higher in 2018 compared to 2017, increasing from $1,061,000 to $1,596,000. The $535,000 increase in interest expense during 2018 compared to 2017 was due to higher rates (up $531,000) and higher volume (up $4,000). The increase in interest expense can be attributed to an increase in rates paid on deposit and borrowing balances during a higher interest rate environment. Rates paid on interest bearing liabilities increased 11 basis points from 0.30% to 0.41% for 2017 compared to 2018. The largest increase due to rates occurred in the time deposits. Some of these time deposits are indexed to the three- or six-month treasury rates which have increased over the past twelve months. Interest expense on time deposits increased by $367,000, (or 52.9%), from $694,000 in 2017 to $1,061,000 in 2018 while the average time deposit balances decreased by $1,634,000, (or 2.0%), from $81,056,000 in 2017 to $79,422,000 in 2018.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are provided to enable the reader to understand the components and past trends of the Company’s interest income and expenses. Table Two provides an analysis of net interest margin on earning assets setting forth average assets, liabilities and shareholders’ equity; interest income earned and interest expense paid and average rates earned and paid; and the net interest margin on earning assets. Table Three sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume), computed on a daily average basis, and changes in average interest rates.
| 35 |
Table Two: Analysis of Net Interest Margin on Earning Assets
| Year Ended December 31, | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||
| (Taxable Equivalent Basis) (dollars in thousands) |
Avg Balance |
Interest | Avg Yield |
Avg Balance |
Interest | Avg Yield |
Avg Balance |
Interest | Avg Yield |
|||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||
| Earning assets: | ||||||||||||||||||||||||||||||||||||
| Taxable loans and leases (1) | $ | 338,775 | $ | 16,834 | 4.97 | % | $ | 294,114 | $ | 13,924 | 4.73 | % | $ | 305,345 | $ | 13,947 | 4.57 | % | ||||||||||||||||||
| Tax-exempt loans and leases (2) | 20,554 | 942 | 4.58 | % | 14,251 | 632 | 4.43 | % | 14,286 | 667 | 4.67 | % | ||||||||||||||||||||||||
| Taxable investment Securities | 271,779 | 7,589 | 2.79 | % | 264,247 | 6,901 | 2.61 | % | 238,710 | 5,287 | 2.21 | % | ||||||||||||||||||||||||
| Tax-exempt investment securities (2) | 9,517 | 313 | 3.29 | % | 18,651 | 611 | 3.28 | % | 22,789 | 874 | 3.84 | % | ||||||||||||||||||||||||
| Corporate stock | — | — | — | — | — | — | 55 | 16 | 29.09 | % | ||||||||||||||||||||||||||
| Federal funds sold | 173 | 5 | 2.89 | % | 18,688 | 348 | 1.86 | % | — | — | — | |||||||||||||||||||||||||
| Interest bearing deposits in other banks | 9,829 | 201 | 2.04 | % | 1,745 | 33 | 1.89 | % | 1,258 | 13 | 1.03 | % | ||||||||||||||||||||||||
| Total earning assets | 650,627 | 25,884 | 3.98 | % | 611,696 | 22,449 | 3.67 | % | 582,443 | 20,804 | 3.57 | % | ||||||||||||||||||||||||
| Cash & due from banks | 16,440 | 34,535 | 35,876 | |||||||||||||||||||||||||||||||||
| Other assets | 40,878 | 39,822 | 39,201 | |||||||||||||||||||||||||||||||||
| Allowance for loan & lease losses | (4,740 | ) | (4,423 | ) | (4,800 | ) | ||||||||||||||||||||||||||||||
| Total average assets | $ | 703,205 | $ | 681,630 | $ | 652,720 | ||||||||||||||||||||||||||||||
| Liabilities & Shareholders’ Equity: | ||||||||||||||||||||||||||||||||||||
| Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| NOW & MMDA | $ | 212,499 | 563 | 0.26 | % | $ | 219,742 | 272 | 0.12 | % | $ | 197,298 | 139 | 0.07 | % | |||||||||||||||||||||
| Savings | 74,304 | 28 | 0.04 | % | 71,742 | 26 | 0.04 | % | 64,880 | 22 | 0.03 | % | ||||||||||||||||||||||||
| Time deposits | 85,723 | 1,487 | 1.73 | % | 79,422 | 1,061 | 1.34 | % | 81,056 | 694 | 0.86 | % | ||||||||||||||||||||||||
| Other borrowings | 18,430 | 383 | 2.08 | % | 15,533 | 237 | 1.53 | % | 15,522 | 206 | 1.33 | % | ||||||||||||||||||||||||
| Total interest bearing liabilities | 390,956 | 2,461 | 0.63 | % | 386,439 | 1,596 | 0.41 | % | 358,756 | 1,061 | 0.30 | % | ||||||||||||||||||||||||
| Demand deposits | 222,616 | 215,721 | 204,565 | |||||||||||||||||||||||||||||||||
| Other liabilities | 10,136 | 7,062 | 7,583 | |||||||||||||||||||||||||||||||||
| Total liabilities | 623,708 | 609,222 | 570,904 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 79,497 | 72,408 | 81,816 | |||||||||||||||||||||||||||||||||
| Total average liabilities and shareholders’ equity | $ | 703,205 | $ | 681,630 | $ | 652,720 | ||||||||||||||||||||||||||||||
| Net interest income & margin (3) |
$ | 23,423 | 3.60 | % | $ | 20,853 | 3.41 | % | $ | 19,743 | 3.39 | % | ||||||||||||||||||||||||
| (1) | Loan and lease interest includes loan and lease fees of $257,000, $533,000 and $238,000 in 2019, 2018 and 2017, respectively. |
| (2) | Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes. The effective federal statutory tax rate was 21% in 2019 and 2018 and 34% in 2017. |
| (3) | Net interest margin is computed by dividing net interest income by total average earning assets. |
| 36 |
| Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses | ||||||||||||
| Year ended December 31, 2019 over 2018 (dollars in thousands) | ||||||||||||
| Increase (decrease) in interest income and expense due to change in: | ||||||||||||
| Interest-earning assets: | Volume | Rate (4) | Net Change | |||||||||
| Taxable net loans and leases (1)(2) | $ | 2,114 | $ | 796 | $ | 2,910 | ||||||
| Tax-exempt net loans and leases (3) | 280 | 30 | 310 | |||||||||
| Taxable investment securities | 197 | 491 | 688 | |||||||||
| Tax-exempt investment securities (3) | (299 | ) | 1 | (298 | ) | |||||||
| Federal funds sold | (345 | ) | 2 | (343 | ) | |||||||
| Interest-bearing deposits in other banks | 153 | 15 | 168 | |||||||||
| Total interest on earning assets | 2,100 | 1,335 | 3,435 | |||||||||
| Interest-bearing liabilities: | ||||||||||||
| Interest checking and money market | (9 | ) | 300 | 291 | ||||||||
| Savings deposits | 1 | 1 | 2 | |||||||||
| Time deposits | 84 | 342 | 426 | |||||||||
| Other borrowings | 44 | 102 | 146 | |||||||||
| Total interest on interest-bearing liabilities | 120 | 745 | 865 | |||||||||
| Interest differential | $ | 1,980 | $ | 590 | $ | 2,570 | ||||||
| Year Ended December 31, 2018 over 2017 (dollars in thousands) Increase (decrease) in interest income and expense due to change in: | ||||||||||||
| Interest-earning assets: | Volume | Rate (4) | Net Change | |||||||||
| Taxable net loans and leases (1)(2) | $ | (513 | ) | $ | 490 | $ | (23 | ) | ||||
| Tax-exempt net loans and leases (3) | (2 | ) | (33 | ) | (35 | ) | ||||||
| Taxable investment securities | 566 | 1,048 | 1,614 | |||||||||
| Tax-exempt investment securities (3) | (159 | ) | (104 | ) | (263 | ) | ||||||
| Corporate stock | (16 | ) | — | (16 | ) | |||||||
| Federal funds sold | — | 348 | 348 | |||||||||
| Interest bearing deposits in other banks | 5 | 15 | 20 | |||||||||
| Total interest on earning assets | (119 | ) | 1,764 | 1,645 | ||||||||
| Interest-bearing liabilities: | ||||||||||||
| Interest checking and money market | 16 | 117 | 133 | |||||||||
| Savings deposits | 2 | 2 | 4 | |||||||||
| Time deposits | (14 | ) | 381 | 367 | ||||||||
| Other borrowings | — | 31 | 31 | |||||||||
| Total interest on interest-bearing liabilities | 4 | 531 | 535 | |||||||||
| Interest differential | $ | (123 | ) | $ | 1,233 | $ | 1,110 | |||||
| (1) | The average balance of non-accruing loans and leases is immaterial as a percentage of total loans and leases and has been included in net loans and leases. |
| (2) | Loan and lease fees of $257,000, $533,000 and $238,000 for the years ended December 31, 2019, 2018 and 2017, respectively, have been included in the interest income computation. |
| (3) | Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes. The effective federal statutory tax rate was 21% in 2019 and 2018 and 34% in 2017. |
| (4) | The rate/volume variance has been included in the rate variance. |
| 37 |
Provision for Loan and Lease Losses
The Company experienced net loan and lease recoveries of $86,000 or -0.02% of average loans and leases during 2019 and recorded a provision for loan and lease losses of $660,000 to support the Company’s loan growth during the year. The Company experienced net loan and lease losses of $261,000 or 0.08% of average loans and leases during 2018, compared to net loan and lease losses of $794,000 or 0.25% of average loans and leases during 2017. To support the net losses in 2018 and 2017, the Company recorded provisions for loan and lease losses of $175,000 and $450,000, respectively during 2018 and 2017. The level of nonperforming loans and leases, which began to increase during the economic cycle of 2007 through 2010, reached a high of $22,571,000 at December 31, 2010, but has decreased to zero at December 31, 2019. For additional information see the “Nonaccrual, Past Due and Restructured Loans and Leases” and the “Allowance for Loan and Lease Losses Activity.”
Noninterest Income
Table Four below provides a summary of the components of noninterest income for the periods indicated (dollars in thousands):
| Table Four: Components of Noninterest Income | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Service charges on deposit accounts | $ | 558 | $ | 476 | $ | 465 | ||||||
| Merchant fee income | 391 | 422 | 411 | |||||||||
| Earnings on bank-owned life insurance | 334 | 307 | 317 | |||||||||
| Gain on sale of securities | 115 | 31 | 161 | |||||||||
| Other | 290 | 277 | 242 | |||||||||
| $ | 1,688 | $ | 1,513 | $ | 1,596 | |||||||
Noninterest income increased $175,000 (11.6%) to $1,688,000 in 2019 from $1,513,000 in 2018. The increase from 2018 to 2019 was primarily related to higher gains on sale of securities which increased $84,000 (271.0%) from 2018 to 2019 and an increase in service charges on deposit accounts which increased $82,000 (17.2%) from $476,000 in 2018 to $558,000 in 2019.
Noninterest income decreased $83,000 (5.2%) to $1,513,000 in 2018 from $1,596,000 in 2017. The decrease from 2017 to 2018 was primarily related to lower gains on sale of securities. Gain on sales of securities decreased $130,000 (81.3%) from 2017 to 2018.
Noninterest Expense
Salaries and Benefits
Salaries and benefits were $11,316,000 (up $1,113,000 or 10.9%) for 2019, compared to $10,203,000 in 2018. The increase in salaries and benefits expense resulted from a full year of salary and benefits for new hires in 2018 including additional relationship managers and lending support personnel, as well as, increased incentive payments to the relationship managers due to the increased loan production in 2019. Salary expense in 2019 also includes normal cost of living increases and promotions. Average full-time equivalent employees was 102 during 2019 compared to 97 during 2018. Employer benefit expenses, such as insurance, 401(k) matching and incentives and payroll taxes increased commensurate with the increased staffing levels.
Salaries and benefits were $10,203,000 (up $1,283,000 or 14.4%) for 2018, compared to $8,920,000 in 2017. The increase in salaries and benefits expense resulted from filling some vacant positions, hiring additional relationship managers, creating a position for a Chief Lending Officer in December 2017, and normal cost of living increases and promotions. Average full-time equivalent employees was 97 during 2018 compared to 93 during 2017. Employer benefit expenses, such as insurance, 401(k) matching and incentives and payroll taxes increased commensurate with the increased staffing levels.
| 38 |
Other Real Estate Owned
The total other real estate owned (“OREO”) expense in 2019 was $134,000 (up $114,000 or 570.0%) compared to $20,000 in 2018. The primary reason for the increase in OREO related expense was due to the $111,000 write-down of the Company’s lone remaining property in 2019 after receipt of an updated property valuation report. Operating expenses on the properties in 2019 totaled $23,000 compared to $16,000 in 2018. Write-downs on the property totaled $4,000 in 2018. At December 31, 2019, the Company held one property with a book value of $846,000.
The total OREO expense in 2018 was $20,000 (down $24,000 or 54.5%) compared to $44,000 in 2017. The primary reason for the decrease in OREO related expenses was due to the sale of one of the properties in the third quarter of 2017. Operating expenses on the properties held in 2017 totaled $52,000 compared to $16,000 in 2018. In 2017, the gains on sale, which offset the overall OREO expense, were $8,000 compared to zero in 2018. There were no write-downs on any of the properties held during 2017 compared to write-downs of $4,000 in 2018. At December 31, 2018, the Company held one property with a book value of $957,000.
Occupancy, Furniture and Equipment
Occupancy expense decreased $27,000 (2.6%) during 2019 to $1,023,000, compared to $1,050,000 in 2018. Furniture and equipment expense decreased $11,000 (2.0%) during 2019 to $542,000 compared to $553,000 in 2018. The decrease in occupancy and furniture and equipment expense decrease resulted from lower depreciation expense on premises and equipment leased or owned by the Company.
Occupancy expense decreased $3,000 (0.3%) during 2018 to $1,050,000, compared to $1,053,000 in 2017. Furniture and equipment expense decreased $33,000 (5.6%) during 2018 to $553,000 compared to $586,000 in 2017. The decrease in occupancy and furniture and equipment expense decrease resulted from lower depreciation expense on premises and equipment leased or owned by the Company.
Regulatory Assessments
Regulatory assessments include fees paid to the California Department of Business Oversight (the “DBO”) and the Federal Deposit Insurance Corporation (the “FDIC”). FDIC assessments decreased $154,000 (76.2%) during 2019 to $48,000, compared to $202,000 in 2018. The assessments paid to the DBO in 2019 were $78,000, compared to an expense of $78,000 in 2018. The decrease in FDIC assessments in 2019 is due to the receipt of the FDIC’s Small Bank Assessment Credits during the year as the Deposit Insurance Fund Reserve Ratio exceeded 1.35%.
FDIC assessments decreased $4,000 (1.9%) during 2018 to $202,000, compared to $206,000 in 2017. The assessments paid to the DBO in 2018 were $78,000, compared to an expense of $74,000 in 2017.
Other Expenses
Table Five below provides a summary of the components of the other noninterest expenses for the periods indicated (dollars in thousands):
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Professional fees | $ | 1,226 | $ | 1,158 | $ | 1,140 | ||||||
| Outsourced item processing | 322 | 315 | 319 | |||||||||
| Directors’ expense | 518 | 514 | 427 | |||||||||
| Telephone and postage | 328 | 409 | 360 | |||||||||
| Stationery and supplies | 138 | 140 | 135 | |||||||||
| Advertising and promotion | 599 | 561 | 228 | |||||||||
| Other operating expenses | 574 | 307 | 557 | |||||||||
| $ | 3,705 | $ | 3,404 | $ | 3,166 | |||||||
| 39 |
Other expenses were $3,705,000 (up $301,000 or 8.8%) for 2019, compared to $3,404,000 for 2018. The increase in other expenses occurred primarily in the professional fees (up $68,000) and bank charges (up $233,000) (which is included in the other operating expenses line item). The increase in professional expenses is related to more services being provided by the Company’s network administrator. The higher bank charges relate to lower average balances maintained by the Company in these accounts in 2019 resulting in higher service charges and the interest earned on these balances began to increase in 2018 due to the higher interest rate environment and continued into 2019, as a result, in 2019 the Company began being recording this as interest income on deposits held in other banks. Partially offsetting these increases was a reduction in telephone expense which decreased $91,000 (26.6%) from $342,000 in 2018 to $251,000 in 2019 and relates to the Company converted to a more cost-effective telephone system. The overhead efficiency ratio on a taxable equivalent basis for 2019 was 67.1% compared to 69.4% in 2018.
Other expenses were $3,404,000 (up $238,000 or 7.5%) for 2018, compared to $3,166,000 for 2017. The increase in other expenses occurred primarily in the advertising and promotion expense category. Advertising and promotion expense increased $333,000 (146.1%), from $228,000 in 2017 to $561,000 in 2018. Much of this increase is related to the expenses to sponsor community events and other promotional activities as the Company is focusing more effort in our markets to strengthen our brand. The overhead efficiency ratio on a taxable equivalent basis for 2018 was 69.4% compared to 65.8% in 2017.
Provision for Income Taxes
The effective tax rate on income was 25.6%, 24.3%, and 50.4% in 2019, 2018 and 2017, respectively. The effective tax rate differs from the federal statutory tax rate due to state tax expense (net of federal tax effect) of $610,000, $523,000, and $420,000 in these years. Tax-exempt income of $1,361,000, $1,315,000, and $1,471,000 from investment securities, loans, and bank-owned life insurance in these years helped to reduce the effective tax rate. The higher effective tax rate in 2019 compared 2018 is related to the tax treatment of equity based compensation under Accounting Standards Update 2016-09 (“ASU 2016-09”). Under ASU 2016-09, if the market value of the Company’s stock price on the date restricted stock vests is higher than the Company’s stock price on the date the restricted stock was awarded the Company receives a tax credit for the difference in values and if the market price on the vesting date is lower than the stock price on the award date the Company recognizes additional tax expense. During 2018, the Company recognized a $166,000 tax credit under ASU 2016-09 and in 2019 the Company recognized a $34,000 tax credit under ASU 2016-09.
The lower effective tax rate in 2018 compared to 2017 results from the lower corporate federal income tax rate of 21% effective January 1, 2018, which was a reduction from the Company’s 2017 rate of 34%. The high effective tax rate in 2017 resulted from the Company recording an income tax expense adjustment of $1,220,000 related to “H.R.1” commonly referred to as the Tax Cuts and Jobs Act that was signed into law on December 22, 2017. The adjustment relates to revaluing the Company’s net deferred tax assets using the new lower corporate federal income tax rate of 21%.
The Company’s taxable income in 2018 was $6,474,000 up slightly from $6,450,000 in 2017, however, the combined federal and State income tax expense decreased $1,678,000 (51.6%) from $3,252,000 in 2017 to $1,574,000 in 2018. Excluding the $1,220,000 adjustment related to H.R.1, the tax expense would have been $2,032,000 in 2017. Comparing the actual expense of $1,574,000 in 2018 to the adjusted expense of $2,032,000 in 2017 points out the benefit of the lower 21% federal tax rate.
Balance Sheet Analysis
The Company’s total assets were $720,353,000 at December 31, 2019 compared to $688,092,000 at December 31, 2018, representing an increase of $32,261,000 (4.7%). The average balances of total assets during 2019 were $703,205,000, up $21,575,000 or 3.2% from the 2018 average balances of total assets of $681,630,000.
Investment Securities
The Company classifies its investment securities as trading, held-to-maturity or available-for-sale. The Company’s intent is to hold all securities classified as held-to-maturity until maturity and management believes that it has the ability to do so. Securities classified as available-for-sale may be sold to implement asset/liability management strategies as part of our contingency funding plan and in response to changes in interest rates, prepayment rates and similar factors. Table Six below summarizes the values of the Company’s investment securities held on December 31 of the years indicated. The Company did not have any investment securities classified as trading in any of the years indicated below.
| 40 |
Table Six: Investment Securities Composition
(dollars in thousands)
| Available-for-sale (at fair value) | 2019 | 2018 | 2017 | |||||||||
| Debt securities: | ||||||||||||
| US Government Agencies and US Government-Sponsored Agencies | $ | 241,887 | $ | 269,049 | $ | 232,869 | ||||||
| Obligations of states and political subdivisions | 13,447 | 14,400 | 22,715 | |||||||||
| Corporate debt securities | 6,631 | 6,508 | 6,626 | |||||||||
| U. S Treasury securities | — | 4,976 | — | |||||||||
| Equity securities: | ||||||||||||
| Corporate stock | — | — | 112 | |||||||||
| Total available-for-sale investment securities | $ | 261,965 | $ | 294,933 | $ | 262,322 | ||||||
| Held-to-maturity (at amortized cost) | ||||||||||||
| Debt securities: | ||||||||||||
| US Government Agencies and US Government-Sponsored Agencies | $ | 248 | $ | 292 | $ | 378 | ||||||
| Total held-to-maturity investment securities | $ | 248 | $ | 292 | $ | 378 | ||||||
Net unrealized gains on available-for-sale investment securities totaling $2,554,000 were recorded, net of $752,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2019 and net unrealized losses on available-for-sale investment securities totaling $2,664,000 were recorded, net of $788,000 in tax assets, as accumulated other comprehensive income within shareholders’ equity at December 31, 2018. Management periodically evaluates each investment security in a loss position for other than temporary impairment relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Management has the ability and intent to hold securities with established maturity dates until recovery of fair value, which may be until maturity, and believes it will be able to collect all amounts due according to the contractual terms for all of the underlying investment securities; therefore, management does not consider these investments to be other-than-temporarily impaired. See Table Fifteen, “Securities Maturities and Weighted Average Yields,” for a breakdown of the investment securities by maturity and the corresponding weighted average yields.
Loans and Leases
The Company concentrates its lending activities in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) lease financing receivable; (7) agriculture; and (8) consumer loans. At December 31, 2019, these categories accounted for approximately 11%, 54%, 14%, 6%, 7%, 0%, 2% and 6%, respectively, of the Company’s loan portfolio compared to approximately 9%, 62%, 18%, 2%, 5%, 0%, 1% and 3%, respectively, at December 31, 2018. Also, as noted in Table 7 below, the Company’s primary focus is commercial and real estate loans, however, in 2018 the Company was selected by a lender that specializes in classic and collector cars. The company began purchasing loans from this lender during the third quarter of 2018 and recorded $10,791,000 during 2018 and $20,960,000 during 2019 and accounts for the increase in consumer loans.
Continuing focus in the Company’s market area, new borrowers developed through the Company’s marketing efforts, an upgraded lending team in 2018, and credit extensions expanded to existing borrowers resulted in the Company originating approximately $149 million in loans in 2019 and $104 million in 2018 compared to $30 million in 2017. This production was offset by normal pay downs and payoffs, and resulted in an overall net increase in net loans and leases of $75.3 million (23.6%) from December 31, 2018. The market in which the Company operates has shown increased demand for credit products as the relatively low rate environment and expectations for economic expansion have increased refinancing as well as new loan activity. Table Seven below summarizes the composition of the loan and lease portfolio for the past five years as of December 31.
| 41 |
Table Seven: Loan and Lease Portfolio Composition
| December 31, | ||||||||||||||||||||
| (dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Commercial | $ | 43,019 | $ | 29,650 | $ | 25,377 | $ | 35,374 | $ | 36,195 | ||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | 214,604 | 199,894 | 185,452 | 191,129 | 199,591 | |||||||||||||||
| Multi-family | 56,818 | 56,139 | 78,025 | 73,373 | 23,494 | |||||||||||||||
| Construction | 23,169 | 5,685 | 5,863 | 9,180 | 14,533 | |||||||||||||||
| Residential | 29,180 | 16,338 | 15,813 | 15,718 | 14,200 | |||||||||||||||
| Lease financing receivable | — | 32 | 205 | 404 | 732 | |||||||||||||||
| Agriculture | 6,479 | 4,419 | 1,713 | 2,302 | 2,431 | |||||||||||||||
| Consumer | 25,671 | 10,714 | 945 | 1,650 | 3,122 | |||||||||||||||
| 398,940 | 322,871 | 313,393 | 329,130 | 294,298 | ||||||||||||||||
| Deferred loan fees and costs, net | — | 37 | (202 | ) | (222 | ) | (221 | ) | ||||||||||||
| Allowance for loan and lease losses | (5,138 | ) | (4,392 | ) | (4,478 | ) | (4,822 | ) | (4,975 | ) | ||||||||||
| Total net loans and leases | $ | 393,802 | $ | 318,516 | $ | 308,713 | $ | 324,086 | $ | 289,102 | ||||||||||
A significant portion of the Company’s loans and leases are direct loans and leases made to individuals and local businesses. The Company relies substantially on networking, local promotional activity, and personal contacts by American River Bank officers, directors and employees to compete with other financial institutions. The Company makes loans and leases to borrowers whose applications include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products. Consumer loans include a range of traditional consumer loan products such as personal lines of credit and homeowner equity lines of credit and loans to finance purchases of autos (including classic and collector’s autos), boats, recreational vehicles, mobile homes and various other consumer items. Construction loans are generally comprised of commitments to customers within the Company’s service area for construction of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans consist primarily of loans secured by first trust deeds on commercial, multi-family, and residential properties typically with maturities from 3 to 10 years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily of loans secured by real property. In general, except in the case of loans under SBA programs or Farm Services Agency guarantees, the Company does not make long-term mortgage loans.
Average loans and leases in 2019 were $359,329,000, which represents an increase of $50,964,000 (16.5%) compared to the average in 2018. Average loans and leases in 2018 were $308,365,000, which represents a decrease of $11,266,000 (3.5%) compared to the $319,631,000 average balance in 2017.
Risk Elements
The Company assesses and manages credit risk on an ongoing basis through a total credit culture that emphasizes excellent credit quality, extensive internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant to periodically review the existing loan and lease portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company’s loan and lease portfolio is critical for profitability and growth. Management strives to continue its emphasis on credit quality in the loan and lease approval process, through active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan and lease review and grading system that functions to continually assess the credit risk inherent in the loan and lease portfolio.
Ultimately, underlying trends in economic and business cycles influence credit quality. American River Bank’s business is concentrated in the Sacramento Metropolitan Statistical Area, which is a diversified economy, but with a large State of California government presence and employment base; in Sonoma County, which is focused on businesses within the two communities in which the Bank has offices (Santa Rosa and Healdsburg); and in Amador County, in which the Bank is primarily focused on businesses within the three communities in which it has offices (Jackson, Pioneer, and Ione). The economy of Sonoma County is diversified with professional services, manufacturing, agriculture and real estate investment and construction, while the economy of Amador County is reliant upon government, services, retail trade, manufacturing industries and Indian gaming.
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The Company has significant extensions of credit and commitments to extend credit that are secured by real estate. The ultimate repayment of these loans is generally dependent on personal or business cash flows or the sale or refinancing of the real estate. The Company monitors the effects of current and expected market conditions and other factors on the collectability of real estate loans. The more significant factors management considers involve the following: lease rates and terms, vacancy rates, absorption and sale rates and capitalization rates; real estate values, supply and demand factors, and rates of return; operating expenses; inflation and deflation; and sufficiency of repayment sources independent of the real estate including, in some instances, personal guarantees.
In extending credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flows or from proceeds from the sale of selected assets of the borrowers. The Company’s requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management’s evaluation of the creditworthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. The Company secures its collateral by perfecting its security interest in business assets, obtaining deeds of trust, or outright possession among other means.
In management’s judgment, a concentration exists in real estate loans which represented approximately 81% of the Company’s loan and lease portfolio at December 31, 2019 and 87% at December 31, 2018. Management believes that the residential land portion of the Company’s loan portfolio carries a reasonable level of credit risk. As of December 31, 2019, outstanding unimproved residential land commitments were $6,184,000 (or just 1.9% of the total real estate loans). Of the $6,184,000, $1,997,000 (32%) was represented by one amortizing loan, which was considered well-secured, with a favorable loan-to-value ratio. Management currently believes that it maintains its allowance for loan and lease losses at levels adequate to reflect the loss risk inherent in its total loan portfolio.
A decline in the economy in general, or decline in real estate values in the Company’s market areas, in particular, could have an adverse impact on the collectability of real estate loans and require an increase in the provision for loan and lease losses. This could adversely affect the Company’s future prospects, results of operations, profitability and stock price. Management believes that its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no assurance that losses will not occur. The Company’s loan practices and underwriting standards include, but are not limited to, the following: (1) maintaining a thorough understanding of the Company’s market area and originating a significant majority of its loans within that area, (2) maintaining a thorough understanding of borrowers’ knowledge, capacity, and market position in their field of expertise, (3) basing real estate loan approvals not only on market demand for the project, but also on the borrowers’ capacity to support the project financially in the event it does not perform to expectations (whether sale or income performance), and (4) maintaining conforming and prudent loan-to-value and loan-to-cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Company’s lending officers or contracted third-party professionals.
Nonaccrual, Past Due and Restructured Loans and Leases
Management places loans and leases on nonaccrual status when they become 90 days past due or if a loss is expected, unless the loan or lease is well secured and in the process of collection. Loans and leases are partially or fully charged off when, in the opinion of management, collection of such amount appears unlikely.
The recorded investments in nonperforming loans and leases, which includes nonaccrual loans and leases and loans and leases that were 90 days or more past due and on accrual, totaled zero and $27,000 at December 31, 2019 and 2018, respectively. The $27,000 in nonperforming loans and leases at December 31, 2018 were comprised of one commercial loan relationship with two loans totaling $27,000, both of which were current to terms. At December 31, 2019 there were two loans totaling $75,000 30 days or more past due compared to no loans that were 30 days or more past due December 31, 2018.
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Restructured loans considered performing and accruing at December 31, 2019, 2018, 2017, 2016 and 2015, were $5,970,000, $6,626,000, $6,799,000, $7,975,000, and $8,062,000, respectively. Table Eight below sets forth nonaccrual loans and leases and loans and leases past due 90 days or more and on accrual as of year-end for the past five years.
| Table Eight: Nonperforming Loans and Leases | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| (dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Past due 90 days or more and still accruing: | ||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Real estate | — | — | — | — | — | |||||||||||||||
| Lease financing receivable | — | — | — | — | — | |||||||||||||||
| Consumer and other | — | — | — | — | — | |||||||||||||||
| Nonaccrual: | ||||||||||||||||||||
| Commercial | — | 27 | 1,597 | — | 30 | |||||||||||||||
| Real estate | — | — | 289 | — | 1,493 | |||||||||||||||
| Lease financing receivable | — | — | — | — | — | |||||||||||||||
| Consumer and other | — | — | 6 | 19 | 120 | |||||||||||||||
| Total nonperforming loans and leases | $ | — | $ | 27 | $ | 1,892 | $ | 19 | $ | 1,643 | ||||||||||
Interest income recognized from payments received on nonaccrual loans and leases was approximately $1,000 in 2019, $43,000 in 2018 and $2,000 in 2017. There were no loan or lease concentrations in excess of 10% of total loans and leases not otherwise disclosed as a category of loans and leases as of December 31, 2019. Management is not aware of any potential problem loans, which were accruing and current at December 31, 2019, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms and that would result in a significant loss to the Company apart from those loans identified in the Bank’s impairment analysis.
Management monitors the Company’s performance metrics including the ratios related to nonperforming loans and leases. From 2008 to 2010, the Company experienced an increase in nonperforming loans and leases. In 2011, the focused efforts of the previous years resulted in a decrease in these levels. From 2012 to 2019, the level of nonperforming loans and leases continued to decrease to a level below the amount reported at December 31, 2008. However, the variations in the amount of nonperforming loans and leases does not directly impact the level of the Company’s allowance for loan and lease losses as management monitors each of the loans and leases for loss potential or probability of loss on an individual basis using accounting principles generally accepted in the United States of America.
Impaired Loans and Leases
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 original contractual terms of the loan or lease agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan or lease discounted at the loan’s or lease’s original effective interest rate, (ii) the observable market price of the impaired loan or lease, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans or leases that are collectively evaluated for credit risk. In assessing whether a loan or lease is impaired, the Company typically reviews loans or leases graded substandard or lower with outstanding principal balances in excess of $100,000, as well as loans considered troubled debt restructures with outstanding principal balances in excess of $25,000. The Company identifies troubled debt restructures by reviewing each renewal, modification, or extension of a loan with a screening document. This document is designed to identify any characteristics of such a loan that would qualify it as a troubled debt restructure. If the characteristics are not present that would qualify a loan as a troubled debt restructure, it is deemed to be a modification.
The recorded investment in loans and leases that were considered to be impaired totaled $7,604,000 at December 31, 2019 and had a related valuation allowance of $142,000. The average recorded investment in impaired loans and leases during 2019 was approximately $7,845,000. As of December 31, 2018, the recorded investment in loans and leases that were considered to be impaired totaled $8,702,000 and had a related valuation allowance of $185,000. The average recorded investment in impaired loans and leases during 2018 was approximately $8,847,000. As of December 31, 2017, the recorded investment in loans and leases that were considered to be impaired totaled $13,757,000 and had a related valuation allowance of $355,000. The average recorded investment in impaired loans and leases during 2017 was approximately $14,046,000.
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Allowance for Loan and Lease Losses Activity
The Company maintains an allowance for loan and lease losses (“ALLL”) to cover probable losses inherent in the loan and lease portfolio, which is based upon management’s estimate of those losses. The ALLL is established through a provision for loan and lease losses and is increased by provisions charged against current earnings and recoveries and reduced by charge-offs. Actual losses for loans and leases can vary significantly from this estimate. The methodology and assumptions used to calculate the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change.
The adequacy of the ALLL and the level of the related provision for loan and lease losses is determined based on management’s judgment after consideration of numerous factors including, but not limited to: (i) local and regional economic conditions, (ii) the financial condition of the borrowers, (iii) loan impairment and the related level of expected charge-offs, (iv) evaluation of industry trends, (v) industry and other concentrations, (vi) loans and leases which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management, (vii) continuing evaluations of the performing loan portfolio, (viii) ongoing review and evaluation of problem loans identified as having loss potential, (ix) quarterly review by the Board of Directors, and (x) assessments by banking regulators and other third parties. Management and the Board of Directors evaluate the ALLL and determine its appropriate level considering objective and subjective measures, such as knowledge of the borrower’s business, valuation of collateral, the determination of impaired loans or leases and exposure to potential losses.
The ALLL totaled $5,138,000 or 1.29% of total loans and leases at December 31, 2019, $4,392,000 or 1.36% of total loans and leases at December 31, 2018, and $4,478,000 or 1.43% at December 31, 2017. The increase in the allowance for loan and lease losses from $4,392,000 at December 31, 2018 to $5,138,000 at December 31, 2019, was mainly due to the increase in loans outstanding at December 31, 2019. The Company establishes general and specific reserves in accordance with accounting principles generally accepted in the United States of America. The ALLL is composed of categories of the loan and lease portfolio based on loan type and loan rating; however, the entire allowance is available to cover actual loan and lease losses. While management uses available information to recognize possible losses on loans and leases, future additions to the allowance may be necessary, based on changes in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require the Company to provide additions to the allowance based on their judgment of information available to them at the time of their examination.
The allowance for loans and leases as a percentage of impaired loans and leases was 67.6% at December 31, 2019 and 50.5% at December 31, 2018. Of the total nonperforming and impaired loans and leases outstanding as of December 31, 2019, there were $794,000 in loans or leases that had been reduced by partial charge-offs of $292,000.
At December 31, 2019, there was $5,848,000 in impaired loans or leases that did not carry a specific reserve. Of this amount, $477,000 were loans or leases that had previous partial charge-offs and $5,371,000 were loans or leases that were analyzed and determined not to require a specific reserve or charge-off because the collateral value or discounted cash flow value exceeded the loan or lease balance. Prior to 2013, the Company had been operating in a market that had experienced significant decreases in real estate values of commercial, residential, land, and construction properties. As such, the Company continues to focus on monitoring collateral values for those loans considered collateral dependent. The collateral evaluations performed by the Company are updated as necessary, which is generally once every twelve months, and are reviewed by a qualified credit officer.
The Company’s policy with regard to loan or lease charge-offs continues to be that a loan or lease is charged off against the ALLL when management believes that the collectability of the principal is unlikely. As previously discussed in the “Impaired Loans and Leases” section, certain loans are evaluated for impairment. Generally, if a loan is collateralized by real estate, and considered collateral dependent, the impaired portion will be charged off to the allowance for loan and lease losses unless it is in the process of collection, in which case a specific reserve may be warranted. If the collateral is other than real estate and considered impaired, a specific reserve may be warranted.
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It is the policy of management to maintain the allowance for loan and lease losses at a level believed to be adequate for known and inherent risks in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Formula allocations are calculated by applying historical loss factors to outstanding loans with similar characteristics. Historical loss factors are based upon the Company’s loss experience. These historical loss factors are adjusted for changes in the business cycle and for significant factors that, in management’s judgment, affect the collectability of the loan portfolio as of the evaluation date. The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions. Based on information currently available, management believes that the allowance for loan and lease losses is prudent and adequate. However, no prediction of the ultimate level of loans and leases charged off in future periods can be made with any certainty. Table Nine below summarizes, for the periods indicated, the activity in the ALLL.
| Table Nine: Allowance for Loan and Lease Losses | ||||||||||||||||||||
| (dollars in thousands) | Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Average loans and leases outstanding | $ | 359,329 | $ | 308,365 | $ | 319,631 | $ | 306,737 | $ | 279,728 | ||||||||||
| Allowance for loan & lease losses at beginning of period | $ | 4,392 | $ | 4,478 | $ | 4,822 | $ | 4,975 | $ | 5,301 | ||||||||||
| Loans and leases charged off: | ||||||||||||||||||||
| Commercial | — | 213 | 1,073 | — | 609 | |||||||||||||||
| Real estate | — | — | — | 93 | — | |||||||||||||||
| Consumer | — | 69 | — | 34 | 6 | |||||||||||||||
| Lease financing receivable | — | — | — | — | 1 | |||||||||||||||
| Total | — | 282 | 1,073 | 127 | 616 | |||||||||||||||
| Recoveries of loans and leases previously charged off: | ||||||||||||||||||||
| Commercial | 7 | 12 | 6 | 660 | 123 | |||||||||||||||
| Real estate | 11 | 8 | 228 | 534 | 165 | |||||||||||||||
| Consumer | 68 | — | 4 | 124 | 2 | |||||||||||||||
| Lease financing receivable | — | 1 | 41 | — | — | |||||||||||||||
| Total | 86 | 21 | 279 | 1,318 | 290 | |||||||||||||||
| Net loans and leases (recovered) charged off | (86 | ) | 261 | 794 | (1,191 | ) | 326 | |||||||||||||
| Additions (reductions) to allowance charged (credited) to operating expenses | 660 | 175 | 450 | (1,344 | ) | — | ||||||||||||||
| Allowance for loan and lease losses at end of period | $ | 5,138 | $ | 4,392 | $ | 4,478 | $ | 4,822 | $ | 4,975 | ||||||||||
| Ratio of net (recoveries) charge-offs to average loans and leases outstanding | (0.02 | %) | 0.08 | % | 0.25 | % | (0.39 | %) | 0.12 | % | ||||||||||
| Provision for loan and lease losses to average loans and leases outstanding | 0.18 | % | 0.06 | % | 0.14 | % | (0.44 | %) | — | |||||||||||
| Allowance for loan and lease losses to total loans and leases, at end of period | 1.29 | % | 1.36 | % | 1.43 | % | 1.47 | % | 1.69 | % | ||||||||||
| Allowance for loan and lease losses to nonperforming loans and leases, at end of period | N/A | 16,266.67 | % | 236.68 | % | 25,378.95 | % | 302.80 | % | |||||||||||
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As part of its loan review process, management has allocated the overall allowance based on specific identified problem loans and leases, qualitative factors, uncertainty inherent in the estimation process and historical loss data. A risk exists that future losses cannot be precisely quantified or attributed to particular loans or leases or classes of loans and leases. Management continues to evaluate the loan and lease portfolio and assesses current economic conditions that will affect management’s conclusion as to future allowance levels. Table Ten below summarizes the allocation of the allowance for loan and lease losses for the five years ended December 31, 2019.
| Table Ten: Allowance for Loan and Lease Losses by Loan Category | ||||||||||||||||||||||||
| (dollars in thousands) | December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||||||||||||||
| Amount | Percent of
loans in each category to total loans |
Amount | Percent of
loans in each category to total loans |
Amount | Percent of
loans in each category to total loans |
|||||||||||||||||||
| Commercial | $ | 950 | 11 | % | $ | 668 | 9 | % | $ | 447 | 8 | % | ||||||||||||
| Real estate | 3,502 | 81 | % | 3,165 | 87 | % | 3,695 | 91 | % | |||||||||||||||
| Agriculture | 107 | 2 | % | 88 | 1 | % | 31 | 1 | % | |||||||||||||||
| Consumer | 334 | 6 | % | 192 | 3 | % | 14 | — | ||||||||||||||||
| Lease financing receivable | — | — | — | — | — | — | ||||||||||||||||||
| Unallocated | 245 | — | 279 | — | 291 | — | ||||||||||||||||||
| Total | $ | 5,138 | 100 | % | $ | 4,392 | 100 | % | $ | 4,478 | 100 | % | ||||||||||||
| December 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
| Amount | Percent of
loans in each category to total loans |
Amount | Percent of
loans in each category to total loans |
|||||||||||||||||||||
| Commercial | $ | 855 | 12 | % | $ | 860 | 12 | % | ||||||||||||||||
| Real estate | 3,600 | 86 | % | 3,729 | 86 | % | ||||||||||||||||||
| Agriculture | 64 | 1 | % | 77 | 1 | % | ||||||||||||||||||
| Consumer | 24 | 1 | % | 78 | 1 | % | ||||||||||||||||||
| Lease financing receivable | 1 | — | 1 | — | ||||||||||||||||||||
| Unallocated | 278 | — | 230 | — | ||||||||||||||||||||
| Total | $ | 4,822 | 100 | % | $ | 4,975 | 100 | % | ||||||||||||||||
The allocation presented should not be interpreted as an indication that charges to the allowance for loan and lease losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan and lease category represents the total amounts available for charge-offs that may occur within these categories.
Other Real Estate Owned and Repossessed Assets
The balance in OREO at December 31, 2019 and 2018 consisted of one property acquired through foreclosure. During 2018, the Company received an updated appraisal on the one property and reduced the balance by $4,000 through a charge to OREO expense. During 2019, the Company received an updated appraisal on the one property and reduced the balance by an additional $111,000 through a charge to OREO expense. During 2019, the Company did not acquire any OREO properties. There was $846,000 in OREO at December 31, 2019 with no valuation allowance and $957,000 in OREO at December 31, 2018 with no valuation allowance. During 2019, the Company took possession of an automobile formerly held as collateral on a loan. The book value of the automobile at December 31, 2019 was $517,000. Other than the $517,000 automobile, there were no other asset repossessed during 2019 or 2018.
Deposits
At December 31, 2019, total deposits were $604,837,000 representing an increase of $14,163,000 (2.4%) from the December 31, 2018 balance of $590,674,000. The Company’s deposit growth plan for 2019 was to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing money market and interest-bearing checking, and savings accounts, while continuing to focus on reducing overall interest expense. Due to these efforts, the Company experienced an increase in non-time deposits (CD’s) balances of $28,441,000 (5.7%) from $502,587,000 at December 31, 2018 to $531,028,000 at December 31, 2019. During 2019 the Company had increased balances in noninterest-bearing checking ($12,310,000 or 5.7%), money market ($12,488,000 or 8.6%), savings ($3,298,000 or 4.5%), and interest checking ($345,000 or 0.5%) and a decrease in time deposit ($14,278,000 or 16.2%).
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Other Borrowed Funds
Other borrowings outstanding as of December 31, 2019 consist of advances from the Federal Home Loan Bank (the “FHLB”). The following table summarizes these borrowings (dollars in thousands):
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
| Short-term borrowings: FHLB advances | $ | 9,000 | 1.46 | % | $ | 5,000 | 1.32 | % | $ | 3,500 | 1.39 | % | ||||||||||||
| Long-term borrowings: FHLB advances | $ | 10,500 | 2.48 | % | $ | 10,500 | 2.02 | % | $ | 12,000 | 1.41 | % | ||||||||||||
The maximum amount of short-term borrowings at any month-end during 2019, 2018 and 2017, was $16,000,000, $6,500,000, and $3,500,000, respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of rates and maturities on FHLB advances (dollars in thousands):
| Short-term | Long-term | |||||||
| Amount | $ | 9,000 | $ | 10,500 | ||||
| Maturity | 2020 | 2021 to 2023 | ||||||
| Average rates | 1.46 | % | 2.48 | % | ||||
The Company has the ability to enter into letters of credit with the FHLB. There were no letters of credit outstanding as of December 31, 2019 or 2018. There were no amounts drawn upon any letter of credit in 2019 or 2018 and management does not expect to draw upon these sources of liquidity in the foreseeable future.
Capital Resources
The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company’s capital position represents the level of capital available to support continuing operations and expansion.
On January 24, 2018, the Company approved and authorized a stock repurchase program for 2018 (the “2018 Program”). The 2018 Program authorized the repurchase during 2018 of up to 5% of the outstanding shares of the Company’s common stock. During 2018, the Company repurchased 308,618 shares of its common stock at an average price of $15.52 per share. The Company did not have a repurchase program in 2019 and therefore did not repurchase any shares in 2019.
The Company repurchased 575,389 shares in 2012, 849,404 shares in 2013, 424,462 in 2014, 790,989 shares in 2015, 716,897 shares in 2016, and 574,748 shares in 2017. Share amounts have been adjusted for stock dividends and/or splits. See Part II, Item 5, “Stock Repurchases” for more information regarding stock repurchases.
The Company and American River Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation. Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and American River Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of December 31, 2019 and 2018, the most recent regulatory notification categorized American River Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s categories.
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At December 31, 2019, shareholders’ equity was $82,909,000, representing an increase of $8,188,000 (11.0%) from $74,721,000 at December 31, 2018. The increase in 2019 resulted from additions of net income of $5,500,000, the increase in the unrealized gain on securities due to a decrease in interest rates of $3,668,000, and stock based compensation of $433,000 exceeding the payment of cash dividends of $1,413,000. In 2018, shareholders’ equity decreased $2,200,000 (2.9%) from $76,921,000 at December 31, 2017. The decrease in 2018 resulted from repurchases of common stock of $4,773,000, the payment of cash dividends of $1,188,000, and a decrease in other comprehensive income of $1,555,000, as a result of the decrease in the unrealized gain on securities due to an increase in interest rates, exceeding the additions from net income of $4,900,000 for the period and the stock based compensation of $416,000.
Table Eleven below lists the Company’s and American River Bank’s actual capital ratios at December 31, 2019 and 2018, as well as the minimum capital ratios for capital adequacy for American River Bank. The ratio for the minimum regulatory requirement includes the capital conservation buffer of 2.50% as of December 31, 2019 and 1.875% as of December 31, 2018.
Table Eleven: Capital Ratios
| At December 31, | Minimum Regulatory Capital Requirements | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| American River Bankshares: | ||||||||||||||||
| Leverage ratio | 9.2 | % | 8.9 | % | N/A | N/A | ||||||||||
| Tier 1 Risk-Based Capital | 14.8 | % | 16.1 | % | N/A | N/A | ||||||||||
| Total Risk-Based Capital | 15.9 | % | 17.3 | % | N/A | N/A | ||||||||||
| American River Bank: | ||||||||||||||||
| Leverage ratio | 9.3 | % | 9.0 | % | 6.5 | % | 5.9 | % | ||||||||
| Common Equity Tier 1 Capital | 14.9 | % | 16.2 | % | 7.0 | % | 6.4 | % | ||||||||
| Tier 1 Risk-Based Capital | 14.9 | % | 16.2 | % | 8.5 | % | 7.9 | % | ||||||||
| Total Risk-Based Capital | 16.1 | % | 17.4 | % | 10.5 | % | 9.9 | % | ||||||||
Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet future needs. At December 31, 2019, American River Bank’s ratios were in excess of the regulatory definition of “well capitalized.” Management believes that the Company’s capital is adequate to support current operations and anticipated growth and currently foreseeable future capital requirements of the Company and its subsidiaries.
Effective January 1, 2015, bank holding companies with consolidated assets of $1 Billion or more ($3 Billion or more effective August 30, 2018) and banks like American River Bank must comply with new minimum capital ratio requirements to be phased-in between January 1, 2015 and January 1, 2019, which consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6%; (iii) a total capital to total risk weighted assets ratio of 8%; and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.
In addition, a “capital conservation buffer,” was established and has been fully phased-in as of January 1, 2019 and requires maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer increases the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The buffer requirement was phased-in between January 1, 2016 and January 1, 2019. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its loan, investment and deposit functions. The goal for managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk. The Board of Directors has overall responsibility for the interest rate risk management policies. The Company has an Enterprise Risk Management Committee, made up of Company management that establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates.
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Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits and investing in securities. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments. The Company uses simulation models to forecast earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer-modeling techniques, with specialized software built for this specific purpose for financial institutions, the Company is able to estimate the potential impact of changing interest rates on earnings, net interest margin and market value of equity. A balance sheet is prepared using detailed inputs of actual loans, securities and interest-bearing liabilities (i.e. deposits/borrowings). The balance sheet is processed using multiple interest rate scenarios. The scenarios include a rising rate forecast, a flat rate forecast and a falling rate forecast which take place within a one-year time frame. The net interest income is measured over one-year and two-year periods assuming a gradual change in rates over the twelve-month horizon. The simulation modeling attempts to estimate changes in the Company’s net interest income utilizing a detailed current balance sheet. Table Twelve below summarizes the effect on net interest income (NII) of a ±100 and ±200 basis point change in interest rates as measured against a constant rate (no change) scenario.
Table Twelve: Interest Rate Risk Simulation of Net Interest as of December 31, 2019
| (dollars in thousands) | $ Change in NII from Current 12 Month Horizon |
$ Change in NII from Current 24 Month Horizon |
||||||||
| Variation from a constant rate scenario | ||||||||||
| +100bp | $ | 370 | $ | 1,172 | ||||||
| +200bp | $ | 686 | $ | 2,097 | ||||||
| -100bp | $ | (318 | ) | $ | (1,411 | ) | ||||
| -200bp | $ | (788 | ) | $ | (3,642 | ) | ||||
After a review of the model results as of December 31, 2019, the Company does not consider the fluctuations from the base case, to have a material impact on the Company’s projected results and are within the tolerance levels outlined in the Company’s interest rate risk polices. The simulations of earnings do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as reasonable estimates of interest rate risk.
Interest Rate Sensitivity Analysis
Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the current portfolio that are subject to repricing at various time horizons. The differences are known as interest sensitivity gaps. A positive cumulative gap may be equated to an asset sensitive position. An asset sensitive position in a rising interest rate environment will cause a bank’s interest rate margin to expand. This results as floating or variable rate loans reprice more rapidly than fixed rate certificates of deposit that reprice as they mature over time. Conversely, a declining interest rate environment will cause the opposite effect. A negative cumulative gap may be equated to a liability sensitive position. A liability sensitive position in a rising interest rate environment will cause a bank’s interest rate margin to contract, while a declining interest rate environment will have the opposite effect.
| 50 |
Inflation
The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company through its effect on market rates of interest, which affects the Company’s ability to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which may be generated in the future. In addition to its effects on interest rates, inflation increases overall operating expenses. Inflation has not had a material effect upon the results of operations of the Company during the years ended December 31, 2019, 2018 and 2017.
Liquidity
Liquidity management refers to the Company’s ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company’s liquidity position. Federal funds lines, short-term investments and securities, and loan and lease repayments contribute to liquidity, along with deposit increases, while loan and lease funding and deposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit at December 31, 2019 were approximately $40,324,000 and $300,000, respectively. Such loan commitments relate primarily to revolving lines of credit and other commercial loans and to real estate construction loans. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Company’s sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale. On December 31, 2019, consolidated liquid assets totaled $141.5 million or 19.6% of total assets compared to $226.5 million or 32.9% of total assets on December 31, 2018. In addition to liquid assets, the Company maintains short-term lines of credit in the amount of $17,000,000 with two of its correspondent banks. At December 31, 2019, the Company had $17,000,000 available under these credit lines. Additionally, American River Bank is a member of the FHLB. At December 31, 2019, American River Bank could have arranged for up to $162,306,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At December 31, 2019, the Company had $143,406,000 available under these secured borrowing arrangements. American River Bank also has a secured borrowing arrangement with the Federal Reserve Bank. The borrowing can be secured by pledging selected loans and investment securities. Based on the amount of assets pledged at the Federal Reserve Bank at December 31, 2019, the Company’s borrowing capacity was $8,642,000.
The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The Company can sell any of its unpledged securities held in the available-for-sale category to meet liquidity needs. These securities are also available to pledge as collateral for borrowings if the need should arise. American River Bank can also pledge additional securities to borrow from the Federal Reserve Bank and the FHLB.
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The maturity distribution of certificates of deposit is set forth in Table Thirteen below for the period presented. These deposits are generally more rate sensitive than other deposits and, therefore, are more likely to be withdrawn to obtain higher yields elsewhere if available.
| Table Thirteen: Certificates of Deposit Maturities | ||||||||
| December 31, 2019 (dollars in thousands) | Less than $250,000 | Over $250,000 | ||||||
| Three months or less | $ | 6,900 | $ | 24,474 | ||||
| Over three months through six months | 3,998 | 9,486 | ||||||
| Over six months through twelve months | 5,758 | 3,618 | ||||||
| Over twelve months | 10,935 | 8,640 | ||||||
| Total | $ | 27,591 | $ | 46,218 | ||||
Loan and lease demand also affects the Company’s liquidity position. Table Fourteen below presents the maturities of loans and leases for the period indicated.
| Table Fourteen: Loan and Lease Maturities (Gross Loans and Leases) | ||||||||||||||||
| December 31, 2019 | One year | One year through | Over | |||||||||||||
| (dollars in thousands) | or less | five years | five years | Total | ||||||||||||
| Commercial | $ | 4,330 | $ | 13,674 | $ | 25,015 | $ | 43,019 | ||||||||
| Real estate | 24,228 | 110,738 | 188,805 | 323,771 | ||||||||||||
| Agriculture | — | 150 | 6,329 | 6,479 | ||||||||||||
| Consumer | 434 | 591 | 24,646 | 25,671 | ||||||||||||
| Total | $ | 28,992 | $ | 125,153 | $ | 244,795 | $ | 398,940 | ||||||||
Loans and leases shown above with maturities greater than one year include $220,545,000 of variable interest rate loans and $149,403,000 of fixed interest rate loans and leases. The carrying amount, maturity distribution and weighted average yield of the Company's investment securities available-for-sale and held-to-maturity portfolios are presented in Table Fifteen below. The yields on tax-exempt obligations have been computed on a tax equivalent basis. Yields may not represent actual future income to be recorded. Timing of principal prepayments on mortgage-backed securities may increase or decrease depending on market factors and the borrowers’ ability to make unscheduled principal payments. Fast prepayments on bonds that were purchased with a premium will result in a lower yield and slower prepayments on premium bonds will result in a higher yield, the opposite would be true for bonds purchased at a discount. Table Fifteen does not include FHLB Stock, which does not have stated maturity dates or readily available market values. The balance in FHLB Stock at December 31, 2019, 2018 and 2017 was $4,259,000, $3,932,000 and $3,932,000, respectively.
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Table Fifteen: Securities Maturities and Weighted Average Yields
| (Taxable Equivalent Basis) | ||||||||||||||||||||||||
| December 31, | 2019 | 2018 | 2017 | |||||||||||||||||||||
| (dollars in thousands) | Carrying Amount | Weighted Average Yield | Carrying Amount | Weighted Average Yield | Carrying Amount | Weighted Average Yield | ||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||||||
| State and political subdivisions | ||||||||||||||||||||||||
| Maturing within 1 year | $ | — | — | $ | 255 | 5.06 | % | $ | — | — | ||||||||||||||
| Maturing after 1 year but within 5 years | 952 | 3.70 | % | 1,141 | 5.06 | % | 3,018 | 2.23 | % | |||||||||||||||
| Maturing after 5 years but within 10 years | 5,224 | 2.40 | % | 9,831 | 6.03 | % | 14,389 | 4.42 | % | |||||||||||||||
| Maturing after 10 years | 7,271 | 2.81 | % | 3,173 | 6.33 | % | 5,307 | 4.11 | % | |||||||||||||||
| U.S. Treasury securities Maturing within 1 year | — | — | 4,976 | 2.30 | % | — | — | |||||||||||||||||
| U.S. Government Agencies and U.S.-Sponsored Agencies | 241,887 | 2.69 | % | 269,049 | 2.69 | % | 232,869 | 2.10 | % | |||||||||||||||
| Other | ||||||||||||||||||||||||
| Maturing within 1 year | 501 | 3.50 | % | — | — | — | — | |||||||||||||||||
| Maturing after 1 year but within 5 years | 2,003 | 2.24 | % | 2,434 | 2.49 | % | 2,469 | 2.72 | % | |||||||||||||||
| Maturing after 5 years but within 10 years | 4,127 | 5.53 | % | 4,074 | 5.53 | % | 4,158 | 4.56 | % | |||||||||||||||
| Non-maturing | — | — | — | — | 112 | 0.00 | % | |||||||||||||||||
| Total investment securities | $ | 261,965 | 2.73 | % | $ | 294,933 | 2.88 | % | $ | 262,322 | 2.32 | % | ||||||||||||
| Held-to-maturity securities: | ||||||||||||||||||||||||
| U.S. Government Agencies and U.S.-Sponsored Agencies | $ | 248 | 5.51 | % | $ | 292 | 5.40 | % | $ | 378 | 5.46 | % | ||||||||||||
| Total investment securities | $ | 248 | 5.51 | % | $ | 292 | 5.40 | % | $ | 378 | 5.46 | % | ||||||||||||
The carrying values of available-for-sale securities include net unrealized gains (losses) of $2,544,000, ($2,664,000) and ($456,000) at December 31, 2019, 2018 and 2017, respectively. The carrying values of held-to-maturity securities do not include unrealized gains or losses; however, the net unrecognized gains at December 31, 2019, 2018 and 2017 were $18,000, $14,000 and $26,000, respectively.
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.
As of December 31, 2019, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. At origination, real estate commitments are generally secured by property with a loan-to-value ratio of 55% to 75%. In addition, the majority of the Company’s commitments have variable interest rates. The following financial instruments represent off-balance-sheet credit risk:
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| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Commitments to extend credit (dollars in thousands): | ||||||||
| Revolving lines of credit secured by 1-4 family residences | $ | 41 | $ | 47 | ||||
| Commercial real estate, construction and land development commitments secured by real estate | 22,508 | 21,185 | ||||||
| Other unused commitments, principally commercial loans | 17,775 | 13,044 | ||||||
| $ | 40,324 | $ | 34,276 | |||||
| Letters of credit | $ | 300 | $ | 361 | ||||
The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for loans included on the consolidated balance sheets.
Certain financial institutions have elected to use special purpose vehicles (“SPV”) to dispose of problem assets. The SPV is typically a subsidiary company with an asset and liability structure and legal status that makes its obligations secure even if the parent corporation goes bankrupt. Under certain circumstances, these financial institutions may exclude the problem assets from their reported impaired and nonperforming assets. The Company does not use those vehicles or any other structures to dispose of problem assets.
Contractual Obligations
The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under non-cancelable operating leases are noted in Table Sixteen below. Table Sixteen below presents certain of the Company’s contractual obligations as of December 31, 2019.
Table Sixteen: Contractual Obligations
| (dollars in thousands) | Payments due by period | |||||||||||||||||||
| Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years |
||||||||||||||||
| Long-Term Debt | $ | 10,500 | $ | — | $ | 7,000 | $ | 3,500 | $ | — | ||||||||||
| Capital Lease Obligations | — | — | — | — | — | |||||||||||||||
| Operating Leases | 3,427 | 769 | 1,446 | 555 | 657 | |||||||||||||||
| Purchase Obligations | — | — | — | — | — | |||||||||||||||
| Certificates of Deposit | 73,809 | 54,234 | 12,521 | 7,054 | — | |||||||||||||||
| Other Long-Term Liabilities Reflected on the Company’s Balance Sheet under GAAP | 4,665 | 384 | 800 | 799 | 2,682 | |||||||||||||||
| Total | $ | 92,401 | $ | 55,387 | $ | 21,767 | $ | 11,908 | $ | 3,339 | ||||||||||
Included in the table are amounts payable under the Company’s Deferred Compensation Plan, Deferred Fees Plan and salary continuation agreements listed in the “Other Long-Term Liabilities…” category. At December 31, 2019, these amounts represented $4,665,000 most of which is anticipated to be primarily payable at least five years in the future.
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Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize changes to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 was initially scheduled to become effective for the Company for interim and annual reporting periods beginning after December 15, 2019, however, on November 15, 2019 the FASB issued ASU 2019-10 delaying the effective date for smaller reporting companies, such as the Company, to interim and annual reporting periods beginning after December 15, 2022; early adoption is still permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, including if it will early adopt the standard, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, evaluating its current IT systems, and purchasing a software solution. The Company has imported current and historical data into the new software and is currently validating the data and intends to begin processing information, on a test basis, with the new CECL specific software during 2020 and 2021 and to disclose any material potential impact of this modeling once it becomes available.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by Item 7A of Form 10-K is contained in the “Market Risk Management” section of Item 7-“Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 49.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the Consolidated Financial Statements or notes thereto.
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 |
Crowe LLP Independent Member Crowe Global |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
American River Bankshares
Rancho Cordova, California
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of American River Bankshares and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ Crowe LLP | |
| Crowe LLP |
We have served as the Company’s auditor since 2011.
Sacramento, California
February 21, 2020
| 58 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
December 31, 2019 and 2018
(Dollars in thousands)
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 15,258 | $ | 20,987 | ||||
| Federal funds sold | — | 7,000 | ||||||
| Interest-bearing deposits in banks | 2,552 | 1,746 | ||||||
| Total cash and cash equivalents | 17,810 | 29,733 | ||||||
| Investment securities (Note 5): | ||||||||
| Available-for-sale, at fair value | 261,965 | 294,933 | ||||||
| Held-to-maturity, at amortized cost; fair value of $266 in 2019 and $306 in 2018 | 248 | 292 | ||||||
| Loans and leases, less allowance for loan and lease losses of $5,138 in 2019 and $4,392 in 2018 (Notes 6, 7, 12 and 17) | 393,802 | 318,516 | ||||||
| Premises and equipment, net (Note 8) | 1,191 | 1,071 | ||||||
| Federal Home Loan Bank of San Francisco stock | 4,259 | 3,932 | ||||||
| Other real estate owned, net | 846 | 957 | ||||||
| Goodwill (Note 4) | 16,321 | 16,321 | ||||||
| Bank-owned life insurance (Note 16) | 15,763 | 15,429 | ||||||
| Accrued interest receivable and other assets (Notes 11 and 16) | 8,148 | 6,908 | ||||||
| $ | 720,353 | $ | 688,092 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | 227,055 | $ | 214,745 | ||||
| Interest-bearing (Note 9) | 377,782 | 375,929 | ||||||
| Total deposits | 604,837 | 590,674 | ||||||
| Short-term borrowings (Note 10) | 9,000 | 5,000 | ||||||
| Long-term borrowings (Note 10) | 10,500 | 10,500 | ||||||
| Accrued interest payable and other liabilities (Note 16) | 13,107 | 7,197 | ||||||
| Total liabilities | 637,444 | 613,371 | ||||||
| Commitments and contingencies (Note 12) | ||||||||
| Shareholders’ equity (Notes 13 and 14): | ||||||||
| Common stock - no par value; 20,000,000 shares authorized; issued and outstanding – 5,898,878 shares in 2019 and 5,858,428 shares in 2018 | 30,536 | 30,103 | ||||||
| Retained earnings | 50,581 | 46,494 | ||||||
| Accumulated other comprehensive income (loss), net of taxes (Note 5) | 1,792 | (1,876 | ) | |||||
| Total shareholders’ equity | 82,909 | 74,721 | ||||||
| $ | 720,353 | $ | 688,092 | |||||
See accompanying notes to consolidated financial statements.
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AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands, except per share data)
| 2019 | 2018 | 2017 | ||||||||||
| Interest income: | ||||||||||||
| Interest and fees on loans and leases: | ||||||||||||
| Taxable | $ | 16,834 | $ | 13,924 | $ | 13,947 | ||||||
| Exempt from Federal income taxes | 781 | 529 | 499 | |||||||||
| Interest on deposits in banks | 201 | 33 | 13 | |||||||||
| Interest on Federal funds sold | 5 | 348 | — | |||||||||
| Interest and dividends on investment securities: | ||||||||||||
| Taxable | 7,589 | 6,901 | 5,300 | |||||||||
| Exempt from Federal income taxes | 260 | 507 | 655 | |||||||||
| Total interest income | 25,670 | 22,242 | 20,414 | |||||||||
| Interest expense: | ||||||||||||
| Interest on deposits (Note 9) | 2,078 | 1,359 | 855 | |||||||||
| Interest on borrowings | 383 | 237 | 206 | |||||||||
| Total interest expense | 2,461 | 1,596 | 1,061 | |||||||||
| Net interest income | 23,209 | 20,646 | 19,353 | |||||||||
| Provision for loan and lease losses (Note 7) | 660 | 175 | 450 | |||||||||
| Net interest income after provision for loan and lease losses | 22,549 | 20,471 | 18,903 | |||||||||
| Noninterest income: | ||||||||||||
| Service charges | 558 | 476 | 465 | |||||||||
| Gain on sale of investment securities (Note 5) | 115 | 31 | 161 | |||||||||
| Other income (Note 15) | 1,015 | 1,006 | 970 | |||||||||
| Total noninterest income | 1,688 | 1,513 | 1,596 | |||||||||
| Noninterest expense: | ||||||||||||
| Salaries and employee benefits (Notes 6 and 16) | 11,316 | 10,203 | 8,920 | |||||||||
| Other real estate expense | 134 | 20 | 44 | |||||||||
| Occupancy (Notes 8, 12 and 17) | 1,023 | 1,050 | 1,053 | |||||||||
| Furniture and equipment (Notes 8 and 12) | 542 | 553 | 586 | |||||||||
| Regulatory assessments | 126 | 280 | 280 | |||||||||
| Other expense (Note 15) | 3,705 | 3,404 | 3,166 | |||||||||
| Total noninterest expense | 16,846 | 15,510 | 14,049 | |||||||||
| Income before provision for income taxes | 7,391 | 6,474 | 6,450 | |||||||||
| Provision for income taxes (Note 11) | 1,891 | 1,574 | 3,252 | |||||||||
| Net income | $ | 5,500 | $ | 4,900 | $ | 3,198 | ||||||
| Basic earnings per share (Note 13) | $ | 0.94 | $ | 0.83 | $ | 0.50 | ||||||
| Diluted earnings per share (Note 13) | $ | 0.94 | $ | 0.83 | $ | 0.50 | ||||||
See accompanying notes to consolidated financial statements.
| 60 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands)
| 2019 | 2018 | 2017 | ||||||||||
| Net income | $ | 5,500 | $ | 4,900 | $ | 3,198 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Increase (decrease) in net unrealized gains on investment securities | 5,322 | (2,225 | ) | (1,211 | ) | |||||||
| Deferred tax (expense) benefit | (1,573 | ) | 691 | 491 | ||||||||
| Increase (decrease) in net unrealized gains on investment securities, net of tax | 3,749 | (1,534 | ) | (720 | ) | |||||||
| Reclassification adjustment for realized gains included in net income | (115 | ) | (31 | ) | (161 | ) | ||||||
| Tax effect | 34 | 10 | 64 | |||||||||
| Realized gains, net of tax | (81 | ) | (21 | ) | (97 | ) | ||||||
| Total other comprehensive income (loss) | 3,668 | (1,555 | ) | (817 | ) | |||||||
| Comprehensive income | $ | 9,168 | $ | 3,345 | $ | 2,381 | ||||||
See accompanying notes to consolidated financial statements.
| 61 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands)
| Accumulated | ||||||||||||||||||||
| Other | Total | |||||||||||||||||||
| Common Stock | Comprehensive | Share- | ||||||||||||||||||
| Retained | Income (Loss) | holders’ | ||||||||||||||||||
| Shares | Amount | Earnings | (Net of Taxes) | Equity | ||||||||||||||||
| Balance, January 1, 2017 | 6,661,726 | $ | 42,484 | $ | 40,822 | $ | 544 | $ | 83,850 | |||||||||||
| Net income | — | — | 3,198 | — | 3,198 | |||||||||||||||
| Other comprehensive loss, net of tax (Note 5) | — | — | — | (817 | ) | (817 | ) | |||||||||||||
| Disproportionate tax effect resulting from H.R.1 Tax Act (Note 2) | — | — | 48 | (48 | ) | — | ||||||||||||||
| Payment of cash dividend, $0.20 per share (Note 14) | — | — | (1,293 | ) | — | (1,293 | ) | |||||||||||||
| Retirement of common stock (Note 13) | (574,748 | ) | (8,641 | ) | — | — | (8,641 | ) | ||||||||||||
| Net restricted stock award activity and related compensation expense (Note 13) | 3,486 | 248 | 4 | — | 252 | |||||||||||||||
| Stock options exercised (Note 13) | 41,898 | 351 | — | — | 351 | |||||||||||||||
| Stock option compensation expense (Note 13) | — | 21 | — | — | 21 | |||||||||||||||
| Balance, December 31, 2017 | 6,132,362 | 34,463 | 42,779 | (321 | ) | 76,921 | ||||||||||||||
| Net income | — | — | 4,900 | — | 4,900 | |||||||||||||||
| Other comprehensive loss, net of tax (Note 5) | — | — | — | (1,555 | ) | (1,555 | ) | |||||||||||||
| Payment of cash dividend, $0.20 per share (Note 14) | — | — | (1,188 | ) | — | (1,188 | ) | |||||||||||||
| Retirement of common stock (Note 13) | (306,618 | ) | (4,773 | ) | — | — | (4,773 | ) | ||||||||||||
| Net restricted stock award activity and related compensation expense (Note 13) | 11,374 | 196 | 3 | — | 199 | |||||||||||||||
| Stock options exercised (Note 13) | 21,310 | 189 | — | — | 189 | |||||||||||||||
| Stock option compensation expense (Note 13) | — | 28 | — | — | 28 | |||||||||||||||
| Balance, December 31, 2018 | 5,858,428 | 30,103 | 46,494 | (1,876 | ) | 74,721 | ||||||||||||||
| Net income | — | — | 5,500 | — | 5,500 | |||||||||||||||
| Other comprehensive income, net of tax (Note 5) | — | — | — | 3,668 | 3,668 | |||||||||||||||
| Payment of cash dividend, $0.24 per share (Note 14) | — | — | (1,413 | ) | — | (1,413 | ) | |||||||||||||
| Net restricted stock award activity and related compensation expense (Note 13) | 29,310 | 324 | — | — | 324 | |||||||||||||||
| Stock options exercised (Note 13) | 11,140 | 95 | — | — | 95 | |||||||||||||||
| Stock option compensation expense (Note 13) | — | 14 | — | — | 14 | |||||||||||||||
| Balance, December 31, 2019 | 5,898,878 | $ | 30,536 | $ | 50,581 | $ | 1,792 | $ | 82,909 | |||||||||||
See accompanying notes to consolidated financial statements.
| 62 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands)
| 2019 | 2018 | 2017 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 5,500 | $ | 4,900 | $ | 3,198 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Provision for loan and lease losses | 660 | 175 | 450 | |||||||||
| Change in deferred loan and lease origination fees, costs and purchase premiums, net | (384 | ) | (239 | ) | (20 | ) | ||||||
| Depreciation and amortization | 226 | 265 | 333 | |||||||||
| Amortization of investment security premiums and discounts, net | 1,455 | 2,404 | 3,246 | |||||||||
| Gain on sale of investment securities | (115 | ) | (31 | ) | (161 | ) | ||||||
| Increase in cash surrender value of life insurance policies | (334 | ) | (307 | ) | (317 | ) | ||||||
| Deferred income tax (benefit) expense | (752 | ) | 333 | 1,247 | ||||||||
| Stock-based compensation expense | 338 | 227 | 273 | |||||||||
| Loss (gain) on sale or write-down of other real estate owned | 111 | 4 | (8 | ) | ||||||||
| Increase in accrued interest receivable and other assets | (523 | ) | (125 | ) | (537 | ) | ||||||
| Increase (decrease) in accrued interest payable and other liabilities | 1,688 | 76 | (173 | ) | ||||||||
| Net cash provided by operating activities | 7,870 | 7,682 | 7,531 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Proceeds from the sale of available-for-sale investment securities | 63,325 | 27,003 | 31,289 | |||||||||
| Proceeds from called available-for-sale investment securities | — | 2,139 | 145 | |||||||||
| Proceeds from matured available-for-sale investment securities | 5,255 | — | 1,930 | |||||||||
| Purchases of available-for-sale investment securities | (75,732 | ) | (110,615 | ) | (89,273 | ) | ||||||
| Proceeds from principal repayments for available-for-sale mortgage-backed securities | 46,705 | 44,321 | 43,150 | |||||||||
| Proceeds from principal repayments for held-to-maturity mortgage-backed securities | 44 | 86 | 105 | |||||||||
| Net (increase) decrease in loans and leases | (54,598 | ) | (290 | ) | 14,944 | |||||||
| Proceeds from sale of loans | — | 1,349 | — | |||||||||
| Purchases of loans | (20,964 | ) | (10,799 | ) | — | |||||||
| Net proceeds from sale of other real estate owned | — | — | 395 | |||||||||
| Purchases of equipment | (346 | ) | (178 | ) | (129 | ) | ||||||
| Net increase in FHLB stock | (327 | ) | — | (153 | ) | |||||||
| Net cash (used in) provided by investing activities | (36,638 | ) | (46,984 | ) | 2,403 | |||||||
(Continued)
| 63 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands)
| 2019 | 2018 | 2017 | ||||||||||
| Cash flows from financing activities: | ||||||||||||
| Net increase in demand, interest-bearing and savings deposits | $ | 28,431 | $ | 26,198 | $ | 14,552 | ||||||
| Net (decrease) increase in time deposits | (14,268 | ) | 8,396 | (3,278 | ) | |||||||
| Cash paid to repurchase common stock | — | (4,773 | ) | (8,641 | ) | |||||||
| Proceeds from exercised options | 95 | 189 | 351 | |||||||||
| Decrease in long-term borrowings | — | (1,500 | ) | — | ||||||||
| Increase in short-term borrowings | 4,000 | 1,500 | — | |||||||||
| Cash dividends paid | (1,413 | ) | (1,188 | ) | (1,293 | ) | ||||||
| Net cash provided by financing activities | 16,845 | 28,822 | 1,691 | |||||||||
| (Decrease) increase in cash and cash equivalents | (11,923 | ) | (10,480 | ) | 11,625 | |||||||
| Cash and cash equivalents at beginning of year | 29,733 | 40,213 | 28,588 | |||||||||
| Cash and cash equivalents at end of year | $ | 17,810 | $ | 29,733 | $ | 40,213 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Right of use asset and obligation recorded upon adoption of ASU 2016-02 | $ | 3,570 | $ | — | $ | — | ||||||
| Addition to right of use asset and obligation recorded upon renewal of existing lease | $ | 234 | $ | — | $ | — | ||||||
| Cash paid during the year for: | ||||||||||||
| Interest expense | $ | 2,519 | $ | 1,598 | $ | 1,058 | ||||||
| Income taxes | $ | 1,888 | $ | 1,095 | $ | 2,375 | ||||||
| Non-cash activities: | ||||||||||||
| Real estate acquired through foreclosure, repossession or deed in lieu of foreclosure | $ | 517 | $ | — | $ | — | ||||||
See accompanying notes to consolidated financial statements.
| 64 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | THE BUSINESS OF THE COMPANY |
American River Bankshares (the “Company”) was incorporated under the laws of the State of California in 1995 under the name of American River Holdings and changed its name in 2004 to American River Bankshares. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. As a community oriented regional bank holding company, the principal communities served are located in Sacramento, Placer, Yolo, El Dorado, Amador, and Sonoma counties.
The Company owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank (“ARB” or the “Bank”). ARB was incorporated in 1983. ARB accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services. ARB operates four full-service banking offices in Sacramento County, one full-service banking office in Placer County, two full-service banking offices in Sonoma County, and three full-service banking offices in Amador County. The Company also owns one inactive subsidiary, American River Financial.
ARB does not offer trust services or international banking services and does not plan to do so in the near future. The deposits of ARB are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
General
The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and prevailing practices within the financial services industry.
Reclassifications
Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2019. Reclassifications did not affect prior year net income or shareholders’ equity.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and accounts among the Company and its subsidiaries have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
| 65 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Cash and Cash Equivalents
For the purpose of the statement of cash flows, cash and due from banks and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold for one-day periods. Interest-bearing deposits in banks are also considered to be cash equivalents, mature within one year and are carried at cost.
Investment Securities
Investments are classified into the following categories:
| · | Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity. |
| · | Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost. |
Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value. There were no transfers during the years ended December 31, 2019 and 2018.
Gains or losses on the sale of investment securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums.
An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For debt securities, once a decline in value is determined to be other than temporary and management does not intend to sell the security or it is more likely than not that management will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that management will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings. For any equity securities, the entire amount of the fair value adjustment is recognized through earnings.
Federal Home Loan Bank Stock
Investments in Federal Home Loan Bank of San Francisco (the “FHLB”) stock are carried at cost and are redeemable at par with certain restrictions. Investments in FHLB stock are necessary to participate in FHLB programs.
| 66 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Loans and Leases
Loans and leases that management has both the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amounts outstanding, adjusted for unearned income, deferred loan origination fees and costs, purchase premiums and discounts, write-downs and the allowance for loan and lease losses. Loan and lease origination fees, net of certain deferred origination costs, and purchase premiums and discounts are recognized as an adjustment to the yield of the related loans and leases.
For all classes of loans and leases, the accrual of interest is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payment requirements within an acceptable time frame relative to the terms stated in the loan agreement. Upon such discontinuance, all unpaid accrued interest is reversed against current income unless the loan or lease is well secured and in the process of collection. Interest received on nonaccrual loans and leases is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans and leases are restored to accrual status when the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Direct financing leases are carried net of unearned income. Income from leases is recognized by a method that approximates a level yield on the outstanding net investment in the lease.
Loan Sales and Servicing
Included in the loan and lease portfolio are Small Business Administration (“SBA”) loans and Farm Service Agency guaranteed loans that may be sold in the secondary market. At the time the loan is sold, the related right to service the loan is either retained, with the Company earning future servicing income, or released in exchange for a one-time servicing-released premium. Loans subsequently transferred to the loan portfolio are transferred at the lower of cost or fair value at the date of transfer. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method. There were no loans held for sale at December 31, 2019 and 2018.
SBA and Farm Service Agency loans with unpaid balances of $78,000 and $109,000 were being serviced for others as of December 31, 2019 and 2018, respectively. The Company also serviced loans that are participated with other financial institutions totaling $4,042,000 and $7,815,000 as of December 31, 2019 and 2018, respectively.
Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold or securitized with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are initially recorded at fair value and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing assets are periodically evaluated for impairment. Servicing assets were not considered material for disclosure purposes at December 31, 2019 and 2018.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of probable credit losses inherent in the Company’s credit portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan and lease losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is typically recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired credits and general reserves for inherent probable losses related to credits that are not impaired.
| 67 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Allowance for Loan and Lease Losses (Continued)
For all classes of the portfolio, a loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, and the probability of collecting scheduled principle and interest payments when due. Impaired loans are individually evaluated to determine the extent of impairment, if any, except for smaller-balance loans that are collectively evaluated for credit risk. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the credit’s original interest rate, the credit’s observable market price, or the fair value of the collateral if the credit is collateral dependent. A loan or lease is collateral dependent if the repayment of the credit is expected to be provided solely by the sale or operation of the underlying collateral.
For all portfolio segments, a restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Company grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans or leases that are reported as TDRs are considered impaired and measured for impairment as described above.
For all portfolio segments, the determination of the general reserve for loans and leases that are not impaired is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the credit portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company determines a separate allowance for each portfolio segment. These portfolio segments include commercial, real estate construction (including land and development loans), residential real estate, multi-family real estate, commercial real estate, leases, agriculture, and consumer loans. The allowance for loan and lease losses attributable to each portfolio segment, which includes both impaired credits and credits that are not impaired, is combined to determine the Company’s overall allowance, which is included as a component of loans and leases on the consolidated balance sheet and available for all loss exposures.
The Company assigns a risk rating to all loans and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual credit. The risk ratings can be grouped into six major categories, defined as follows:
Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.
Watch – A watch credit is a loan or lease that otherwise meets the definition of a standard or minimum acceptable quality loan, but which requires more than normal attention due to any of the following items: deterioration of borrower financial condition less severe than those warranting more adverse grading, deterioration of repayment ability and/or collateral value, increased leverage, adverse effects from a downturn in the economy, local market or industry, adverse changes in local or regional employer, management changes (including illness, disability, and death), and adverse legal action. Payments are current per the terms of the agreement. If conditions persist or worsen, a more severe risk grade may be warranted.
| 68 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Allowance for Loan and Lease Losses (Continued)
Special Mention – A special mention credit is a loan or lease that has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Company’s position at some future date. Special Mention credits are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard – A substandard credit is a loan or lease that is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Credits classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include inadequate cash flow or collateral support, a project’s lack of marketability, failure to complete construction on time or a project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Credits classified as doubtful are loans or leases that have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loss – Credits classified as loss are loans or leases considered uncollectible and charged off immediately.
The general reserve component of the allowance for loan and lease losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below.
Real Estate- Commercial – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate- Construction – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Real Estate- Multi-family – Multi-family loans are non-construction term mortgages for the acquisition, refinance, or improvement of residential rental properties with generally more than 4 dwelling units. Underwriting is generally based on borrower creditworthiness, sufficiency of net operating income to service the bank loan payment, and a prudent loan-to-value ratio, among other factors.
| 69 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Allowance for Loan and Lease Losses (Continued)
Real Estate- Residential – Residential loans are generally loans to purchase or refinance 1-4 unit single-family residences, either owner-occupied or investor-owned. Some residential loans are short term to match their intended source of repayment through sale or refinance. The remainder are fixed or floating-rate term first mortgages with an original maturity between 2 and 10 years, generally with payments based on a 25-30 year amortization.
Commercial – Commercial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Lease Financing Receivable – Leases originated by the bank are non-consumer finance leases (as contrasted with operating leases) for the acquisition of titled and non-titled business equipment. Leases are generally amortized over a period from 36 to 84 months, depending on the useful life of the equipment acquired. Residual (balloon) payments at lease end range from 0-20% of original cost, and are a non-optional obligation of the lessee. Lessees are contractually responsible for all costs, expenses, taxes, and liability associated with the leased equipment.
Agricultural – Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of the Company and borrowers: commodity prices and weather conditions.
Consumer – The consumer loan portfolio is comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made directly for consumer purchases, but business loans granted for the purchase of heavy equipment or industrial vehicles may also be included. Also included in the consumer loan portfolio are home equity lines of credit and loans purchased from a specialty lender that originates classic and collector auto loans. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s primary regulators, the FDIC and the California Department of Business Oversight, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates probable incurred losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet.
| 70 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Other Real Estate Owned (OREO)
Other real estate owned includes real estate acquired in full or partial settlement of loan obligations. When property is acquired, any excess of the recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property less estimated selling costs is charged against the allowance for loan and lease losses. Any excess of the fair value over the loan balance less estimated selling costs is recorded as noninterest income-other income. A valuation allowance for losses on other real estate may be maintained to provide for temporary declines in value. The valuation allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or write-downs resulting from permanent impairments are recorded in other income or expense as incurred.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Land is not depreciated. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful life of the building and improvements is forty years. The useful lives of furniture, fixtures and equipment are estimated to be three to ten years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. Impairment of long-lived assets is evaluated by management based upon an event or changes in circumstances surrounding the underlying assets which indicate long-lived assets may be impaired.
Goodwill and Intangible Assets
Business combinations involving the Company’s acquisition of equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisition and is not deductible for tax purposes. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2019, the Company had one reporting unit and that reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
| 71 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Income Taxes
The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for 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 tax bases. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable, results in the income tax expense for the current year. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On December 22, 2017, President Trump signed into law “H.R.1” commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). During 2017, the Company recorded an income tax expense adjustment of $1,220,000 related to the Tax Act. The adjustment relates to revaluing the Company’s net deferred tax assets using the new lower corporate federal income tax rate of 21% which became effective January 1, 2018, a reduction from the Company’s 2017 rate of 34%.
The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized. “More likely than not” is defined as greater than a 50% likelihood. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Based upon the Company’s analysis of available evidence, the Company determined that it is “more likely than not” that all of the deferred income tax assets as of December 31, 2019 and 2018 will be fully realized and therefore no valuation allowance was recorded.
The Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income.
Comprehensive Income
Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income consists of net income and other comprehensive income (loss). Unrealized gains and losses on the Company’s available-for-sale investment securities are included in other comprehensive income (loss), adjusted for realized gains or losses included in net income, net of tax. Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the consolidated statements of comprehensive income.
Earnings Per Share
Basic earnings per share (“EPS”), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects 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 that share in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options and restricted stock in computing diluted EPS. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the consolidated financial statements.
| 72 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
There were no stock splits or stock dividends in 2019, 2018 or 2017.
Stock-Based Compensation
At December 31, 2019, the Company had one stock-based compensation plan, which is described more fully in Note 13. Compensation expense recorded in 2019, 2018, and 2017 totaled $338,000, $227,000 and $273,000, respectively. Compensation expense is recognized over the vesting period on a straight line accounting basis.
The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton based option valuation model that uses the assumptions noted in the table in Footnote 13. Because Black-Scholes-Merton based option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate the dividend yield, option life and forfeiture rate within the valuation model. The expected option life represents the period of time that options granted are expected to be outstanding. The risk-free rate for the period representing the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Operating Segments
While the Company’s management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Recently Issued Financial Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize changes to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 was initially scheduled to become effective for the Company for interim and annual reporting periods beginning after December 15, 2019, however, on November 15, 2019 the FASB issued ASU 2019-10 delaying the effective date for smaller reporting companies, such as the Company, to interim and annual reporting periods beginning after December 15, 2022; early adoption is still permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, including if it will early adopt the standard, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, evaluating its current IT systems, and purchasing a software solution. The Company has imported current and historical data into the new software and is currently validating the data and intends to begin processing information, on a test basis, with the new CECL specific software during 2020 and 2021 and to disclose any material potential impact of this modeling once it becomes available.
| 73 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 3. | 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 December 31, 2019 and December 31, 2018. 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 2019. 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):
| 74 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 3. | FAIR VALUE MEASUREMENTS (Continued) |
| Carrying | Fair Value Measurements Using: | |||||||||||||||||||
| December 31, 2019 | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 15,258 | $ | 15,258 | $ | — | $ | — | $ | 15,258 | ||||||||||
| Interest-bearing deposits in banks | 2,552 | — | 2,552 | — | 2,552 | |||||||||||||||
| Available-for-sale securities | 261,965 | — | 261,965 | — | 261,965 | |||||||||||||||
| Held-to-maturity securities | 248 | — | 266 | — | 266 | |||||||||||||||
| FHLB stock | 4,259 | N/A | N/A | N/A | N/A | |||||||||||||||
| Loans and leases, net | 393,802 | — | — | 396,089 | 396,089 | |||||||||||||||
| Accrued interest receivable | 1,929 | — | 780 | 1,149 | 1,929 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Noninterest-bearing | $ | 227,055 | $ | 227,055 | $ | — | $ | — | $ | 227,055 | ||||||||||
| Savings | 75,820 | 75,820 | — | — | 75,820 | |||||||||||||||
| Money market | 158,319 | 158,319 | — | — | 158,319 | |||||||||||||||
| NOW accounts | 69,834 | 69,834 | — | — | 69,834 | |||||||||||||||
| Time Deposits | 73,809 | — | 73,924 | — | 73,924 | |||||||||||||||
| Short-term borrowings | 9,000 | 9,000 | — | — | 9,000 | |||||||||||||||
| Long-term borrowings | 10,500 | — | 10,717 | — | 10,717 | |||||||||||||||
| Accrued interest payable | 120 | — | 120 | — | 120 | |||||||||||||||
| Carrying | Fair Value Measurements Using: | |||||||||||||||||||
| December 31, 2018 | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 20,987 | $ | 20,987 | $ | — | $ | — | $ | 20,987 | ||||||||||
| Federal funds sold | 7,000 | 7,000 | — | — | 7,000 | |||||||||||||||
| Interest-bearing deposits in banks | 1,746 | — | 1,746 | — | 1,746 | |||||||||||||||
| Available-for-sale securities | 294,933 | 4,976 | 289,957 | — | 294,933 | |||||||||||||||
| Held-to-maturity securities | 292 | — | 306 | — | 306 | |||||||||||||||
| FHLB stock | 3,932 | N/A | N/A | N/A | N/A | |||||||||||||||
| Loans and leases, net | 318,516 | — | — | 315,235 | 315,235 | |||||||||||||||
| Accrued interest receivable | 1,959 | — | 1,044 | 915 | 1,959 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Noninterest-bearing | $ | 214,745 | $ | 214,745 | $ | — | $ | — | $ | 214,745 | ||||||||||
| Savings | 72,522 | 72,522 | — | — | 72,522 | |||||||||||||||
| Money market | 145,831 | 145,831 | — | — | 145,831 | |||||||||||||||
| NOW accounts | 69,489 | 69,489 | — | — | 69,489 | |||||||||||||||
| Time Deposits | 88,087 | — | 88,078 | — | 88,078 | |||||||||||||||
| Short-term borrowings | 5,000 | 5,000 | — | — | 5,000 | |||||||||||||||
| Long-term borrowings | 10,500 | — | 10,733 | — | 10,733 | |||||||||||||||
| Accrued interest payable | 63 | — | 63 | — | 63 | |||||||||||||||
Because no established 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.
| 75 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 3. | FAIR VALUE MEASUREMENTS (Continued) |
Assets and liabilities measured at fair value on a recurring and non-recurring basis are presented in the following table:
| (Dollars
in thousands) December 31, 2019 | Fair Value | Quoted
Prices in Active Markets for Identical Assets (Level 1) | Significant
Other Observable Inputs (Level 2) | Significant
Unobservable Inputs (Level 3) | Total
Gains (Losses) | |||||||||||||||
| Assets and liabilities measured on a recurring basis: | ||||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | 241,887 | $ | — | $ | 241,887 | $ | — | $ | — | ||||||||||
| Corporate Debt Securities | 6,631 | — | 6,631 | — | — | |||||||||||||||
| Obligations of states and political subdivisions | 13,447 | — | 13,477 | — | — | |||||||||||||||
| Total recurring | $ | 261,965 | $ | — | $ | 261,965 | $ | — | $ | — | ||||||||||
| December 31, 2019 | Fair Value | Quoted
Prices in Active Markets for Identical Assets (Level 1) | Significant
Other Observable Inputs (Level 2) | Significant
Unobservable Inputs (Level 3) | Total Gains
(Losses) | |||||||||||||||
| Assets and liabilities measured on a nonrecurring basis: | ||||||||||||||||||||
| Other Assets: | ||||||||||||||||||||
| Repossessed asset | $ | 517 | $ | — | $ | — | $ | 517 | $ | — | ||||||||||
| Other real estate owned:Land | 846 | — | — | 846 | (111 | ) | ||||||||||||||
| Total nonrecurring | $ | 1,363 | $ | — | $ | — | $ | 1,363 | $ | (111 | ) | |||||||||
| 76 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 3. | FAIR VALUE MEASUREMENTS (Continued) |
| (Dollars
in thousands) December 31, 2018 | Fair Value | Quoted
Prices in Active Markets for Identical Assets (Level 1) | Significant
Other Observable Inputs (Level 2) | Significant
Unobservable Inputs (Level 3) | Total
Gains (Losses) | |||||||||||||||
| Assets and liabilities measured on a recurring basis: | ||||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | 269,049 | $ | — | $ | 269,049 | $ | — | $ | — | ||||||||||
| Corporate Debt Securities | 6,508 | — | 6,508 | — | — | |||||||||||||||
| Obligations of states and political subdivisions | 14,400 | — | 14,400 | — | — | |||||||||||||||
| U.S. Treasury bonds | 4,976 | 4,976 | — | — | — | |||||||||||||||
| Total recurring | $ | 294,933 | $ | 4,976 | $ | 289,957 | $ | — | $ | — | ||||||||||
| December 31, 2018 | Fair Value | Quoted
Prices in Active Markets for Identical Assets (Level 1) | Significant
Other Observable Inputs (Level 2) | Significant
Unobservable Inputs (Level 3) | Total
Gains (Losses) | |||||||||||||||
| Assets and liabilities measured on a nonrecurring basis: | ||||||||||||||||||||
| Impaired loans: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | $ | 5,274 | $ | — | $ | — | $ | 5,274 | $ | — | ||||||||||
| Other real estate owned: | ||||||||||||||||||||
| Land | 957 | — | — | 957 | (4 | ) | ||||||||||||||
| Total nonrecurring | $ | 6,231 | $ | — | $ | — | $ | 6,231 | $ | (4 | ) | |||||||||
U.S. Government Agencies and Sponsored Agencies consist predominately of residential mortgage-backed securities. There were no transfers between Levels 1 and 2 during the years ended December 31, 2019 or December 31, 2018.
The following methods were used to estimate the fair value of each class of financial instrument above:
Available-for-sale securities – Fair values for investment securities are based on quoted market prices, if available, and are considered Level 1, or evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and are considered Level 2. Pricing applications apply available information, as applicable, through processes such as benchmark curves, benchmarking to like securities, sector groupings and matrix pricing.
Impaired loans – The fair value of collateral dependent impaired loans adjusted for specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring impaired loans is the sales comparison approach less a reserve for past dues taxes and selling costs ranging from 8% to 10%.
| 77 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 3. | FAIR VALUE MEASUREMENTS (Continued) |
Other assets and real estate owned – Other assets can contain non-real estate property obtained by repossession of collateral in the case of a loan default and are measured at fair value, less costs to sell. Certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on recent appraisals and/or evaluations. These appraisals and/or evaluations may use a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring other assets and OREO is the sales comparison approach less selling costs ranging from 8% to 10%.
| 4. | GOODWILL AND OTHER INTANGIBLE ASSETS |
At December 31, 2019 and 2018, goodwill totaled $16,321,000. Goodwill is evaluated annually for impairment under the provisions of the codification Topic 350, Goodwill and Other Intangibles. The most recent annual assessment was performed as of December 31, 2019, and at that time, the Company’s reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Management determined that no impairment recognition was required for the years ended December 31, 2019, 2018 and 2017.
At December 31, 2019 and 2018, the Company did not have other intangible assets.
| 78 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 5. | INVESTMENT SECURITIES |
The amortized cost and estimated fair value of investment securities at December 31, 2019 and 2018 consisted of the following (dollars in thousands):
| Available-for-Sale | ||||||||||||||||
| 2019 | ||||||||||||||||
| Amortized
Cost | Gross
Unrealized Gains | Gross
Unrealized Losses | Estimated
Fair Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | 239,617 | $ | 3,371 | $ | (1,101 | ) | $ | 241,887 | |||||||
| Obligations of states and political subdivisions | 13,308 | 212 | (73 | ) | 13,447 | |||||||||||
| Corporate Debt Securities | 6,496 | 135 | — | 6,631 | ||||||||||||
| $ | 259,421 | $ | 3,718 | $ | (1,174 | ) | $ | 261,965 | ||||||||
| 2018 | ||||||||||||||||
| Amortized
Cost | Gross
Unrealized Gains | Gross
Unrealized Losses | Estimated
Fair Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | 271,685 | $ | 984 | $ | (3,620 | ) | $ | 269,049 | |||||||
| Obligations of states and political subdivisions | 14,440 | 165 | (205 | ) | 14,400 | |||||||||||
| Corporate Debt Securities | 6,493 | 74 | (59 | ) | 6,508 | |||||||||||
| U.S. Treasury securities | 4,979 | — | (3 | ) | 4,976 | |||||||||||
| $ | 297,597 | $ | 1,223 | $ | (3,887 | ) | $ | 294,933 | ||||||||
U.S. Government Agencies and U.S. Government-sponsored Agencies consist predominately of residential mortgage-backed securities. Net unrealized gains on available-for-sale investment securities totaling $2,544,000 were recorded, net of $752,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2019. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the year ended December 31, 2019 totaled $63,325,000 and $115,000, respectively. There were no transfers of available-for-sale investment securities during the year ended December 31, 2019.
Net unrealized losses on available-for-sale investment securities totaling $2,664,000 were recorded, net of $788,000 in tax assets, as accumulated other comprehensive income within shareholders’ equity at December 31, 2018. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the year ended December 31, 2018 totaled $29,142,000 and $31,000, respectively. There were no transfers of available-for-sale investment securities during the year ended December 31, 2018.
Proceeds and gross realized gains from the sale, impairment and call of available-for-sale investment securities for the year ended December 31, 2017 totaled $31,434,000 and $161,000, respectively.
| 79 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 5. | INVESTMENT SECURITIES (Continued) |
Held-to-Maturity
| 2019 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | 248 | $ | 18 | $ | — | $ | 266 | ||||||||
| 2018 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | 292 | $ | 14 | $ | — | $ | 306 | ||||||||
There were no sales or transfers of held-to-maturity investment securities for the years ended December 31, 2019, 2018 and 2017.
The amortized cost and estimated fair value of investment securities at December 31, 2019 by contractual maturity are shown below (dollars in thousands).
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| Estimated | Estimated | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| Within one year | $ | 500 | $ | 501 | ||||||||||||
| After one year through five years | 2,937 | 2,955 | ||||||||||||||
| After five years through ten years | 9,196 | 9,351 | ||||||||||||||
| After ten years | 7,171 | 7,271 | ||||||||||||||
| 19,804 | 20,078 | |||||||||||||||
| Investment securities not due at a single maturity date: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | 239,617 | 241,887 | $ | 248 | $ | 266 | ||||||||||
| $ | 259,421 | $ | 261,965 | $ | 248 | $ | 266 | |||||||||
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.
| 80 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 5. | INVESTMENT SECURITIES (Continued) |
Investment securities with amortized costs totaling $127,307,000 and $88,460,000 and estimated fair values totaling $129,643,000 and $87,351,000 were pledged to secure State Treasury funds on deposit, public agency and bankruptcy trustee deposits and borrowing arrangements (see Note 10) at December 31, 2019 and 2018, respectively.
Investment securities with unrealized losses at December 31, 2019 and 2018 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):
| 2019 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Available-for-Sale | ||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | 65,082 | $ | (438 | ) | $ | 38,380 | $ | (663 | ) | $ | 103,462 | $ | (1,101 | ) | |||||||||
| Obligations of states and political subdivisions | 8,060 | (73 | ) | — | — | 8,060 | (73 | ) | ||||||||||||||||
| $ | 73,142 | $ | (511 | ) | $ | 38,380 | $ | (663 | ) | $ | 111,522 | $ | (1,174 | ) | ||||||||||
| 2018 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Available-for-Sale | ||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | 39,267 | $ | (310 | ) | $ | 138,894 | $ | (3,310 | ) | $ | 178,161 | $ | (3,620 | ) | |||||||||
| Obligations of states and political subdivisions | 2,168 | (28 | ) | 5,583 | (177 | ) | 7,751 | (205 | ) | |||||||||||||||
| U.S. Treasury securities | 4,976 | (3 | ) | — | — | 4,976 | (3 | ) | ||||||||||||||||
| Corporate bonds | 497 | (4 | ) | 1,938 | (55 | ) | 2,435 | (59 | ) | |||||||||||||||
| $ | 46,908 | $ | (345 | ) | $ | 146,415 | $ | (3,542 | ) | $ | 193,323 | $ | (3,887 | ) | ||||||||||
At December 31, 2019, the Company held 205 securities of which 41 were in a loss position for less than twelve months and 29 were in a loss position for twelve months or more. These 29 securities consisted of mortgage-backed, corporate and municipal securities.
The unrealized loss on the Company’s investments in 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 maturity, management does not consider these investments to be other-than-temporarily impaired.
| 81 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 6. | LOANS AND LEASES |
Outstanding loans and leases are summarized as follows (dollars in thousands):
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Real estate – commercial | $ | 214,604 | $ | 199,894 | ||||
| Real estate – construction | 23,169 | 5,685 | ||||||
| Real estate – multi-family | 56,818 | 56,139 | ||||||
| Real estate – residential | 29,180 | 16,338 | ||||||
| Commercial | 43,019 | 29,650 | ||||||
| Lease financing receivable | — | 32 | ||||||
| Agriculture | 6,479 | 4,419 | ||||||
| Consumer | 25,671 | 10,714 | ||||||
| 398,940 | 322,871 | |||||||
| Deferred loan and lease origination fees and costs, net | — | 37 | ||||||
| Allowance for loan and lease losses | (5,138 | ) | (4,392 | ) | ||||
| $ | 393,802 | $ | 318,516 | |||||
Certain loans are pledged as collateral for available borrowings with the FHLB and the Federal Reserve Bank of San Francisco (the “FRB”). Pledged loans totaled $220,918,000 and $194,431,000 at December 31, 2019 and 2018, respectively (see Note 10).
Salaries and employee benefits totaling $438,000, $357,000 and $177,000 have been deferred as loan and lease origination costs for the years ended December 31, 2019, 2018 and 2017, respectively.
| 82 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES |
The following tables show the activity in the allowance for loan and lease losses for the years ended December 31, 2019, 2018 and 2017 and the allocation of the allowance for loan and lease losses as of December 31, 2019, 2018 and 2017 by portfolio segment and by impairment methodology (dollars in thousands):
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Real Estate | Other | |||||||||||||||||||||||||||||||||||
| Commercial | Commercial | Multi- Family | Construction | Residential | Agriculture | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||
| Allowance for Loan and Lease Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 668 | $ | 2,114 | $ | 564 | $ | 267 | $ | 220 | $ | 88 | $ | 192 | $ | 279 | $ | 4,392 | ||||||||||||||||||
| Provision for loan losses | 275 | (219 | ) | (235 | ) | 719 | 61 | 19 | 74 | (34 | ) | 660 | ||||||||||||||||||||||||
| Loans charged-off | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Recoveries | 7 | 11 | — | — | — | — | 68 | — | 86 | |||||||||||||||||||||||||||
| Ending balance allocated to portfolio segments | $ | 950 | $ | 1,906 | $ | 329 | $ | 986 | $ | 281 | $ | 107 | $ | 334 | $ | 245 | $ | 5,138 | ||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | — | $ | 133 | $ | — | $ | — | $ | 9 | $ | — | $ | — | $ | — | $ | 142 | ||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 950 | $ | 1,773 | $ | 329 | $ | 986 | $ | 272 | $ | 107 | $ | 334 | $ | 245 | $ | 4,996 | ||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 43,019 | $ | 214,604 | $ | 56,818 | $ | 23,169 | $ | 29,180 | $ | 6,479 | $ | 25,671 | $ | — | $ | 398,940 | ||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | — | $ | 7,152 | $ | — | $ | — | $ | 452 | $ | — | $ | — | $ | — | $ | 7,604 | ||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 43,019 | $ | 207,452 | $ | 56,818 | $ | 23,169 | $ | 28,728 | $ | 6,479 | $ | 25,671 | $ | — | $ | 391,336 | ||||||||||||||||||
| 83 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) |
| December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
| Real Estate | Other | |||||||||||||||||||||||||||||||||||||||
| Commercial | Commercial | Multi- Family |
Construction | Residential | Leases | Agriculture | Consumer | Unallocated | Total | |||||||||||||||||||||||||||||||
| Allowance for Loan and Lease Losses | ||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 447 | $ | 2,174 | $ | 1,047 | $ | 269 | $ | 205 | $ | — | $ | 31 | $ | 14 | $ | 291 | $ | 4,478 | ||||||||||||||||||||
| Provision for loan losses | 422 | (68 | ) | (483 | ) | (2 | ) | 15 | (1 | ) | 57 | 247 | (12 | ) | 175 | |||||||||||||||||||||||||
| Loans charged-off | (213 | ) | — | — | — | — | — | — | (69 | ) | — | (282 | ) | |||||||||||||||||||||||||||
| Recoveries | 12 | 8 | — | — | — | 1 | — | — | — | 21 | ||||||||||||||||||||||||||||||
| Ending balance allocated to portfolio segments | $ | 668 | $ | 2,114 | $ | 564 | $ | 267 | $ | 220 | $ | — | $ | 88 | $ | 192 | $ | 279 | $ | 4,392 | ||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | — | $ | 132 | $ | — | $ | — | $ | 53 | $ | — | $ | — | $ | — | $ | — | $ | 185 | ||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 668 | $ | 1,982 | $ | 564 | $ | 267 | $ | 167 | $ | — | $ | 88 | $ | 192 | $ | 279 | $ | 4,207 | ||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 29,650 | $ | 199,894 | $ | 56,139 | $ | 5,685 | $ | 16,338 | $ | 32 | $ | 4,419 | $ | 10,714 | $ | — | $ | 322,871 | ||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | — | $ | 7,783 | $ | — | $ | — | $ | 919 | $ | — | $ | — | $ | — | $ | — | $ | 8,702 | ||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | 29,650 | $ | 192,111 | $ | 56,139 | $ | 5,685 | $ | 15,419 | $ | 32 | $ | 4,419 | $ | 10,714 | $ | — | $ | 314,169 | ||||||||||||||||||||
| 84 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) |
| December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
| Real Estate | Other | |||||||||||||||||||||||||||||||||||||||
| Commercial | Commercial | Multi- Family | Construction | Residential | Leases | Agriculture | Consumer | Unallocated | Total | |||||||||||||||||||||||||||||||
| Allowance for Loan and Lease Losses | ||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 855 | $ | 2,050 | $ | 851 | $ | 446 | $ | 253 | $ | 1 | $ | 64 | $ | 24 | $ | 278 | $ | 4,822 | ||||||||||||||||||||
| Provision for loan losses | 659 | (104 | ) | 196 | (177 | ) | (48 | ) | (42 | ) | (33 | ) | (14 | ) | 13 | 450 | ||||||||||||||||||||||||
| Loans charged-off | (1,073 | ) | — | — | — | — | — | — | — | — | (1,073 | ) | ||||||||||||||||||||||||||||
| Recoveries | 6 | 228 | — | — | — | 41 | — | 4 | — | 279 | ||||||||||||||||||||||||||||||
| Ending balance allocated to portfolio segments | $ | 447 | $ | 2,174 | $ | 1,047 | $ | 269 | $ | 205 | $ | — | $ | 31 | $ | 14 | $ | 291 | $ | 4,478 | ||||||||||||||||||||
| 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 | ||||||||||||||||||||
| 85 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) |
The following tables show the loan portfolio allocated by management’s internal risk ratings as of December 31, 2019 and 2018 (dollars in thousands):
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| Credit Risk Profile by Internally Assigned Grade | ||||||||||||||||||||||||||||||||
| Real Estate | Other Credit Exposure | |||||||||||||||||||||||||||||||
| Commercial | Commercial | Multi-Family | Construction | Residential | Agriculture | Consumer | Total | |||||||||||||||||||||||||
| Grade: | ||||||||||||||||||||||||||||||||
| Pass | $ | 38,085 | $ | 208,140 | $ | 56,818 | $ | 23,169 | $ | 28,570 | $ | 6,479 | $ | 25,596 | $ | 386,857 | ||||||||||||||||
| Watch | 4,915 | 6,329 | — | — | 610 | — | 75 | 11,929 | ||||||||||||||||||||||||
| Special mention | 19 | — | — | — | — | — | — | 19 | ||||||||||||||||||||||||
| Substandard | — | 135 | — | — | — | — | — | 135 | ||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | 43,019 | $ | 214,604 | $ | 56,818 | $ | 23,169 | $ | 29,180 | $ | 6,479 | $ | 25,671 | $ | 398,940 | ||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||||||||||
| Credit Risk Profile by Internally Assigned Grade | ||||||||||||||||||||||||||||||||||||
| Real Estate | Other Credit Exposure | |||||||||||||||||||||||||||||||||||
| Commercial | Commercial | Multi-Family | Construction | Residential | Leases | Agriculture | Consumer | Total | ||||||||||||||||||||||||||||
| Grade: | ||||||||||||||||||||||||||||||||||||
| Pass | $ | 29,570 | $ | 185,548 | $ | 52,301 | $ | 5,685 | $ | 15,373 | $ | 32 | $ | 4,419 | $ | 10,691 | $ | 303,619 | ||||||||||||||||||
| Watch | 53 | 13,118 | 3,838 | — | 965 | — | — | 22 | 17,996 | |||||||||||||||||||||||||||
| Special mention | — | 1,087 | — | — | — | — | — | 1 | 1,088 | |||||||||||||||||||||||||||
| Substandard | 27 | 141 | — | — | — | — | — | — | 168 | |||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Total | $ | 29,650 | $ | 199,894 | $ | 56,139 | $ | 5,685 | $ | 16,338 | $ | 32 | $ | 4,419 | $ | 10,714 | $ | 322,871 | ||||||||||||||||||
| 86 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) |
The following tables show an aging analysis of the loan portfolio at December 31, 2019 and 2018 (dollars in thousands):
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| Past Due | Past Due | |||||||||||||||||||||||||||||||
| Greater | Greater Than | |||||||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | Than | Total Past | 90 Days and | ||||||||||||||||||||||||||||
| Past Due | Past Due | 90 Days | Due | Current | Total Loans | Accruing | Nonaccrual | |||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | — | $ | 43,019 | $ | 43,019 | $ | — | $ | — | ||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||
| Commercial | — | — | — | — | 214,604 | 214,604 | — | — | ||||||||||||||||||||||||
| Multi-family | — | — | — | — | 56,818 | 56,818 | — | — | ||||||||||||||||||||||||
| Construction | — | — | — | — | 23,169 | 23,169 | — | — | ||||||||||||||||||||||||
| Residential | — | — | — | — | 29,180 | 29,180 | — | — | ||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||
| Agriculture | — | — | — | — | 6,479 | 6,479 | — | — | ||||||||||||||||||||||||
| Consumer | 75 | — | — | 75 | 25,596 | 25,671 | — | — | ||||||||||||||||||||||||
| Total | $ | 75 | $ | — | $ | — | $ | 75 | $ | 398,865 | $ | 398,940 | $ | — | $ | — | ||||||||||||||||
| 87 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) |
| December 31, 2018 | ||||||||||||||||||||||||||||||||
| Past Due | Past Due | |||||||||||||||||||||||||||||||
| Greater | Greater Than | |||||||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | Than | Total Past | 90 Days and | ||||||||||||||||||||||||||||
| Past Due | Past Due | 90 Days | Due | Current | Total Loans | Accruing | Nonaccrual | |||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | — | $ | 29,650 | $ | 29,650 | $ | — | $ | 27 | ||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||
| Commercial | — | — | — | — | 199,894 | 199,894 | — | — | ||||||||||||||||||||||||
| Multi-family | — | — | — | — | 56,139 | 56,139 | — | — | ||||||||||||||||||||||||
| Construction | — | — | — | — | 5,685 | 5,685 | — | — | ||||||||||||||||||||||||
| Residential | — | — | — | — | 16,338 | 16,338 | — | — | ||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||
| Leases | — | — | — | — | 32 | 32 | — | — | ||||||||||||||||||||||||
| Agriculture | — | — | — | — | 4,419 | 4,419 | — | — | ||||||||||||||||||||||||
| Consumer | — | — | — | — | 10,714 | 10,714 | — | — | ||||||||||||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | $ | 322,871 | $ | 322,871 | $ | — | $ | 27 | ||||||||||||||||
| 88 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) |
The following tables show information related to impaired loans as of and for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):
| December 31, 2019 | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | $ | 5,530 | $ | 5,664 | $ | — | $ | 5,654 | $ | 333 | ||||||||||
| Residential | 318 | 405 | — | 323 | 20 | |||||||||||||||
| $ | 5,848 | $ | 6,069 | $ | — | $ | 5,977 | $ | 353 | |||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | $ | 1,622 | $ | 1,693 | $ | 133 | $ | 1,719 | $ | 101 | ||||||||||
| Residential | 134 | 134 | 9 | 149 | 7 | |||||||||||||||
| $ | 1,756 | $ | 1,827 | $ | 142 | $ | 1,868 | $ | 108 | |||||||||||
| Total: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | $ | 7,152 | $ | 7,357 | $ | 133 | $ | 7,373 | $ | 434 | ||||||||||
| Residential | 452 | 539 | 9 | 472 | 27 | |||||||||||||||
| $ | 7,604 | $ | 7,896 | $ | 142 | $ | 7,845 | $ | 461 | |||||||||||
| 89 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) |
| December 31, 2018 | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | — | $ | 4 | ||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | 5,645 | 5,879 | — | 5,711 | 283 | |||||||||||||||
| Residential | 323 | 410 | — | 326 | 18 | |||||||||||||||
| $ | 5,968 | $ | 6,289 | $ | — | $ | 6,037 | $ | 305 | |||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | $ | 2,138 | $ | 2,217 | $ | 132 | $ | 2,199 | $ | 133 | ||||||||||
| Residential | 596 | 596 | 53 | 611 | 29 | |||||||||||||||
| $ | 2,734 | $ | 2,813 | $ | 185 | $ | 2,810 | $ | 162 | |||||||||||
| Total: | ||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | — | $ | 4 | ||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | 7,783 | 8,096 | 132 | 7,910 | 416 | |||||||||||||||
| Residential | 919 | 1,006 | 53 | 937 | 47 | |||||||||||||||
| $ | 8,702 | $ | 9,102 | $ | 185 | $ | 8,847 | $ | 467 | |||||||||||
| 90 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) |
| December 31, 2017 | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial | $ | 1,598 | $ | 2,671 | $ | — | $ | 1,808 | $ | 108 | ||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | 5,674 | 5,907 | — | 5,701 | 281 | |||||||||||||||
| Residential | 329 | 416 | — | 331 | 19 | |||||||||||||||
| Other: | ||||||||||||||||||||
| Consumer | — | — | — | — | 2 | |||||||||||||||
| $ | 7,601 | $ | 8,994 | $ | — | $ | 7,840 | $ | 410 | |||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | $ | 4,396 | $ | 4,483 | $ | 261 | $ | 4,435 | $ | 249 | ||||||||||
| Multi-family | 474 | 474 | 21 | 476 | 33 | |||||||||||||||
| Residential | 1,286 | 1,286 | 73 | 1,295 | 62 | |||||||||||||||
| $ | 6,156 | $ | 6,243 | $ | 355 | $ | 6,206 | $ | 344 | |||||||||||
| Total: | ||||||||||||||||||||
| Commercial | $ | 1,598 | $ | 2,671 | $ | — | $ | 1,808 | $ | 108 | ||||||||||
| Real estate: | ||||||||||||||||||||
| Commercial | 10,070 | 10,390 | 261 | 10,136 | 530 | |||||||||||||||
| Multi-family | 474 | 474 | 21 | 476 | 33 | |||||||||||||||
| Residential | 1,615 | 1,702 | 73 | 1,626 | 81 | |||||||||||||||
| Other: | ||||||||||||||||||||
| Consumer | — | — | — | — | 2 | |||||||||||||||
| $ | 13,757 | $ | 15,237 | $ | 355 | $ | 14,046 | $ | 754 | |||||||||||
Interest income on non-accrual loans is generally recognized on a cash basis and was approximately $1,000, $43,000 and $2,000 for the years ended December 31, 2019, 2018 and 2017.
| 91 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 7. | ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) |
Troubled Debt Restructurings
There were no modifications made during the period ended December 31, 2019 and one modification made during the period ended December 31, 2018 that was considered a troubled debt restructuring. The modification of the terms of the loan in 2018 was a term out of a line of credit to an amortizing loan with a rate reduction. The loan had a pre-modification and post-modification outstanding recorded investment of $18,000. As of December 31, 2019 and 2018, the Company has a recorded investment in troubled debt restructurings of $5,970,000 and $6,642,000, respectively. The Company has allocated $78,000 and $185,000 of specific allowance for those loans at December 31, 2019 and 2018 and has not committed to lend additional amounts.
There were no payment defaults on troubled debt restructurings within 12 months following the modification during the year ended December 31, 2019 and 2018.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
| 8. | PREMISES AND EQUIPMENT |
Premises and equipment consisted of the following (dollars in thousands):
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Land | $ | 206 | $ | 206 | ||||
| Building and improvements | 907 | 886 | ||||||
| Furniture, fixtures and equipment | 6,475 | 6,169 | ||||||
| Leasehold improvements | 1,739 | 1,721 | ||||||
| 9,327 | 8,982 | |||||||
| Less accumulated depreciation and amortization | (8,136 | ) | (7,911 | ) | ||||
| $ | 1,191 | $ | 1,071 | |||||
Depreciation and amortization included in occupancy and furniture and equipment expense totaled $226,000, $265,000 and $333,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
| 92 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 9. | INTEREST-BEARING DEPOSITS |
Interest-bearing deposits consisted of the following (dollars in thousands):
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Savings | $ | 75,820 | $ | 72,522 | ||||
| Money market | 158,319 | 145,831 | ||||||
| NOW accounts | 69,834 | 69,489 | ||||||
| Time, $250,000 or more | 46,218 | 57,028 | ||||||
| Other time | 27,591 | 31,059 | ||||||
| $ | 377,782 | $ | 375,929 | |||||
The Company held $29,000,000 in certificates of deposit for the State of California as of December 31, 2019 and 2018. This amount represents 4.8% of total deposit balances at December 31, 2019 and 4.9% at December 31, 2018.
Aggregate annual maturities of time deposits are as follows (dollars in thousands):
| Year Ending December 31, | ||||
| 2020 | $ | 54,234 | ||
| 2021 | 8,064 | |||
| 2022 | 4,457 | |||
| 2023 | 4,988 | |||
| 2024 | 2,066 | |||
| Thereafter | — | |||
| $ | 73,809 | |||
Interest expense recognized on interest-bearing deposits consisted of the following (dollars in thousands):
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Savings | $ | 28 | $ | 26 | $ | 22 | ||||||
| Money market | 548 | 257 | 123 | |||||||||
| NOW accounts | 15 | 15 | 16 | |||||||||
| Time Deposits | 1,487 | 1,061 | 694 | |||||||||
| $ | 2,078 | $ | 1,359 | $ | 855 | |||||||
| 93 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 10. | BORROWING ARRANGEMENTS |
The Company has $17,000,000 in unsecured short-term borrowing arrangements to purchase Federal funds with two of its correspondent banks. There were no advances under the borrowing arrangements as of December 31, 2019 and 2018.
In addition, the Company has a line of credit available with the FHLB which is secured by pledged mortgage loans (see Note 6) and investment securities (see Note 5). Borrowings may include overnight advances as well as loans with a term of up to thirty years. Advances totaling $19,500,000 were outstanding from the FHLB at December 31, 2019, bearing fixed interest rates ranging from 1.31% to 3.17% and maturing between January 1, 2020 and November 24, 2023. Advances totaling $15,500,000 were outstanding from the FHLB at December 31, 2018, bearing fixed interest rates ranging from 1.18% to 3.17% and maturing between April 30, 2019 and November 24, 2023. Amounts available under the borrowing arrangement with the FHLB at December 31, 2019 and 2018 totaled $143,406,000 and $107,262,000, respectively.
In addition, the Company entered into a secured borrowing agreement with the FRB in 2008. The borrowing arrangement is secured by pledging selected loans (see Note 6) and investment securities (see Note 5). There were no advances outstanding as of December 31, 2019 and 2018. Amounts available under the borrowing arrangement with the FRB at December 31, 2019 and 2018 totaled $8,642,000 and $8,340,000, respectively.
The following table summarizes these borrowings (dollars in thousands):
| December 31, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Short-term portion of borrowings | $ | 9,000 | 1.46 | % | $ | 5,000 | 1.32 | % | ||||||||
| Long-term borrowings | 10,500 | 2.48 | % | 10,500 | 2.02 | % | ||||||||||
| $ | 19,500 | 2.01 | % | $ | 15,500 | 1.79 | % | |||||||||
Maturities on these borrowings are as follows (dollars in thousands):
| Year Ending December 31, | ||||
| 2020 | $ | 9,000 | ||
| 2021 | 2,000 | |||
| 2022 | 5,000 | |||
| 2023 | 3,500 | |||
| Thereafter | — | |||
| $ | 19,500 | |||
| 94 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 11. | INCOME TAXES |
The provision for income taxes for the years ended December 31, 2019, 2018 and 2017 consisted of the following (dollars in thousands):
| Federal | State | Total | ||||||||||
| 2019 | ||||||||||||
| Current | $ | 1,642 | $ | 1,001 | $ | 2,643 | ||||||
| Deferred | (523 | ) | (229 | ) | (752 | ) | ||||||
| Provision for income taxes | $ | 1,119 | $ | 772 | $ | 1,891 | ||||||
| 2018 | ||||||||||||
| Current | $ | 733 | $ | 508 | $ | 1,241 | ||||||
| Deferred | 205 | 128 | 333 | |||||||||
| Provision for income taxes | $ | 938 | $ | 636 | $ | 1,574 | ||||||
| 2017 | ||||||||||||
| Current | $ | 1,397 | $ | 608 | $ | 2,005 | ||||||
| Deferred | 1,222 | 25 | 1,247 | |||||||||
| Provision for income taxes | $ | 2,619 | $ | 633 | $ | 3,252 | ||||||
| 95 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 11. | INCOME TAXES (Continued) |
Deferred tax assets (liabilities) consisted of the following (dollars in thousands):
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for loan and lease losses | $ | 1,548 | $ | 1,328 | ||||
| Unrealized losses on available-for-sale investment securities | — | 788 | ||||||
| Deferred compensation | 1,899 | 1,695 | ||||||
| Future state tax deduction | 198 | 110 | ||||||
| Premises and equipment | 5 | — | ||||||
| Lease liabilities | 915 | — | ||||||
| Other | 72 | 47 | ||||||
| Total deferred tax assets | 4,637 | 3,968 | ||||||
| Deferred tax liabilities: | ||||||||
| Deferred loan costs | (202 | ) | (291 | ) | ||||
| Unrealized gains on available-for-sale investment securities | (752 | ) | — | |||||
| Federal Home Loan Bank stock dividends | (139 | ) | (139 | ) | ||||
| Other real estate owned | (17 | ) | (50 | ) | ||||
| Lease right of use asset | (850 | ) | — | |||||
| Premises and equipment | — | (24 | ) | |||||
| Total deferred tax liabilities | (1,960 | ) | (504 | ) | ||||
| Net deferred tax assets | $ | 2,677 | $ | 3,464 | ||||
The Company and its subsidiaries file income tax returns in the United States and California jurisdictions. There are currently no pending federal, state or local income tax examinations by tax. Furthermore, with few exceptions, the Company is no longer subject to the examination by federal taxing authorities for the years ended before December 31, 2016 and by state and local taxing authorities for years before December 31, 2015. There were no unrecognized tax benefits accrued by the Company as of December 31, 2019. The Company does not expect to have a significant increase or decrease in unrecognized tax benefits in the next twelve months.
The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate of 21% in 2019 and 2018 and 34% in 2017 to income before income taxes. The significant items comprising these differences consisted of the following:
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Federal income tax statutory rate | 21.0 | % | 21.0 | % | 34.0 | % | ||||||
| State franchise tax, net of Federal tax effect | 8.3 | % | 8.1 | % | 6.5 | % | ||||||
| Effect of Federal rate reduction on deferred tax assets | — | — | 19.0 | % | ||||||||
| Tax benefit of interest on loans to/investments in states and political subdivisions | (2.9 | )% | (3.3 | )% | (6.1 | )% | ||||||
| Tax-exempt income from life insurance policies | (1.0 | )% | (1.0 | )% | (1.7 | )% | ||||||
| Equity compensation expense | — | 0.1 | % | 0.1 | % | |||||||
| Other | 0.2 | % | (0.6 | )% | (1.4 | )% | ||||||
| Effective tax rate | 25.6 | % | 24.3 | % | 50.4 | % | ||||||
| 96 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 12. | COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK |
Leases
The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, using the alternative transition method whereby comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required. The Company also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things allowed the Company to carry forward the historical lease classifications. Additionally, the Company elected the hindsight practical expedient to determine the lease term for existing leases.
The Company leases nine locations for administrative offices and branch locations. All leases were classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. The Company elected to use the practical expedient to not recognize short-term leases on the consolidated balance sheet and instead account for them as executory contracts.
Certain leases include options to renew, with renewal terms that can extend the lease term, typically for five years. One of the branch facilities is leased from a current member of the Company’s Board of Directors (see Note 17). Lease assets and liabilities include related options that are reasonably certain of being exercised, however, in the case of those leases that have renewal options, the Company is not including those additional lease terms as the rates are undeterminable and it has been the Company’s historical practice to renegotiate lease terms upon expiration of the original lease terms. The depreciable life of leased assets is limited by the expected lease term.
Adoption of this standard resulted in the Company recognizing a right of use asset and a corresponding lease liability of $3,570,000 on January 1, 2019.
Supplemental lease information at or for the year ended December 31, 2019 is as follows:
| Balance Sheet | ||||
| Operating lease asset classified as other assets | $ | 2,875,000 | ||
| Operating lease liability classified as other liabilities | 3,098,000 | |||
| Income Statement | ||||
| Operating lease cost classified as occupancy and equipment expense | $ | 756,000 | ||
| Weighted average lease term, in years | 5.63 | |||
| Weighted average discount rate* | 2.97 | % | ||
| Operating cash flows | $ | 754,000 |
*The discount rate was developed by using the fixed rate credit advance borrowing rate at the Federal Home Loan Bank of San Francisco for a term correlating to the remaining life of each lease.
A maturity analysis of the Company’s lease liabilities at December 31, 2019 was as follows:
| Balance | ||||
| January 1, 2020 to December 31, 2020 | $ | 769,000 | ||
| January 1, 2020 to December 31, 2021 | 739,000 | |||
| January 1, 2021 to December 31, 2022 | 707,000 | |||
| January 1, 2022 to December 31, 2023 | 282,000 | |||
| January 1, 2023 to December 31, 2024 | 273,000 | |||
| Thereafter | 657,000 | |||
| Total lease payments | 3,427,000 | |||
| Less: Interest | (329,000 | ) | ||
| Present value of lease liabilities | $ | 3,098,000 | ||
| 97 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 12. | COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK (Continued) |
Leases (Continued)
Operating lease cost included in occupancy, furniture and equipment expense totaled $756,000, $753,000 and $755,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the consolidated balance sheet. The following financial instruments represent off-balance-sheet credit risk (dollars in thousands):
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Commitments to extend credit: | ||||||||
| Revolving lines of credit secured by 1-4 family residences | $ | 41 | $ | 47 | ||||
| Commercial real estate, construction and land development commitments secured by real estate | 22,508 | 21,185 | ||||||
| Other unused commitments, principally commercial loans | 17,775 | 13,044 | ||||||
| $ | 40,324 | $ | 34,276 | |||||
| Standby letters of credit | $ | 300 | $ | 361 | ||||
At inception, real estate loan commitments are generally secured by property with a loan to value ratio of 55% to 75%. In addition, the majority of the Company’s commitments have variable rates.
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each client’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, equipment and deeds of trust on real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the performance or financial obligation of a client to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients.
Significant Concentrations of Credit Risk
The Company grants real estate mortgage, real estate construction, commercial, agricultural and consumer loans to clients throughout Northern California.
| 98 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 12. | COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK (Continued) |
Significant Concentrations of Credit Risk (Continued)
In management’s judgment, a concentration exists in real estate-related loans which represented approximately 81% of the Company’s loan portfolio at December 31, 2019 and 87% at December 31, 2018. A continued substantial decline in the economy in general, or a continued decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on collectability of these loans. However, personal and business income represents the primary source of repayment for a majority of these loans.
Correspondent Banking Agreements
The Company maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. The Company had $6,438,000 in uninsured deposits at December 31, 2019. The Company had $9,175,000 in uninsured deposits at December 31, 2018.
Contingencies
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company.
| 99 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 13. | SHAREHOLDERS’ EQUITY |
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows (dollars and shares in thousands, except per share data):
| Weighted | ||||||||||||
| Average | ||||||||||||
| Number of | ||||||||||||
| Net | Shares | Per-Share | ||||||||||
| For the Year Ended | Income | Outstanding | Amount | |||||||||
| December 31, 2019 | ||||||||||||
| Basic earnings per share | $ | 5,500 | 5,847 | $ | 0.94 | |||||||
| Effect of dilutive stock-based compensation | — | 22 | ||||||||||
| Diluted earnings per share | $ | 5,500 | 5,869 | $ | 0.94 | |||||||
| December 31, 2018 | ||||||||||||
| Basic earnings per share | $ | 4,900 | 5,871 | $ | 0.83 | |||||||
| Effect of dilutive stock-based compensation | — | 38 | ||||||||||
| Diluted earnings per share | $ | 4,900 | 5,909 | $ | 0.83 | |||||||
| December 31, 2017 | ||||||||||||
| Basic earnings per share | $ | 3,198 | 6,349 | $ | 0.50 | |||||||
| Effect of dilutive stock-based compensation | — | 78 | ||||||||||
| Diluted earnings per share | $ | 3,198 | 6,427 | $ | 0.50 | |||||||
No shares were antidilutive for the year ended December 31, 2019 or for the year ended December 31, 2018. Stock options for 34,736 shares of common stock were not considered in computing diluted earnings per common share for the year ended December 31, 2017, because they were antidilutive.
Stock Based Compensation
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. At December 31, 2019, the total number of authorized shares that are available for issuance under the 2010 Plan is 1,269,229. 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. The 2010 Plan, under which equity incentives may be granted to employees and directors under incentive and nonstatutory agreements, requires that the option price may not be less than the fair value of the stock at the date the option is granted. The option awards under the 2010 Plan expire on dates determined by the Board of Directors, but not later than ten years from the date of award.
| 100 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 13. | SHAREHOLDERS’ EQUITY (Continued) |
Stock Based Compensation (Continued)
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 2010 Plan are exercisable until their expiration. The 2010 Plan does not provide for the settlement of awards in cash and new shares are issued upon exercise of an option.
There were no options granted in 2017, 2018 or 2019.
A summary of the outstanding and nonvested stock option activity for the year ended December 31, 2019 is as follows:
| Outstanding | Nonvested | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Grant Date | |||||||||||||||
| Price | Fair Value | |||||||||||||||
| Shares | Per Share | Shares | Per Share | |||||||||||||
| Balance, January 1, 2019 | 41,098 | $ | 8.71 | 7,136 | $ | 2.94 | ||||||||||
| Options granted | — | $ | — | — | $ | — | ||||||||||
| Options vested | — | $ | — | (4,913 | ) | $ | 3.01 | |||||||||
| Options exercised | (11,140 | ) | $ | 8.50 | — | $ | — | |||||||||
| Options expired or canceled | — | $ | — | — | $ | — | ||||||||||
| Balance, December 31, 2019 | 29,958 | $ | 8.79 | 2,223 | $ | 3.24 | ||||||||||
A summary of options as of December 31, 2019 is as follows:
| Nonvested: | ||||
| Weighted average exercise price of nonvested stock options | $ | 9.56 | ||
| Aggregate intrinsic value of nonvested stock options | $ | 11,804 | ||
| Weighted average remaining contractual term in years of nonvested stock options | 5.39 | |||
| Vested: | ||||
| Number of vested stock options | 27,735 | |||
| Number of options expected to vest | 2,223 | |||
| Weighted average exercise price per share | $ | 8.73 | ||
| Aggregate intrinsic value | $ | 170,293 | ||
| Weighted average remaining contractual term in years | 4.32 |
| 101 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 13. | SHAREHOLDERS’ EQUITY (Continued) |
Stock Based Compensation (Continued)
| Number of | Weighted | Number of | ||||||||||
| Options | Average | Options | ||||||||||
| Outstanding | Remaining | Exercisable | ||||||||||
| December 31, | Contractual | December 31, | ||||||||||
| Range of Exercise Prices | 2019 | Life | 2019 | |||||||||
| $7.07- $8.73 | 5,402 | 2.38 years | 5,402 | |||||||||
| $8.74- $9.56 | 24,556 | 4.85 years | 22,333 | |||||||||
| 29,958 | 27,735 | |||||||||||
Restricted Stock
Restricted stock awards are grants of shares of the Company’s common stock that are subject to forfeiture until specific conditions or goals are met. Conditions may be based on continuing employment or service and/or achieving specified performance goals. During the period of restriction, Plan participants holding restricted share awards have voting and cash dividend rights. The restrictions lapse in accordance with a schedule or with other conditions determined by the Board of Directors as reflected in each award agreement. Upon the vesting of each restricted stock award, the Company issues the associated common shares from its inventory of authorized common shares. All outstanding awards under the Plan immediately vest in the event of a change of control of the Company. The shares associated with any awards that fail to vest become available for re-issuance under the Plan. The following is a summary of stock-based compensation information as of or for the years ended December 31, 2019, 2018 and 2017:
There were 33,968 shares of restricted stock awarded during 2019. Of the 33,968 restricted common shares, 11,076 will vest one year from the date of the award, 18,394 will vest 33% per year from the date of the award, and 4,498 will vest 20% per year from the date of the award. The weighted average contractual term over which the restricted stock will vest is 2.62 years. There were 22,514 shares of restricted stock awarded during 2018. Of the 22,514 restricted common shares, 8,535 will vest one year from the date of the award, 11,599 will vest 33% per year from the date of the award, and 2,380 will vest 20% per year from the date of the award. The weighted average contractual term over which the restricted stock will vest is 2.45 years.
| 102 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 13. | SHAREHOLDERS’ EQUITY (Continued) |
Restricted Stock (Continued)
| Weighted | ||||||||
| Average | ||||||||
| Grant Date | ||||||||
| Restricted Stock | Shares | Fair Value | ||||||
| Nonvested at January 1, 2019 | 32,528 | $ | 14.60 | |||||
| Awarded | 33,968 | $ | 13.67 | |||||
| Vested | (17,867 | ) | $ | 14.60 | ||||
| Cancelled | (4,658 | ) | $ | 13.91 | ||||
| Nonvested at December 31, 2019 | 43,971 | $ | 13.95 | |||||
The shares awarded to employees and directors under the restricted stock agreements vest on 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. New shares are issued upon vesting of the restricted common stock.
| 2019 | 2018 | 2017 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Total intrinsic value of options exercised | $ | 60 | $ | 137 | $ | 235 | ||||||
| Aggregate cash received for option exercises | $ | 95 | $ | 189 | $ | 351 | ||||||
| Total fair value of options vested | $ | 15 | $ | 14 | $ | 57 | ||||||
| Total compensation cost, options and restricted stock | $ | 338 | $ | 227 | $ | 273 | ||||||
| Tax benefit recognized | $ | 88 | $ | 53 | $ | 99 | ||||||
| Net compensation cost, options and restricted stock | $ | 250 | $ | 174 | $ | 174 | ||||||
| Total compensation cost for nonvested option awards not yet recognized | $ | 3 | $ | 17 | $ | 47 | ||||||
| Weighted average years for compensation cost for nonvested options to be recognized | 0.3 | 1.0 | 1.0 | |||||||||
| Total compensation cost for restricted stock not yet recognized | $ | 394 | $ | 318 | $ | 284 | ||||||
| Weighted average years for compensation cost for restricted stock to be recognized | 0.8 | 0.8 | 1.1 | |||||||||
The intrinsic value used for stock options and restricted stock awards was derived from the market price of the Company’s common stock of $14.87 as of December 31, 2019.
Other Equity Awards
There were no stock appreciation rights, restricted performance stock, unrestricted Company stock, or performance units awarded during 2019 or 2018 or outstanding at December 31, 2019 or December 31, 2018.
Stock Repurchase Program
On January 24, 2018, the Company approved and authorized a stock repurchase program which authorized the repurchase during 2018 of up to 5% of the outstanding shares of the Company’s common stock. During 2018, the Company repurchased 308,618 shares of its common stock at an average price of $15.52 per share. The Company did not repurchase shares of its common stock during 2019.
| 103 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 14. | REGULATORY MATTERS |
Dividends
Upon declaration by the Board of Directors of the Company, all shareholders of record will be entitled to receive dividends. In 2018 and 2017, the Company declared cash dividends in the amount of $0.05 per common share for each quarter, totaling $0.20 per common share for the years ended December 31, 2018 and 2017. The Company continued declaring cash dividends in the amount of $0.05 per common share for the first two quarters of 2019 and then increased it to $0.07 per common share for the final two quarters of the year, totaling $0.24 per share for the year ended December 31, 2019. There is no assurance, however, that any dividends will be paid in the future since they are subject to regulatory restrictions, and dependent upon earnings, financial condition and capital requirements of the Company and its subsidiaries.
As a California corporation, the Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law (the “Corporation Law”). The Corporation Law provides that neither a corporation nor any of its subsidiaries shall make a distribution to the corporation’s shareholders unless the board of directors has determined in good faith either of the following: (1) the amount of retained earnings of the corporation immediately prior to the distribution equals or exceeds the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount; or (2) immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount. The good faith determination of the board of directors may be based upon (1) financial statements prepared on the basis of reasonable accounting practices and principles, (2) a fair valuation, or (3) any other method reasonable under the circumstances; provided, that a distribution may not be made if the corporation or subsidiary making the distribution is, or is likely to be, unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature. The term “preferential dividends arrears amount” means the amount, if any, of cumulative dividends in arrears on all shares having a preference with respect to payment of dividends over the class or series to which the applicable distribution is being made, provided that if the articles of incorporation provide that a distribution can be made without regard to preferential dividends arrears amount, then the preferential dividends arrears amount shall be zero. The term “preferential rights amount” means the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights, including accrued but unpaid dividends, of other shareholders upon dissolution that are superior to the rights of the shareholders receiving the distribution, provided that if the articles of incorporation provide that a distribution can be made without regard to any preferential rights, then the preferential rights amount shall be zero.
| 104 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 14. | REGULATORY MATTERS (Continued) |
Dividends (Continued)
In addition, the California Financial Code restricts the total dividend payment of any state banking corporation in any calendar year to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. In addition, subject to prior regulatory approval, any state banking corporation may request an exception to this restriction.
Regulatory Capital
The Company and ARB are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the FDIC. Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and American River Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of December 31, 2019 and 2018, the most recent regulatory notification categorized American River Bank as well capitalized under the regulatory framework for prompt corrective action plan. There are no conditions or events since that notification that management believes have changed the Bank’s categories.
Effective January 1, 2015, bank holding companies with consolidated assets of $1 Billion or more ($3 Billion or more effective August 30, 2018) and banks like American River Bank must comply with new minimum capital ratio requirements to be phased-in between January 1, 2015 and January 1, 2019, which would consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.
In addition, a “capital conservation buffer,” requires maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer will increase the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases.
To be categorized as well capitalized, ARB must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.
Management believes that the Company and ARB met all their capital adequacy requirements as of December 31, 2019 and 2018.
| 105 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 14. | REGULATORY MATTERS (Continued) |
Regulatory Capital (Continued)
| December 31, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Leverage Ratio | ||||||||||||||||
| American River Bankshares and Subsidiaries | $ | 64,796 | 9.2 | % | $ | 60,276 | 8.9 | % | ||||||||
| American River Bank | $ | 65,467 | 9.3 | % | $ | 60,704 | 9.0 | % | ||||||||
| Minimum requirement for “Well-Capitalized” institution | $ | 35,366 | 5.0 | % | $ | 33,700 | 5.0 | % | ||||||||
| Minimum regulatory requirement* | $ | 45,975 | 6.5 | % | $ | 39,597 | 5.9 | % | ||||||||
| Common Equity Tier 1 Risk-Based Capital Ratio | ||||||||||||||||
| American River Bank | $ | 65,467 | 14.9 | % | $ | 60,704 | 16.2 | % | ||||||||
| Minimum requirement for “Well-Capitalized” institution | $ | 28,499 | 6.5 | % | $ | 24,307 | 6.5 | % | ||||||||
| Minimum regulatory requirement* | $ | 30,691 | 7.0 | % | $ | 23,839 | 6.4 | % | ||||||||
| Tier 1 Risk-Based Capital Ratio | ||||||||||||||||
| American River Bankshares and Subsidiaries | $ | 64,796 | 14.8 | % | $ | 60,276 | 16.1 | % | ||||||||
| American River Bank | $ | 65,467 | 14.9 | % | $ | 60,704 | 16.2 | % | ||||||||
| Minimum requirement for “Well-Capitalized” institution | $ | 35,076 | 8.0 | % | $ | 29,916 | 8.0 | % | ||||||||
| Minimum regulatory requirement* | $ | 37,268 | 8.5 | % | $ | 29,449 | 7.9 | % | ||||||||
| Total Risk-Based Capital Ratio | ||||||||||||||||
| American River Bankshares and Subsidiaries | $ | 69,934 | 15.9 | % | $ | 64,668 | 17.3 | % | ||||||||
| American River Bank | $ | 70,605 | 16.1 | % | $ | 65,096 | 17.4 | % | ||||||||
| Minimum requirement for “Well-Capitalized” institution | $ | 43,845 | 10.0 | % | $ | 37,395 | 10.0 | % | ||||||||
| Minimum regulatory requirement* | $ | 46,037 | 10.5 | % | $ | 36,928 | 9.9 | % | ||||||||
| * | Ratio for regulatory requirement includes the capital conservation buffer of 2.50% as of December 31, 2019 and 1.875% as of December 31, 2018. |
| 106 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 15. | OTHER NONINTEREST INCOME AND EXPENSE |
Other noninterest income consisted of the following (dollars in thousands):
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Merchant fee income | $ | 391 | $ | 422 | $ | 411 | ||||||
| Increase in cash surrender value of life insurance policies (Note 16) | 334 | 307 | 317 | |||||||||
| Other | 290 | 277 | 242 | |||||||||
| $ | 1,015 | $ | 1,006 | $ | 970 | |||||||
Other noninterest expense consisted of the following (dollars in thousands):
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Professional fees | $ | 1,226 | $ | 1,158 | $ | 1,140 | ||||||
| Outsourced item processing | 322 | 315 | 319 | |||||||||
| Directors’ expense | 518 | 514 | 427 | |||||||||
| Telephone and postage | 328 | 409 | 360 | |||||||||
| Stationery and supplies | 138 | 140 | 135 | |||||||||
| Advertising and promotion | 599 | 561 | 228 | |||||||||
| Other operating expenses | 574 | 307 | 557 | |||||||||
| $ | 3,705 | $ | 3,404 | $ | 3,166 | |||||||
| 16. | EMPLOYEE BENEFIT PLANS |
American River Bankshares 401(k) Plan
The American River Bankshares 401(k) Plan has been in place since January 1, 1993 and is available to all employees. Under the plan, the Company will match 100% of each participant’s contribution up to 3% of annual compensation plus 50% of the next 2% of annual compensation. Employer Safe Harbor matching contributions are 100% vested upon entering the plan. The Company’s contributions totaled $264,000, $230,000 and $196,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
Employee Stock Purchase Plan
The Company contracts with an administrator for an Employee Stock Purchase Plan which allows employees to purchase the Company’s stock at fair market value as of the date of purchase. The Company bears all costs of administering the Plan, including broker’s fees, commissions, postage and other costs actually incurred.
| 107 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 16. | EMPLOYEE BENEFIT PLANS (Continued) |
American River Bankshares Deferred Compensation Plan
The Company has established a Deferred Compensation Plan for certain members of the management team and a Deferred Fee Agreement for Non-Employee Directors for the purpose of providing the opportunity for participants to defer compensation. Participants of the management team, who are selected by a committee designated by the Board of Directors, may elect to defer annually a minimum of $5,000 or a maximum of eighty percent of their base salary and all of their cash bonus. Directors may also elect to defer up to one hundred percent of their monthly fees. The Company bears all administration costs and accrues interest on the participants’ deferred balances at a rate based on U.S. Government Treasury rates plus 4.0%. This rate was 6.51% and 6.20% for 2019 and 2018, respectively. Deferred compensation, including interest earned, totaled $3,274,000 and $3,211,000 at December 31, 2019 and 2018, respectively. The expense recognized under this plan totaled $210,000, $199,000 and $183,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
Salary Continuation Plan
The Company has agreements to provide certain current executives, or their designated beneficiaries, with annual benefits for up to 15 years after retirement or death. These benefits are substantially equivalent to those available under life insurance policies purchased by the Company on the lives of the executives. The Company accrues for these future benefits from the effective date of the agreements until the executives’ expected final payment dates in a systematic and rational manner. As of December 31, 2019 and 2018, the Company had accrued $1,391,000 and $1,402,000, respectively, for potential benefits payable. This payable approximates the then present value of the benefits expected to be provided at retirement and is included in accrued interest payable and other liabilities on the consolidated balance sheet. The expense recognized under this plan totaled $114,000, $85,000 and $234,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
In connection with these current and former plans, the Company invested in single premium life insurance policies with cash surrender values totaling $15,763,000 and $15,429,000 at December 31, 2019 and 2018, respectively. Tax-exempt income on these policies, net of expense, totaled approximately $334,000, $307,000 and $317,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
| 108 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 17. | RELATED PARTY TRANSACTIONS |
During the normal course of business, the Company enters into loan and deposit transactions with related parties, including Directors and affiliates. The following is a summary of the aggregate loan activity involving related party borrowers during 2019 (dollars in thousands):
| Balance, January 1, 2019 | $ | 676 | ||
| Disbursements | 4,275 | |||
| Amounts repaid | (120 | ) | ||
| Balance, December 31, 2019 | $ | 4,831 |
There are no undisbursed commitments to related parties as of December 31, 2019.
The Company also leases one of its branch facilities from a current member of the Company’s Board of Directors. Rental payments to the Director totaled $76,000 for each of the years ended December 31, 2019, 2018 and 2017, respectively.
| 109 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 18. | PARENT ONLY CONDENSED FINANCIAL STATEMENTS |
CONDENSED BALANCE SHEETS
December 31, 2019 and 2018
(Dollars in thousands)
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 97 | $ | 261 | ||||
| Investment in subsidiaries | 83,580 | 75,149 | ||||||
| Other assets | 186 | 172 | ||||||
| $ | 83,863 | $ | 75,582 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Liabilities: | ||||||||
| Other liabilities | $ | 954 | $ | 861 | ||||
| Total liabilities | 954 | 861 | ||||||
| Shareholders’ equity: | ||||||||
| Common stock | 30,536 | 30,103 | ||||||
| Retained earnings | 50,581 | 46,494 | ||||||
| Accumulated other comprehensive income (loss), net of taxes | 1,792 | (1,876 | ) | |||||
| Total shareholders’ equity | 82,909 | 74,721 | ||||||
| $ | 83,863 | $ | 75,582 | |||||
| 110 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 18. | PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued) |
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands)
| 2019 | 2018 | 2017 | ||||||||||
| Income: | ||||||||||||
| Dividends declared by subsidiaries – eliminated in consolidation | $ | 1,505 | $ | 4,845 | $ | 11,118 | ||||||
| Total income | 1,505 | 4,845 | 11,118 | |||||||||
| Expenses: | ||||||||||||
| Professional fees | 200 | 155 | 142 | |||||||||
| Directors’ expense | 374 | 361 | 282 | |||||||||
| Other expenses | 231 | 218 | 226 | |||||||||
| Total expenses | 805 | 734 | 650 | |||||||||
| Income before equity in undistributed income of subsidiaries | 700 | 4,111 | 10,468 | |||||||||
| Equity in undistributed (dividends in excess of) income of subsidiaries | 4,554 | 562 | (7,554 | ) | ||||||||
| Income before income taxes | 5,254 | 4,673 | 2,914 | |||||||||
| Income tax benefit | 246 | 227 | 284 | |||||||||
| Net income | $ | 5,500 | $ | 4,900 | $ | 3,198 | ||||||
| 111 |
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| 18. | PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued) |
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands)
| 2019 | 2018 | 2017 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 5,500 | $ | 4,900 | $ | 3,198 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| (Equity in undistributed) dividends in excess of income of subsidiaries | (4,554 | ) | (562 | ) | 7,554 | |||||||
| Equity-based compensation expense | 338 | 227 | 273 | |||||||||
| Increase in other assets | (223 | ) | (10 | ) | (95 | ) | ||||||
| Increase (decrease) in other liabilities | 93 | (127 | ) | (1 | ) | |||||||
| Net cash provided by operating activities | 1,154 | 4,428 | 10,929 | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from exercised options | 95 | 189 | 351 | |||||||||
| Cash dividends paid | (1,413 | ) | (1,188 | ) | (1,293 | ) | ||||||
| Cash paid to repurchase common stock | — | (4,773 | ) | (8,641 | ) | |||||||
| Net cash used in financing activities | (1,318 | ) | (5,772 | ) | (9,583 | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | (164 | ) | (1,344 | ) | 1,346 | |||||||
| Cash and cash equivalents at beginning of year | 261 | 1,605 | 259 | |||||||||
| Cash and cash equivalents at end of year | $ | 97 | $ | 261 | $ | 1,605 | ||||||
| 112 |
Selected Quarterly Information (Unaudited)
| (In thousands, except per share and price range of common stock) | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| 2019 | ||||||||||||||||
| Interest income | $ | 6,132 | $ | 6,276 | $ | 6,555 | $ | 6,707 | ||||||||
| Net interest income | 5,549 | 5,628 | 5,928 | 6,104 | ||||||||||||
| Provision for loan and lease losses | 180 | 180 | 120 | 180 | ||||||||||||
| Noninterest income | 411 | 421 | 417 | 439 | ||||||||||||
| Noninterest expense | 4,260 | 4,148 | 4,093 | 4,345 | ||||||||||||
| Income before taxes | 1,520 | 1,721 | 2,132 | 2,018 | ||||||||||||
| Net income | 1,146 | 1,276 | 1,571 | 1,507 | ||||||||||||
| Basic earnings per share | $ | 0.20 | $ | 0.22 | $ | 0.27 | $ | 0.26 | ||||||||
| Diluted earnings per share | 0.20 | 0.22 | 0.27 | 0.26 | ||||||||||||
| Cash dividends per share | 0.05 | 0.05 | 0.07 | 0.07 | ||||||||||||
| Price range, common stock | $12.01-15.00 | $11.66-13.50 | $12.04-13.98 | $13.09-15.99 | ||||||||||||
| 2018 | ||||||||||||||||
| Interest income | $ | 5,066 | $ | 5,498 | $ | 5,666 | $ | 6,012 | ||||||||
| Net interest income | 4,737 | 5,120 | 5,257 | 5,532 | ||||||||||||
| Provision for loan and lease losses | — | — | 50 | 125 | ||||||||||||
| Noninterest income | 372 | 380 | 377 | 384 | ||||||||||||
| Noninterest expense | 3,350 | 3,828 | 4,003 | 4,329 | ||||||||||||
| Income before taxes | 1,759 | 1,672 | 1,581 | 1,462 | ||||||||||||
| Net income | 1,353 | 1,269 | 1,153 | 1,125 | ||||||||||||
| Basic earnings per share | $ | 0.23 | $ | 0.22 | $ | 0.20 | $ | 0.19 | ||||||||
| Diluted earnings per share | 0.22 | 0.22 | 0.20 | 0.19 | ||||||||||||
| Cash dividends per share | 0.05 | 0.05 | 0.05 | 0.05 | ||||||||||||
| Price range, common stock | $12.21-16.48 | $14.95-17.50 | $14.90-17.48 | $10.50-15.65 | ||||||||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There have been no disagreements with such independent registered public accountants during the last two fiscal years ended December 31, 2019, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
Item 9A. Controls and Procedures.
Effectiveness of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2019. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
During the quarter ended December 31, 2019, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.
| 113 |
Report of Management on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended).
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, presented in conformity with accounting principles generally accepted in the United States of America. In making this assessment, management used the criteria applicable to the Company as set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control—Integrated Framework. Based upon such assessment, management believes that, as of December 31, 2019, the Company’s internal control over financial reporting is effective based upon those criteria.
The Company’s independent registered public accounting firm that audited the Company’s financial statements included in this Form 10-K has issued an attestation report on the Company’s internal control over financial reporting.
| /s/ DAVID E. RITCHIE, JR. | /s/ MITCHELL A. DERENZO | |
| David E. Ritchie, Jr. | Mitchell A. Derenzo | |
| President and Chief Executive Officer | Executive Vice President and | |
| Chief Financial Officer |
| 114 |
None.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 of Form 10-K is incorporated by reference to the information contained in the Company’s Proxy Statement for the 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
Item 11. Executive Compensation.
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the Company’s Proxy Statement for the 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the Company’s Proxy Statement for the 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the Company’s Proxy Statement for the 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in the Company’s Proxy Statement for the 2020 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
| 115 |
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits.
| Exhibit Number | Document Description |
| (3.2) | Bylaws, as amended and restated, incorporated by reference from Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on June 21, 2019. |
| (4.2) | Description of Common Stock registered pursuant to the Securities Exchange Act of 1934, as amended.** |
| *(10.4) | Registrant’s Deferred Fee Plan, incorporated by reference from Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 3, 2012. |
| 116 |
| 117 |
| 118 |
| (23.1) | Consent of Crowe Horwath LLP.** |
| (31.1) | Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** |
| (31.2) | Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** |
| (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.** |
| 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** | |
*Denotes management contracts, compensatory plans or arrangements. **Filed herewith. |
Not applicable.
| 119 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AMERICAN RIVER BANKSHARES | |
February 21, 2020 |
By: /s/ DAVID E. RITCHIE, JR. |
| David E. Ritchie, Jr. | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
February 21, 2020 |
By: /s/ MITCHELL A. DERENZO |
| Mitchell A. Derenzo | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ NICOLAS C. ANDERSON | Director | 2/21/20 | ||
| Nicolas C. Anderson | ||||
| /s/ KIMBERLY A.BOX | Director | 2/21/20 | ||
| Kimberly A. Box | ||||
| /s/ CHARLES D. FITE | Director, Chairman | 2/21/20 | ||
| Charles D. Fite | ||||
/s/ JEFFERY OWENSBY |
Director | 2/21/20 | ||
Jeffery Owensby |
||||
/s/ JULIE A.RANEY |
Director | 2/21/20 | ||
Jeffery Owensby |
||||
| /s/ DAVID E. RITCHIE, JR. | Director, Chief Executive Officer | 2/21/20 | ||
| David E. Ritchie, Jr. | (Principal Executive Officer) | |||
| /s/ WILLIAM A. ROBOTHAM | Director, Vice Chairman | 2/21/20 | ||
| William A. Robotham | ||||
| /s/ PHILIP A. WRIGHT | Director | 2/21/20 | ||
| Philip A. Wright | ||||
| /s/ MITCHELL A. DERENZO | Chief Financial Officer | 2/21/20 | ||
| Mitchell A. Derenzo | (Principal Financial and Accounting Officer) |
| 120 |