UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| For the quarterly period ended | |
or
| For the transition period from | to |
Commission File Number:
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
| (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 |
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 | ||
| Non-accelerated filer o | Smaller Reporting Company
| |
| Emerging Growth Company
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
No par value Common Stock – shares outstanding at November 5, 2020
AMERICAN RIVER BANKSHARES
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2020
| Part I. | Page | |
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 50 |
| Item 4. | Controls and Procedures | 51 |
| Part II. | ||
| Item 1. | Legal Proceedings | 52 |
| Item 1A. | Risk Factors | 52 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 52 |
| Item 3. | Defaults Upon Senior Securities | 52 |
| Item 4. | Mine Safety Disclosures | 52 |
| Item 5. | Other Information | 52 |
| Item 6. | Exhibits | 53 |
| Signatures | 54 | |
| Exhibits | ||
| 31.1 | Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 55 |
| 31.2 | Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 56 |
| 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 | 57 |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation | |
| 101.DEF | XBRL Taxonomy Extension Definition | |
| 101.LAB | XBRL Taxonomy Extension Label | |
| 101.PRE | XBRL Taxonomy Extension Presentation | |
| 2 |
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN RIVER BANKSHARES
CONSOLIDATED BALANCE SHEET
(Unaudited)
| (dollars in thousands) | September 30, 2020 | December 31, 2019 | ||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing deposits in banks | ||||||||
| Total cash and cash equivalents | ||||||||
| Investment securities: | ||||||||
| Available-for-sale, at fair value | ||||||||
| Held-to-maturity, at amortized cost; fair value of $ | ||||||||
| Loans, less allowance for loan losses of $ | ||||||||
| Premises and equipment, net | ||||||||
| Federal Home Loan Bank stock | ||||||||
| Goodwill and other intangible assets | ||||||||
| Other real estate owned | ||||||||
| Bank owned life insurance | ||||||||
| Accrued interest receivable and other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Deposits: | ||||||||
| Noninterest bearing | $ | $ | ||||||
| Interest-bearing | ||||||||
| Total deposits | ||||||||
| Short-term borrowings | ||||||||
| Long-term borrowings | ||||||||
| Accrued interest payable and other liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, par value; shares authorized; outstanding | ||||||||
| Common stock, par value; shares authorized; issued and outstanding – shares at September 30, 2020 and shares at December 31, 2019 | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income, net of taxes | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See Notes to Unaudited Consolidated Financial Statements
| 3 |
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
| (dollars in thousands, except per share data) | ||||||||||||||||
| For the periods ended September 30, | Three months | Nine months | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Interest income: | ||||||||||||||||
| Interest and fees on loans: | ||||||||||||||||
| Taxable | $ | $ | $ | $ | ||||||||||||
| Exempt from Federal income taxes | ||||||||||||||||
| Interest on Federal funds sold | ||||||||||||||||
| Interest on deposits in banks | ||||||||||||||||
| Interest and dividends on investment securities: | ||||||||||||||||
| Taxable | ||||||||||||||||
| Exempt from Federal income taxes | ||||||||||||||||
| Total interest income | ||||||||||||||||
| Interest expense: | ||||||||||||||||
| Interest on deposits | ||||||||||||||||
| Interest on borrowings | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest income | ||||||||||||||||
| Provision for loan losses | ||||||||||||||||
| Net interest income after provision for loan losses | ||||||||||||||||
| Noninterest income: | ||||||||||||||||
| Service charges on deposit accounts | ||||||||||||||||
| Gain on sale or call of securities | — | 9 | 38 | 74 | ||||||||||||
| Other noninterest income | ||||||||||||||||
| Total noninterest income | ||||||||||||||||
| Noninterest expense: | ||||||||||||||||
| Salaries and employee benefits | ||||||||||||||||
| Occupancy | ||||||||||||||||
| Furniture and equipment | ||||||||||||||||
| Federal Deposit Insurance Corporation assessments | ( | ) | ||||||||||||||
| Expenses related to other real estate owned | ||||||||||||||||
| Other expense | ||||||||||||||||
| Total noninterest expense | ||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
See notes to Unaudited Consolidated Financial Statements
| 4 |
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
| (dollars in thousands) | ||||||||||||||||
| For the periods ended September 30, | Three months | Nine months | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| (Decrease) increase in net unrealized gains on investment securities | ( | ) | ||||||||||||||
| Deferred tax benefit (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| (Decrease) increase in net unrealized gains on investment securities, net of tax | ( | ) | ||||||||||||||
| Reclassification adjustment for realized gains included in net income | ( | ) | ( | ) | ( | ) | ||||||||||
| Tax effect | ||||||||||||||||
| Realized gains, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other comprehensive (loss) income | ( | ) | ||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
See Notes to Unaudited Consolidated Financial Statements
| 5 |
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||
| (dollars in thousands, except per share data) | Other | Total | ||||||||||||||||||
| Common Stock | Retained | Comprehensive | Shareholders’ | |||||||||||||||||
| Shares | Amount | Earnings | Income (Loss) | Equity | ||||||||||||||||
| Balance, January 1, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||
| Cash dividends ($0.17 per share) | ( | ) | ( | ) | ||||||||||||||||
| Net restricted stock award activity and related compensation expense | ||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||
| Stock option compensation expense | ||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | $ | ||||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||
| Cash dividends ($0.21 per share) | ( | ) | ( | ) | ||||||||||||||||
| Net restricted stock award activity and related compensation expense | ||||||||||||||||||||
| Stock option compensation expense | ||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements
| 6 |
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||
| (dollars in thousands, except per share data) | Other | Total | ||||||||||||||||||
| Common Stock | Retained | Comprehensive | Shareholders’ | |||||||||||||||||
| Shares | Amount | Earnings | Income (Loss) | Equity | ||||||||||||||||
| Balance, July 1, 2019 | $ | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||
| Cash dividends ($0.07 per share) | ( | ) | ( | ) | ||||||||||||||||
| Net restricted stock award activity and related compensation expense | ||||||||||||||||||||
| Stock option compensation expense | ||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | $ | ||||||||||||||||
| Balance, July 1, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ) | ( | ) | ||||||||||||||||
| Cash dividends ($0.07 per share) | ( | ) | ( | ) | ||||||||||||||||
| Net restricted stock award activity and related compensation expense | ||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements
| 7 |
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT
OF CASH FLOWS
(Unaudited)
| (dollars in thousands) | ||||||||
| For the nine months ended September 30, | 2020 | 2019 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Provision for loan losses | ||||||||
| Increase (decrease) in deferred loan origination fees and costs, net | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| Gain on sale of investment securities, net | (38 | ) | (74 | ) | ||||
| Amortization of investment security premiums and discounts, net | ||||||||
| Increase in cash surrender values of life insurance policies | ( | ) | ( | ) | ||||
| Stock based compensation expense | ||||||||
| (Increase) decrease in accrued interest receivable and other assets | ( | ) | ||||||
| (Decrease) increase in accrued interest payable and other liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from the sale of available-for-sale investment securities | ||||||||
| Proceeds from matured available-for-sale investment securities | ||||||||
| Purchases of available-for-sale investment securities | ( | ) | ( | ) | ||||
| Proceeds from principal repayments for available-for-sale investment securities | ||||||||
| Proceeds from principal repayments for held-to-maturity investment securities | ||||||||
| Net increase in loans | ( | ) | ( | ) | ||||
| Purchases of loans | ( | ) | ( | ) | ||||
| Net decrease (increase) in FHLB stock | ( | ) | ||||||
| Purchases of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
(Continued)
| 8 |
AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT
OF CASH FLOWS (Continued)
(Unaudited)
| (dollars in thousands) | ||||||||
| For the nine months ended September 30, | 2020 | 2019 | ||||||
| Cash flows from financing activities: | ||||||||
| Net increase in demand, interest-bearing and savings deposits | $ | $ | ||||||
| Net decrease in time deposits | ( | ) | ( | ) | ||||
| Net increase in short-term borrowings | ||||||||
| Net increase to long-term borrowings | ||||||||
| Proceeds from stock options exercised | ||||||||
| Cash dividends paid | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of year | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental noncash disclosures: | ||||||||
| Right of use asset and obligation recorded upon adoption of ASU 2016-02 | $ | $ | ||||||
| Lease liabilities arising from obtaining right of use assets | $ | $ | ||||||
| Cash paid during the year for: | ||||||||
| Interest expense | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See Notes to Unaudited Consolidated Financial Statements
| 9 |
AMERICAN RIVER BANKSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of American River Bankshares (the “Company”) at September 30, 2020 and December 31, 2019, the results of its operations and statement of comprehensive income for the three-month and nine-month periods ended September 30, 2020 and 2019, its cash flows for the nine-month periods ended September 30, 2020 and 2019 and its statement of changes in shareholders’ equity for the nine-month periods ended September 30, 2020 and 2019 in conformity with accounting principles generally accepted in the United States of America.
Certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2019. The results of operations for the three-month and nine-month periods ended September 30, 2020 may not necessarily be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.
Management has determined that since all of the banking products and services offered by the Company are available in each branch office of American River Bank, all branch offices are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate all of the branch offices and report them as a single operating segment. No client accounts for more than ten percent (10%) of revenues for the Company or American River Bank.
Equity Plans
On March 18, 2020, the Board of Directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan was approved by the Company’s shareholders on May 21, 2020. At September 30, 2020 there were restricted shares outstanding, zero stock options outstanding, and the total number of authorized shares that remain available for issuance under the 2020 Plan, including the 19,634 restricted shares that have not yet vested, was 250,000. The 2020 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. Under the 2020 Plan, the awards may be granted to employees and directors under incentive and nonqualified option agreements, restricted stock agreements, and other award agreements. The unvested restricted stock under the 2020 Plan have dividend and voting rights. The 2020 Plan requires that the option price may not be less than the fair market value of the stock at the date the option is awarded. The option awards expire on dates determined by the Board of Directors, but not later than ten years from the date of award. The vesting period is generally one to five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding option awards are exercisable until their expiration. New shares are issued upon exercise of an option.
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 September 30, 2020 there were stock options and restricted shares outstanding. The 2010 Plan expired by its term on March 17, 2020. Accordingly, outstanding awards under the 2010 Plan are exercisable and will continue to vest until their expiration, but no new awards may be granted under the 2010 Plan. The unvested restricted stock under the 2010 Plan have dividend and voting rights. The 2010 Plan required that the option price may not be less than the fair market value of the stock at the date the option is awarded. The option awards expire on dates determined by the Board of Directors, but not later than ten years from the date of award. All of the stock options previously awarded under the 2010 Plan are fully vested. New shares are issued upon exercise of an option. The initial vesting period for restricted stock issued under the 2010 Plan was generally three to five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors.
| 10 |
The award date fair value of awards is determined by the market price of the Company’s common stock on the date of award and is recognized ratably as compensation expense or director expense over the vesting periods. The shares of common stock awarded pursuant to such agreements vest in increments over one to five years from the date of award. The shares awarded to employees and directors under the restricted stock agreements vest on the applicable vesting dates only to the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated.
Equity Compensation
For the three-month periods ended September 30, 2020 and 2019, the compensation cost recognized for equity compensation was $ and $, respectively, and the recognized tax benefit for equity compensation expense was $ and $, respectively, for the same three-month periods. For the nine-month periods ended September 30, 2020 and 2019, the compensation cost recognized for equity compensation was $ and $, respectively, and the recognized tax benefit for equity compensation expense was $ and $, respectively, for the nine-month periods ended September 30, 2020 and 2019.
At September 30, 2020, there was no unrecognized pre-tax compensation cost related to nonvested stock option awards. At September 30, 2020, the total compensation cost related to restricted stock awards not yet recorded was $. This amount will be recognized over the next years and the weighted average period of recognizing these costs is expected to be years.
Equity Plans Activity
Stock Options
Options | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | ||||||||||||
| Outstanding at January 1, 2020 | $ | years | $ | |||||||||||||
| Awarded | — | — | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Expired, forfeited or cancelled | — | — | ||||||||||||||
| Outstanding at September 30, 2020 | $ | years | $ | |||||||||||||
| Vested at September 30, 2020 | $ | years | $ | |||||||||||||
| Non-vested at September 30, 2020 | $ | — | $ | |||||||||||||
Restricted Stock
There were no shares of restricted stock awarded during the three-month periods ended September 30, 2020 and 2019. There were and shares of restricted stock awarded during the nine-month periods ended September 30, 2020 and 2019, respectively.
| 11 |
There were no restricted share awards that were fully vested during the three-month periods ended September 30, 2020 and 2019. There were restricted share awards that were fully vested during the nine-month period ended September 30, 2020 and restricted share awards that were fully vested during the nine-month period ended September 30, 2019. There were zero restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2020, respectively. There were zero restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2019, respectively. The intrinsic value of nonvested restricted shares at September 30, 2020 was $.
Restricted Stock | Shares | Weighted
Average Award Date Fair Value | ||||||
| Nonvested at January 1, 2020 | $ | |||||||
| Awarded | ||||||||
| Less: Vested | ( | ) | ||||||
| Less: Expired, forfeited or cancelled | ||||||||
| Nonvested at September 30, 2020 | $ | |||||||
Other Equity Awards
There were no stock appreciation rights, restricted performance stock, unrestricted Company stock, or performance units awarded during the three-month or nine-month month periods ended September 30, 2020 or 2019 or outstanding at September 30, 2020 or December 31, 2019.
The
intrinsic value used for stock options and restricted stock awards was derived from the market price of the Company’s common
stock of $
3. COMMITMENTS AND CONTINGENCIES
In the normal
course of business there are outstanding various commitments to extend credit which are not reflected in the financial statements,
including loan commitments of approximately $
Standby letters of credit are commitments issued to guarantee the performance or financial obligation of a client to a third party. These guarantees are issued primarily relating to purchases of inventory, insurance programs, performance obligations to government agencies, or as security for real estate rents by commercial clients and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to clients and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The majority of all such commitments are collateralized. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at September 30, 2020 or December 31, 2019.
Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period ( and shares for the three-month and nine-month periods ended September 30, 2020, and and shares for the three-month and nine-month periods ended September 30, 2019). Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or restricted stock, result in the issuance of common stock. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of stock based awards. There were and , respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2020 and and , respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2019. For the three-month and nine-month periods ended September 30, 2020 and 2019, there were zero stock options that were excluded from the calculation as they were considered antidilutive. Earnings per share is retroactively adjusted for stock dividends and stock splits, if applicable, for all periods presented.
| 12 |
5. INVESTMENT SECURITIES
The amortized cost and estimated fair values of Available-for-Sale and Held-to-Maturity investment securities at September 30, 2020 and December 31, 2019 consisted of the following (dollars in thousands):
Available-for-Sale
| September 30, 2020 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Entities | $ | $ | $ | ( | ) | $ | ||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
| December 31, 2019 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Entities | $ | $ | $ | ( | ) | $ | ||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||
| Corporate bonds | ||||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
Net unrealized gains on available-for-sale investment securities totaling $9,283,000 were recorded, net of $2,744,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at September 30, 2020. There were no sales or realized gains from the sale of available-for-sale investment securities for the three-month period ended September 30, 2020 and for the nine-month period ended September 30, 2020, proceeds and gross realized gains from the sale and call of available-for-sale investment securities totaled $4,229,000 and $38,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2020.
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 loss within shareholders’ equity at December 31, 2019. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities totaled $13,538,000 and $9,000, respectively, for the three-month period ended September 30, 2019 and for the nine-month period ended September 30, 2019, proceeds and gross realized gains from the sale and call of available-for-sale investment securities totaled $43,213,000 and $74,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2019.
| 13 |
Held-to-Maturity
| September 30, 2020 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Entities | $ | $ | $ | $ | ||||||||||||
| December 31, 2019 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Entities | $ | $ | $ | $ | ||||||||||||
There were no sales or transfers of held-to-maturity investment securities for the periods ended September 30, 2020 and September 30, 2019. Investment securities with unrealized losses at September 30, 2020 and December 31, 2019 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):
| September 30, 2020 | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| Available-for-Sale | ||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| U.S. Government Agencies and Sponsored Entities | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| $ | 32,735 | $ | (255 | ) | $ | 35,932 | $ | (490 | ) | $ | 68,667 | $ | (745 | ) | ||||||||||
| December 31, 2019 | Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| Available-for-Sale | ||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| U.S. Government Agencies and Sponsored Entities | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Obligations of states and political subdivisions | ( | ) | ( | ) | ||||||||||||||||||||
| $ | 73,142 | $ | (511 | ) | $ | 38,380 | $ | (663 | ) | $ | 111,522 | $ | (1,174 | ) | ||||||||||
There
were no held-to-maturity investment securities with unrealized losses as of September 30, 2020 or December 31, 2019. At
September 30, 2020, the Company held
At
December 31, 2019, the Company held
| 14 |
The amortized cost and estimated fair values of investment securities at September 30, 2020 by contractual maturity are shown below (dollars in thousands).
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||
| Within one year | $ | $ | ||||||||||||||
| After one year through five years | ||||||||||||||||
| After five years through ten years | ||||||||||||||||
| After ten years | ||||||||||||||||
| Investment securities not due at a single maturity date: | ||||||||||||||||
| U.S. Government Agencies and Sponsored Entities | $ | $ | ||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
6. IMPAIRED AND NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED
At September 30, 2020 and December 31, 2019, the recorded investment in nonperforming loans was zero. Nonperforming loans include all such loans that are either placed on nonaccrual status or are 90 days past due as to principal or interest but still accrue interest because such loans are well-secured and in the process of collection. The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the contractual terms of the original loan agreement.
At September 30, 2020 and December 31, 2019, the recorded investment in other real estate owned (“OREO”) was $846,000. At September 30, 2020 the Company did not own any residential OREO properties nor were there any residential properties in the process of foreclosure. During the first nine months of 2020, the Company did not add any new or sell any of the OREO properties, nor did we decrease the book value on any of the properties. The September 30, 2020 OREO balance of $846,000 consisted of one parcel of land zoned for commercial use. Included in the other asset balance at June 30, 2020 was a repossessed automobile that was acquired in June 2020 with a book value of $19,000. The loan balance at the time of acquisition was $25,000 and was reduced by $6,000 though a charge to the allowance for loan losses. The asset was sold in early July 2020, for no further loss. Included in the other assets balance at December 30, 2019 is a repossessed automobile acquired in December 2019 with a book value of $517,000 that was sold in the first quarter of 2020 for no loss.
Nonperforming assets at September 30, 2020 and December 31, 2019 are summarized as follows:
| (dollars in thousands) | September 30, 2020 | December 31, 2019 | ||||||
| Nonaccrual loans that are current to terms (less than 30 days past due) | $ | — | $ | — | ||||
| Nonaccrual loans that are past due | — | — | ||||||
| Loans past due 90 days and accruing interest | — | — | ||||||
| Other real estate owned | ||||||||
| Other assets | ||||||||
| Total nonperforming assets | $ | $ | ||||||
| Nonperforming loans to total loans | % | % | ||||||
| Total nonperforming assets to total assets | % | % | ||||||
| 15 |
Impaired loans as of and for the periods ended September 30, 2020 and December 31, 2019 are summarized as follows:
| (dollars in thousands) | As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||
Recorded Investment | Unpaid Balance |
Related Allowance |
Recorded Investment | Unpaid Balance |
Related Allowance | |||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||||||
| Real estate-commercial | $ | $ | $ | — | $ | $ | $ | — | ||||||||||||||||
| Real estate-residential | — | — | ||||||||||||||||||||||
| Subtotal | $ | $ | $ | — | $ | $ | $ | — | ||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||
| Real estate-commercial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Real estate-residential | ||||||||||||||||||||||||
| Subtotal | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total: | ||||||||||||||||||||||||
| Real estate-commercial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Real estate-residential | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
The following table presents the average balance related to impaired loans for the periods indicated (dollars in thousands):
| Average Recorded Investments for the three months ended | Average Recorded Investments for the nine months ended | |||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Real estate-commercial | $ | $ | $ | $ | ||||||||||||
| Real estate-residential | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following table presents the interest income recognized on impaired loans for the periods indicated (dollars in thousands):
| Interest Income Recognized for the three months ended | Interest Income Recognized for the nine months ended | |||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Real estate-commercial | $ | $ | $ | $ | ||||||||||||
| Real estate-residential | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
7. TROUBLED DEBT RESTRUCTURINGS
During the three and nine-month periods ended September 30, 2020 and 2019, there were no loans that were modified as troubled debt restructurings (“TDRs”). There were no payment defaults on TDRs within 12 months following the modification for the three-month and nine-month periods ended September 30, 2020 and 2019. At September 30, 2020 and December 31, 2019, there were no troubled debt restructured loans that had unfunded commitments.
8. ALLOWANCE FOR LOAN LOSSES
The Company’s loan portfolio allocated by management’s internal risk ratings as of September 30, 2020 and December 31, 2019 are summarized below (Commercial “Pass” loans includes $75,804,000 in Paycheck Protection Program (“PPP”) loans at September 30, 2020):
| 16 |
| September 30, 2020 | Credit Risk Profile by Internally Assigned Grade | |||||||||||||||||||
| (dollars in thousands) | Real Estate | |||||||||||||||||||
| Commercial | Commercial | Multi-family | Construction | Residential | ||||||||||||||||
| Grade: | ||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | |||||||||||||||
| Watch | ||||||||||||||||||||
| Special mention | ||||||||||||||||||||
| Substandard | ||||||||||||||||||||
| Doubtful | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Credit Risk Profile by Internally Assigned Grade | ||||||||||||||||||||
| Other Credit Exposure | ||||||||||||||||||||
| Agriculture | Consumer | Total | ||||||||||||||||||
| Grade: | ||||||||||||||||||||
| Pass | $ | $ | $ | |||||||||||||||||
| Watch | ||||||||||||||||||||
| Special mention | ||||||||||||||||||||
| Substandard | ||||||||||||||||||||
| Doubtful | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| December 31, 2019 | Credit Risk Profile by Internally Assigned Grade | |||||||||||||||||||
| (dollars in thousands) | Real Estate | |||||||||||||||||||
| Commercial | Commercial | Multi-family | Construction | Residential | ||||||||||||||||
| Grade: | ||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | | ||||||||||||||
| Watch | ||||||||||||||||||||
| Special mention | ||||||||||||||||||||
| Substandard | ||||||||||||||||||||
| Doubtful or loss | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Credit Risk Profile by Internally Assigned Grade | ||||||||||||||||||||
| Other Credit Exposure | ||||||||||||||||||||
| Agriculture | Consumer | Total | ||||||||||||||||||
| Grade: | ||||||||||||||||||||
| Pass | $ | $ | $ | |||||||||||||||||
| Watch | ||||||||||||||||||||
| Special mention | ||||||||||||||||||||
| Substandard | ||||||||||||||||||||
| Doubtful | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
Tables
above do not include loan fees of $
| 17 |
The allocation of the Company’s allowance for loan losses and by portfolio segment and by impairment methodology are summarized below (Commercial loans includes $75,804,000 in PPP loans at September 30, 2020, and do not carry any associated allowance for loan loss, as they are 100% guaranteed by the Small Business Administration (“SBA”)):
| September 30, 2020 | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Real Estate | Other | ||||||||||||||||||||||||||||||||||
| Commercial | Commercial | Multi-family | Construction | Residential | Agriculture | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance, January 1, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ||||||||||||||||||||||||||||||||||
| Loans charged-off | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Ending balance, September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance, July 1, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Loans charged off | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Ending balance, September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| 18 |
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Real Estate | Other | ||||||||||||||||||||||||||||||||||
| Commercial | Commercial | Multi-family | Construction | Residential | Agriculture | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Ending balance: | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| September 30, 2019 | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Real Estate | Other | ||||||||||||||||||||||||||||||||||
| Commercial | Commercial | Multi-family | Construction | Residential | Agriculture | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance, January 1, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Loans charged-off | ||||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Ending balance, September 30, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Allowance for Loan Losses | ||||||||||||||||||||||||||||||||||||
| Beginning balance, July 1, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Loans charged off | ||||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Ending balance, September 30, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| 19 |
The Company’s aging analysis of the loan portfolio at September 30, 2020 and December 31, 2019 are summarized below:
| September 30, 2020 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| 30-59 Days Past Due | 60-89 Days Past Due | Past Due Greater Than 89 Days | Total Past Due | Current | Total Loans | Past Due Greater Than 89 Days and Accruing | Nonaccrual | |||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| 30-59 Days Past Due | 60-89 Days Past Due | Past Due Greater Than 89 Days | Total Past Due | Current | Total Loans | Past Due Greater Than 89 Days and Accruing | Nonaccrual | |||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 20 |
The Federal Deposit Insurance Corporation (the “FDIC”) is encouraging financial institutions, like American River Bank, to provide borrowers affected in a variety of ways by the COVID-19 outbreak with payment accommodations that facilitate their ability to work through the immediate impact of the virus. Such assistance provided in a prudent manner to borrowers facing short-term setbacks could help the borrower and our community to recover. The FDIC indicated that these loan accommodation programs should be ultimately targeted toward loan repayment, but that if provided in a prudent manner such programs can help borrowers and communities recover from short-term setbacks.
The FDIC suggested that financial institutions should consider ways to address any deferred or skipped payments such as extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan. During the second and third quarters of 2020, the Company made arrangements with some of its borrowers to defer principal and interest payments from three to six months and extend the original maturities by a like term, defer principal and interest payments from three to six months, with the amount deferred due at maturity, and defer principle payments for six months, with the amount deferred due at maturity. These arrangements are not considered TDRs as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), provided relief from certain requirements under U.S. GAAP. Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for TDRs under Accounting Standards Codification (“ASC”) 310-40 in certain situations. All of these arrangements met such requirements. The Company continues to accrue interest on all of the loan deferrals. The amount of deferred loans at June 30, 2020 totaled $96,465,000. This balance has been reduced by paydowns, payoffs, or loans returning to normal payments, to $39,576,000 as of September 30, 2020.
9. 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. 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 nine months ended September 30, 2020 is as follows:
| Balance Sheet | ||||
| Operating lease asset classified as other assets | $ | |||
| Operating lease liability classified as other liabilities | ||||
| Income Statement | ||||
| Operating lease cost classified as occupancy and equipment expense | $ | |||
| Weighted average lease term, in years | ||||
| Weighted average discount rate (1) | ||||
| Operating cash flows | $ |
| (1) |
| 21 |
A maturity analysis of the Company’s lease liabilities at September 30, 2020 was as follows:
| Balance | ||||
| October 1, 2020 to December 31, 2020 | $ | |||
| January 1, 2021 to December 31, 2021 | ||||
| January 1, 2022 to December 31, 2022 | ||||
| January 1, 2023 to December 31, 2023 | ||||
| January 1, 2024 to December 31, 2024 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: Interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
10. BORROWING ARRANGEMENTS
At
September 30, 2020, the Company had $
The
Company has a line of credit available with the Federal Home Loan Bank of San Francisco (the “FHLB”) which is secured
by pledged mortgage loans and investment securities. Borrowings may include overnight advances as well as loans with terms of
up to thirty years. Advances (both short-term and long-term) totaling $
11. INCOME TAXES
The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for (benefit from) income taxes.
The Company accounts for income taxes using the balance sheet method, under which deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above, if applicable, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties related to unrecognized tax benefits, if applicable, as a component of interest expense in the consolidated statement of income. There have been no unrecognized tax benefits or accrued interest and penalties for the three-month and nine-month periods ended September 30, 2020 and 2019.
| 22 |
12. FAIR VALUE MEASUREMENTS
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2020 and December 31, 2019. They indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value measurement is the exchange price to sell the asset or transfer the liability (exit price) in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
| · | Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| · | Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| · | Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities. |
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities classified as available-for-sale are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items. The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):
| 23 |
| Carrying | Fair Value Measurements Using: | |||||||||||||||||||
| September 30, 2020 | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | $ | $ | $ | $ | |||||||||||||||
| Interest-bearing deposits in banks | ||||||||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||
| Held-to-maturity securities | ||||||||||||||||||||
| Net loans | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Noninterest-bearing | $ | $ | $ | $ | $ | |||||||||||||||
| Savings | ||||||||||||||||||||
| Money market | ||||||||||||||||||||
| Interest checking | ||||||||||||||||||||
| Time Deposits | ||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Long-term borrowings | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| Carrying | Fair Value Measurements Using: | |||||||||||||||||||
| December 31, 2019 | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | $ | $ | $ | $ | |||||||||||||||
| Interest-bearing deposits in banks | ||||||||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||
| Held-to-maturity securities | ||||||||||||||||||||
| FHLB stock | ||||||||||||||||||||
| Net loans: | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Noninterest-bearing | $ | $ | $ | $ | $ | |||||||||||||||
| Savings | ||||||||||||||||||||
| Money market | ||||||||||||||||||||
| NOW accounts | ||||||||||||||||||||
| Time Deposits | ||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Long-term borrowings | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.
Assets and liabilities measured at fair value on a recurring and non-recurring basis along with any related gain or loss recognized in the income statement due to fair value changes are presented in the following table:
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| Description | Fair Value Measurements Using: | Total Gains | ||||||||||||||||||
| (dollars in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | (Losses) | |||||||||||||||
| September 30, 2020 | ||||||||||||||||||||
| Assets and liabilities measured on a recurring basis: | ||||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | $ | $ | $ | $ | |||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||
| Total recurring | $ | $ | $ | $ | $ | |||||||||||||||
| Assets and liabilities measured on a nonrecurring basis: | ||||||||||||||||||||
| Other real estate owned Land | $ | $ | $ | $ | $ | |||||||||||||||
| Total nonrecurring | $ | $ | $ | $ | $ | |||||||||||||||
At September 30, 2020, there were no impaired loans carried at fair value as the appraised value exceeded carrying value.
| Description | Fair Value Measurements Using: | Total Gains | ||||||||||||||||||
| (dollars in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | (Losses) | |||||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Assets and liabilities measured on a recurring basis: | ||||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||
| U.S. Government Agencies and Sponsored Agencies | $ | $ | $ | $ | $ | |||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||
| Total recurring | $ | $ | $ | $ | $ | |||||||||||||||
| Assets and liabilities measured on a nonrecurring basis: | ||||||||||||||||||||
| Other assets: | ||||||||||||||||||||
| Repossessed asset | $ | $ | $ | $ | $ | |||||||||||||||
| Other real estate owned Land | ||||||||||||||||||||
| Total nonrecurring | $ | $ | $ | $ | $ | |||||||||||||||
At December 31, 2019, there were no impaired loans carried at fair value as the appraised value exceeded carrying value.
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.
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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%.
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%.
13. RECENTLY ISSUED 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 credit 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 2021 and to disclose any material potential impact of this modeling once it becomes available.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820). – Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 became effective for the Company on January 1, 2020. The effects of adopting ASU No. 2018-13 did not have a material impact on the Company’s financial position, results of operations or cash flows.
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14. NOVEL CORONAVIRUS PANDEMIC (“COVID-19”)
The COVID-19 pandemic has placed significant health, economic and other major pressures on the individuals and communities we serve, the state of California, the United States and the entire world. We have implemented a number of procedures in response to the pandemic to support the safety and wellbeing of our employees and clients, and the financial viability of our clients, that continue through the date of this report:
| · | We have addressed the safety of our ten branches and our corporate office, following the guidelines of the Centers for Disease Control. While our branches generally remain open to clients, we have taken steps, and continue to evaluate those steps, to push as much traffic and transactions as possible to our digital and electronic channels and our night depositories, and many of our employees can and are working remotely; |
| · | We hold regular executive meetings to address issues that change rapidly; |
| · | Provided extensions and loan payment deferrals to our borrowers effected by COVID-19 provided such clients were not 30 days past due; and | |
| · | We
have been participating in the Paycheck Protection Program (“PPP”) under CARES Act to help provide potentially
forgivable loans to our business clients to provide them with additional working capital to enable them to retain their employees. During
the second quarter of 2020, we funded |
We continue to closely monitor this pandemic and expect to make future changes to respond to the pandemic as this situation continues to evolve.
The potential financial impact is unknown at this time. However, if the economic downturn currently being experienced is sustained, it may adversely impact industries within our business footprint and impair the ability of the Company’s borrowers to fulfill their contractual obligations and reduce our opportunity to create new client relationships. This could cause the Company to experience a material adverse effect to its business operations, asset valuations, financial condition and results of operations. Material adverse effects may include losses in earnings, higher loan loss provisions, and valuation impairments on the Company’s loans, investments, goodwill, or deferred tax assets.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is management’s discussion and analysis of the significant changes in American River Bankshares’ (the “Company”) balance sheet accounts between December 31, 2019 and September 30, 2020 and its income and expense accounts for the three-month and nine-month periods ended September 30, 2020 and 2019. The discussion is designed to provide a better understanding of significant trends related to the Company’s financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. This discussion and supporting tables and the consolidated financial statements and related notes appearing elsewhere in this report are unaudited. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within management’s discussion and analysis. Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q including, but not limited to, matters described in this “Item 2 - 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:
| · | The adverse effects of the COVID-19 pandemic on the economy, our business, borrowers, customers and employees and the impact of local, state and federal governments in response to the pandemic, including various government stimulus packages; |
| · | 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 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should also be carefully considered and understood as being applicable to all related forward-looking statements contained in this Quarterly Report on Form 10-Q, 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.
Potential Impact of COVID-19
2020 began with optimism based off the progress made in 2019, but that was stalled when the novel coronavirus pandemic (“COVID-19”) arrived and created a global health crisis that has set off an economic crisis causing significant disruption in the local, national and global economies and financial markets. Continuation and further spread of COVID-19 could cause additional quarantines, shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The disruptions in the economy will impair the ability of some of our borrowers to make their loan payments, which could result in significant increases in delinquencies, defaults, foreclosures, declining collateral values, and credit losses on our loans. Similarly, because of changing economic and market conditions, we may be required to recognize credit losses on the investment securities we hold as well. COVID-19 may also materially disrupt banking and other financial activity generally and may result in a decline in demand for our products and services, including loans and deposits which could negatively impact our liquidity position and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, operations, consolidated financial condition, and consolidated results of operations.
In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the “FRB”) has taken a number of actions that have significantly affected the financial markets in the United States, including actions intended to result in substantial decreases in market interest rates, including reducing the target federal funds range by 150 basis points during the first quarter of 2020 to 0% and announcing further quantitative easing in response to the expected economic downturn caused by COVID-19. We expect that these reductions in interest rates, among other actions of the FRB and the Federal government generally, especially if prolonged, could adversely affect our net interest income, margins and profitability.
In addition to preparing the Company to handle the impact of the economic crisis, protecting the health and wellbeing of our employees and the financial viability of our clients, is now our highest priority. The Company quickly put its pandemic plan into action to adjust to the impact of the health issues from the COVID-19 pandemic on our employees and our clients. We have been working with our clients by assisting them with loan payment deferrals and maintaining service at all of our branch locations, subject to reduced operating hours. We are encouraging the use of our digital and electronic channels and our night depositories, all the while adhering to the ever-evolving State and Federal guidelines. We have been participating in the Small Business Administration’s (“SBA’s”) Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to help provide loans to our business clients to provide them with additional working capital to enable them to retain their employees.
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We believe the COVID-19 pandemic has already impacted our local economy when Federal, State and local shelter-in-place recommendations were enacted in our markets in March 2020 causing many businesses to close and workers to be furloughed or become unemployed. Essential purpose entities such as medical professionals, food and agricultural businesses, and transportation and logistical businesses were exempted from the closures; however, unemployment rates are increasing in our local market area. Prior to the pandemic unemployment rates were at all-time lows. At the end of February 2020, the unemployment rate in Sacramento County was 3.7%, in Sonoma County it was 2.8%, and in Amador County it was 4.4%. By the end of May 2020, these numbers increased to 14.1% in Sacramento County, 12.7%, in Sonoma County, and 15.1% in Amador County. With some businesses allowed to reopen these rates have decreased some to 10.3% in Sacramento County, 7.7%, in Sonoma County, and 9.3% in Amador County as of August 31, 2020. While shelter-in-place restrictions were eased in our markets during the second quarter of 2020, and just as many businesses were opening, new restrictions were put in place, essentially eliminating the progress that had been made until later in the third quarter when selected areas had the restrictions eased again.
The Company has taken measures to protect the health and safety of its employees by implementing remote work arrangements to the full extent possible, and by adjusting banking offices hours and operational measures to promote social distancing. The Company will continue to analyze economic conditions in our geographic markets and perform stress testing of our investment and loan portfolios. The Company does not currently have a stock repurchase program in place. Our Board of Directors will evaluate whether or not to implement a program following such time that the economic impact of the COVID-19 has been assessed and minimized. On October 22, 2020, the Company announced a $0.07 per share cash dividend payable on November 18, 2020 to shareholders of record on November 4, 2020. Future cash dividend decisions will consider, among other business considerations, the impact of COVID-19 on the Company’s capital and liquidity levels. Based on the Company’s current capital levels, historical conservative underwriting policies, low loan-to-deposit ratio, concentration and geographical diversification of the loan portfolio, the Company currently expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic with sufficient liquidity and capital levels.
While the Company is not exposed to large oil and gas, airline, or the entertainment industries we have been evaluating the exposure to potentially increased loan losses related to the COVID-19 pandemic and have identified the following industry segments most impacted by the pandemic as of September 30, 2020:
| Industry | Loan Balance | Percentage
of total non PPP loans outstanding (1) | ||||||
| Hospitality | — | N/A | ||||||
| Churches | $ | 18,203,000 | 4.5 | % | ||||
| Restaurants | $ | 5,777,000 | 1.4 | % | ||||
| Eldercare | $ | 6,615,000 | 1.6 | % | ||||
| School/childcare | $ | 4,572,000 | 1.1 | % | ||||
| Recreation (golf/sportsclubs) | $ | 1,934,000 | 0.5 | % | ||||
| Oil/Gas | $ | 6,194,000 | (2) | 1.5 | % | |||
| (1) | The PPP loans are 100% guaranteed by the SBA. By removing them from the total loans outstanding in this calculation, we believe the table represents a more reflective picture of the risk in the loan portfolio. The percentage of loans outstanding is, therefore, calculated excluding the PPP loans from the total loans. |
| (2) | Of this total, $1,920,000 is to three gas stations with convenience stores; $3,318,000 is to a gas station, convenience store and car wash; $642,000 is to an auto restoration company; and $314,000 is to a drive though oil change and car wash facility. |
The Company is closely monitoring the effects of the pandemic on our loan and deposit clients. We are focusing on assessing the risks in our loan portfolio and working with our borrowers to minimize potential loan losses. We have implemented loan programs to allow borrowers to defer loan principal and interest payments. See “Working with Borrowers” for more information on loan deferrals. As of September 30, 2020, the Company had funded 477 PPP loans totaling $80,154,000, of which 473 PPP loans totaling $75,804,000 remained at September 30, 2020.
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Use of Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q (“Form 10Q”) contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP. These measures include the 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 10Q because it believes that they provide useful and comparative information to assess trends in the Company’s financial position reflected in the current quarter and year-to-date results and facilitate comparison of our performance with the performance of our peers.
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 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) | For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net interest income (GAAP) | $ | 6,720 | $ | 5,928 | $ | 19,428 | $ | 17,105 | ||||||||
| Tax equivalent adjustment | 49 | 49 | 154 | 148 | ||||||||||||
| Net interest income - tax equivalent adjusted (non-GAAP) | $ | 6,769 | $ | 5,977 | $ | 19,582 | $ | 17,253 | ||||||||
| Average earning assets | $ | 787,756 | $ | 655,937 | $ | 739,412 | $ | 642,605 | ||||||||
| Net interest margin (GAAP) | 3.39 | % | 3.59 | % | 3.51 | % | 3.56 | % | ||||||||
| Net interest margin (non-GAAP) | 3.42 | % | 3.62 | % | 3.54 | % | 3.59 | % | ||||||||
Reconciliation of Non-GAAP Measure – Efficiency Ratio
| (dollars in thousands) | For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net interest income (GAAP) | $ | 6,720 | $ | 5,928 | $ | 19,428 | $ | 17,105 | ||||||||
| Tax equivalent adjustment | 49 | 49 | 154 | 148 | ||||||||||||
| Net interest income – tax-equivalent adjusted (non-GAAP) | $ | 6,769 | $ | 5,977 | $ | 19,582 | $ | 17,253 | ||||||||
| Noninterest income | 374 | 417 | 1,162 | 1,249 | ||||||||||||
| Total income | 7,143 | 6,394 | 20,744 | 18,502 | ||||||||||||
| Total noninterest expense | 4,223 | 4,093 | 12,355 | 12,501 | ||||||||||||
| Efficiency ratio, fully tax-equivalent (non-GAAP) | 59.12 | % | 64.01 | % | 59.56 | % | 67.57 | % | ||||||||
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 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.
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Allowance for Loan Losses
The allowance for loan 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 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. 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. For further information regarding our allowance for loan losses, see “Allowance for Loan Losses Activity.”
General Development of Business
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) 854-0123. The Company employed an equivalent of 101 full-time employees as of September 30, 2020.
The Company owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank (the “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 five full service offices in Sacramento and Placer Counties including the main office located at 1545 River Park Drive, Suite 107, Sacramento and branch offices in Sacramento, Gold River, and 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.
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. 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 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 2020 and 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 “Federal Reserve Board”), 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.”
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Overview
The Company recorded net income of $1,779,000 for the quarter ended September 30, 2020, which was an increase of $208,000 compared to $1,571,000 reported for the same period of 2019. Diluted earnings per share for the third quarter of 2020 were $0.30 compared to $0.27 recorded in the third quarter of 2019. The return on average equity (“ROAE”) and the return on average assets (“ROAA”) for the third quarter of 2020 were 7.79% and 0.82%, respectively, as compared to 7.65% and 0.88%, respectively, for the same period in 2019.
Net income for the nine months ended September 30, 2020 and 2019 was $4,952,000 and $3,993,000, respectively, with diluted earnings per share of $0.84 in 2020 and $0.68 in 2019. For the first nine months of 2020, ROAE was 7.52% and ROAA was 0.82% compared to 6.81% and 0.77%, respectively, for the same period in 2019.
Total assets of the Company increased by $137,581,000, or 19.1%, from $720,353,000 at December 31, 2019 to $857,934,000 at September 30, 2020. Net loans totaled $471,647,000 at September 30, 2020, an increase of $77,845,000 or (19.8%) from $393,802,000 at December 31, 2019. Deposit balances at September 30, 2020 totaled $728,831,000, an increase of $123,994,000, or 20.5%, from the $604,837,000 at December 31, 2019.
The Company ended the third quarter of 2020 with a leverage capital ratio of 8.2%, a Tier 1 capital ratio of 15.3%, and a total risk-based capital ratio of 16.5% compared to 9.2%, 14.8%, and 15.9%, respectively, at December 31, 2019. Table One below provides a summary of the components of net income for the periods indicated (See the “Results of Operations” section that follows for an explanation of the fluctuations in the individual components).
Table One: Components of Net Income
| (dollars in thousands) | For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Interest income* | $ | 7,104 | $ | 6,604 | $ | 20,899 | $ | 19,111 | ||||||||
| Interest expense | (335 | ) | (627 | ) | (1,317 | ) | (1,858 | ) | ||||||||
| Net interest income* | 6,769 | 5,977 | 19,582 | 17,253 | ||||||||||||
| Provision for loan losses | (445 | ) | (120 | ) | (1,485 | ) | (480 | ) | ||||||||
| Noninterest income | 374 | 417 | 1,162 | 1,249 | ||||||||||||
| Noninterest expense | (4,223 | ) | (4,093 | ) | (12,355 | ) | (12,501 | ) | ||||||||
| Provision for income taxes | (647 | ) | (561 | ) | (1,798 | ) | (1,380 | ) | ||||||||
| Tax equivalent adjustment | (49 | ) | (49 | ) | (154 | ) | (148 | ) | ||||||||
| Net income | $ | 1,779 | $ | 1,571 | $ | 4,952 | $ | 3,993 | ||||||||
| Average total assets | $ | 861,843 | $ | 708,698 | $ | 802,388 | $ | 695,364 | ||||||||
| Net income (annualized) as a percentage of average total assets | 0.82 | % | 0.88 | % | 0.82 | % | 0.77 | % | ||||||||
* Fully taxable equivalent basis (FTE)
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 investments in time deposits) over the interest paid on interest-bearing deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. The Company’s net interest margin was 3.42% for the three months ended September 30, 2020, 3.62% for the three months ended September 30, 2019, 3.54% for the nine months ended September 30, 2020 and 3.59% for the nine months ended September 30, 2019.
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The fully taxable equivalent interest income component for the third quarter of 2020 increased $500,000 (7.6%) to $7,104,000 compared to $6,604,000 for the three months ended September 30, 2019. The increase in the fully taxable equivalent interest income for the third quarter of 2020 compared to the same period in 2019 is broken down by rate (down $943,000) and volume (up $1,443,000). The yield on earning assets decreased from 3.99% during the third quarter of 2019 to 3.59% during the third quarter of 2020. The lower interest rate environment led to decreases in yields on loans (which decreased from 4.98% in the third quarter of 2019 to 4.64% in the third quarter of 2020), investments (which decreased from 2.77% in the third quarter of 2019 to 2.37% in the third quarter of 2020), and interest-bearing balances in banks (which decreased from 2.06% in the third quarter of 2019 to 0.14% in the third quarter of 2020). The lower yield led to decreases in loan interest of $429,000, investment income of $262,000 and interest from deposit in banks of $252,000. The increase in interest income was driven by increased loan balances, which led to an additional $1,327,000 in interest income, as well as increased balances in interest-deposit in banks which led to an additional $200,000 in interest income. The increased income on loans resulted from a higher balance of loans. Loans increased $104,757,000 (28.5%) from $368,160,000 in the third quarter of 2019 to $472,917,000 in the third quarter of 2020. Of the $104,757,000 increase in loans, $75,804,000 was related to PPP. These PPP loans carried an interest rate of 1% and added just $194,000 in interest income for the quarter, however, the SBA also paid the Company a processing fee ranging between 1% and 5%, which is amortized (net of costs) over the two-year life of the loans. The net fees added during the third quarter related to these PPP loans was $441,000. Average interest-balances in banks increased $38,578,000, (or 282.4%), from $13,662,000 during the third quarter of 2019 to $52,240,000 during the third quarter of 2020.
Total fully taxable equivalent interest income for the nine months ended September 30, 2020 increased $1,788,000 (9.4%) to $20,899,000 compared to $19,111,000 for the nine months ended September 30, 2019. The breakdown of the increase in fully taxable equivalent interest income for the nine months ended September 30, 2020 over the same period in 2019 resulted from a decrease in rate (down $1,548,000) and an increase in volume (up $3,336,000). The primary driver in this rate decrease was a decrease in the yields on loans which decreased from 4.94% in 2019 to 4.80% in 2020, on the investment portfolio which decreased from 2.84% in 2019 to 2.56% in 2020, and a decrease in the yields on interest-bearing balances in banks which decreased from 2.22% in 2019 to 0.26% in 2020. The decreased yield in 2020 compared to 2019 was due to the overall lower interest rate environment. The decreased yield earned on loans, investments and interest-bearing balances in banks was the reason the yield on earning assets decreased from 3.98% in 2019 to 3.78% in 2020. The volume increase of $3,336,000 was primarily from an increase in loans ($3,333,000) and interest-deposit in banks ($483,000), partially offset by a decrease in investment balances ($475,000). Average loans balances increased $89,577,000, (or 25.6%), from $349,718,000 during the first nine months of 2019 to $439,295,000 during the first nine months of 2020; the average interest-deposit in banks increased $29,040,000, (or 319.3%), from $9,096,000 during the first nine months of 2019 to $38,136,000 during the first nine months of 2020; and average investment balances decreased $21,579,000, (or 7.6%), from $283,560,000 during the first nine months of 2019 to $261,981,000 during the first nine months of 2020. Of the $89,577,000 increase in loans, $38,958,000 was related to PPP. These PPP loans added $333,000 in interest income for the year and the net fees for the year related to these PPP loans was $748,000.
Interest expense was $292,000 (or 46.6%) lower in the third quarter of 2020 versus the prior year period, decreasing from $627,000 to $335,000. The $292,000 decrease in interest expense during the third quarter of 2020 compared to the third quarter of 2019 was due to lower rates (down $326,000) and higher volume (up $34,000). The decrease in interest expense can be attributed to a decrease in rates paid on deposit and borrowing balances during a lower interest rate environment. Rates paid on interest bearing liabilities decreased 23 basis points from 0.64% to 0.29% for the third quarter of 2019 compared to the same period in 2020. The largest decrease 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 decreased over the past twelve months. Interest expense on time deposits decreased by $255,000, or 66.6%, from $383,000 in the third quarter of 2019 to $128,000 in the third quarter of 2020. Average time deposit balances decreased by $17,669,000, or (20.3%), from $86,938,000 in the third quarter of 2019 to $69,269,000 in the third quarter of 2020. Of the decrease in expense related to time deposits of $255,000, $177,000 was related to rate and $78,000 was related to volume. The volume increase of $34,000 was attributed to an increase in the lower cost interest checking and money market balances which increased $67,174,000 (31.7%) from $211,930,000 in third quarter of 2019 to $279,104,000 in the third quarter of 2020 and in other borrowings which increased $11,846,000 (75.9%) from $15,614,000 in third quarter of 2019 to $27,460,000 in the third quarter of 2020.
Interest expense was $541,000 (or 29.1%) lower in the nine-month period ended September 30, 2020 decreasing from $1,858,000 in 2019 to $1,317,000 in 2020. The decrease is related to rates (down $452,000) and volume (down $89,000). Rates paid on interest bearing liabilities decreased 23 basis points from 0.64% to 0.41% for the first nine months of 2019 compared to the first nine months of 2020. Of the $452,000 decrease in interest expense related to rates, $386,000 is related to lower rates paid on time deposit balances. Some of these time deposits are indexed to the three-or six-month treasury rates which have decreased over the past twelve months. Net interest expense on time deposits decreased by $620,000, or 53.1%, from $1,168,000 in 2019 to $548,000 in 2020 while the average time deposit balances decreased by $17,570,000, or 20.0%, from $87,655,000 in 2019 to $70,085,000 in 2020. Of the decrease in expense from time deposits of $620,000, $386,000 was related to rate and $234,000 was related to volume. Partially offsetting the decrease in time deposit expense due to rates and volume was an increase in interest checking and money market balances which increased $49,890,000 (23.9%) from $208,607,000 in 2019 to $258,497,000 in 2020 and in other borrowings which increased $3,535,000 (18.3%) from $19,341,000 in 2019 to $22,876,000 in 2020.
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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 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) and changes in average interest rates.
Table Two: Analysis of Net Interest Margin on Earning Assets
| Three Months Ended September 30, | 2020 | 2019 | ||||||||||||||||||||||
| (Taxable
Equivalent Basis) (dollars in thousands) | Avg Balance |
Interest | Avg Yield (4) | Avg Balance |
Interest | Avg Yield (4) | ||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Earning assets: | ||||||||||||||||||||||||
| Taxable loans (1) | $ | 452,301 | $ | 5,275 | 4.64 | % | $ | 346,598 | $ | 4,397 | 5.03 | % | ||||||||||||
| Tax-exempt loans (2) | 20,616 | 244 | 4.71 | % | 21,562 | 224 | 4.12 | % | ||||||||||||||||
| Taxable investment securities | 257,171 | 1,523 | 2.36 | % | 267,012 | 1,846 | 2.74 | % | ||||||||||||||||
| Tax-exempt investment securities (2) | 5,428 | 43 | 3.15 | % | 7,103 | 66 | 3.69 | % | ||||||||||||||||
| Interest-bearing deposits in banks | 52,240 | 19 | 0.14 | % | 13,662 | 71 | 2.06 | % | ||||||||||||||||
| Total earning assets | 787,756 | 7,104 | 3.59 | % | 655,937 | 6,604 | 3.99 | % | ||||||||||||||||
| Cash & due from banks | 39,524 | 17,215 | ||||||||||||||||||||||
| Other assets | 40,845 | 40,406 | ||||||||||||||||||||||
| Allowance for loan losses | (6,282 | ) | (4,860 | ) | ||||||||||||||||||||
| Total average assets | $ | 861,843 | $ | 708,698 | ||||||||||||||||||||
| Liabilities & Shareholders’ Equity | ||||||||||||||||||||||||
| Interest bearing liabilities: | ||||||||||||||||||||||||
| Interest checking and money market | $ | 279,104 | 126 | 0.18 | % | $ | 211,930 | 155 | 0.29 | % | ||||||||||||||
| Savings | 83,140 | 7 | 0.03 | % | 74,738 | 7 | 0.04 | % | ||||||||||||||||
| Time deposits | 69,269 | 128 | 0.74 | % | 86,938 | 383 | 1.75 | % | ||||||||||||||||
| Other borrowings | 27,460 | 74 | 1.07 | % | 15,614 | 82 | 2.08 | % | ||||||||||||||||
| Total interest bearing liabilities | 458,973 | 335 | 0.29 | % | 389,220 | 627 | 0.64 | % | ||||||||||||||||
| Noninterest bearing demand deposits | 301,505 | 227,644 | ||||||||||||||||||||||
| Other liabilities | 10,476 | 10,368 | ||||||||||||||||||||||
| Total liabilities | 770,954 | 627,232 | ||||||||||||||||||||||
| Shareholders’ equity | 90,889 | 81,466 | ||||||||||||||||||||||
| Total average liabilities and shareholders’ equity | $ | 861,843 | $ | 708,698 | ||||||||||||||||||||
| Net interest income & margin (3) | $ | 6,769 | 3.42 | % | $ | 5,977 | 3.62 | % | ||||||||||||||||
| (1) | Loan interest includes loan fees of $446,000 and $18,000, respectively, during the three months ended September 30, 2020 and September 30, 2019. Includes $441,000 in net fees from PPP loans during the third quarter of 2020. Average loan balances include nonperforming loans. |
| (2) | Includes taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 21% for 2020 and 2019. |
| (3) | Net interest margin is computed by dividing net interest income by total average earning assets. |
| (4) | Average yield is calculated based on actual days in the period (92 days) and annualized to actual days in the year (366 days for 2020 and 365 days). |
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| Nine Months Ended September 30, | 2020 | 2019 | ||||||||||||||||||||||
| (Taxable
Equivalent Basis) (dollars in thousands) | Avg Balance |
Interest | Avg Yield (4) | Avg Balance |
Interest | Avg Yield (4) | ||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Earning assets: | ||||||||||||||||||||||||
| Taxable loans (1) | $ | 417,667 | $ | 15,034 | 4.81 | % | $ | 330,312 | $ | 12,329 | 4.99 | % | ||||||||||||
| Tax-exempt loans (2) | 21,628 | 767 | 4.74 | % | 19,406 | 604 | 4.16 | % | ||||||||||||||||
| Taxable investment securities | 256,566 | 4,894 | 2.55 | % | 272,738 | 5,756 | 2.82 | % | ||||||||||||||||
| Tax-exempt investment securities (2) | 5,415 | 131 | 3.23 | % | 10,822 | 266 | 3.29 | % | ||||||||||||||||
| Federal funds sold | — | — | -% | 231 | 5 | 2.89 | % | |||||||||||||||||
| Interest-bearing deposits in banks | 38,136 | 73 | 0.26 | % | 9,096 | 151 | 2.22 | % | ||||||||||||||||
| Total earning assets | 739,412 | 20,899 | 3.78 | % | 642,605 | 19,111 | 3.98 | % | ||||||||||||||||
| Cash & due from banks | 28,212 | 16,356 | ||||||||||||||||||||||
| Other assets | 40,507 | 41,048 | ||||||||||||||||||||||
| Allowance for loan losses | (5,743 | ) | (4,645 | ) | ||||||||||||||||||||
| Total average assets | $ | 802,388 | $ | 695,364 | ||||||||||||||||||||
| Liabilities & Shareholders’ Equity | ||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Interest checking and money market | $ | 258,497 | 505 | 0.26 | % | $ | 208,607 | 369 | 0.24 | % | ||||||||||||||
| Savings | 78,869 | 21 | 0.04 | % | 73,596 | 21 | 0.04 | % | ||||||||||||||||
| Time deposits | 70,085 | 548 | 1.04 | % | 87,655 | 1,168 | 1.78 | % | ||||||||||||||||
| Other borrowings | 22,876 | 243 | 1.42 | % | 19,341 | 300 | 2.07 | % | ||||||||||||||||
| Total interest-bearing liabilities | 430,327 | 1,317 | 0.41 | % | 389,199 | 1,858 | 0.64 | % | ||||||||||||||||
| Noninterest-bearing demand deposits | 273,016 | 217,760 | ||||||||||||||||||||||
| Other liabilities | 11,140 | 10,019 | ||||||||||||||||||||||
| Total liabilities | 714,483 | 616,978 | ||||||||||||||||||||||
| Shareholders’ equity | 87,905 | 78,386 | ||||||||||||||||||||||
| Total average liabilities and shareholders’ equity | $ | 802,388 | $ | 695,364 | ||||||||||||||||||||
| Net interest income & margin (3) | $ | 19,582 | 3.54 | % | $ | 17,253 | 3.59 | % | ||||||||||||||||
| (1) | Loan interest includes loan fees of $990,000 and $194,000, respectively, during the nine months ended September 30, 2020 and September 30, 2019. Includes $748,000 in net fees from PPP loans during 2020. Average loan balances include nonperforming loans. |
| (2) | Includes taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 21% for 2020 and 2021. |
| (3) | Net interest margin is computed by dividing net interest income by total average earning assets. |
| (4) | Average yield is calculated based on actual days in the period (274 days for 2020 and 273 days for 2019) and annualized to actual days in the year (366 days for 2020 and 365 days for 2019). |
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Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
| Three Months Ended September 30, 2020 over 2019 (dollars in thousands) | ||||||||||||
| Increase (decrease) due to change in: | ||||||||||||
| Interest-earning assets: | Volume | Rate (4) | Net Change | |||||||||
| Taxable loans (1) | $ | 1,337 | $ | (459 | ) | $ | 878 | |||||
| Tax-exempt loans (2) | (10 | ) | 30 | 20 | ||||||||
| Taxable investment securities | (68 | ) | (255 | ) | (323 | ) | ||||||
| Tax exempt investment securities (3) | (16 | ) | (7 | ) | (23 | ) | ||||||
| Interest-bearing deposits in banks | 200 | (252 | ) | (52 | ) | |||||||
| Total | 1,443 | (943 | ) | 500 | ||||||||
| Interest-bearing liabilities: | ||||||||||||
| Interest checking and money market | 49 | (78 | ) | (29 | ) | |||||||
| Savings deposits | 1 | (1 | ) | — | ||||||||
| Time deposits | (78 | ) | (177 | ) | (255 | ) | ||||||
| Other borrowings | 62 | (70 | ) | (8 | ) | |||||||
| Total | 34 | (326 | ) | (292 | ) | |||||||
| Interest differential | $ | 1,409 | $ | (617 | ) | $ | 792 | |||||
| Nine Months Ended September 30, 2020 over 2019 (dollars in thousands) | ||||||||||||
| Increase (decrease) due to change in: | ||||||||||||
| Interest-earning assets: | Volume | Rate (4) | Net Change | |||||||||
| Taxable loans (1) | $ | 3,264 | $ | (559 | ) | $ | 2,705 | |||||
| Tax-exempt loans (2) | 69 | 94 | 163 | |||||||||
| Taxable investment securities | (342 | ) | (520 | ) | (862 | ) | ||||||
| Tax exempt investment securities (3) | (133 | ) | (2 | ) | (135 | ) | ||||||
| Federal funds sold | (5 | ) | — | (5 | ) | |||||||
| Interest-bearing deposits in banks | 483 | (561 | ) | (78 | ) | |||||||
| Total | 3,336 | (1,548 | ) | 1,788 | ||||||||
| Interest-bearing liabilities: | ||||||||||||
| Interest checking and money market | 88 | 48 | 136 | |||||||||
| Savings deposits | 2 | (2 | ) | — | ||||||||
| Time deposits | (234 | ) | (386 | ) | (620 | ) | ||||||
| Other borrowings | 55 | (112 | ) | (57 | ) | |||||||
| Total | (89 | ) | (452 | ) | (541 | ) | ||||||
| Interest differential | $ | 3,425 | $ | (1,096 | ) | $ | 2,329 | |||||
| (1) | The average balance of non-accruing loans is immaterial as a percentage of total loans and, as such, has been included in net loans. |
| (2) | Loan fees of $446,000 and $18,000, respectively, during the three months ended September 30, 2020 and September 30, 2019, and loan fees of $990,000 and $194,000, respectively, during the nine months ended September 30, 2020 and September 30, 2019, have been included in the interest income computation. The three and nine- month periods in 2020 include $414,000 and $748,000, respectively, in net fees from PPP loans. |
| (3) | Includes taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 21% for 2020 and 2019. |
| (4) | The rate/volume variance has been included in the rate variance. |
Provision for Loan Losses
The Company added $445,000 to the provision for loan losses for the third quarter of 2020 compared to $120,000 in the third quarter of 2019. The Company experienced net loan losses of $27,000 or 0.02% (on an annualized basis) of average loans for the three months ended September 30, 2020 compared to net loan recoveries of ($72,000) or 0.08% (on an annualized basis) of average loans for the three months ended September 30, 2019. The Company added $1,485,000 to the allowance for loan losses during the first nine months of 2020. This compares to additions of $480,000 to the allowance for loan losses during the first nine months of 2019. Net loan losses were $7,000 (0.00%) (on an annualized basis) of average loans outstanding in 2020 and net loan recoveries were ($81,000) or 0.03% (on an annualized basis) of average loans outstanding in 2019.
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The Company continues to experience an overall improvement in the credit quality of the loan portfolio and a reduction of credit losses, however, due to the uncertain economic impact on the Company’s borrowers due to COVID-19, the $445,000 addition to the provision for loan losses during the third quarter of 2020 and the $1,485,000 addition to the provision for loan losses during 2020 was warranted. For additional information see the “Allowance for Loan Losses Activity” and “Potential Impact of COVID-19.”
Noninterest Income
Table Four below provides a summary of the components of noninterest income for the periods indicated:
Table Four: Components of Noninterest Income
| (dollars in thousands) | Three Months September 30, | Nine Months September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Service charges on deposit accounts | $ | 115 | $ | 149 | $ | 381 | $ | 409 | ||||||||
| Gain on sale of securities | — | 9 | 38 | 74 | ||||||||||||
| Merchant fee income | 98 | 105 | 274 | 294 | ||||||||||||
| Bank owned life insurance | 89 | 83 | 258 | 248 | ||||||||||||
| Other | 72 | 71 | 211 | 224 | ||||||||||||
| Total noninterest income | $ | 374 | $ | 417 | $ | 1,162 | $ | 1,249 | ||||||||
Noninterest income decreased $43,000 (10.3%) to $374,000 for the three months ended September 30, 2020 compared to $417,000 during the three months ended September 30, 2019. The decrease from the third quarter of 2019 to the third quarter of 2020 was primarily related to a decrease in service charges on deposit accounts which decreased $34,000 from $149,000 in 2019 to $115,000 in 2020.
Noninterest income decreased $87,000 (or 7.0%) from $1,249,000 during the first nine months of 2020 to $1,162,000 during the first nine months of 2019. The decrease from the first nine months of 2020 compared to the same period in 2019 was primarily related to a decrease in gain on sale of securities (down $36,000 or 48.6%) resulting in income of $74,000 in the first nine months of 2019 compared to $38,000 for the first nine months of 2020 and a decrease in service charges on deposit accounts which decreased $28,000 (6.8%) from $409,000 in 2019 to $381,000 in 2020.
Noninterest Expense
Noninterest expense increased $130,000 (3.2%) from $4,093,000 in the third quarter of 2019 to $4,223,000 in the third quarter of 2020. Salary and employee benefits expense decreased $9,000 (0.3%) from $2,898,000 during the third quarter of 2019 to $2,889,000 during the third quarter of 2020. Average full-time equivalent employees was 101 during the third quarter of 2020 and 2019. Occupancy expense increased $2,000 (0.8%) and furniture and equipment expense increased $20,000 (16.6%) from the third quarter of 2019 to the third quarter of 2020. FDIC assessments increased $109,000 from the third quarter of 2019 to the third quarter of 2020. OREO related expenses decreased $3,000 (42.9%) during the third quarter of 2020 compared to the third quarter of 2019. Other expenses increased $11,000 (1.3%) to $870,000 in the third quarter of 2020 compared to $859,000 in the third quarter of 2019. The increased FDIC assessments result from a credit received in 2019 as the FDIC insurance fund reaching the target of 1.38% and the Company being able to use the Small Bank Assessment Credits, awarded to banks like American River Bank, which essentially gave banks a credit for the assessments paid for the second quarter of 2019 and allowed them to forgo the assessment expense for the third quarter of 2019. The fully taxable equivalent efficiency ratio for the third quarter of 2020 decreased to 59.1% from 64.0% for the third quarter of 2019.
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Noninterest expense for the nine-month period ended September 30, 2020 was $12,355,000 compared to $12,501,000 for the same period in 2019 for a decrease of $146,000 (1.2%). Salaries and employee benefits expense decreased $158,000 (1.9%) from $8,423,000 for the nine months ended September 30, 2019 to $8,265,000 for the same period in 2020. The decrease in salaries and benefits expense resulted from an increase in the deferral of direct loan origination costs, which reduced salary expense. Total origination costs for 2020 were $635,000 compared to $340,000 for 2019. Of the $635,000 in deferred loan origination costs recorded in 2020, $332,000 was related to PPP loans. The benefit from the deferred loan origination costs was partially offset by normal cost of living increases and promotions and higher allocations to the earned but unpaid personal time. Salary expense increased $49,000 (0.9%) from $5,707,000 in 2019 to $5,756,000 in 2020. Expenses related to accruals for paid time off increased $42,000 (22.5%) from $187,000 in 2019 to $229,000 in 2020. Average full-time equivalent employees was 102 in 2019 compared to 101 during 2020. Occupancy expense increased $5,000 (0.7%) and furniture and equipment expense increased $22,000 (5.5%). FDIC assessments increased $90,000 (187.5%). OREO related expenses increased $12,000 (80.0%) during 2020 to $27,000, from $15,000 in 2019. Other expenses decreased $117,000 (4.1%) from $2,847,000 for the nine months ended September 30, 2019 to $2,730,000 for the same period in 2020. The increased FDIC assessments result from the Small Bank Assessment Credits received in 2019. There were numerous line items that make up the $117,000 decrease in other expenses including advertising and business development. Advertising and business development decreased $253,000 (58.7%) from $431,000 in 2019 to $178,000 in 2020. Partially offsetting the reduced advertising and business development costs was a $70,000 expense related to a retirement plan payment to the estate of a director who passed away during the second quarter of 2020 and internet processing which increased $74,000 (42.3%) from $175,000 in 2019 to $249,000 in 2020.
The overhead efficiency ratio (fully taxable equivalent) for the first nine months of 2020 was 59.6% as compared to 67.6% in the same period of 2019.
Provision for Income Taxes
Federal and state income taxes for the quarter ended September 30, 2020 increased $86,000 (15.3%) from $561,000 in the third quarter of 2019 to $647,000 in the third quarter of 2020 and increased $418,000 (30.3%), from $1,380,000 in the nine months ended September 30, 2019 to $1,798,000 for the nine months ended September 30, 2020. The combined federal and state effective tax rate for the quarter ended September 30, 2020 was 26.7%, compared to 26.3% for the third quarter of 2019 and for the nine months ended September 30, 2020, the effective tax rate was 26.7% compared to 25.7% for the nine months ended September 30, 2019. The higher taxes and effective tax rate in 2020 compared to 2019 is related to a higher level of taxable income, a lower level of benefits from tax exempt municipal bonds, and the tax treatment of equity based compensation under Accounting Standards Update 2016-09 (“ASU 2016-09”).
Taxable income increased $294,000 (13.8%) from $2,132,000 in the third quarter of 2019 to $2,426,000 in the third quarter of 2020, and increased $1,377,000 (25.6%) from $5,373,000 in the first nine months of 2019 to $6,750,000 in the first nine months of 2020. 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.
In the third quarter of 2019 the Company recognized a $3,000 tax credit under ASU 2016-09 and in the third quarter of 2020 the Company recognized a $4,000 tax credit under ASU 2016-09. For the nine months ended September 30, 2019, the Company recognized a $32,000 tax credit under ASU 2016-09 and in the nine months ended September 30, 2020, the Company recognized a $34,000 tax expense under ASU 2016-09. The average balance of tax exempt municipal bonds decreased $1,675,000 (23.6%) from $7,103,000 in the third quarter of 2019 to $5,428,000 in the third quarter of 2020, and decreased $5,407,000 (50.0%) from $10,822,000 in the first nine months of 2019 to $5,415,000 in the first nine months of 2020.
Balance Sheet Analysis
The Company’s total assets were $857,934,000 at September 30, 2020 compared to $720,353,000 at December 31, 2019, representing an increase of $137,581,000 (19.1%). The average assets for the three months ended September 30, 2020 were $861,843,000, which represents an increase of $153,145,000 (21.6%) from the average balance of $708,698,000 during the three-month period ended September 30, 2019. The average assets for the nine months ended September 30, 2020 were $802,388,000, which represents an increase of $107,024,000 (15.4%) from the average balance of $695,364,000 during the nine-month period ended September 30, 2019.
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Cash and Cash Equivalents
The balance held in cash and cash equivalents at September 30, 2020, was $73,038,000 compared to $17,810,000 at December 31, 2019 an increase of $55,228,000 (310.1%). The primary reason for the increase in cash and cash equivalents since December 31, 2019 is directly related to the increase in deposit balances during the same period.
Investment Securities
Table Five below summarizes the values of the Company’s investment securities held on September 30, 2020 and December 31, 2019.
Table Five: Investment Securities Composition
| (dollars in thousands) | ||||||||
| Available-for-sale (at fair value) | September 30, 2020 | December 31, 2019 | ||||||
| Debt securities: | ||||||||
| U.S. Government Agencies and Sponsored Entities | $ | 243,687 | $ | 241,887 | ||||
| Obligations of states and political subdivisions | 16,362 | 13,447 | ||||||
| Corporate bonds | 6,868 | 6,631 | ||||||
| Total available-for-sale investment securities | $ | 266,917 | $ | 261,965 | ||||
| Held-to-maturity (at amortized cost) | ||||||||
| Debt securities: | ||||||||
| U.S. Government Agencies and Sponsored Entities | $ | 15 | $ | 248 | ||||
| Total held-to-maturity investment securities | $ | 15 | $ | 248 | ||||
The Company classifies its investment securities as available-for-sale or held-to-maturity. 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 available-for-sale may be sold to implement asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors.
Net unrealized gains on available-for-sale investment securities totaling $9,283,000 were recorded, net of $2,744,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at September 30, 2020 and net unrealized losses on available-for-sale investment securities totaling $2,544,000 were recorded, net of $752,000 in tax benefits, as accumulated other comprehensive loss within shareholders’ equity at December 31, 2019.
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.
Loans
The Company’s historical lending activities have been 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) agriculture; and (7) consumer loans. The Company’s continuing focus in our market area, new borrowers developed through the Company’s marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company originating $63.5 million in new loans during the first nine months of 2020. In addition to the $63.5 million in new production the Company also originated 477 PPP loans totaling $80.2 million. This production was partially offset by pay downs and payoffs, and excluding the PPP loans resulted in an overall increase in net loans of $3,636,000 (0.9%) from December 31, 2019. At September 30, 2020, gross PPP loans were $75,804,000 and had related fees of $1,595,000, for a net balance of $74,209,000. These PPP loans were recorded as commercial loans. At September 30, 2020, net loans excluding net PPP loans were $397,438,000.
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A significant portion of the Company’s loans are direct loans 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 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 collectors 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 three to ten years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily of first trust deed loans on properties that produce grapes, fruit, and nut loans. In general, except in the case of loans under SBA programs or Farm Services Agency guarantees, the Company does not make long-term residential mortgage loans.
Table Six below summarizes the composition of the loan portfolio in dollars and as a percentage of total loans as of September 30, 2020 and December 31, 2019.
Table Six: Loan Portfolio Composition
| (dollars in thousands) | September 30, 2020 | December 31, 2019 | Change in | Percentage | ||||||||||||||||||||
| $ | % | $ | % | dollars | change | |||||||||||||||||||
| Commercial (1) | $ | 120,156 | 25 | % | $ | 43,019 | 11 | % | $ | 77,137 | 179.3 | % | ||||||||||||
| Real estate | ||||||||||||||||||||||||
| Commercial | 225,129 | 47 | % | 214,604 | 54 | % | 10,525 | 4.9 | % | |||||||||||||||
| Multi-family | 42,739 | 9 | % | 56,818 | 14 | % | (14,079 | ) | (24.8 | %) | ||||||||||||||
| Construction | 30,504 | 6 | % | 23,169 | 6 | % | 7,335 | 31.6 | % | |||||||||||||||
| Residential | 27,720 | 6 | % | 29,180 | 7 | % | (1,460 | ) | (5.0 | %) | ||||||||||||||
| Agriculture | 6,138 | 1 | % | 6,479 | 2 | % | (341 | ) | (5.3 | %) | ||||||||||||||
| Consumer | 28,160 | 6 | % | 26,392 | 6 | % | 1,768 | 6.7 | % | |||||||||||||||
| Total loans | 480,546 | 100 | % | 399,661 | 100 | % | 80,885 | 20.2 | % | |||||||||||||||
| Deferred loan fees and costs, net | (2,283 | ) | (721 | ) | (1,562 | ) | ||||||||||||||||||
| Allowance for loan losses | (6,616 | ) | (5,138 | ) | (1,478 | ) | ||||||||||||||||||
| Total net loans | $ | 471,647 | $ | 393,802 | $ | 77,845 | 19.8 | % | ||||||||||||||||
| (1) | The September 30, 2020 balance includes $75,804,000 in PPP loans. |
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 portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company’s loan portfolio is critical for profitability and growth. Management strives to continue its emphasis on credit quality in the loan approval process, through active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio.
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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. 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 portfolio at September 30, 2020 and December 31, 2019. The September 30, 2020 figure excludes the PPP loans, which are 100% guaranteed by the SBA. Management believes that the residential land and construction portion of the Company’s loan portfolio carries a reasonable level of credit risk. As of September 30, 2020, outstanding unimproved residential land and construction loans were $7,744,000 (or just 2.4% of the total real estate loans). Of the $7,744,000, $1,617,000 (20.9%) 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 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 losses. This could adversely affect the Company’s future prospects, results of operations, profitability and stock price. See “Potential Impact of COVID-19.” 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.
Nonperforming, Past Due and Restructured Loans
Management places loans on nonaccrual status when they become 90 days past due or if a loss is expected, unless the loan is well secured and in the process of collection. Loans are partially or fully charged off when, in the opinion of management, collection of such amount appears unlikely. The recorded investments in nonperforming loans, which includes nonaccrual loans and loans that were 90 days or more past due and on accrual, totaled zero at both September 30, 2020 and December 31, 2019, respectively.
There were no loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as of September 30, 2020. Management is not aware of any potential problem loans, which were accruing and current at September 30, 2020, 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.
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Table Seven below sets forth nonaccrual loans and loans past due 90 days or more as of September 30, 2020 and December 31, 2019.
| Table Seven: Nonperforming Loans | ||||||||
| (dollars in thousands) | ||||||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Past due 90 days or more and still accruing: | ||||||||
| Commercial | $ | — | $ | — | ||||
| Real estate | — | — | ||||||
| Agriculture | — | — | ||||||
| Consumer | — | — | ||||||
| Nonaccrual: | ||||||||
| Commercial | — | — | ||||||
| Real estate | — | — | ||||||
| Agriculture | — | — | ||||||
| Consumer | — | — | ||||||
| Total nonperforming loans | $ | — | $ | — | ||||
There were no loans that were considered past due between 30 and 89 days at September 30, 2020 and $75,000 at December 31, 2019.
Impaired Loans
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 agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan discounted at the loan’s original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans that are collectively evaluated for credit risk. In assessing whether a loan is impaired, the Company typically reviews loans 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.
At September 30, 2020, the recorded investment in loans that were considered to be impaired totaled $7,108,000, all of which are considered performing loans. Of the total impaired loans of $7,108,000, loans totaling $5,415,000 were deemed to require no specific reserve and loans totaling $1,693,000 were deemed to require a related valuation allowance of $128,000. Of the $5,415,000 impaired loans that did not carry a specific reserve there were $469,000 in loans that had previous partial charge-offs and $4,946,000 in loans 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 balance. The recorded investment in loans that were considered to be impaired totaled $7,604,000 at December 31, 2019. Of the total impaired loans of $7,604,000, loans totaling $5,848,000 were deemed to require no specific reserve and loans totaling $1,756,000 were deemed to require a related valuation allowance of $142,000.
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 is focused on monitoring collateral values for those loans considered collateral dependent. For collateral dependent loans the Company performs an internal evaluation or obtains an updated appraisal, as necessary. In the third quarter of 2020, the Company had net loan losses of $27,000 with $445,000 in provisions for loan losses. For the nine months ended September 30, 2020, the Company had net loan losses of $7,000 with $1,485,000 in provisions for loan losses. Despite the Company’s continued improvement in the credit quality of the loan portfolio, due to the uncertain economic impact on the Company’s borrowers due to COVID-19, management believes that the $445,000 addition to the provision for loan losses during the third quarter of 2020 was warranted. In the third quarter of 2019, the Company had net loan recoveries of $72,000 with $120,000 in provisions for loan and lease losses and for the nine months ended September 30, 2019, the Company had net recoveries of $81,000 with $480,000 in provisions for loan losses.
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During the quarters ended September 30, 2020 and September 30, 2019, there were no loans that were modified as troubled debt restructurings. There were no payment defaults on troubled debt restructurings within 12 months following the modification for the three-month and nine-month periods ended September 30, 2020.
There were no payment defaults on troubled debt restructurings within 12 months following the modification for the three-month and nine-month periods ended September 30, 2019. At September 30, 2020 and December 31, 2019 there were no unfunded commitments on those loans considered troubled debt restructures.
Working with Borrowers
The FDIC is encouraging financial institutions, like American River Bank, to provide borrowers affected in a variety of ways by the COVID-19 outbreak with payment accommodations that facilitate their ability to work through the immediate impact of the virus. Such assistance provided in a prudent manner to borrowers facing short-term setbacks could help the borrower and our community to recover. The FDIC indicated that these loan accommodation programs should be ultimately targeted toward loan repayment, but that if provided in a prudent manner such programs can help borrowers and communities recover from short-term setbacks.
The FDIC suggested that financial institutions should consider ways to address any deferred or skipped payments such as extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan. As of June 30, 2020, the Company had made 107 such loan payment deferrals totaling $96,465,000. During the third quarter 2020, two additional loans totaling $2,980,000 were extended loan payment deferrals and four loans that had previously been provided loan payment deferrals totaling $2,123,000 paid off in full. In addition, during the third quarter 69 loans that had previously been granted loan payment deferrals began making their loan payments and are no longer on a loan deferral program. As of September 30, 2020, 39 loans totaling $39,576,000 were on a loan deferral program and of these loans, four loans totaling $4,074,000 were in their initial deferral period while 32 loans totaling $35,502,000 were provided an additional deferral period either after their initial deferral period ended or prior to the ending of their initial deferral period. The following arrangements had been made for borrowers requesting these loan deferrals:
Three loans totaling $2,992,000 that had payments deferred for principal and interest for three months with the maturity extended three months;
One loan totaling $30,000 that had payments deferred payments for principal and interest for four months with the maturity extended four months;
Twenty-eight loans totaling $30,894,000 that had payments deferred for principal and interest for six months with the maturity extended six months;
One loan totaling $25,000 that had payments deferred for principal and interest for three months, due at maturity;
One loan totaling $3,723,000 that had payments deferred for principal and interest for four months, due at maturity;
Two loans totaling $1,912,000 that had principal payments deferred but were paying interest only for six months, maturity was not extended.
The Company continues to accrue interest on all of the loan deferrals. The Company expects to continue to work with its borrowers and make prudent credit arrangements as needed, while intending to continue to act in a safe and sound manner. The Company has continued to keep in close contact with the borrowers that have been granted the remaining 39 loan payment deferrals and continued to monitor those loans that have begun making their loan payments to track their payment history and evaluate whether it is appropriate to upgrade or downgrade the individual loan ratings. None of the borrowers that had been granted loan deferrals were more than 30 days past due immediately preceding the deferral date, and for those that have resumed making payments, none are more than 30 days past due at September 30, 2020.
Allowance for Loan Losses Activity
The Company maintains an allowance for loan losses (“ALLL”) to cover probable losses inherent in the loan portfolio, which is based upon management’s estimate of those losses. The ALLL is established through a provision for loan losses and is increased by provisions charged against current earnings and recoveries and reduced by charge-offs.
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Actual losses for loans 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. Table Eight below summarizes, for the periods indicated, the activity in the ALLL.
Table Eight: Allowance for Loan Losses
| (dollars in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Average loans outstanding | $ | 472,917 | $ | 368,160 | $ | 439,295 | $ | 349,718 | ||||||||
| Allowance for loan losses at beginning of period | $ | 6,198 | $ | 4,761 | $ | 5,138 | $ | 4,392 | ||||||||
| Loans charged off: | ||||||||||||||||
| Commercial | (27 | ) | — | (27 | ) | — | ||||||||||
| Real estate | — | — | — | — | ||||||||||||
| Agriculture | — | — | — | — | ||||||||||||
| Consumer | — | — | (6 | ) | — | |||||||||||
| Total | (27 | ) | — | (33 | ) | — | ||||||||||
| Recoveries of loans previously charged off: | ||||||||||||||||
| Commercial | — | 2 | 13 | 5 | ||||||||||||
| Real estate | — | 2 | 13 | 8 | ||||||||||||
| Agriculture | — | — | — | — | ||||||||||||
| Consumer | — | 68 | — | 68 | ||||||||||||
| Total | — | 72 | 26 | 81 | ||||||||||||
| Net loans (charged off) recovered | (27 | ) | 72 | (7 | ) | 81 | ||||||||||
| Additions to allowance charged to operating expenses | 445 | 120 | 1,485 | 480 | ||||||||||||
| Allowance for loan losses at end of period | $ | 6,616 | $ | 4,953 | $ | 6,616 | $ | 4,953 | ||||||||
| Ratio of net charge-offs (recoveries) to average loans outstanding (annualized) | 0.02 | % | -0.08 | % | 0.00 | % | -0.03 | % | ||||||||
| Provision of allowance for loan losses to average loans outstanding (annualized) | 0.37 | % | 0.13 | % | 0.45 | % | 0.18 | % | ||||||||
| Allowance for loan losses to loans net of deferred fees at end of period | 1.38 | % | 1.32 | % | 1.38 | % | 1.32 | % | ||||||||
| Allowance for loan losses to non PPP loans net of deferred fees at end of period | 1.64 | % | 1.32 | % | 1.64 | % | 1.32 | % | ||||||||
The adequacy of the ALLL and the level of the related provision for loan 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 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 and exposure to potential losses.
The ALLL totaled $6,616,000 or 1.38% of total loans at September 30, 2020 compared to $5,138,000 or 1.29% of total loans at December 31, 2019. Excluding the 100% SBA guaranteed PPP loans, which do not carry the same risk as the rest of the loan portfolio, the ALLL to total loans was 1.64% at September 30, 2020. 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 portfolio based on loan type and loan rating; however, the entire allowance is available to cover actual loan losses. While management uses available information to recognize possible losses on loans, 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.
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The ALLL as a percentage of impaired loans was 93.1% at September 30, 2020 and 67.6% at December 31, 2019. Of the total nonperforming and impaired loans outstanding as of September 30, 2020, there were $648,000 in loans that had been reduced by partial charge-offs of $281,000.
The Company’s policy with regard to loan charge-offs continues to be that a loan is charged off against the ALLL when management believes that the collectability of the principal is unlikely. As previously discussed in the “Impaired Loans” section, certain loans are evaluated for impairment. Generally, if a loan is collateralized by real estate or other collateral, and considered collateral dependent, the impaired portion will be charged off to the allowance for loan losses unless it is in the process of collection, in which case a specific reserve may be warranted.
It is the policy of management to maintain the allowance for loan 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 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 losses is prudent and adequate. However, no prediction of the ultimate level of loans charged off in future periods can be made with any certainty.
Other Real Estate Owned
At September 30, 2020 and December 31, 2019, the Company had one other real estate owned (“OREO”) property totaling $846,000. During 2020, the Company did not acquire or sell any OREO properties nor were there any impairment charges to this property. There was no valuation allowance at September 30, 2020 nor at year-end 2019. The Company believes that the OREO property owned at September 30, 2020 was carried approximately at fair value.
Other Assets
Other assets consists of bank owned life insurance, accrued interest receivable and other assets. There was no significant change in the balance in bank owned life insurance at September 30, 2020 ($16,021,000) compared to December 31, 2019 ($15,763,000). Accrued interest receivable and other assets decreased from $8,148,000 at December 31, 2019 to $7,979,000 at September 30, 2020, a decrease of $169,000 (2.1%). A portion of this decrease is related to a decrease in the lease right-of-use-asset related to the Company’s adoption of ASU 2016-02 during 2019 which decreased $479,000 (16.7%), from $2,875,000 at December 31, 2019 to $2,396,000 at September 30, 2020. There were no repossessed automobiles at September 30, 2020, compared to $517,000 at December 31, 2019.
Deposits
At September 30, 2020, total deposits were $728,831,000 representing a $123,994,000 (20.5%) increase from the December 31, 2019 balance of $604,837,000. The Company’s deposit growth plan for 2020 is to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing money market and NOW accounts, and savings accounts while continuing to focus on maintaining an overall lower cost of funds than our peer group while at the same time retaining our high-valued deposit relationships. During the first nine months of 2020, the Company’s experienced increases in noninterest-bearing checking ($69,807,000 or 30.3%), interest-bearing checking ($14,556,000 or 20.8%), money market savings ($35,328,000 or 22.3%) and savings ($10,117,000 or 13.3%), and a decrease in time deposits ($4,814,000 or 6.5%). Some of the deposit increase can be attributed to our business accounts depositing the funds received from their PPP loans into their accounts held at American River Bank, as well as, balance increases due to the deferral payroll tax payments and other government programs.
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Other Borrowed Funds
Other borrowings outstanding as of September 30, 2020 and December 31, 2019, consist of advances (both long-term and short-term) from the FHLB. Table Nine below summarizes these borrowings.
Table Nine: Other Borrowed Funds
(dollars in thousands)
| September 30, 2020 | December 31, 2019 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Short-term borrowings: | ||||||||||||||||
| FHLB advances | $ | 12,000 | 0.32 | % | $ | 9,000 | 1.46 | % | ||||||||
| Long-term borrowings: | ||||||||||||||||
| FRBSF advances | $ | 1,960 | 0.35 | % | — | — | ||||||||||
| FHLB advances | $ | 13,500 | 1.81 | % | $ | 10,500 | 2.48 | % | ||||||||
The maximum amount of short-term borrowings at any month-end during the first nine months of 2020 and 2019 was $17,000,000 and $25,000,000, respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The FRBSP advances are collateralized by PPP loans pledged to the FRBSF under the Paycheck Protection Program Lending Facility. The following is a breakdown of rates and maturities on FHLB and FRBSF advances (dollars in thousands):
| Short-term | Long-term | |||||||
| Amount | $ | 12,000 | $ | 15,460 | ||||
| Maturity | 2020 to 2021 | 2021 to 2023 | ||||||
| Weighted average rates | 0.32 | % | 1.62 | % | ||||
Capital Resources
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 (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.
While the Company has elected to adopt the community bank leverage ratio framework in which it is no longer required to report the risk-based capital ratios, we believe reporting them to our shareholders allows them to compare the ratios of companies of similar size and, therefore, are presented below. Table Ten below lists the Company’s and American River Bank’s capital ratios at September 30, 2020 and December 31, 2019 as well as the minimum regulatory requirements.
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| Table Ten: Capital Ratios | ||||||||||||||||
| September 30, | December 31, | Minimum Regulatory Capital Requirements | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| American River Bankshares | ||||||||||||||||
| Leverage Ratio | 8.2 | % | 9.2 | % | N/A | N/A | ||||||||||
| Tier 1 Risk-Based Capital | 15.3 | % | 14.8 | % | N/A | N/A | ||||||||||
| Total Risk-Based Capital | 16.5 | % | 15.9 | % | N/A | N/A | ||||||||||
| American River Bank | ||||||||||||||||
| Leverage Ratio | 8.3 | % | 9.3 | % | 6.5 | % | 6.5 | % | ||||||||
| Common Equity Tier 1 Risk-Based Capital | 15.4 | % | 14.9 | % | N/A | 7.0 | % | |||||||||
| Tier 1 Risk-Based Capital | 15.4 | % | 14.9 | % | N/A | 8.5 | % | |||||||||
| Total Risk-Based Capital | 16.7 | % | 16.1 | % | N/A | 10.5 | % | |||||||||
At September 30, 2020, shareholders’ equity was $91,684,000, representing an increase of $8,775,000 (10.6%) from $82,909,000 at December 31, 2019. The increase results from net income for the period ($4,952,000), stock based compensation ($319,000), and the increase from other comprehensive income ($4,747,000), exceeding the payment of cash dividends ($1,243,000).
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 minimum capital ratio requirements which have been fully phased in. The capital requirements consist of the following: (i) a 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 which 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 became fully phased in on 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.
On February 12, 2020, May 15, 2020, and August 12, 2020, the Company paid cash dividends of $0.07 per common share to shareholders of record on January 29, 2020, April 29, 2020, and July 29, 2020, respectively. These 2020 quarterly cash dividends follow four quarterly cash dividends, totaling $0.24 per share, paid in 2019. Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory requirements and is adequate to meet future needs. Accordingly, we cannot provide any assurance that we will continue to pay cash dividends at the same historical rates, or at all. Management believes that both the Company and American River Bank met all of their capital adequacy requirements as of September 30, 2020 and December 31, 2019.
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 and its subsidiaries 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 significant effect upon the results of operations of the Company and its subsidiaries during the periods ended September 30, 2020 and 2019.
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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 repayments contribute to liquidity, along with deposit increases, while loan 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 September 30, 2020 were approximately $35,729,000 and zero, 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 pledged for secured borrowings. At September 30, 2020, consolidated liquid assets totaled $165.5 million or 19.3% of total assets compared to $141.5 million or 19.6% of total assets on December 31, 2019. In addition to liquid assets, the Company maintains two short-term unsecured lines of credit in the amount of $17,000,000 with two of its correspondent banks. At September 30, 2020, the Company had $17,000,000 available under these credit lines. Additionally, the Bank is a member of the FHLB. At September 30, 2020, the Bank could have arranged for up to $164,746,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At September 30, 2020, the Bank had advances, borrowings and commitments (including letters of credit) outstanding of $25,500,000, leaving $139,246,000 available under these FHLB secured borrowing arrangements. The Bank also has a secured borrowing arrangement with the Federal Reserve Bank of San Francisco. The borrowing can be secured by pledging selected loans and investment securities. At September 30, 2020, the Bank’s borrowing capacity at the Federal Reserve Bank was $6,345,000. In April 2020, the Company entered into a borrowing arrangement with the Federal Reserve Bank of San Francisco to participate in the Paycheck Protection Program Lending Facility (“PPPLF”). The PPPLF allows commercial lenders to pledge PPP loans as collateral for advances up to the term of the original PPP loans, through December 31, 2020. At September 30, 2020, the Company had $1,960,000 pledged and borrowed under the PPPLF, and $73,844,000 in remaining PPP loans that could be pledged as collateral for future advances under the PPPLF. 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 and borrowing capacity to offset the potential runoff of these volatile and/or 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. Furthermore, the Bank can pledge additional unencumbered securities to borrow from the Federal Reserve Bank of San Francisco or the FHLB.
Off-Balance Sheet Items
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.
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 applies the same credit policies to commitments and letters of credit as it does for loans included on the consolidated balance sheet. As of September 30, 2020 and December 31, 2019, commitments to extend credit and standby 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. Loan commitments and standby letters of credit were $35,729,000 and $40,624,000 at September 30, 2020 and December 31, 2019, respectively. As a percentage of net loans these off-balance sheet items represent 6.9% and 10.3%, respectively. See also, Note 3 “Commitments and Contingencies” to the unaudited consolidated financial statements included herein for additional information about the Company’s off-balance sheet items.
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The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results. See also, Note 9 “Leases” to the unaudited consolidated financial statements included herein for additional information about the Company’s leases.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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.
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.
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.
Table Eleven 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.
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Table Eleven: Interest Rate Risk Simulation of Net Interest as of September 30, 2020
| (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 | $ | 589 | $ | 2,028 | ||||
| +200bp | $ | 1,143 | $ | 4,050 | ||||
| -100bp | $ | (301 | ) | $ | (1,503 | ) | ||
| -200bp | $ | (715 | ) | $ | (2,928 | ) | ||
After a review of the model results as of September 30, 2020, 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.
Item 4. 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 September 30, 2020. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
During the quarter ended September 30, 2020, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company and/or its subsidiaries is a party to claims and legal proceedings arising in the ordinary course of business. The Company’s management is not aware of any significant pending legal proceedings to which either it or its subsidiaries may be a party or has recently been a party, which will have a significant adverse effect on the financial condition or results of operations of the Company or its subsidiaries, taken as a whole.
Item 1A. Risk Factors.
There have been no significant changes in the risk factors previously disclosed in the Company’s Form 10-K for the period ended December 31, 2019, filed with the Securities and Exchange Commission on February 21, 2020, except as described below.
The COVID-19 pandemic has significantly impacted the State of California and our business. We have already experienced an adverse impact on our business as result of the pandemic. The ultimate impact of the COVID-19 pandemic on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. We, and many of our clients, have been adversely affected by the COVID-19 pandemic. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering-in-place requirements in many states and communities. Our operations, like those of other financial institutions, are significantly influenced by economic conditions in California, including the strength of the real estate market and construction industry. As a result, the demand for our products and services has been, and may continue to be, adversely impacted.
Furthermore, the pandemic could influence the recognition of credit losses in our loan portfolios and increase our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. For the nine months ending September 30, 2020, we increased our allowance for loan losses by $1,485,000, primarily as a result of the COVID-19 pandemic. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairments in future periods on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, and we have already temporarily reduced hours at our branches and staff are working remotely. In response to the pandemic, we have implemented loan programs to allow borrowers to defer loan principal and interest payments and are participating in the PPP under the CARES Act to help provide loans to our business clients to provide them with additional working capital to enable them to retain their employees. The extent to which the COVID-19 pandemic continues to negatively impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company did not repurchase any shares during 2019 or the first nine months of 2020 and does not currently have a stock repurchase program in place.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
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SIGNATURES
Pursuant to the requirements 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 | ||
| November 5, 2020 | By: | /s/ DAVID E. RITCHIE, JR. |
| David E. Ritchie, Jr. | ||
| President and | ||
| Chief Executive Officer | ||
| AMERICAN RIVER BANKSHARES | ||
| November 5, 2020 | By: | /s/ MITCHELL A. DERENZO |
| Mitchell A. Derenzo | ||
| Executive Vice President and | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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