Item 1. Financial Statements.
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
BALANCE SHEET
(Unaudited)
(dollars
in thousands)
|
|
March
31,
2021
|
|
|
December
31,
2020
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and
due from banks
|
|
$
|
18,927
|
|
|
$
|
14,030
|
|
Interest-bearing deposits
in banks
|
|
|
78,871
|
|
|
|
28,479
|
|
Total
cash and cash equivalents
|
|
|
97,798
|
|
|
|
42,509
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
301,628
|
|
|
|
306,966
|
|
Held-to-maturity,
at amortized cost fair value of $11 in 2021 and $13 in 2020
|
|
|
10
|
|
|
|
12
|
|
Loans,
less allowance for loan losses of $6,696 at March 31, 2021 and $6,628 at December 31, 2020
|
|
|
468,718
|
|
|
|
471,853
|
|
Premises and equipment,
net
|
|
|
956
|
|
|
|
1,002
|
|
Federal Home Loan Bank
stock
|
|
|
4,212
|
|
|
|
4,212
|
|
Goodwill
|
|
|
16,321
|
|
|
|
16,321
|
|
Other real estate owned
|
|
|
800
|
|
|
|
800
|
|
Bank owned life insurance
|
|
|
16,162
|
|
|
|
16,101
|
|
Accrued interest receivable
and other assets
|
|
|
9,458
|
|
|
|
9,215
|
|
Total
assets
|
|
$
|
916,063
|
|
|
$
|
868,991
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
339,714
|
|
|
$
|
330,095
|
|
Interest-bearing
|
|
|
448,855
|
|
|
|
414,082
|
|
Total
deposits
|
|
|
788,569
|
|
|
|
744,177
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
7,000
|
|
|
|
7,000
|
|
Long-term borrowings
|
|
|
13,787
|
|
|
|
13,787
|
|
Accrued interest payable
and other liabilities
|
|
|
13,816
|
|
|
|
10,932
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
823,172
|
|
|
|
775,896
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock,
no par value; 10,000,000 shares authorized; none outstanding
|
|
|
|
|
|
|
|
|
Common
stock, no par value; 20,000,000 shares authorized; issued and outstanding – 5,962,466 shares at March 31, 2021 and 5,937,529
shares at December 31, 2020
|
|
|
31,066
|
|
|
|
30,961
|
|
Retained
earnings
|
|
|
58,209
|
|
|
|
55,978
|
|
Accumulated
other comprehensive income, net of taxes
|
|
|
3,616
|
|
|
|
6,156
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
92,891
|
|
|
|
93,095
|
|
Total
liabilities and shareholders' equity
|
|
$
|
916,063
|
|
|
$
|
868,991
|
|
See
Notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF INCOME
(Unaudited)
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
Interest income:
|
|
|
|
|
|
|
|
|
Interest and fees on loans:
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
5,604
|
|
|
$
|
4,675
|
|
Exempt from Federal income taxes
|
|
|
193
|
|
|
|
230
|
|
Interest on deposits in banks
|
|
|
8
|
|
|
|
34
|
|
Interest and dividends on investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,515
|
|
|
|
1,739
|
|
Exempt from Federal income taxes
|
|
|
34
|
|
|
|
37
|
|
Total interest income
|
|
|
7,354
|
|
|
|
6,715
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
160
|
|
|
|
440
|
|
Interest on borrowings
|
|
|
62
|
|
|
|
87
|
|
Total interest expense
|
|
|
222
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
7,132
|
|
|
|
6,188
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
495
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
7,132
|
|
|
|
5,693
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
164
|
|
|
|
155
|
|
Gain on sale of securities
|
|
|
172
|
|
|
|
38
|
|
Other noninterest income
|
|
|
255
|
|
|
|
259
|
|
Total noninterest income
|
|
|
591
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,762
|
|
|
|
2,865
|
|
Occupancy
|
|
|
259
|
|
|
|
256
|
|
Furniture and equipment
|
|
|
134
|
|
|
|
143
|
|
Federal Deposit Insurance Corporation assessments
|
|
|
54
|
|
|
|
27
|
|
Expenses related to other real estate owned
|
|
|
4
|
|
|
|
5
|
|
Other expense
|
|
|
850
|
|
|
|
920
|
|
Total noninterest expense
|
|
|
4,063
|
|
|
|
4,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,013
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,647
|
|
|
$
|
1,432
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.45
|
|
|
$
|
0.24
|
|
Diluted earnings per share
|
|
$
|
0.45
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
See
notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
For the three
months ended March 31,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
Net income
|
|
$
|
2,647
|
|
|
$
|
1,432
|
|
Other comprehensive (loss)
income:
|
|
|
|
|
|
|
|
|
(Decrease) increase in
net unrealized gains on investment securities
|
|
|
(3,434
|
)
|
|
|
4,053
|
|
Deferred tax benefit
(expense)
|
|
|
1,016
|
|
|
|
(1,198
|
)
|
(Decrease) increase in
net unrealized gains on investment securities, net of tax
|
|
|
(2,418
|
)
|
|
|
2,855
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment
for realized gains included in net income
|
|
|
(172
|
)
|
|
|
(38
|
)
|
Tax effect
|
|
|
50
|
|
|
|
11
|
|
Realized gains, net of
tax
|
|
|
(122
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income
|
|
|
(2,540
|
)
|
|
|
2,828
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
107
|
|
|
$
|
4,260
|
|
See
notes to Unaudited Consolidated Financial Statements
AMERICAN
RIVER BANKSHARES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
Balance, January 1, 2020
|
|
|
5,898,878
|
|
|
$
|
30,536
|
|
|
$
|
50,581
|
|
|
$
|
1,792
|
|
|
$
|
82,909
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,432
|
|
|
|
|
|
|
|
1,432
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains on available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,828
|
|
|
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.07 per share)
|
|
|
|
|
|
|
|
|
|
|
(413
|
)
|
|
|
|
|
|
|
(413
|
)
|
Net restricted stock award activity and related compensation expense
|
|
|
19,497
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
Stock option compensation expense
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
|
|
5,918,375
|
|
|
$
|
30,634
|
|
|
$
|
51,600
|
|
|
$
|
4,620
|
|
|
$
|
86,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2021
|
|
|
5,937,529
|
|
|
$
|
30,961
|
|
|
$
|
55,978
|
|
|
$
|
6,156
|
|
|
$
|
93,095
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
2,647
|
|
|
|
|
|
|
|
2,647
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains on available-for-sale investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,540
|
)
|
|
|
(2,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.07 per share)
|
|
|
|
|
|
|
|
|
|
|
(416
|
)
|
|
|
|
|
|
|
(416
|
)
|
Net restricted stock award activity and related compensation expense
|
|
|
22,761
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
Stock options exercised
|
|
|
2,176
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2021
|
|
|
5,962,466
|
|
|
$
|
31,066
|
|
|
$
|
58,209
|
|
|
$
|
3,616
|
|
|
$
|
92,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated
Financial Statements
AMERICAN RIVER
BANKSHARES
CONSOLIDATED STATEMENT
OF CASH FLOWS
(Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,647
|
|
|
$
|
1,432
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
495
|
|
Increase (decrease) in deferred loan origination fees and costs, net
|
|
|
305
|
|
|
|
(64
|
)
|
Depreciation and amortization
|
|
|
48
|
|
|
|
219
|
|
Gain on sale of investment securities
|
|
|
(172
|
)
|
|
|
(38
|
)
|
Amortization of investment security premiums and discounts, net
|
|
|
764
|
|
|
|
304
|
|
Increase in cash surrender values of life insurance policies
|
|
|
(61
|
)
|
|
|
(84
|
)
|
Stock based compensation expense
|
|
|
90
|
|
|
|
98
|
|
Decrease (increase) in accrued interest receivable and other assets
|
|
|
651
|
|
|
|
(407
|
)
|
Decrease in accrued interest payable and other liabilities
|
|
|
(239
|
)
|
|
|
(2,380
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
4,033
|
|
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of available-for-sale investment securities
|
|
|
11,048
|
|
|
|
4,229
|
|
Proceeds from matured available-for-sale investment securities
|
|
|
734
|
|
|
|
—
|
|
Purchases of available-for-sale investment securities
|
|
|
(22,793
|
)
|
|
|
(4,987
|
)
|
Proceeds from principal repayments for available-for-sale investment securities
|
|
|
15,446
|
|
|
|
10,848
|
|
Proceeds from principal repayments for held-to-maturity investment securities
|
|
|
2
|
|
|
|
8
|
|
Net decrease in loans
|
|
|
4,115
|
|
|
|
8,164
|
|
Purchases of loans
|
|
|
(1,285
|
)
|
|
|
(2,837
|
)
|
Purchases of equipment
|
|
|
(2
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
7,265
|
|
|
|
15,401
|
|
|
|
|
|
|
|
|
|
|
(Continued)
AMERICAN RIVER
BANKSHARES
CONSOLIDATED STATEMENT
OF CASH FLOWS (Continued)
(Unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in demand, interest-bearing and savings deposits
|
|
$
|
38,552
|
|
|
$
|
1,193
|
|
Net increase (decrease) in time deposits
|
|
|
5,840
|
|
|
|
(2,894
|
)
|
Increase in short term borrowing
|
|
|
—
|
|
|
|
(4,000
|
)
|
Proceeds from exercised options
|
|
|
15
|
|
|
|
—
|
|
Cash dividends paid
|
|
|
(416
|
)
|
|
|
(413
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
43,991
|
|
|
|
(6,114
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
55,289
|
|
|
|
8,862
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
42,509
|
|
|
|
17,810
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
97,798
|
|
|
$
|
26,672
|
|
|
|
|
|
|
|
|
|
|
Supplemental noncash disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
227
|
|
|
$
|
533
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited
Consolidated Financial Statements
AMERICAN RIVER
BANKSHARES
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
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 March
31, 2021 and December 31, 2020, the results of its operations and its cash flows for the three-month periods ended March 31, 2021
and 2020 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, 2020.
The results of operations for the three-month period ended March 31, 2021 may not necessarily be indicative of the operating results
for the full year.
In preparing
such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly
from those estimates.
Management has
determined that since all of the banking products and services offered by the Company are available in each branch office of American
River Bank, all branch offices are located within the same economic environment and management does not allocate resources based
on the performance of different lending or transaction activities, it is appropriate to aggregate all of the branch offices and
report them as a single operating segment. No client accounts for more than ten percent (10%) of revenues for the Company or American
River Bank.
2.
STOCK-BASED COMPENSATION
Equity
Plans
On
March 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 March 31, 2021 there were 42,395 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 42,395 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 March 31, 2021 there were 27,782 stock options and 23,364 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.
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 March 31, 2021 and 2020, the compensation cost recognized for equity compensation was $90,000 and
$98,000, respectively. The recognized tax benefit for equity compensation expense was $27,000 and $26,000, for the three-month
periods ended March 31, 2021 and 2020, respectively.
At
March 31, 2021, there was no unrecognized pre-tax compensation cost related to nonvested stock option awards. At March 31, 2021
the total compensation cost related to restricted stock awards not yet recorded is $705,000. This amount will be recognized over
the next 4.25 years and the weighted average period of recognizing these costs is expected to be 1.3 years.
Equity
Plans Activity
Stock
Options
There
were no stock options awarded during the three-month periods ended March 31, 2021 and 2020. A summary of option activity under
the Plans as of March 31, 2021 and changes during the period then ended is presented below:
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value ($000)
|
|
Outstanding at January 1, 2021
|
|
|
29,958
|
|
|
$
|
8.79
|
|
|
|
3.4 years
|
|
|
$
|
131
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(2,176
|
)
|
|
|
7.07
|
|
|
|
—
|
|
|
|
—
|
|
Expired, forfeited or cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2021
|
|
|
27,782
|
|
|
$
|
8.93
|
|
|
|
3.3 years
|
|
|
$
|
205
|
|
Vested at March 31, 2021
|
|
|
27,782
|
|
|
$
|
8.93
|
|
|
|
3.3 years
|
|
|
$
|
205
|
|
Non-vested at March 31, 2021
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Restricted
Stock
There
were 22,761 shares of restricted stock awarded during the three-month period ended March 31, 2021 and 19,497 shares of restricted
stock awarded during the three-month period ended March 31, 2020. There were 15,501 and 9,000 restricted stock awards that were
fully vested during the three-month periods ended March 31, 2021 and 2020, respectively. The intrinsic value of nonvested restricted
stock at March 31, 2021 was $1,073,000.
Schedule of nonvested share activity
Restricted Stock
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested at January 1, 2021
|
|
|
58,499
|
|
|
$
|
13.03
|
|
Awarded
|
|
|
22,761
|
|
|
|
15.25
|
|
Less: Vested
|
|
|
15,501
|
|
|
|
14.61
|
|
Less: Expired, forfeited or cancelled
|
|
|
—
|
|
|
|
—
|
|
Nonvested at March 31, 2021
|
|
|
65,759
|
|
|
$
|
13.43
|
|
Other
Equity Awards
There
were no stock appreciation rights, restricted performance stock, unrestricted Company stock, or performance units awarded during
the three-month periods ended March 31, 2021 or 2020 or outstanding at March 31, 2021 or December 31, 2020.
The
intrinsic value used for stock options and restricted stock was derived from the market price of the Company’s common stock
of $16.31 as of March 31, 2021.
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 $43,649,000 and standby letters of credit of approximately $60,000 at March 31, 2021
and loan commitments of approximately $32,851,000 and standby letters of credit of zero at December 31, 2020. Such commitments
relate primarily to real estate construction loans, revolving lines of credit and other commercial loans. However, all such commitments
will not necessarily culminate in actual extensions of credit by the Company during 2021 as some of these are expected to expire
without being fully drawn upon.
Standby letters
of credit are commitments issued to guarantee the performance or financial obligation of a client to a third party. These guarantees
are issued primarily relating to purchases of inventory, insurance programs, performance obligations to government agencies, or
as security for real estate rents by commercial clients and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to clients and accordingly, evaluation and collateral requirements similar to those for
loan commitments are used. The majority of all such commitments are collateralized. The fair value of the liability related to
these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at March 31,
2021 or December 31, 2020.
4. EARNINGS PER SHARE COMPUTATION
Basic earnings
per share is computed by dividing net income by the weighted average common shares outstanding for the period (5,886,297 shares
and 5,858,919 shares for the three-month periods ended March 31, 2021 and 2020, respectively). 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 (35,661 shares for the three-month period
ended March 31, 2021 and 24,657 shares for the three-month period ended March 31, 2020). For the three-month periods ended March
31, 2021 and 2020, 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.
5.
INVESTMENT SECURITIES
The
amortized cost and estimated fair values of investment securities at March 31, 2021 and December 31, 2020 consisted of the following
(dollars in thousands):
Available-for-Sale
|
|
March 31, 2021
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
261,826
|
|
|
$
|
6,326
|
|
|
$
|
(1,665
|
)
|
|
$
|
266,487
|
|
Obligations of states and political subdivisions
|
|
|
16,257
|
|
|
|
495
|
|
|
|
(29
|
)
|
|
|
16,723
|
|
U. S Treasury securities
|
|
|
11,663
|
|
|
|
—
|
|
|
|
(99
|
)
|
|
|
11,564
|
|
Corporate bonds
|
|
|
6,749
|
|
|
|
110
|
|
|
|
(5
|
)
|
|
|
6,854
|
|
|
|
$
|
296,495
|
|
|
$
|
6,931
|
|
|
$
|
(1,798
|
)
|
|
$
|
301,628
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies and Sponsored Agencies
|
|
$
|
276,191
|
|
|
$
|
8,474
|
|
|
$
|
(832
|
)
|
|
$
|
283,833
|
|
Obligations of states and
political subdivisions
|
|
|
15,288
|
|
|
|
1,013
|
|
|
|
—
|
|
|
|
16,301
|
|
Corporate bonds
|
|
|
6,748
|
|
|
|
85
|
|
|
|
(1
|
)
|
|
|
6,832
|
|
|
|
$
|
298,227
|
|
|
$
|
9,572
|
|
|
$
|
(833
|
)
|
|
$
|
306,966
|
|
Net
unrealized gains on available-for-sale investment securities totaling $5,133,000 were recorded, net of $1,517,000 in tax liabilities,
as accumulated other comprehensive income within shareholders’ equity at March 31, 2021. Proceeds and gross realized gains
from the sale and call of available-for-sale investment securities for the three-month period ended March 31, 2021 totaled $11,048,000
and $172,000, respectively. There were no transfers of available-for-sale investment securities for the three-month period ended
March 31, 2021.
Net
unrealized gains on available-for-sale investment securities totaling $8,739,000 were recorded, net of $2,583,000 in tax liabilities,
as accumulated other comprehensive loss within shareholders’ equity at December 31, 2020. Proceeds and gross realized gains
from the sale and call of available-for-sale investment securities for the three-month period ended March 31, 2020 totaled $4,229,000
and $38,000, respectively. There were no transfers of available-for-sale investment securities for the three-month period ended
March 31, 2020.
Held-to-Maturity
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
$
|
12
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
13
|
|
There
were no sales or transfers of held-to-maturity investment securities for the periods ended March 31, 2021 and March 31, 2020.
Investment securities with unrealized losses at March 31, 2021 and December 31, 2020 are summarized and classified according to
the duration of the loss period as follows (dollars in thousands):
Investment
securities with unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
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 Agencies
|
|
$
|
81,619
|
|
|
$
|
(1,307
|
)
|
|
$
|
21,350
|
|
|
$
|
(358
|
)
|
|
$
|
102,969
|
|
|
$
|
(1,665
|
)
|
Obligations of states and political subdivisions
|
|
|
2,328
|
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,328
|
|
|
|
(29
|
)
|
U. S Treasury securities
|
|
|
11,564
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
11,564
|
|
|
|
(99
|
)
|
Corporate bonds
|
|
|
745
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
745
|
|
|
|
(5
|
)
|
|
|
$
|
96,256
|
|
|
$
|
(1,440
|
)
|
|
$
|
21,350
|
|
|
$
|
(358
|
)
|
|
$
|
117,606
|
|
|
$
|
(1,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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 Agencies
|
|
$
|
58,886
|
|
|
$
|
(403
|
)
|
|
$
|
31,138
|
|
|
$
|
(429
|
)
|
|
$
|
90,024
|
|
|
$
|
(832
|
)
|
Corporate bonds
|
|
|
749
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
749
|
|
|
|
(1
|
)
|
|
|
$
|
59,635
|
|
|
$
|
(404
|
)
|
|
$
|
31,138
|
|
|
$
|
(429
|
)
|
|
$
|
90,773
|
|
|
$
|
(833
|
)
|
There
were no held-to-maturity investment securities with unrealized losses as of March 31, 2021 or December 31, 2020.
At
March 31, 2021, the Company held 218 securities of which 40 were in a loss position for less than twelve months and 16 were in
a loss position for twelve months or more. All 16 of these securities consisted of mortgage-backed securities. At
December 31, 2020, the Company held 204 securities of which 29 were in a loss position for less than twelve months and 21 were
in a loss position for twelve months or more. These 50 securities consisted of mortgage-backed and corporate securities.
The
unrealized loss on the Company's investment securities is primarily driven by interest rates. Because the decline in market
value is attributable to a change in interest rates and not credit quality, and because the Company has the ability and intent
to hold these investments until recovery of fair value, which may be until maturity, management does not consider these investments
to be other-than-temporarily impaired. The amortized cost and estimated fair values of investment securities at March 31, 2021
by contractual maturity are shown below (dollars in thousands).
The
amortized cost and estimated fair value of investment securities
|
|
Available-for-Sale
|
|
|
Held-to-Maturity
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
2,279
|
|
|
$
|
2,292
|
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
360
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
After five years through ten years
|
|
|
28,523
|
|
|
|
28,956
|
|
|
|
|
|
|
|
|
|
After ten years
|
|
|
3,507
|
|
|
|
3,532
|
|
|
|
|
|
|
|
|
|
|
|
|
34,669
|
|
|
|
35,141
|
|
|
|
|
|
|
|
|
|
Investment securities not due at a single maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Agencies
|
|
|
261,826
|
|
|
|
266,487
|
|
|
$
|
10
|
|
|
$
|
11
|
|
|
|
$
|
296,495
|
|
|
$
|
301,628
|
|
|
$
|
10
|
|
|
$
|
11
|
|
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
March 31, 2021 and December 31, 2020 the recorded investment in nonperforming loans was zero in both periods. 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.
At
March 31, 2021 and December 31, 2020, the recorded investment in other real estate owned (“OREO”) was $800,000. During
the first quarter of 2021, the Company repossessed and sold two automobiles that had combined loan balances of $66,000 and took
a combined charge to the Allowance for Loan Losses (“ALLL”) of $9,000. At March 31, 2021, the Company did not own
any residential OREO properties nor were there any residential properties in the process of foreclosure. During 2021, 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 March
31, 2021 OREO balance of $800,000 consisted of one parcel of land zoned for commercial use. Nonperforming loans and other assets
and OREO at March 31, 2021 and December 31, 2020 are summarized as follows (in thousands):
Nonperforming
assets
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. Impaired loans
as of and for the periods ended March 31, 2021 and December 31, 2020 are summarized as follows:
Impaired
loans as of and for the periods ended June 30, 2020 and December 31, 2019 are summarized as follows:
The
following table presents the average balance related to impaired loans for the periods indicated (in thousands):
The
following table presents the interest income recognized on impaired loans for the periods indicated (in thousands):
7.
TROUBLED DEBT RESTRUCTURINGS
During
the periods ended March 31, 2021 and 2020, there were no loans that were modified as troubled debt restructurings (“TDRs”).
There
were no payment defaults during the three months ended March 31, 2021 or March 31, 2020 on troubled debt restructurings made in
the preceding twelve months. At March 31, 2021 and December 31, 2020, there were no unfunded commitments on those loans considered
troubled debt restructures. See also “Impaired Loans” in Item 2.
8. ALLOWANCE FOR
LOAN LOSSES
The
Company’s loan portfolio allocated by management's internal risk ratings as of March 31, 2021 and December 31, 2020 are
summarized below (Commercial “Pass” loans includes $57,486,000 and $55,546,000 in Paycheck Protection Program (“PPP”)
loans at March 31, 2021 and December 31, 2020, respectively):
March 31, 2021
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
87,216
|
|
|
$
|
227,925
|
|
|
$
|
45,254
|
|
|
$
|
25,242
|
|
|
$
|
31,234
|
|
Watch
|
|
|
6,766
|
|
|
|
18,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
515
|
|
Special mention
|
|
|
—
|
|
|
|
1,437
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Substandard
|
|
|
—
|
|
|
|
1,198
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
93,982
|
|
|
$
|
248,660
|
|
|
$
|
45,254
|
|
|
$
|
25,242
|
|
|
$
|
31,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
6,034
|
|
|
$
|
26,462
|
|
|
|
|
|
|
|
|
|
|
$
|
449,367
|
|
Watch
|
|
|
—
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
25,514
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1,198
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
6,034
|
|
|
$
|
26,595
|
|
|
|
|
|
|
|
|
|
|
$
|
477,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
90,021
|
|
|
$
|
229,887
|
|
|
$
|
48,760
|
|
|
$
|
18,424
|
|
|
$
|
31,760
|
|
Watch
|
|
|
4,501
|
|
|
|
20,143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
569
|
|
Special mention
|
|
|
—
|
|
|
|
118
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Substandard
|
|
|
—
|
|
|
|
1,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
94,522
|
|
|
$
|
251,348
|
|
|
$
|
48,760
|
|
|
$
|
18,424
|
|
|
$
|
32,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Total
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
6,091
|
|
|
$
|
28,668
|
|
|
|
|
|
|
|
|
|
|
$
|
453,611
|
|
Watch
|
|
|
—
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
25,349
|
|
Special mention
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1,200
|
|
Doubtful or loss
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
6,091
|
|
|
$
|
28,804
|
|
|
|
|
|
|
|
|
|
|
$
|
480,278
|
|
The
allocation of the Company’s allowance for loan losses and by portfolio segment and by impairment methodology are summarized
below (Commercial loans includes $57,486,000 and $55,546,000 in PPP loans at March 31, 2021 and December 31, 2020, respectively,
and do not carry any associated allowance for loan loss, as they are 100% guaranteed by the Small Business Administration (“SBA”
)):
Schedule of Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2021
|
|
$
|
922
|
|
|
$
|
3,466
|
|
|
$
|
411
|
|
|
$
|
687
|
|
|
$
|
388
|
|
|
$
|
85
|
|
|
$
|
391
|
|
|
$
|
278
|
|
|
$
|
6,628
|
|
Provision for loan losses
|
|
|
(149
|
)
|
|
|
(61
|
)
|
|
|
(34
|
)
|
|
|
236
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
28
|
|
|
|
—
|
|
Loans charged-off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
Recoveries
|
|
|
76
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2021
|
|
$
|
849
|
|
|
$
|
3,406
|
|
|
$
|
377
|
|
|
$
|
923
|
|
|
$
|
387
|
|
|
$
|
85
|
|
|
$
|
363
|
|
|
$
|
306
|
|
|
$
|
6,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
849
|
|
|
$
|
3,306
|
|
|
$
|
377
|
|
|
$
|
923
|
|
|
$
|
378
|
|
|
$
|
85
|
|
|
$
|
363
|
|
|
$
|
306
|
|
|
$
|
6,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
93,982
|
|
|
$
|
248,660
|
|
|
$
|
45,254
|
|
|
$
|
25,242
|
|
|
$
|
31,749
|
|
|
$
|
6,034
|
|
|
$
|
26,595
|
|
|
$
|
—
|
|
|
$
|
477,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
6,558
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
431
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
93,982
|
|
|
$
|
242,102
|
|
|
$
|
45,254
|
|
|
$
|
25,242
|
|
|
$
|
31,318
|
|
|
$
|
6,034
|
|
|
$
|
26,595
|
|
|
$
|
—
|
|
|
$
|
470,527
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
922
|
|
|
$
|
3,466
|
|
|
$
|
411
|
|
|
$
|
687
|
|
|
$
|
388
|
|
|
$
|
85
|
|
|
$
|
391
|
|
|
$
|
278
|
|
|
$
|
6,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
922
|
|
|
$
|
3,360
|
|
|
$
|
411
|
|
|
$
|
687
|
|
|
$
|
382
|
|
|
$
|
85
|
|
|
$
|
391
|
|
|
$
|
278
|
|
|
$
|
6,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
94,522
|
|
|
$
|
251,348
|
|
|
$
|
48,760
|
|
|
$
|
18,424
|
|
|
$
|
32,329
|
|
|
$
|
6,091
|
|
|
$
|
28,804
|
|
|
$
|
—
|
|
|
$
|
480,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
6,614
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
436
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
94,522
|
|
|
$
|
244,734
|
|
|
$
|
48,760
|
|
|
$
|
18,424
|
|
|
$
|
31,893
|
|
|
$
|
6,091
|
|
|
$
|
28,804
|
|
|
$
|
—
|
|
|
$
|
473,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Real Estate
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-family
|
|
|
Construction
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance, January 1, 2020
|
|
$
|
950
|
|
|
$
|
1,906
|
|
|
$
|
329
|
|
|
$
|
986
|
|
|
$
|
281
|
|
|
$
|
107
|
|
|
$
|
334
|
|
|
$
|
245
|
|
|
$
|
5,138
|
|
Provision for loan losses
|
|
|
63
|
|
|
|
349
|
|
|
|
64
|
|
|
|
(98
|
)
|
|
|
56
|
|
|
|
(4
|
)
|
|
|
58
|
|
|
|
7
|
|
|
|
495
|
|
Loans charged-off
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recoveries
|
|
|
1
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2020
|
|
$
|
1,014
|
|
|
$
|
2,258
|
|
|
$
|
393
|
|
|
$
|
888
|
|
|
$
|
337
|
|
|
$
|
103
|
|
|
$
|
392
|
|
|
$
|
252
|
|
|
$
|
5,637
|
|
The
Company’s aging analysis of the loan portfolio at March 31, 2021 and December 31, 2020 are summarized below (Commercial
loans includes $57,486,000 and $55,546,000 in PPP loans at March 31, 2021 and December 31, 2020, respectively):
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93,982
|
|
|
$
|
93,982
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
248,660
|
|
|
|
248,660
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,254
|
|
|
|
45,254
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,242
|
|
|
|
25,242
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,749
|
|
|
|
31,749
|
|
|
|
—
|
|
|
|
—
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,034
|
|
|
|
6,034
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,595
|
|
|
|
26,595
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
477,516
|
|
|
$
|
477,516
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
94,522
|
|
|
$
|
94,522
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
251,348
|
|
|
|
251,348
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48,760
|
|
|
|
48,760
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,424
|
|
|
|
18,424
|
|
|
|
—
|
|
|
|
—
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,329
|
|
|
|
32,329
|
|
|
|
—
|
|
|
|
—
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,091
|
|
|
|
6,091
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,804
|
|
|
|
28,804
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
480,278
|
|
|
$
|
480,278
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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 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 $4,882,000 as of December 31, 2020. These loans are not considered past due until after the deferral period
is over and scheduled payments have resumed. During the first quarter of 2021, both of the loan deferrals comprised of the $4,882,000
at December 31, 2020 began making their scheduled payments and one additional loan, in the amount of $2,017,000, was granted a
three-month interest only arrangement and is scheduled to resume contractual payments in the second quarter of 2021.
9. 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.
Supplemental
lease information at or for the three months ended March 31, 2021 and 2020 is as follows:
|
|
2021
|
|
|
2020
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
Operating lease asset classified as other assets
|
|
$
|
2,551,000
|
|
|
$
|
2,717,000
|
|
Operating lease liability classified as other liabilities
|
|
|
2,730,000
|
|
|
|
2,392,000
|
|
|
|
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
Operating lease cost classified as occupancy and equipment expense
|
|
$
|
194,000
|
|
|
$
|
190,000
|
|
Weighted average lease term, in years
|
|
|
5.87
|
|
|
|
5.47
|
|
Weighted average discount rate (1)
|
|
|
2.98
|
%
|
|
|
2.98
|
%
|
Operating cash flows
|
|
$
|
190,000
|
|
|
$
|
194,000
|
|
|
(1)
|
The discount rate was developed
by using the fixed rate credit advance borrowing rate at the Federal Home Loan Bank of San Francisco for a term correlating
to the remaining life of each lease.
|
A maturity analysis
of the Company’s lease liabilities at March 31, 2021 was as follows:
|
|
Balance
|
|
April
1, 2021 to December 31, 2021
|
|
$
|
583,000
|
|
January
1, 2021 to December 31, 2022
|
|
|
753,000
|
|
January
1, 2022 to December 31, 2023
|
|
|
329,000
|
|
January
1, 2023 to December 31, 2024
|
|
|
322,000
|
|
January
1, 2024 to December 31, 2025
|
|
|
232,000
|
|
Thereafter
|
|
|
753,000
|
|
Total
lease payments
|
|
|
2,972,000
|
|
Less: Interest
|
|
|
(242,000
|
)
|
Present
value of lease liabilities
|
|
$
|
2,730,000
|
|
10. BORROWING ARRANGEMENTS
At
March 31, 2021 and December 31, 2020, the Company had $17,000,000 of unsecured short-term borrowing arrangements with two of its
correspondent banks. There were no advances under the borrowing arrangements as of March 31, 2021 or December 31, 2020.
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 $20,787,000 were outstanding from the FHLB at March 31,
2021 and December 31, 2020, bearing interest rates ranging from 0.00% to 2.43% and maturing between April 12, 2021 and October
20, 2025. Remaining amounts available under the borrowing arrangement with the FHLB at March 31, 2021 and December 31, 2020 totaled
$152,049,000 and $132,409,000, respectively. In addition, the Company has a secured borrowing agreement with the Federal Reserve
Bank of San Francisco. The borrowing can be secured by pledging selected loans and investment securities. Borrowings generally
are short-term including overnight advances as well as loans with terms up to ninety days. Amounts available under this borrowing
arrangement at March 31, 2021 and December 31, 2020 were $6,021,000 and $6,209,000, respectively. There were no advances outstanding
under this borrowing arrangement as of March 31, 2021 and December 31, 2020.
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 periods
ended March 31, 2021 and 2020.
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 March 31, 2021 and December 31, 2020. 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):
Schedule of Estimated Fair Value of Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
March 31, 2021
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
18,927
|
|
|
$
|
18,927
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,927
|
|
Interest-bearing deposits in banks
|
|
|
78,871
|
|
|
|
78,871
|
|
|
|
—
|
|
|
|
—
|
|
|
|
78,871
|
|
Available-for-sale Securities
|
|
|
301,628
|
|
|
|
—
|
|
|
|
301,628
|
|
|
|
—
|
|
|
|
301,628
|
|
Held-to-maturity securities
|
|
|
10
|
|
|
|
—
|
|
|
|
11
|
|
|
|
—
|
|
|
|
11
|
|
Net loans
|
|
|
468,718
|
|
|
|
—
|
|
|
|
—
|
|
|
|
479,432
|
|
|
|
479,432
|
|
Accrued interest receivable
|
|
|
3,460
|
|
|
|
—
|
|
|
|
1,502
|
|
|
|
1,958
|
|
|
|
3,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
339,714
|
|
|
$
|
339,714
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
339,714
|
|
Savings
|
|
|
93,622
|
|
|
|
93,622
|
|
|
|
—
|
|
|
|
—
|
|
|
|
93,622
|
|
Money market
|
|
|
186,086
|
|
|
|
186,086
|
|
|
|
—
|
|
|
|
—
|
|
|
|
186,086
|
|
Interest checking
|
|
|
94,126
|
|
|
|
94,126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
94,126
|
|
Time Deposits
|
|
|
75,021
|
|
|
|
—
|
|
|
|
75,347
|
|
|
|
—
|
|
|
|
75,347
|
|
Short-term borrowings
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,000
|
|
Long-term borrowings
|
|
|
13,787
|
|
|
|
—
|
|
|
|
13,945
|
|
|
|
—
|
|
|
|
13,945
|
|
Accrued interest payable
|
|
|
37
|
|
|
|
9
|
|
|
|
28
|
|
|
|
—
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
December 31, 2020
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
14,030
|
|
|
$
|
14,030
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,030
|
|
Interest-bearing deposits in banks
|
|
|
28,479
|
|
|
|
26,733
|
|
|
|
1,746
|
|
|
|
—
|
|
|
|
28,479
|
|
Available-for-sale Securities
|
|
|
306,966
|
|
|
|
—
|
|
|
|
306,966
|
|
|
|
—
|
|
|
|
306,966
|
|
Held-to-maturity securities
|
|
|
12
|
|
|
|
—
|
|
|
|
13
|
|
|
|
—
|
|
|
|
13
|
|
Net loans:
|
|
|
471,853
|
|
|
|
—
|
|
|
|
—
|
|
|
|
474,400
|
|
|
|
474,400
|
|
Accrued interest receivable
|
|
|
3,733
|
|
|
|
—
|
|
|
|
1,428
|
|
|
|
2,305
|
|
|
|
3,733
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
330,095
|
|
|
$
|
330,095
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
330,095
|
|
Savings
|
|
|
87,315
|
|
|
|
87,315
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87,315
|
|
Money market
|
|
|
175,541
|
|
|
|
175,541
|
|
|
|
—
|
|
|
|
—
|
|
|
|
175,541
|
|
Interest checking
|
|
|
82,045
|
|
|
|
82,045
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82,045
|
|
Time Deposits
|
|
|
69,181
|
|
|
|
—
|
|
|
|
69,511
|
|
|
|
—
|
|
|
|
69,511
|
|
Short-term borrowings
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,000
|
|
Long-term borrowings
|
|
|
13,787
|
|
|
|
—
|
|
|
|
13,967
|
|
|
|
—
|
|
|
|
13,967
|
|
Accrued interest payable
|
|
|
42
|
|
|
|
3
|
|
|
|
39
|
|
|
|
—
|
|
|
|
42
|
|
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 are presented in the following table:
Assets and liabilities measured at fair value on a recurring and non-recurring basis
Description
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Gains
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies and Sponsored Entities
|
|
$
|
266,487
|
|
|
$
|
—
|
|
|
$
|
266,487
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Obligations of states and political subdivisions
|
|
|
16,723
|
|
|
|
—
|
|
|
|
16,723
|
|
|
|
—
|
|
|
|
—
|
|
U.S. Treasury securities
|
|
|
11,564
|
|
|
|
11,564
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Corporate Debt securities
|
|
|
6,854
|
|
|
|
—
|
|
|
|
6,854
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
301,628
|
|
|
$
|
11,564
|
|
|
$
|
290,064
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned Land
|
|
$
|
800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
—
|
|
Total nonrecurring
|
|
$
|
800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Gains
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
(Losses)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies and Sponsored Agencies
|
|
$
|
283,833
|
|
|
$
|
—
|
|
|
$
|
283,833
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate Debt securities
|
|
|
6,832
|
|
|
|
—
|
|
|
|
6,832
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political subdivisions
|
|
|
16,301
|
|
|
|
—
|
|
|
|
16,301
|
|
|
|
—
|
|
|
|
—
|
|
Total recurring
|
|
$
|
306,966
|
|
|
$
|
—
|
|
|
$
|
306,966
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned Land
|
|
$
|
800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
(46
|
)
|
Total nonrecurring
|
|
$
|
800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
(46
|
)
|
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.
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). As discussed in Note 15 below, the Company has entered into an Agreement to Merge and Plan of Reorganization with Bank
of Marin Bancorp. While the Company continues to evaluate the provisions of ASU No. 2016-13 to determine the potential impact
of the standard may have on the Company's Consolidated Financial Statements, it may not remain an independent Company and, therefore,
not be subject to adoption of ASU No. 2016-13. Instead, the Company would be merged into Bank of Marin Bancorp. The Company will
continue to take the steps to prepare for the implementation if the merger does not becomes effective, such as continue meetings
of its internal task force, gathering pertinent data, consulting with outside professionals, evaluating its current IT systems,
and maintaining its 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, if needed, on a test basis, with the new CECL specific software
during 2021 and to disclose any material potential impact of this modeling, if necessary, once it becomes available.
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 477 PPP loans totaling $80,154,000. During the
first quarter of 2021 we funded 201 PPP loans totaling $25,465,000. During the fourth quarter of 2020 and continuing
into the first quarter we began processing PPP forgiveness applications for our PPP borrowers. At March 31, 2021,
368 PPP loans totaling $57,486,000 were remaining.
|
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.
15.
SUBSEQUENT EVENT
On
April 16, 2021, the Company entered into a Merger Agreement that, upon the terms and subject to the conditions set forth therein,
the Company will merge (the “Merger”) with and into Bank of Marin Bancorp (“Marin Bancorp”) with Marin
Bancorp surviving, followed immediately thereafter by the merger (the “Bank Merger”) of American River Bank, with
and into Bank of Marin, a California corporation and wholly-owned subsidiary of Marin Bancorp, with Bank of Marin surviving. The
Merger Agreement was approved by the Board of Directors of each of the Company and Marin Bancorp.
Subject
to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each
outstanding share of the Company’s common stock, excluding certain specified shares, will be converted into the right to
receive 0.575 (the “Exchange Ratio”) of a share of Marin Bancorp common stock (the “Merger Consideration”).
In addition, at the Effective Time, (i) each option to purchase shares of Company common stock, whether vested or unvested, that
is outstanding immediately prior to the Effective Time will be canceled and exchanged for the right to receive an amount of cash
equal to the product of (x) the total number of shares of Company common stock subject to such option and (y) the excess, if any,
of (A) the product of (1) the volume weighted average price of Marin Bancorp common stock on each of the last fifteen trading
days ending on the second trading day immediately prior to the Effective Time, and (2) the Exchange Ratio, over (B) the exercise
price per share under such option, less applicable taxes required to be withheld with respect to such payment; and (ii) any vesting
conditions applicable to each outstanding restricted stock award and each outstanding restricted stock unit will accelerate in
full, and each such restricted stock award and restricted stock unit will be treated as any other outstanding share of Company
common stock entitled to receive the Merger Consideration. See the Company’s Form 8-K filed with the SEC on April 19, 2021
for further information.
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, 2020 and March 31, 2021 and its income and expense accounts for the three-month periods
ended March 31, 2021 and 2020. 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
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;
|
|
·
|
the
effects of strategic transactions we are a party to;
|
|
·
|
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, regulatory, 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;
|
|
·
|
the
possibility that the announced merger with Bank of Marin Bancorp (“Marin Bancorp”)
does not close when expected or at all because required regulatory, shareholder or other
approvals, financial tests or other conditions to closing are not received or satisfied
on a timely basis or at all;
|
|
·
|
the
businesses of the Company and Marin Bancorp may not be integrated successfully or such
integration may be more difficult, time-consuming or costly than expected;
|
|
·
|
changes
in the Company’s or Marin Bancorp’s stock price before the effective time
of the merger, including as a result of financial performance, or more generally due
to broader stock market movements, and the performance of financial companies and peer
group companies;
|
|
·
|
the
risk that the benefits from the transaction may not be fully realized or may take longer
to realize than expected, or that expected revenue synergies and cost savings from the
announced merger with Marin Bancorp may not be fully realized or realized within the
expected time frame, including as a result of changes in general economic and market
conditions, interest and exchange rates, monetary policy, laws and regulations and their
enforcement, the effect of pandemic disease (including Covid-19) and the degree of competition
in the geographic and business areas in which the Company and Marin Bancorp operate;
|
|
·
|
the
ability to promptly and effectively integrate the businesses of the Company and Marin
Bancorp;
|
|
·
|
the
reaction to the merger transaction of the companies’ clients, employees and counterparties;
|
|
·
|
diversion
of time of directors, management and other employees on merger-related issues; and
|
|
·
|
the
efficiencies we may expect to receive from any investments in personnel and infrastructure
may not be realized.
|
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, 2020, 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.
Merger
with Bank of Marin Bancorp
On
April 16, 2021, the Company entered into a Merger Agreement that, upon the terms and subject to the conditions set forth therein,
the Company will merge (the “Merger”) with and into Bank of Marin Bancorp (the Marin Bancorp”) with Marin Bancorp
surviving, followed immediately thereafter by the merger (the “Bank Merger”) of American River Bank, with and into
Bank of Marin, a California corporation and wholly-owned subsidiary of Marin Bancorp, with Bank of Marin surviving. The Merger
Agreement was approved by the Board of Directors of each of the Company and Marin Bancorp.
Subject
to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”),
each outstanding share of the Company’s common stock, excluding certain specified shares, will be converted into the
right to receive 0.575 (the “Exchange Ratio”) of a share of Marin Bancorp common stock (the “Merger
Consideration”). In addition, at the Effective Time, (i) each option to purchase shares of Company common stock,
whether vested or unvested, that is outstanding immediately prior to the Effective Time will be canceled and exchanged for
the right to receive an amount of cash equal to the product of (x) the total number of shares of Company common stock subject
to such option and (y) the excess, if any, of (A) the product of (1) the volume weighted average price of Marin Bancorp
common stock on each of the last fifteen trading days ending on the second trading day immediately prior to the
Effective Time, and (2) the Exchange Ratio, over (B) the exercise price per share under such option, less applicable taxes
required to be withheld with respect to such payment; and (ii) any vesting conditions applicable to each outstanding
restricted stock award and each outstanding restricted stock unit will accelerate in full, and each such restricted stock
award and restricted stock unit will be treated as any other outstanding share of Company common stock entitled to receive
the Merger Consideration. We cannot provide any assurance on whether or not the Merger will close in a timely fashion or at
all.
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 has impaired and may continue to 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 continue to 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, will 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.
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 increased 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 to 7.4%
in Sacramento County, 6.0%, in Sonoma County, and 7.4% in Amador County as of March 31, 2021. 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. New restrictions went in place throughout the State later in 2020, which were then eased in January
2021. With the successful rollout of the pandemic vaccines, more business have been able to reopen in the first quarter of 2021.
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 April 21, 2021, the
Company announced a $0.07 per share cash dividend payable on May 19, 2021 to shareholders of record on May 4, 2021. 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 March 31, 2021:
Industry
|
|
Loan
Balance
|
|
|
Percentage
of total
non PPP loans
outstanding (1)
|
|
Hospitality
|
|
$
|
918,000
|
|
|
|
0.2
|
%
|
Churches
|
|
$
|
21,692,000
|
|
|
|
5.2
|
%
|
Restaurants
|
|
$
|
5,725,000
|
|
|
|
1.4
|
%
|
Eldercare
|
|
$
|
6,440,000
|
|
|
|
1.5
|
%
|
School/childcare
|
|
$
|
5,355,000
|
|
|
|
1.3
|
%
|
Recreation (golf/sportsclubs)
|
|
$
|
1,668,000
|
|
|
|
0.4
|
%
|
Oil/Gas
|
|
$
|
8,924,000
|
(2)
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
(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. PPP loans as of March 31, 2021 were $57,486,000,
therefore, gross non-PPP loans were $420,030,000.
|
|
(2)
|
This
total represents gas stations with convenience stores; gas station, convenience store
and car washes; auto restoration companies; gas station, car washes; and drive though
oil change and car wash facilities.
|
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. During 2020, the Company funded 477 PPP loans totaling $80,154,000, and in 2021, the Company funded 201 PPP loans totaling
$25,465,000. At March 31, 2021, there were 368 PPP loans totaling $57,486,000. The reduction in the March 31, 2021 balance represents
loan forgiveness or loan paydowns.
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 March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net interest
income (GAAP)
|
|
$
|
7,132
|
|
|
$
|
6,188
|
|
Tax equivalent adjustment
|
|
|
47
|
|
|
|
56
|
|
Net interest income -
tax equivalent adjusted (non-GAAP)
|
|
$
|
7,179
|
|
|
$
|
6,244
|
|
|
|
|
|
|
|
|
|
|
Average earning assets
|
|
$
|
814,280
|
|
|
$
|
669,974
|
|
Net interest margin (GAAP)
|
|
|
3.55
|
%
|
|
|
3.71
|
%
|
Net interest margin (non-GAAP)
|
|
|
3.58
|
%
|
|
|
3.75
|
%
|
Reconciliation
of Non-GAAP Measure – Efficiency Ratio
(dollars in thousands)
|
|
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net interest income (GAAP)
|
|
$
|
7,132
|
|
|
$
|
6,188
|
|
Tax equivalent adjustment
|
|
|
47
|
|
|
|
56
|
|
Net interest income – tax-equivalent adjusted (non-GAAP)
|
|
$
|
7,179
|
|
|
$
|
6,244
|
|
Noninterest income
|
|
|
591
|
|
|
|
452
|
|
Total income
|
|
|
7,770
|
|
|
|
6,696
|
|
Total noninterest expense
|
|
|
4,063
|
|
|
|
4,216
|
|
Efficiency ratio, fully tax-equivalent (non-GAAP)
|
|
|
52.29
|
%
|
|
|
62.96
|
%
|
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.
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 95 full-time employees as of March 31, 2021.
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 2021 and 2020, 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.”
On
April 16, 2021, the Company entered into a Merger Agreement that, upon the terms and subject to the conditions set forth therein,
the Company will merge with and into Marin Bancorp as described above.
Overview
The Company recorded
net income of $2,647,000 for the quarter ended March 31, 2021, which was an increase of $1,215,000 (84.8%) compared to $1,432,000
reported for the same period of 2020. Diluted earnings per share for the first quarter of 2021 was $0.45, an increase of 87.5%
compared to the $0.24 per share reported in the first quarter of 2020. The return on average equity (“ROAE”) and the
return on average assets (“ROAA”) for the first quarter of 2021 were 11.54% and 1.21%, respectively, as compared to
6.77% and 0.80%, respectively, for the same period in 2020.
Total assets
of the Company increased by $47,072,000 (5.4%) from $868,991,000 at December 31, 2020 to $916,063,000 at March 31, 2021. Net loans
totaled $468,718,000 at March 31, 2021, a decrease of $3,135,000 (0.7%) from $471,853,000 at December 31, 2020. Deposit balances
at March 31, 2021 totaled $788,569,000, an increase of $44,392,000 (6.0%) from $744,177,000 at December 31, 2020. The Company
ended the first quarter of 2021 with a leverage capital ratio of 8.5%, a Tier 1 capital ratio of 15.5%, and a total risk-based
capital ratio of 16.7% compared to 8.3%, 15.0%, and 16.2%, respectively, at December 31, 2020. 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
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Interest
income*
|
|
$
|
7,401
|
|
|
$
|
6,771
|
|
Interest
expense
|
|
|
(222
|
)
|
|
|
(527
|
)
|
Net
interest income*
|
|
|
7,179
|
|
|
|
6,244
|
|
Provision
for loan losses
|
|
|
—
|
|
|
|
(495
|
)
|
Noninterest
income
|
|
|
591
|
|
|
|
452
|
|
Noninterest
expense
|
|
|
(4,063
|
)
|
|
|
(4,216
|
)
|
Provision
for income taxes
|
|
|
(1,013
|
)
|
|
|
(497
|
)
|
Tax
equivalent adjustment
|
|
|
(47
|
)
|
|
|
(56
|
)
|
Net
income
|
|
$
|
2,647
|
|
|
$
|
1,432
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
884,565
|
|
|
$
|
721,439
|
|
Net
income (annualized) as a percentage of average total
assets
|
|
|
1.21
|
%
|
|
|
0.80
|
%
|
*
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 3.58% for the
three months ended March 31, 2021 and 3.75% for the three months ended March 31, 2020.
The fully
taxable equivalent interest income component for the first quarter of 2021 increased $630,000 (9.3%) to $7,401,000 compared to
$6,771,000 for the three months ended March 31, 2020. The increase in the fully taxable equivalent interest income for the first
quarter of 2021 compared to the same period in 2020 is broken down by rate (down $762,000) and volume (up $1,392,000). The primary
driver in this rate decrease was a decrease in the yield on loans, which led to a decrease of $174,000, a decrease in the yield
on investments, which led to a decrease of $476,000, and a decrease in the yield on interest-bearing deposits in banks, which
led to a decrease of $112,000. The yield on loans decreased from 5.03% in the first three months of 2020 to a yield of 4.92% during
the first three months of 2021; the yield on investments decreased from 2.69% in the first three months of 2020 to a yield of
2.06% during the first three months of 2021 and the yield on interest-bearing deposits in banks decreased from 1.59% in the first
quarter of 2020 to 0.11% in the first quarter of 2021. The volume increase of $1,392,000 was primarily from an increase in loans
($1,059,000); an increase in investments ($248,000); and an increase in interest-bearing deposits in banks ($86,000). Average
loans balances increased $84,889,000, (or 21.4%), from $396,322,000 during the first quarter of 2020 to $481,211,000 during the
first quarter of 2021; average investment balances increased $37,401,000, (or 14.1%), from $265,037,000 during the first quarter
of 2020 to $302,438,000 during the first quarter of 2021, and average balances in interest-bearing deposits in banks increased
$22,016,000, (or 255.6%), from $8,615,000 during the first quarter of 2020 to $30,631,000 during the first quarter of 2021.
Interest
expense was $222,000 or $305,000 (57.9%) lower in the first quarter of 2021 compared to $527,000 in the first quarter of 2020.
The net $305,000 decrease in interest expense during the first quarter of 2021 compared to the first quarter of 2020 was predominantly
rate related which reduced expense by $369,000. This decrease was partially offset by volume which increased expense by $64,000.
Rates paid on interest bearing liabilities decreased 34 basis points from 0.54% to 0.20% for the first quarter of 2020 compared
to the first quarter of 2021. Of the $369,000 decrease in interest expense related to rates, $175,000 is related to lower rates
paid on interest checking and money market accounts and $147,000 was related to time deposit balances. The overall lower interest
rate environment in short term rates contributed to this decrease in interest expense. Partially offsetting the decrease in expense
due to rates was an increase due to volume as average interest bearing balances increased $60,515,000 (15.4%) from $392,517,000
in the first quarter of 2020 to $453,032,000 during the first quarter of 2021.
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 March 31,
|
|
2021
|
|
|
2020
|
|
(Taxable
Equivalent Basis)
(dollars in thousands)
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield
(4)
|
|
|
Avg
Balance
|
|
|
Interest
|
|
|
Avg
Yield
(4)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
loans (1)
|
|
$
|
462,037
|
|
|
$
|
5,604
|
|
|
|
4.92
|
%
|
|
$
|
372,826
|
|
|
$
|
4,675
|
|
|
|
5.04
|
%
|
Tax-exempt
loans (2)
|
|
|
19,174
|
|
|
|
233
|
|
|
|
4.93
|
%
|
|
|
23,496
|
|
|
|
278
|
|
|
|
4.76
|
%
|
Taxable
investment securities
|
|
|
297,320
|
|
|
|
1,515
|
|
|
|
2.07
|
%
|
|
|
259,592
|
|
|
|
1,739
|
|
|
|
2.69
|
%
|
Tax-exempt
investment securities (2)
|
|
|
5,118
|
|
|
|
41
|
|
|
|
3.25
|
%
|
|
|
5,445
|
|
|
|
45
|
|
|
|
3.32
|
%
|
Federal
funds sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing
deposits in banks
|
|
|
30,631
|
|
|
|
8
|
|
|
|
0.11
|
%
|
|
|
8,615
|
|
|
|
34
|
|
|
|
1.59
|
%
|
Total
earning assets
|
|
|
814,280
|
|
|
|
7,401
|
|
|
|
3.69
|
%
|
|
|
669,974
|
|
|
|
6,771
|
|
|
|
4.06
|
%
|
Cash
& due from banks
|
|
|
35,124
|
|
|
|
|
|
|
|
|
|
|
|
16,008
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
41,906
|
|
|
|
|
|
|
|
|
|
|
|
40,675
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(6,745
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,218
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
884,565
|
|
|
|
|
|
|
|
|
|
|
$
|
721,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
& Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking and money market
|
|
$
|
266,895
|
|
|
|
61
|
|
|
|
0.09
|
%
|
|
$
|
230,222
|
|
|
|
204
|
|
|
|
0.36
|
%
|
Savings
|
|
|
91,076
|
|
|
|
6
|
|
|
|
0.03
|
%
|
|
|
74,530
|
|
|
|
7
|
|
|
|
0.04
|
%
|
Time
deposits
|
|
|
74,274
|
|
|
|
93
|
|
|
|
0.51
|
%
|
|
|
70,787
|
|
|
|
229
|
|
|
|
1.30
|
%
|
Other
borrowings
|
|
|
20,787
|
|
|
|
62
|
|
|
|
1.21
|
%
|
|
|
16,978
|
|
|
|
87
|
|
|
|
2.06
|
%
|
Total
interest bearing liabilities
|
|
|
453,032
|
|
|
|
222
|
|
|
|
0.20
|
%
|
|
|
392,517
|
|
|
|
527
|
|
|
|
0.54
|
%
|
Noninterest
bearing demand deposits
|
|
|
326,179
|
|
|
|
|
|
|
|
|
|
|
|
232,562
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
12,346
|
|
|
|
|
|
|
|
|
|
|
|
11,282
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
791,557
|
|
|
|
|
|
|
|
|
|
|
|
636,361
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
93,008
|
|
|
|
|
|
|
|
|
|
|
|
85,078
|
|
|
|
|
|
|
|
|
|
|
|
$
|
884,565
|
|
|
|
|
|
|
|
|
|
|
$
|
721,439
|
|
|
|
|
|
|
|
|
|
Net
interest income & margin (3)
|
|
|
|
|
|
$
|
7,179
|
|
|
|
3.58
|
%
|
|
|
|
|
|
$
|
6,244
|
|
|
|
3.75
|
%
|
|
|
(1)
|
Loan interest includes loan fees of $642,000 and $171,000,
respectively, during the three months ended March 31, 2021 and March 31, 2020. Includes $656,000 in net fees from
PPP loans during the first quarter of 2021. Average loan balances include non-performing loans.
|
|
(2)
|
Includes taxable-equivalent adjustments that primarily
relate to income on certain loans and securities that is exempt from federal income taxes. The effective federal statutory tax
rate was 21% for 2021 and 2020.
|
|
(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 (90 days for 2021 and 91 days for 2020) and annualized to actual days in the year (365 days for 2021 and 366 days for 2020).
|
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
|
|
Three Months Ended March 31, 2021 over 2020 (dollars in thousands)
|
Increase (decrease) due to change in:
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
Volume
|
|
|
Rate (4)
|
|
|
Net Change
|
|
Taxable net loans (1)(2)
|
|
$
|
1,109
|
|
|
$
|
(180
|
)
|
|
$
|
929
|
|
Tax-exempt net loans (3)
|
|
|
(51
|
)
|
|
|
6
|
|
|
|
(45
|
)
|
Taxable investment securities
|
|
|
251
|
|
|
|
(475
|
)
|
|
|
(224
|
)
|
Tax exempt investment securities (3)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
Federal funds sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing deposits in banks
|
|
|
86
|
|
|
|
(112
|
)
|
|
|
(26
|
)
|
Total
|
|
|
1,392
|
|
|
|
(762
|
)
|
|
|
630
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking and money market
|
|
|
32
|
|
|
|
(175
|
)
|
|
|
(143
|
)
|
Savings deposits
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
(1
|
)
|
Time deposits
|
|
|
11
|
|
|
|
(147
|
)
|
|
|
(136
|
)
|
Other borrowings
|
|
|
19
|
|
|
|
(44
|
)
|
|
|
(25
|
)
|
Total
|
|
|
64
|
|
|
|
(369
|
)
|
|
|
(305
|
)
|
Interest differential
|
|
$
|
1,328
|
|
|
$
|
(393
|
)
|
|
$
|
935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The average balance of nonaccrual
loans is immaterial as a percentage of total loans and has been included in net loans.
|
|
(2)
|
Loan interest includes loan
fees of $642,000 and $171,000, respectively, during the three months ended March 31, 2021 and March 31, 2020 which have been
included in the interest income computation. Includes $656,000 in net fees from PPP loans during the first quarter of 2021
|
|
(3)
|
Includes taxable-equivalent
adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes. The
effective federal statutory tax rate was 21% for 2021 and 2020.
|
|
(4)
|
The rate/volume variance
has been included in the rate variance.
|
Provision for Loan Losses
The Company did
not provide a provision for loan losses in the first quarter of 2021 compared to $495,000 in the first quarter of 2020. The Company
experienced net loan recoveries of $68,000 or (0.06%) (on an annualized basis) of average loans for the three months ended March
31, 2021 compared to net loan recoveries of $4,000 or (0.00%) (on an annualized basis) of average loans for the three months ended
March 31, 2020. 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 $495,000
addition in 2020 to the provision for loan losses during the first quarter of 2020 was warranted. For additional information see
the “Allowance for Loan Losses Activity” and “Potential Impact of COVID-19.” The net loan recoveries,
reduction in loan balances in the first quarter of 2021, and the progress made in the circulation of the pandemic vaccine allowed
the Company to forgo and additions to the provision for loan losses in the first quarter of 2021
Noninterest Income
Table Four
below provides a summary of the components of noninterest income for the periods indicated (dollars in thousands):
Table
Four: Components of Noninterest Income
|
|
|
|
|
|
Three
Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Service charges
on deposit accounts
|
|
$
|
164
|
|
|
$
|
155
|
|
Gain on sale of securities
|
|
|
172
|
|
|
|
38
|
|
Merchant fee income
|
|
|
90
|
|
|
|
93
|
|
Bank owned life insurance
|
|
|
70
|
|
|
|
84
|
|
Other
|
|
|
95
|
|
|
|
82
|
|
Total
noninterest income
|
|
$
|
591
|
|
|
$
|
452
|
|
Noninterest income
increased $139,000 (30.8%) to $591,000 for the three months ended March 31, 2021 as compared to $452,000 for the three months
ended March 31, 2020. The increase in noninterest income was primarily related to higher gain on sale of securities, which increased
$134,000 (352.6%) from $38,000 in 2020 to $172,000 in 2021.
Noninterest
Expense
Noninterest
expense decreased $153,000 (3.6%) to a total of $4,063,000 in the first quarter of 2021 compared to $4,216,000 in the first quarter
of 2020. Salary and employee benefits expense decreased $103,000 (3.6%) from $2,865,000 during the first quarter of 2020 to $2,762,000
during the first quarter of 2021. The decrease in salaries and benefits expense resulted from an increase in the deferral of direct
loan origination costs, which reduced salary expense. Each PPP loan that was recorded had an associated loan origination cost.
Total origination costs for the first quarter of 2021 were $212,000 compared to $82,000 for the first quarter of 2020. Of the
$212,000 in deferred loan origination costs recorded in 2021, $140,700 was related to PPP loans. The benefit from the deferred
loan origination costs was partially offset by normal cost of living increases and promotions. Average full-time equivalent employees
was 95 during the first quarter of 2021 compared to 101 during the first quarter of 2020.
On a quarter-over-quarter
basis, occupancy expense increased $3,000 (1.2%) and furniture and equipment expense decreased $9,000 (6.3%). FDIC assessments
increased $27,000 (100.0%) from the first quarter of 2020 to the first quarter of 2021. The increased FDIC assessments result
from 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 in the latter half of
2019 and for a partial amount of the expense for the first quarter of 2020. There were no assessment credits received in the first
quarter of 2021. OREO related expenses decreased $1,000 (20.0%) from $5,000 in the first quarter of 2020 to $4,000 in the first
quarter of 2021. Other expense decreased $70,000 (7.6%) from $920,000 in the first quarter of 2020 to $850,000 in the first quarter
of 2021. There were numerous line items that make up the $70,000 decrease in other expenses including a $21,000 (131.3%) decrease
in business development, which decreased from $37,000 in 2020 to $16,000 in 2021, and a $16,000 (40.0%) decrease in legal fees,
which decreased from $40,000 in 2020 to $24,000 in 2021. The fully taxable equivalent efficiency ratio decreased from 63.0% for
the first quarter of 2020 to 52.3% for the first quarter of 2021.
Provision for
Income Taxes
Federal
and state income taxes for the quarter ended March 31, 2021 increased $516,000 (103.8%) from $497,000 in the first quarter of
2020 to $1,013,000 in the first quarter of 2021. The effective tax rate for the quarter ended March 31, 2021 was 27.7% compared
to 25.8% for the first quarter of 2020. The higher tax expense was related to the higher level of taxable income ($1,731,000 or
89.7%), which increased from $1,929,000 in 2020 to $3,660,000 in 2021. The higher effective tax rate in 2021 compared to 2020
is also related to the higher level of taxable income as well as a lower level of benefits from tax-exempt loans and investments
(including investments in bank owned life insurance). Tax-exempt benefits decreased from $346,000 in 2020 to $296,000 in 2021.
Balance
Sheet Analysis
The Company’s
total assets were $916,063,000 at March 31, 2021 as compared to $868,991,000 at December 31, 2021, representing an increase of
$47,072,000 (5.4%). The average assets for the three months ended March 31, 2021 were $884,565,000, which represents an increase
of $163,126,000 or 22.6% over the balance of $721,439,000 during the three-month period ended March 31, 2020.
Cash
and Cash Equivalents
The
balance held in cash and cash equivalents at March 31, 2021, was $97,798,000 compared to $42,509,000 at December 31, 2020 an increase
of $55,289,000 (130.1%). The primary reason for the increase in cash and cash equivalents since December 31, 2020 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 March 31, 2021 and December 31, 2020.
Table Five: Investment Securities
Composition
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
Available-for-sale (at fair value)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
266,487
|
|
|
$
|
283,833
|
|
Obligations of states and political subdivisions
|
|
|
16,723
|
|
|
|
16,301
|
|
U. S Treasury securities
|
|
|
11,564
|
|
|
|
—
|
|
Corporate bonds
|
|
|
6,854
|
|
|
|
6,832
|
|
Total available-for-sale investment securities
|
|
$
|
301,628
|
|
|
$
|
306,966
|
|
Held-to-maturity (at amortized cost)
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
US Government Agencies and Sponsored Agencies
|
|
$
|
10
|
|
|
$
|
12
|
|
Total held-to-maturity investment securities
|
|
$
|
10
|
|
|
$
|
12
|
|
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 $5,133,000 were
recorded, net of $1,517,000 in tax liabilities, as accumulated other comprehensive loss within shareholders’ equity at March
31, 2021 and net unrealized gains on available-for-sale investment securities totaling $8,739,000 were recorded, net of $2,583,000
in tax liabilities, as accumulated other comprehensive loss within shareholders’ equity at December 31, 2020.
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 $25.9 million in new loans during the first quarter of 2021. In addition to the $25.9 million in new
production the Company also originated 201 PPP loans totaling $25.5 million during the first quarter of 2021. This production
was partially offset by pay downs and payoffs, and excluding the PPP loans resulted in an overall decrease in net loans of
$4,702,000 (1.1%) from December 31, 2020. At March 31, 2021, gross PPP loans were $57,486,000 and had related fees of
$1,354,000, for a net balance of $56,132,000. These PPP loans were recorded as commercial loans. At March 31, 2021, net loans
excluding net PPP loans were $419,282,000 and total loans excluding total PPP loans were $420,030,000.
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 as of March 31, 2021 and December 31, 2010.
Table Six: Loan Portfolio Composition
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Change in
|
|
|
Percentage
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
dollars
|
|
|
change
|
|
Commercial (1)
|
|
$
|
93,982
|
|
|
|
20
|
%
|
|
$
|
94,522
|
|
|
|
20
|
%
|
|
$
|
(540
|
)
|
|
|
(0.6
|
%)
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
248,660
|
|
|
|
52
|
%
|
|
|
251,348
|
|
|
|
52
|
%
|
|
|
(2,688
|
)
|
|
|
(1.1
|
%)
|
Multi-family
|
|
|
45,254
|
|
|
|
9
|
%
|
|
|
48,760
|
|
|
|
10
|
%
|
|
|
(3,506
|
)
|
|
|
(7.2
|
%)
|
Construction
|
|
|
25,242
|
|
|
|
5
|
%
|
|
|
18,424
|
|
|
|
4
|
%
|
|
|
6,818
|
|
|
|
37.0
|
%
|
Residential
|
|
|
31,749
|
|
|
|
7
|
%
|
|
|
32,329
|
|
|
|
7
|
%
|
|
|
(580
|
)
|
|
|
(1.8
|
%)
|
Agriculture
|
|
|
6,034
|
|
|
|
1
|
%
|
|
|
6,091
|
|
|
|
1
|
%
|
|
|
(57
|
)
|
|
|
(0.9
|
%)
|
Consumer
|
|
|
26,595
|
|
|
|
6
|
%
|
|
|
28,804
|
|
|
|
6
|
%
|
|
|
(2,209
|
)
|
|
|
(7.7
|
%)
|
Total loans
|
|
|
477,516
|
|
|
|
100
|
%
|
|
|
480,278
|
|
|
|
100
|
%
|
|
|
(2,762
|
)
|
|
|
(0.6
|
%)
|
Deferred loan (fees) and costs, net
|
|
|
(2,102
|
)
|
|
|
|
|
|
|
(1,797
|
)
|
|
|
|
|
|
|
(305
|
)
|
|
|
|
|
Allowance for loan losses
|
|
|
(6,696
|
)
|
|
|
|
|
|
|
(6,628
|
)
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
Total net loans
|
|
$
|
468,718
|
|
|
|
|
|
|
$
|
471,853
|
|
|
|
|
|
|
$
|
(3,135
|
)
|
|
|
(0.7
|
%)
|
|
(1)
|
Incudes
PPP loans of $57,486,000 at March 31, 2021 and $55,546,000 at December 31, 2020.
|
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.
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 84% of the Company’s loan portfolio
at March 31, 2021 and 83% as of December 31, 2020. These figures exclude 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 March 31, 2021, outstanding unimproved residential land and construction loans were $8,342,000
(or just 2.4% of the total real estate loans). 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 principles: (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 March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and
December 31, 2020 there were no loans that were 30 days or more past due.
There were
no loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as of March 31, 2021.
Management is not aware of any potential problem loans, which were accruing and current at March 31, 2021, 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. Table Seven below
sets forth nonaccrual loans and loans past due 90 days or more as of March 31, 2021 and December 31, 2020.
Table Seven: Nonperforming Loans
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Past due 90 days or more and still accruing:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Nonaccrual:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
Real estate
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
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 March 31,
2021, the recorded investment in loans that were considered to be impaired totaled $6,989,000, all of which are considered performing
loans. Of the total impaired loans of $6,989,000, loans totaling $5,357,000 were deemed to require no specific reserve and loans
totaling $1,632,000 were deemed to require a related valuation allowance of $109,000. Of the $5,357,000 impaired loans that did
not carry a specific reserve there were $461,000 in loans that had previous partial charge-offs and $4,896,000 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 $7,050,000 at December
31, 2020. Of the total impaired loans of $7,050,000, loans totaling $5,387,000 were deemed to require no specific reserve and
loans totaling $1,663,000 were deemed to require a related valuation allowance of $112,000.
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 first quarter of 2021, the Company had net loan recoveries of $68,000 with zero provisions for loan
losses. The Company’s ALLL to non-PPP loans (which are 100% SBA guaranteed) is 1.60% at March 31, 2021. The 1.60% ALLL to
loans is higher than the Company’s historical average. 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 1.60% ALLL to non-PPP loans is warranted. In the first quarter of 2020, the Company had net loan recoveries of $4,000
with $475,000 in added provision.
During the periods
ended March 31, 2021 and March 31, 2020, there were no loans that were modified as troubled debt restructurings. There were no
payment defaults during the three months ended March 31, 2021 or March 31, 2020 on troubled debt restructurings made in the preceding
twelve months. At March 31, 2021 and December 31, 2020, 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
encouraged financial institutions to 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. The terms of the payment
deferrals are generally 90 days and up to 180 days and borrowers may be eligible for multiple deferrals. Pursuant to the CARES
Act, these loan modifications are not accounted for as troubled debt restructure. 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. As of December 31, 2020, there were two commercial real estate loans totaling $4,882,000
that had been granted loan payment deferrals. These two loans resumed their contractual payments during the first quarter of 2021.
Also during the first quarter of 2021, one additional loan in the amount of $2,017,000 was granted a 90-day interest only payment
deferral. This was the only loan on payment deferral at March 31, 2021, however, this borrower resumed making the contractual
payment during the second quarter of 2021. These loans are not considered past due until after the deferral period is over and
scheduled payments have resumed and any subsequently scheduled payments are missed.
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 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 March 31, 2021.
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. 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.
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 $6,696,000 or 1.41% of total loans at March 31, 2021 compared to $6,628,000 or 1.39% of total loans at December 31, 2020.
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 1.60% at March 31, 2021 and 1.56% at December 31, 2020. The allowance for loans as a percentage of impaired loans was
95.8% at March 31, 2021 and 94.0% at December 31, 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.
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. 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 March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Average
loans outstanding
|
|
$
|
481,211
|
|
|
$
|
396,322
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses at beginning of period
|
|
$
|
6,628
|
|
|
$
|
5,138
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
9
|
|
|
|
—
|
|
Total
|
|
|
9
|
|
|
|
—
|
|
Recoveries
of loans previously charged
off:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
76
|
|
|
|
1
|
|
Real estate
|
|
|
1
|
|
|
|
3
|
|
Total
|
|
|
77
|
|
|
|
4
|
|
Net
loans recovered
|
|
|
68
|
|
|
|
4
|
|
Additions
to allowance charged to
operating expenses
|
|
|
—
|
|
|
|
495
|
|
Allowance
for loan losses at
end of period
|
|
$
|
6,696
|
|
|
$
|
5,637
|
|
Ratio
of net recoveries to average loans outstanding (annualized)
|
|
|
-0.06
|
%
|
|
|
0.00
|
%
|
Provision
of allowance for loan losses to average loans outstanding (annualized)
|
|
|
0.00
|
%
|
|
|
0.50
|
%
|
Allowance
for loan losses to loans net of deferred fees at end of period
|
|
|
1.41
|
%
|
|
|
1.43
|
%
|
Allowance
for loan losses to non PPP loans net of deferred fees at end of period
|
|
|
1.60
|
%
|
|
|
1.43
|
%
|
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 March
31, 2021 and December 31, 2020, the Company had one other real estate owned (“OREO”) property totaling $800,000. During
the first quarter of 2021, 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 March 31, 2021 nor at year-end 2020. The Company believes that the OREO property
owned at March 31, 2021 was carried approximately at fair value.
Deposits
At March
31, 2021, total deposits were $788,569,000 representing a $44,392,000 (6.0%) increase from the December 31, 2020 balance of $744,177,000.
The Company’s deposit growth plan for 2021 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 quarter of 2021, the
Company experienced increases in noninterest-bearing checking ($9,619,000 or 2.9%), interest-bearing checking ($12,081,000 or
14.7%), money market savings ($10,545,000 or 6.0%), savings ($6,307,000 or 7.2%), and time deposits ($5,840,000 or 8.4%). 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.
Other
Borrowed Funds
Other
borrowings outstanding as of March 31, 2021 and December 31, 2020, consist of advances (both short-term and long-term) from the
Federal Home Loan Bank of San Francisco (“FHLB”). Table Nine below summarizes these borrowings.
Table Nine: Other Borrowed Funds
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
7,000
|
|
|
|
0.54
|
%
|
|
$
|
7,000
|
|
|
|
0.54
|
%
|
Long-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
13,787
|
|
|
|
1.13
|
%
|
|
$
|
13,787
|
|
|
|
1.13
|
%
|
The
maximum amount of short-term borrowings at any month-end during the first three months of 2021 and 2020 was $7,000,000 and $12,000,000,
respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of
rates and maturities on FHLB advances (dollars in thousands) as of March 31, 2021:
|
|
Short-term
|
|
|
Long-term
|
|
Amount
|
|
$
|
7,000
|
|
|
$
|
13,787
|
|
Maturity
|
|
|
2021
|
|
|
|
2022 to 2025
|
|
Weighted average rates
|
|
|
0.54
|
%
|
|
|
1.13
|
%
|
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.
At March 31,
2021, shareholders’ equity was $92,891,000, representing a decrease of $204,000 (0.2%) from $93,095,000 at December 31,
2020. The decrease results from net income for the period ($2,647,000), stock based compensation and stock options exercised ($105,000),
being less than decrease from other comprehensive income ($2,540,000) and the payment of cash dividends ($416,000). Table Ten
below lists the Company’s and American River Bank’s capital ratios at March 31, 2021 and December 31, 2020, as well
as the minimum capital ratios for capital adequacy and the minimum requirement for a well-capitalized institution. 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: Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Regulatory Capital
Requirements
|
|
Capital to Risk-Adjusted Assets
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
2021
|
|
|
2020
|
|
American River Bankshares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
8.5
|
%
|
|
|
8.3
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Risk-Based Capital
|
|
|
15.5
|
%
|
|
|
15.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Risk-Based Capital
|
|
|
16.7
|
%
|
|
|
16.2
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American River Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
8.5
|
%
|
|
|
8.4
|
%
|
|
|
6.5
|
%
|
|
|
6.5
|
%
|
Common Equity Tier 1 Risk-Based Capital
|
|
|
15.6
|
%
|
|
|
15.1
|
%
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
Tier 1 Risk-Based Capital
|
|
|
15.6
|
%
|
|
|
15.1
|
%
|
|
|
8.5
|
%
|
|
|
8.5
|
%
|
Total Risk-Based Capital
|
|
|
16.9
|
%
|
|
|
16.4
|
%
|
|
|
10.5
|
%
|
|
|
10.5
|
%
|
On February 17,
2021, the Company paid a $0.07 per common share cash dividend to shareholders of record on February 3, 2021. This 2021 quarterly
dividend follows four quarterly cash dividends, totaling $0.28 per share, paid in 2020. 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 March 31, 2021 and
December 31, 2020.
The Bank’s
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.
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 March 31, 2021 and 2020.
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 March 31, 2021 were approximately $43,649,000
and $60,000, respectively. Such loan commitments relate primarily to revolving lines of credit and other commercial loans and
to real estate construction loans. Since some of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
The Company’s
sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged
marketable investments and loans held for sale and/or pledged for secured borrowings. At March 31, 2021, consolidated liquid assets
totaled $220.1 million or 24.0% of total assets compared to $191.2 million or 22.0% of total assets on December 31, 2020. 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 March 31, 2021, the Company had $17,000,000 available under these credit lines. Additionally, the Bank
is a member of the FHLB. At March 31, 2021, the Bank could have arranged for up to $172,836,000 in secured borrowings from the
FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At March 31, 2021, the Company had advances,
borrowings and commitments (including letters of credit) outstanding of $20,787,000, leaving $152,049,000 available under these
FHLB secured borrowing arrangements. American River 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 March 31, 2021, the Company’s
borrowing capacity at the Federal Reserve Bank was $6,062,000. The Company serves primarily a business and professional customer
base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced
position of liquid assets 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 and 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 March 31, 2021 and December 31, 2020,
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 $43,709,000 and $32,851,000 at March 31, 2021 and December 31, 2020, respectively.
As a percentage of net loans these off-balance sheet items represent 9.3% and 7.0%, respectively.