The following is management's discussion and analysis of the significant changes in
American River Bankshares'(the "Company") balance sheet accounts between December 31, 2013and June 30, 2014and its income and expense accounts for the three-month and six-month periods ended June 30, 2014and 2013. 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 "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 duration of financial and economic instability and actions taken by the
? the risks presented by a continued economic 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 continued or increasing loan and lease losses; ? potential increasing levels of expenses associated with resolving nonperforming assets as well as regulatory changes;
? changes in the interest rate environment including interest rates charged on
loans, earned on securities investments and paid on deposits and other borrowed funds; ? competitive effects;
? potential declines in fee and other noninterest income earned associated with
economic factors, as well as regulatory changes;
? 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
? changes in the regulatory environment including 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 and other operational systems failures 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 the military conflicts in
the conduct of the war on terrorism by
worsening financial and economic conditions, natural disasters, 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;
? the reputation of the financial services industry could experience further
deterioration, which could adversely affect our ability to access markets for
funding and to acquire and retain customers;
? the efficiencies we may expect to receive from any investments in personnel
and infrastructure may not be realized; and
? downgrades in the credit rating of
28 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, 2013, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should 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.
Critical Accounting Policies
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. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of the probable incurred credit loss risk inherent in our loan and lease portfolio 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 or lease balance. The allowance for loan and lease losses is determined based upon estimates that can and do change when the actual risk, loss events, or changes in other factors, occur. The analysis of the allowance uses an historical loss view as an indicator of future losses and as a result could differ from the actual losses incurred in the future. If the allowance for loan and lease losses falls below that deemed adequate (by reason of loan and lease growth, actual losses, the effect of changes in risk factors, or some combination of these), the Company has a strategy for supplementing the allowance for loan and lease losses, over the short-term. For further information regarding our allowance for loan and lease losses, see "Allowance for Loan and Lease Losses Activity" discussion later in this Item 2 .
The Company recognizes compensation expense over the vesting period in an amount equal to the fair value of all share-based payments which consist of stock options and restricted stock awarded to directors and employees. The fair value of each stock option award is estimated on the date of the award and amortized over the service period using a Black-Scholes-Merton based option valuation model that requires the use of assumptions. Critical assumptions that affect the estimated fair value of each award include expected stock price volatility, dividend yields, option life and the risk-free interest rate. 29 Goodwill Business combinations involving the Company's acquisition of equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The value of goodwill is ultimately derived from the Company's ability to generate net earnings after the acquisition and is not deductible for tax purposes. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment on an annual basis. Impairment exists when a reporting unit's carrying value of goodwill exceeds its fair value. The most recent annual assessment was performed as of
December 31, 2013, and at that time, the Company's reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment.
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 tax bases. 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 is, if applicable, 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 were no unrecognized tax benefits or accrued interest and penalties at
June 30, 2014or 2013 or for the three-month and six-month periods then ended.
The Company is a bank holding company registered under the
Bank Holding CompanyAct of 1956, as amended. The Company was incorporated under the laws of the State of Californiain 1995. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding CompanyAct of 1956, as amended, and regulations thereunder. Its principal office is located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California95670 and its telephone number is (916) 854-0123. The Company employed an equivalent of 103 full-time employees as of June 30, 2014. 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 Californiacorporation which has been inactive since its incorporation in 2003. American River Bankwas incorporated and commenced business in Fair Oaks, California, in 1983 and thereafter moved its headquarters to Sacramento, Californiain 1985. American River Bankoperates five full service offices in Sacramentoand PlacerCounties including the main office located at 1545 River Park Drive, Suite 107, Sacramentoand branch offices in Sacramento, Gold River, and Roseville; two full service offices in Sonoma Countyin Healdsburgand Santa Rosa; and three full service banking offices in Amador Countyin Jackson, Pioneer, and Ione. In addition, American River Bankoperates loan production offices in Santa Clara County, in the city of San Jose, and serves the Contra Costaand Alameda Countymarkets through a loan production office in the city of Pleasanton. 30 In 2000, the Company acquired North Coast Bankas a separate bank subsidiary. North Coast Bankwas incorporated and commenced business in 1990 as Windsor Oaks National Bankin Windsor, California. In 1997, the name was changed to North Coast Bank. Effective December 31, 2003, North Coast Bankwas merged with and into American River Bank. On December 3, 2004, the Company acquired Bank of Amadorlocated in Jackson, California. Bank of Amadorwas merged with and into American River Bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation(the "FDIC") up to applicable legal limits. On July 21, 2010, President Obamasigned the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The Dodd-Frank Act includes a permanent increase to $250,000as the maximum FDICinsurance limit per depositor retroactive to January 1, 2008and the extension of unlimited FDICinsurance for noninterest-bearing transaction accounts effective December 31, 2010through December 31, 2012. On November 9, 2010, the FDICimplemented a final rule to permanently increase the maximum insurance limit to $250,000under the Dodd-Frank Act. The unlimited insurance coverage for noninterest bearing transaction accounts was not extended and terminated on December 31, 2012. The $250,000maximum deposit insurance amount per depositor remains in effect. American River Bankdoes not offer trust services or international banking services and does not plan to do so in the near future. American River Bank'sprimary business is serving the commercial banking needs of small to mid-sized businesses within those counties listed above. American River Bankaccepts 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 Bankalso conducts lease financing for certain types of business equipment. American River Bankowns 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 Mortgagehas been inactive since its formation in 1994. During 2014, 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 Governorsof 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." Overview The Company recorded net income of $1,035,000for the quarter ended June 30, 2014, which was an increase of $383,000compared to $652,000reported for the same period of 2013. Diluted earnings per share for the second quarter of 2014 were $0.13compared to $0.07recorded in the second quarter of 2013. The return on average equity ("ROAE") and the return on average assets ("ROAA") for the second quarter of 2014 were 4.80% and 0.70%, respectively, as compared to 2.87% and 0.45%, respectively, for the same period in 2013. Net income for the six months ended June 30, 2014and 2013 was $2,041,000and $1,274,000, respectively, with diluted earnings per share of $0.25in 2014 and $0.14in 2013. For the first six months of 2014, ROAE was 4.74% and ROAA was 0.69% compared to 2.79% and 0.44%, respectively, for the same period in 2013. Total assets of the Company increased by $1,981,000(0.3%) from $592,753,000at December 31, 2013to $594,734,000at June 30, 2014. Net loans totaled $246,521,000at June 30, 2014, down $5,226,000(2.1%) from $251,747,000at December 31, 2013. Deposit balances at June 30, 2014totaled $490,858,000, up $7,168,000(1.5%) from the $483,690,000at December 31, 2013. The Company ended the second quarter of 2014 with a leverage capital ratio of 11.7%, a Tier 1 capital ratio of 21.4%, and a total risk-based capital ratio of 22.7% compared to 11.9%, 22.0%, and 23.2%, respectively, at December 31, 2013. 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). 31 Table One: Components of Net Income (dollars in thousands) For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013 Interest income* $ 5,137 $ 4,627 $ 10,199 $ 9,351Interest expense (291 ) (375 ) (595 ) (782 ) Net interest income* 4,846 4,252 9,604 8,569
Provision for loan and lease losses -
(100 ) - (200 ) Noninterest income 508 448 1,010 1,073 Noninterest expense (3,699 ) (3,612 ) (7,352 ) (7,614 ) Provision for income taxes (550 ) (260 ) (1,085 ) (405 ) Tax equivalent adjustment (70 ) (76 ) (136 ) (149 ) Net income
$ 1,035 $ 652 $ 2,041 $ 1,274Average total assets $ 595,828 $ 583,606 $ 596,063 $ 584,774Net income (annualized) as a percentage of average total assets 0.70 % 0.45 % 0.69 % 0.44 %
*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 and leases, 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 3.66% for the three months ended
June 30, 2014, 3.41% for the three months ended June 30, 2013, 3.63% for the six months ended June 30, 2014and 3.47% for the six months ended June 30, 2013. The fully taxable equivalent interest income component for the second quarter of 2014 increased $510,000(11.0%) to $5,137,000compared to $4,627,000for the three months ended June 30, 2013. The increase in the fully taxable equivalent interest income for the second quarter of 2014 compared to the same period in 2013 is broken down by rate (up $398,000) and volume (up $112,000). The rate increase primarily occurred in the investment portfolio which can be attributed to a slowdown in the mortgage refinance market. As mortgage refinancing slows it also reduces the principal prepayments that the Company receives on the mortgage backed securities, which reduces the premium amounts amortized on the bonds. A lower amount of amortized premium results in higher interest income. Investment securities added $393,000in additional interest income related to rate. The average yield on investments increased from 1.79% from the second quarter of 2013 to 2.31% during the second quarter of 2014. The volume increase of $112,000was also related to the investments. When compared to the second quarter of 2013, average investment balances were up $31,577,000(12.7%) to $280,394,000for the second quarter of 2014. Total fully taxable equivalent interest income for the six months ended June 30, 2014increased $848,000(9.1%) to $10,199,000compared to $9,351,000for the six months ended June 30, 2013. The breakdown of the fully taxable equivalent interest income for the six months ended June 30, 2014over the same period in 2013 resulted from an increase in rate (up $537,000) and an increase in volume (up $311,000). Average earning assets increased $36,454,000(7.3%) during the first six months of 2014 as compared to the same period in 2013. During the six month periods, the Company also experienced an increase in interest income due to the rates on investments (up $788,000) but this was partially offset by a reduction in rates on loans. While average loan balances increased by $2,425,000(1.0%) from $252,057,000during 2013 to $254,497,000during 2014, the Company did experience a drop in rates on these loans from 5.73% in 2013 to 5.53% in 2014. This decrease is caused by proceeds of principal pay downs and loan prepayments invested in loans yielding lower rates. The volume increase of $311,000is primarily related to an increase in investment balances of $33,823,000(13.8%) from $244,808,000in 2013 to $278,631,000in 2014. 32 Interest expense was $94,000(25.1%) lower in the second quarter of 2014 versus the prior year period, decreasing from $375,000to $291,000. The average balances on interest bearing liabilities were $351,833,000(or $6,666,000and 1.9% higher) in the second quarter of 2014 compared to $345,167,000the same quarter in 2013. The higher balances did not significantly impact the overall interest expense, as these higher balances occurred in the lower cost checking and savings products while the Company experienced decreases in the average balances of time deposits and other borrowings. The Company focused its marketing efforts on replacing higher cost time deposits and borrowings with lower cost checking, savings, and money market accounts. Average time deposit balances were $90,101,000(down $6,546,000or 6.8%) during the second quarter of 2014 compared to $96,647,000during the second quarter of 2013 and average borrowings were $10,956,000(down $6,214,000or 36.2%) compared to $17,170,000during the same time period in 2013. Average interest checking, money market, and savings accounts increased $19,426,000(8.4%) from $231,350,000in the second quarter of 2013 to $250,776,000during the second quarter of 2014. Rates paid on interest bearing liabilities decreased 11 basis points from 0.44% to 0.33% for the second quarter of 2013 compared to the second quarter of 2014. Interest expense was $595,000in the six-month period ended June 30, 2014(or $187,000and 23.9% lower) compared to $782,000in the prior year period. The average balances on interest-bearing liabilities were $351,549,000(up $6,615,000or 1.9% higher) in the six-month period ended June 30, 2014compared $344,934,000in the same period in 2013. Although the average balances where higher, the increases occurred in the lower cost checking and savings products while the Company experienced decreases in the average balances of time deposits and other borrowings. Average time deposit balances were $90,921,000(down $5,960,000or 6.2%) during the first half of 2014 compared to $96,881,000during the first half of 2013 and average borrowings were $11,481,000(down $6,102,000or 34.7%) in the first half of 2014 from $17,583,000during the same time period in 2013. Average interest checking, money market, and savings accounts increased $18,677,000(8.1%) from $230,470,000in the first half of 2013 to $249,147,000during the first half of 2014. Rates paid on interest bearing liabilities decreased 12 basis points from 0.46% in the first half of 2013 to 0.34% for the first half of 2013. 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. 33
Table Two: Analysis of Net Interest Margin on Earning Assets Three Months Ended
2014 2013 (Taxable Equivalent Basis) Avg Avg Avg Avg (dollars in thousands) Balance Interest Yield (4) Balance Interest Yield (4) Assets Earning assets: Loans and leases (1)
$ 250,190 $ 3,5205.64 % $ 250,200 $ 3,5165.65 % Taxable investment Securities 253,204 1,340 2.12 % 219,057 805 1.48 % Tax-exempt investment securities (2) 27,102 270
4.00 % 29,720 295 3.99 % Corporate stock (2) 88 6 27.35 % 40 11 110.60 % Federal funds sold - - - - - -
Investments in time deposits 1,000 1
0.40 % 838 - - Total earning assets 531,584 5,137 3.88 % 499,855 4,627 3.72 % Cash & due from banks 27,904 41,613 Other assets 41,864 48,115
Allowance for loan & lease losses (5,524 ) (5,977 )
Liabilities & Shareholders' Equity Interest bearing liabilities: Interest checking and money market
$ 180,993120 0.27 % Savings 53,023 9 0.07 % 50,357 18 0.14 % Time deposits 90,101 141 0.63 % 96,647 163 0.68 % Other borrowings 10,956 37 1.35 % 17,170 74 1.73 %
Total interest bearing liabilities 351,833 291 0.33 % 345,167 375 0.44 % Noninterest bearing demand deposits 151,058
141,661 Other liabilities 6,406 5,671 Total liabilities 509,297 492,499 Shareholders' equity 86,531 91,107
$ 595,828 $ 583,606
Net interest income & margin (3)
$ 4,2523.41 %
(1) Loan interest includes loan fees of
during the three months ended
balances include non-performing loans.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for 2014 and 2013.
(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 (91 days) and
annualized to actual days in the year (365 days).
34 Six Months Ended June 30, 2014 2013 (Taxable Equivalent Basis) Avg Avg Avg Avg (dollars in thousands) Balance Interest Yield (4) Balance Interest Yield (4) Assets Earning assets: Loans and leases (1)
$ 254,497 $ 6,9755.53 % $ 252,072 $ 7,1585.73 % Taxable investment Securities 251,413 2,678 2.15 % 215,122 1,593 1.49 % Tax-exempt investment securities (2) 27,131 537
3.99 % 29,658 588 4.00 % Corporate stock (2) 87 7 16.23 % 28 11 79.22 % Federal funds sold - - - - - -
Interest-bearing deposits in banks 1,000 2
0.40 % 794 1 0.25 % Total earning assets 534,128 10,199 3.85 % 497,674 9,351 3.79 % Cash & due from banks 24,784 43,563 Other assets 42,643 49,456
Allowance for loan & lease losses (5,492 ) (5,919 )
Liabilities & Shareholders' Equity Interest-bearing liabilities: Interest checking and money market
$ 179,652248 0.28 % Savings 52,995 21 0.08 % 50,818 42 0.17 % Time deposits 90,921 286 0.63 % 96,881 342 0.71 % Other borrowings 11,481 79 1.39 % 17,583 150 1.72 %
Total interest-bearing liabilities 351,549 595 0.34 % 344,934 782 0.46 % Noninterest-bearing demand deposits 151,368
141,712 Other liabilities 6,405 5,936 Total liabilities 509,322 492,582 Shareholders' equity 86,741 92,192
$ 596,063 $ 584,774
Net interest income & margin (3)
$ 8,5693.47 %
(1) Loan interest includes loan fees of
during the six months ended
balances include non-performing loans.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for 2014 and 2013.
(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 (181 days)
and annualized to actual days in the year (365 days). 35
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses Three Months Ended
Interest-earning assets: Volume
Rate (4) Net Change
Net loans (1)(2) $ -
$ 4$ 4 Taxable investment securities 125 410 535 Tax exempt investment securities (3) (26 ) 1 (25 ) Corporate stock 13 (18 ) (5 ) Federal funds sold - - - Interest-bearing deposits in banks - 1 1 Total 112 398 510
Interest checking and money market 11 (27 ) (16 ) Savings deposits 1 (10 ) (9 ) Time deposits (11 ) (11 ) (22 ) Other borrowings (27 ) (10 ) (37 ) Total (26 ) (58 ) (84 ) Interest differential
$ 138 $ 456 $ 594
Six Months Ended
Interest-earning assets: Volume
Rate (4) Net Change
Net loans (1)(2)
$ 69 $ (252 ) $ (183 )Taxable investment securities 269 816 1,085 Tax exempt investment securities (3) (50 ) (1 ) (51 ) Corporate stock 23 (27 ) (4 ) Federal funds sold - - - Interest-bearing deposits in banks - 1 1 Total 311 537 848
Interest checking and money market 23 (62 ) (39 ) Savings deposits 2 (23 ) (21 ) Time deposits (21 ) (35 ) (56 ) Other borrowings (52 ) (19 ) (71 ) Total (48 ) (139 ) (187 ) Interest differential
$ 359 $ 676 $ 1,035
(1) The average balance of non-accruing loans is immaterial as a percentage of
total loans and, as such, has been included in net loans.
(2) Loan fees of
30, 2013, have been included in the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for 2014 and 2013.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan and Lease Losses
The Company did not provide any provision for loan and lease losses for the second quarter of 2014 as compared to
$100,000for the second quarter of 2013. The Company experienced net loan and lease recoveries of $89,000or (0.14%) (on an annualized basis) of average loans and leases for the three months ended June 30, 2014compared to net loan and lease losses of $323,000or 0.52% (on an annualized basis) of average loans and leases for the three months ended June 30, 2013. For the first six months of 2014, the Company did not make any provisions for loan and lease losses and net loan and lease recoveries were $116,000or (0.09%) (on an annualized basis) of average loans and leases outstanding. This compares to provisions for loan and lease losses of $200,000and net loan and lease losses of $301,000for the first six months of 2013 or 0.24% (on an annualized basis) of average loans and leases outstanding. The Company continued to experience an overall improvement in the credit quality of the loan and lease portfolio and a reduction of credit losses. For additional information see the "Allowance for Loan and Lease Losses Activity." 36 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 Six Months Ended Ended June 30, June 30, 2014 2013 2014 2013
Service charges on deposit accounts
17 3 17 3 Merchant fee income 107 111 209 218 Bank owned life insurance 64 51 129 241 Income from OREO properties 105 71 212 163 Other 66 65 138 150
Total noninterest income
Noninterest income increased
$60,000(13.3%) to $508,000for the three months ended June 30, 2014compared to $448,000for the three months ended June 30, 2013. The increase from the second quarter of 2013 to the second quarter of 2014 was primarily related to an increase in income from OREO properties from $71,000in the second quarter of 2013 to $105,000in 2014, and an increase in gain on sale of securities from $3,000in 2013 to $17,000in 2014. The increase in OREO income results from higher rents received from foreclosed office buildings due to increased occupancy and an additional rental property. For the six months ended June 30, 2014, noninterest income decreased $63,000(5.9%) to $1,010,000. The decrease from the first six months of 2013 compared to the same period in 2014 was primarily related to proceeds of a life insurance policy on a former director, resulting in tax-free income of $118,000in the first quarter of 2013. The partial offset to this decrease was in rental income from OREO properties which increased from $163,000in 2013 to $212,000in 2014. Noninterest Expense Noninterest expense increased $87,000(2.4%) to $3,699,000in the second quarter of 2014 compared to $3,612,000in the second quarter of 2013. Salary and employee benefits expense decreased $85,000(2.7%) from $2,175,000during the second quarter of 2013 to $2,117,000during the second quarter of 2014. The decrease in salaries and benefits resulted from a lower number of full-time equivalent employees ("FTE"). Average FTE decreased from 109 during the second quarter of 2013 to 103 during the second quarter of 2014. From the second quarter of 2013, to the second quarter of 2014, occupancy expense decreased $5,000and furniture and equipment expense decreased $3,000. FDICassessments increased from a credit balance of $16,000in the second quarter of 2013 to $91,000during the second quarter of 2014. The change in the FDICassessments relates to an adjustment to the accrual in 2013 based upon an internal analysis which significantly lowered the 2013 expense. OREO related expenses decreased $72,000(36.9%) during the second quarter of 2014 to $123,000, from $195,000in the second quarter of 2013. The primary reason for the decrease in OREO related expenses resulted from a lower amount of property valuation adjustments. In the second quarter of 2013 updated appraisals were received requiring write-downs of $95,000and in the second quarter of 2014 there were no write-downs required. Other expenses increased $118,000(15.4%) to $884,000in the second quarter of 2014 compared to $766,000in the second quarter of 2013. The primary increase in other expenses relates to higher legal expense which increased from $43,000in the second quarter of 2013 to $155,000in the second quarter of 2014. The increase in legal expense was primarily the result of the resolution of issues associated with a former OREO property. The fully taxable equivalent efficiency ratio for the second quarter of 2014 decreased to 69.1% from 76.9% for the
second quarter of 2013. 37 Noninterest expense for the six-month period ended
June 30, 2014was $7,352,000versus $7,614,000for the same period in 2013 for a decrease of $262,000(3.4%). Salaries and benefits expense decreased $156,000(3.6%) from $4,393,000for the six months ended June 30, 2013to $4,237,000for the same period in 2014. Average FTE decreased from 111 during the first six months of 2013 to 102 during the same period in 2014. Occupancy expense increased $1,000and furniture and equipment expense decreased $19,000. FDICassessments increased $84,000(76.4%) during 2014 to $194,000, from $110,000in 2013. The increase results from the adjustment in 2013, as described above. OREO related expenses decreased $378,000(75.6%) during 2014 to $122,000, from $500,000in 2013. The decrease in OREO related expenses resulted from a lower amount of property valuation adjustments in 2014, as well as a sale of property in the first quarter of 2014 that resulted in a gain of $106,000. The $106,000gain on sale is accounted for as a reduction in OREO expenses in 2014. Other expenses increased $206,000(12.7%) from $1,624,000for the six months ended June 30, 2013to $1,830,000for the same period in 2014. The increase in other expenses results from higher legal expenses in 2014. Legal expenses increased from $99,000during the first six months of 2013 to $319,000during the same period in 2014. This increase is primarily related to problem loan credits and the resolution of issues associated with a former OREO property.
The overhead efficiency ratio (fully taxable equivalent), excluding the amortization of intangible assets, for the first six months of 2014 was 69.3% as compared to 79.0% in the same period of 2013.
Provision for Income Taxes
Federal and state income taxes for the quarter ended
June 30, 2014increased by $290,000from $260,000in the second quarter of 2013 to $550,000in the second quarter of 2014. The combined federal and state effective tax rate for the quarter ended June 30, 2014was 34.7%, an increase from 28.5% for the second quarter of 2013. For the six months ended June 30, 2014, the provision for income taxes was $1,085,000with a combined federal and state effective tax rate of 34.7%, compared to a provision of $405,000and a combined federal and state effective tax rate of 24.1% for the six months ended June 30, 2013. The higher level of income taxes and effective tax rate in 2014 resulted from the Company realizing significantly less benefits of Enterprise Zonecredits on our State tax return as the program has been significantly reduced, an increase in taxable income in 2014, and 2013 included tax-free income related to the life insurance benefit as discussed above. Balance Sheet Analysis The Company's total assets were $594,734,000at June 30, 2014compared to $592,753,000at December 31, 2013, representing an increase of $1,981,000(0.3%). The average assets for the three months ended June 30, 2014were $595,828,000, which represents an increase of $12,222,000or 2.1% over the balance of $583,606,000during the three-month period ended June 30, 2013. The average assets for the six months ended June 30, 2014were $596,063,000, which represents an increase of $11,289,000or 1.9% from the average balance of $584,774,000during the six-month period ended June 30, 2013.
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. Table Five below summarizes the values of the Company's investment securities held on
June 30, 2014and December 31, 2013. 38 Table Five: Investment Securities Composition (dollars in thousands) Available-for-sale (at fair value) June 30, 2014 December 31, 2013Debt securities: Mortgage-backed securities $ 251,032$ 244,160
Obligations of states and political subdivisions 27,187
26,903 Corporate bonds 1,630 1,609 Corporate stock 137 119
Total available-for-sale investment securities
$ 279,986$ 272,791 Held-to-maturity (at amortized cost) Debt securities: Mortgage-backed securities $ 1,015 $ 1,185 Total held-to-maturity investment securities $ 1,015
$ 1,185 Net unrealized gains on available-for-sale investment securities totaling
$6,171,000were recorded, net of $2,468,000in tax liabilities, as accumulated other comprehensive income within shareholders' equity at June 30, 2014and net unrealized gains on available-for-sale investment securities totaling $1,872,000were recorded, net of $748,000in tax liabilities, as accumulated other comprehensive income within shareholders' equity at December 31, 2013. 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 and Leases
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) lease financing receivable; (7) agriculture; and (8) 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
$31 millionin new loans during the first half of 2014. Normal and unexpected pay downs and one loan transferred to OREO resulted in a net decrease in total loans and leases of $5.2 million(2.0%) from December 31, 2013. The markets in which the Company operates are seeing marginal new loan volume, but existing borrowers continue to pay down debt and delay expansion plans. Table Six below summarizes the composition of the loan portfolio as of June 30, 2014and December 31, 2013.
Table Six: Loan and Lease Portfolio Composition
(dollars in thousands) June 30, 2014 December
31, 2013 Change in Percentage $ % $ % dollars change Commercial
$ 24,77811 % $ 24,5459 % $ 2331.0 % Real estate Commercial 185,374 71 % 184,204 72 % 1,170 0.7 % Multi-family 10,224 4 % 11,085 4 % (861 ) (7.8 %) Construction 5,927 3 % 9,633 4 % (3,706 ) (38.5 %) Residential 16,595 7 % 17,703 7 % (1,108 ) (6.3 %)
Lease financing receivable 1,262 0 % 1,344
1 % (82 ) (6.1 %) Agriculture 2,962 1 % 3,120 1 % (158 ) (5.1 %) Consumer 5,109 3 % 5,772 2 % (663 ) (11.5 %)
Total loans and leases 252,231 100 % 257,406 100 % (5,175 ) (2.0 %) Deferred loan and lease fees, net (248 ) (313 ) 65 Allowance for loan and lease losses (5,462 ) (5,346
) (116 ) Total net loans and leases
$ 246,521 $ 251,747 $ (5,226 )(2.1 %) 39 A significant portion of the Company's loans and leases are direct loans and leases made to individuals and local businesses. The Company relies substantially on local promotional activity and personal contacts by American River Bankofficers, directors and employees to compete with other financial institutions. The Company makes loans and leases to borrowers whose applications include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment. Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products. Consumer loans include a range of traditional consumer loan products such as personal lines of credit and homeowner equity lines of credit and loans to finance purchases of autos, boats, recreational vehicles, mobile homes and various other consumer items. Construction loans are generally comprised of commitments to customers within the Company's service area for construction of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans consist primarily of loans secured by first trust deeds on commercial, multi-family, and residential properties typically with maturities from 3 to 10 years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily of vineyard loans and development loans to plant vineyards. In general, except in the case of loans under SBA programs or Farm Services Agencyguarantees, the Company does not make long-term mortgage loans. "Subprime" real estate loans generally refer to residential mortgages made to higher-risk borrowers with lower credit and/or income histories. Within the banking industry, many of these loans were originated with adjustable interest rates that reset upward after an introductory period. These "subprime" loans coupled with declines in housing prices led to an increase in default rates resulting in many instances of increased foreclosure rates as the adjustable interest rates reset to higher levels. The Company did not have any such "subprime" loans at June 30, 2014and December 31, 2013.
The Company assesses and manages credit risk on an ongoing basis through a total credit culture that emphasizes excellent credit quality, extensive internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant to periodically review the existing loan and lease portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company's loan and lease portfolio is critical for profitability and growth. Management strives to continue its emphasis on credit quality in the loan and lease approval process, through active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan and lease review and grading system that functions to continually assess the credit risk inherent in the loan and lease portfolio. Ultimately, underlying trends in economic and business cycles influence credit quality.
American River Bank'sbusiness is concentrated in the Sacramento Metropolitan Statistical Area, which is a diversified economy, but with a large State of Californiagovernment presence and employment base; in Sonoma County, which is focused on businesses within the two communities in which the Bank has offices ( Santa Rosaand 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 Countyis diversified with professional services, manufacturing, agriculture and real estate investment and construction, while the economy of Amador Countyis reliant upon government, services, retail trade, manufacturing industries and Indian gaming. The Company has recently entered the Santa Clara, Contra Costa, and Alameda Countymarkets with loan productions offices in Pleasantonand San Jose. The economies of Santa Clara, Contra Costaand AlamedaCounties are diversified with professional services, manufacturing, technology related companies, real estate investment and construction. 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. 40 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 flow 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 86% of the Company's loan and lease portfolio at June 30, 2014, a decrease from 87% at December 31, 2013. Management believes that the residential land and residential construction portion of the Company's loan portfolio carries more than the normal credit risk, due primarily to severely curtailed demand for new and resale residential property, a large supply of unsold residential land and new and resale homes, and observed reductions in values throughout the Company's market area. Management has responded by evaluating loans that it considers to carry any significant risk above the normal risk of collectability by taking actions where possible to reduce credit risk exposure by methods that include, but are not limited to, seeking liquidation of the loan by the borrower, seeking additional tangible collateral or other repayment support, converting the property through judicial or non-judicial foreclosure proceedings, and other collection techniques. Management currently believes that it maintains its allowance for loan and lease losses at levels adequate to reflect the loss risk inherent in its total loan portfolio. A further decline in the economy in general, or a continued additional decline in real estate values in the Company's primary market areas, in particular, could continue to have an adverse impact on the collectability of real estate loans and require an increase in the provision for loan and lease losses. This could adversely affect the Company's future prospects, results of operations, profitability and stock price. Management believes that its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no assurance that losses will not occur. The Company's loan practices and underwriting standards include, but are not limited to, the following: (1) maintaining a thorough understanding of the Company's service 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 and Leases
June 30, 2014, nonperforming loans and leases (those loans and leases on nonaccrual status and those loans and leases still accruing and past due 90 days or more) were $1,506,000or 0.60% of total loans and leases. The $1,506,000in nonperforming loans and leases was made up of ten loans. Six of those loans totaling $651,000were current (less than 30 days past due pursuant to their original or modified terms). Nonperforming loans and leases were $1,979,000or 0.73% of total loans and leases at December 31, 2013. Specific reserves of $255,000were held on the nonperforming loans at June 30, 2014and specific reserves of $398,000were held on the nonperforming loans at December 31, 2013. The overall level of nonperforming loans decreased $377,000(20.0%) to $1,506,000at June 30, 2014compared to $1,883,000at March 31, 2014. At March 31, 2014, the Company had nonperforming loans and leases consisting of four real estate loans totaling $973,000; four commercial loans totaling $758,000and four consumer loans totaling $152,000. During the second quarter of 2014, a single loan in the amount of $189,000was moved to OREO, two loans in the amount of $259,000were placed back on performing status; and a single loan in the amount of $145,000was placed on nonperforming status. The Company also collected approximately $74,000in principal paydowns. The single loan added in the second quarter of 2014 was real estate secured and the loan balance that was transferred to OREO was adjusted based on an updated appraisal and the fair value the OREO is recorded at $243,000. 41
There were no loan or lease concentrations in excess of 10% of total loans and leases not otherwise disclosed as a category of loans and leases as of
June 30, 2014. Management is not aware of any potential problem loans, which were accruing and current at June 30, 2014, 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. Table Seven below sets forth nonaccrual loans as of June 30, 2014and December 31, 2013. Table Seven: Nonperforming Loans and Leases (dollars in thousands) June 30, December 31, 2014 2013
Past due 90 days or more and still accruing:
Commercial $ - $ 80 Real estate - - Lease financing receivable - - Agriculture - - Consumer - - Nonaccrual: Commercial 701 766 Real estate 654 977 Lease financing receivable - - Agriculture - - Consumer 151 156 Total nonperforming loans
$ 1,506 $ 1,979The net interest due on nonaccrual loans and leases but excluded from interest income was $15,000for the three months ended June 30, 2014, compared to foregone interest of $109,000during the three months ended June 30, 2013. The net interest due on nonaccrual loans and leases but excluded from interest income was $54,000for the six months ended June 30, 2014, compared to foregone interest of $168,000during the six months ended June 30, 2013.
Impaired Loans and Leases
The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the original contractual terms of the loan or lease agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan or lease discounted at the loan's or lease's original effective interest rate, (ii) the observable market price of the impaired loan or lease, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans or leases that are collectively evaluated for credit risk. In assessing whether a loan or lease is impaired, the Company typically reviews loans or leases graded substandard or lower with outstanding principal balances in excess of
$100,000, as well as loans considered troubled debt restructures with outstanding principal balances in excess of $25,000. The Company identifies troubled debt restructures by reviewing each renewal, modification, or extension of a loan with a screening document. This document is designed to identify any characteristic 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 June 30, 2014, the recorded investment in loans and leases that were considered to be impaired totaled $26,157,000, which includes $24,746,000in performing loans and leases. Of the total impaired loans of $26,157,000, loans totaling $11,542,000were deemed to require no specific reserve and loans totaling $14,615,000were deemed to require a related valuation allowance of $1,541,000. Of the $11,542,000impaired loans that did not carry a specific reserve there were $294,000in loans or leases that had previous partial charge-offs and $11,248,000in loans or leases that were analyzed and determined not to require a specific reserve or charge-off because the collateral value or discounted cash flow value exceeded the loan or lease balance. The recorded investment in loans and leases that were considered to be impaired totaled $27,034,000at December 31, 2013. Of the total impaired loans of $27,034,000, loans totaling $11,783,000were deemed to require no specific reserve and loans totaling $15,251,000were deemed to require a related valuation allowance of $1,598,000. The Company has been operating in a market that has 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. The collateral evaluations performed by the Company are updated as necessary, which is generally once every six months, and are reviewed by a qualified credit officer. In the second quarter of 2014, the Company had net recoveries of $89,000with no provision. In the second quarter of 2013, the Company had net charge-offs of $323,000with a provision of $100,000. 42
June 30, 2014, there were 11 loans and leases that were modified and are currently performing (less than ninety days past due) totaling $13,898,000and four loans and leases that are considered nonperforming (and included in Table Seven above), totaling $756,000, that are considered troubled debt restructures ("TDR"). These TDRs have a specific reserve of $828,000. As of June 30, 2014, of the 15 TDRs, there were seven rate reductions, three extensions, three changes in terms, and two lines of credit converted to term loans. All were performing as agreed except for two extensions and two term outs. The Company generally requires TDRs that are on non-accrual status to make six consecutive payments on the restructured loan or lease prior to returning the loan or lease to accrual status.
Allowance for Loan and Lease Losses Activity
The Company maintains an allowance for loan and lease losses ("ALLL") to cover probable losses inherent in the loan and lease portfolio, which is based upon management's estimate of those losses. The ALLL is established through a provision for loan and lease losses and is increased by provisions charged against current earnings and recoveries and reduced by charge-offs. Actual losses for loans and leases can vary significantly from this estimate. The methodology and assumptions used to calculate the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change. The adequacy of the ALLL and the level of the related provision for loan and lease losses is determined based on management's judgment after consideration of numerous factors including, but not limited to: (i) local and regional economic conditions, (ii) the financial condition of the borrowers, (iii) loan impairment and the related level of expected charge-offs, (iv) evaluation of industry trends, (v) industry and other concentrations, (vi) loans and leases which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management, (vii) continuing evaluations of the performing loan portfolio, (viii) ongoing review and evaluation of problem loans identified as having loss potential, (ix) quarterly review by the Board of Directors, and (x) assessments by banking regulators and other third parties. Management and the Board of Directors evaluate the ALLL and determine its appropriate level considering objective and subjective measures, such as knowledge of the borrowers' business, valuation of collateral, the determination of impaired loans or leases and exposure to potential losses. The ALLL totaled
$5,462,000or 2.17% of total loans and leases at June 30, 2014compared to $5,346,000or 2.08% of total loans and leases at December 31, 2013. The Company establishes general and specific reserves in accordance with the generally accepted accounting principles. The ALLL is maintained by categories of the loan and lease portfolio based on loan type and loan rating; however, the entire allowance is available to cover actual loan and lease losses. While management uses available information to recognize possible losses on loans and leases, future additions to the allowance may be necessary, based on changes in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ALLL. Such agencies may require the Company to provide additions to the allowance based on their judgment of information available to them at the time of their examination. The ALLL as a percentage of non-performing loans and leases was 362.7% at June 30, 2014and 270.1% at December 31, 2013. The ALLL as a percentage of impaired loans and leases was 20.9% at June 30, 2014and 19.8% at December 31, 2013. Of the total non-performing and impaired loans and leases outstanding as of June 30, 2014, there were $1,428,000in loans or leases that had been reduced by partial charge-offs of $291,000. As these loan or lease balances are charged off, the remaining balances, following analysis, normally do not initially require specific reserves and are not eligible for general reserves. The impact of this analysis on credit ratios is that the Company's ALLL as a percentage may be lower, because the partial charge-offs have reduced the potential future losses related to those credits. The Company's policy with regard to loan or lease charge-offs continues to be that a loan or lease is charged off against the ALLL when management believes that the collectability of the principal is unlikely. Generally, a loan or lease is charged off, or partially charged off, when estimated losses related to impaired loans and leases are identified. If the loan is collateralized by real estate the impaired portion will be charged off to the ALLL unless the loan or lease is in the process of collection, in which case a specific reserve may be warranted. If the collateral is other than real estate the Company will typically charge-off the impaired portion of a loan or lease, unless the loan or lease is in the process of collection, in which case a specific reserve may
be warranted. 43
It is the policy of management to maintain the allowance for loan and lease losses at a level believed to be adequate for known and inherent risks in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Based on information currently available to analyze inherent credit risk, including economic factors, overall credit quality, historical delinquencies and a history of actual charge-offs, management believes that the provision for loan and lease losses and the allowance for loan and lease losses are prudent and adequate. Adjustments may be made based on differences from estimated loan and lease growth, the types of loans constituting this growth, changes in risk ratings within the portfolio, and general economic conditions. However, no prediction of the ultimate level of loans and leases charged off in future periods can be made with any certainty. Table Eight below summarizes, for the periods indicated, the activity in the ALLL.
Table Eight: Allowance for Loan and Lease Losses
(dollars in thousands) Three Months Six Months Ended June 30, Ended June 30, 2014 2013 2014 2013 Average loans and leases outstanding
$ 250,190 $ 250,200 $ 254,497 $ 252,072Allowance for loan and lease losses at beginning of period $ 5,373 $ 5,903 $ 5,346
Loans and leases charged off:
Commercial - - - (11 ) Real estate - (356 ) - (393 ) Lease financing receivable - - - - Agriculture - - - - Consumer (73 ) - (74 ) (5 )
Total (73 ) (356 ) (74 ) (409 ) Recoveries of loans and leases previously charged off: Commercial 121 22 141 97 Real estate 41 11 46 11 Lease financing receivable - - 3 - Agriculture - - - - Consumer - - - -
Total 162 33 190
Net loans and leases charged off 89 (323 ) 116
(301 ) Additions to allowance charged to operating expenses - 100 - 200 Allowance for loan and lease losses at end of period
$ 5,462 $ 5,680 $ 5,462 $ 5,680Ratio of net charge-offs to average loans and
leases outstanding (annualized) -0.14 % 0.52 % -0.09 % 0.24 % Provision of allowance for loan and lease losses to average loans and leases outstanding (annualized) 0.00 % 0.16 % 0.00 % 0.16 % Allowance for loan and lease losses to loans and leases net of deferred fees at end of period 2.17 % 2.24 % 2.17 % 2.24 % Other Real Estate Owned At
June 30, 2014, the Company had ten other real estate owned ("OREO") properties totaling $6,864,000. This compares to nine properties totaling $6,621,000at December 31, 2013and 14 properties totaling $8,120,000at June 30, 2013. During the second quarter of 2014, the Company added a single property with a fair value of $243,000. During the second quarter of 2014, there was no valuation adjustment to the book value of the existing OREO properties. At June 30, 2014, there was a $105,000valuation reserve. This compares to a reserve balance of zero at June 30, 2013and $105,000at December 31, 2013. The Company believes that all ten OREO properties owned at June 30, 2014are carried approximately at fair value.
44 Deposits At
June 30, 2014, total deposits were $490,858,000representing a $7,168,000(1.5%) increase from the December 31, 2013balance of $483,690,000. The Company's deposit growth plan for 2014 is to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing money market and NOW accounts, and savings accounts while allowing higher cost time deposits to mature and close or renew at lower rates. During thee first six months of 2014, the Company experienced increases in noninterest-bearing ( $3,653,000or 2.5%), interest-bearing checking ( $715,000or 1.2%), money market accounts ( $4,423,000or 3.3%), and savings ( $1,813,000or 3.5%), and a decrease in time deposits ( $3,436,000or 3.7%).
Other Borrowed Funds
Other borrowings outstanding as of
June 30, 2014and December 31, 2013, consist of advances (both long-term and short-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) June 30, 2014 December 31, 2013 Amount Rate Amount Rate Short-term borrowings: FHLB advances
$ 1,5000.24 % $ 8,0002.15 % Long-term borrowings: FHLB advances $ 9,5001.40 % $ 8,0001.47 % The maximum amount of short-term borrowings at any month-end during the first six months of 2014 and 2013 was $3,000,000and $8,000,000, 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): Short-term Long-term Amount $ 1,500 $ 9,500Maturity 2015 2015 to 2019 Weighted average rates 0.24 % 1.40 %
The Company has also been issued a total of
$5,800,000in letters of credit by the FHLB which are pledged to secure Local Agency Deposits. The letters of credit act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The letters of credit were not drawn upon in 2014 or 2013 and management does not currently expect to draw upon these lines in the foreseeable future. See the "Liquidity" section that follows for additional information on FHLB borrowings. Capital Resources The Company and American River Bankare subject to certain regulatory capital requirements administered by the Federal Reserve Boardand 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 current 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'scapital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 45 At June 30, 2014, shareholders' equity was $87,564,000, representing an increase of $544,000(6.3%) from $87,020,000at December 31, 2013. The increase results from the addition of earnings of $2,041,000and an increase in the unrealized gain on securities of $2,580,000exceeding the stock repurchases of $4,148,000made under the 2014 Stock Repurchase Program. The ratio of total risk-based capital to risk adjusted assets was 22.7% at June 30, 2014and 23.2% at December 31, 2013. Tier 1 risk-based capital to risk-adjusted assets was 21.4% at June 30, 2014and 22.0% at December 31, 2013. The leverage ratio was 11.7% at June 30, 2014and 11.9% at December 31, 2013.
Table Ten below lists the Company's actual capital ratios at
Table Ten: Capital Ratios Capital to Risk-Adjusted Assets At June 30, At December 31, Minimum Regulatory 2014 2013 Capital Requirements Leverage ratio 11.7 % 11.9 % 4.00 % Tier 1 Risk-Based Capital 21.4 % 22.0 % 4.00 % Total Risk-Based Capital 22.7 % 23.2 % 8.00 % Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory requirements and is adequate to meet future needs. Management believes that both the Company and
American River Bankmet all of their capital adequacy requirements as of June 30, 2014and December 31, 2013. In July 2013, the federal bank regulatory agencies issued interim final rules which were subsequently adopted as final rules to revise and replace the current risk-based capital requirements in order to implement the "Basel III" regulatory capital reforms released by the Basel Committee on Banking Supervisionand changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Basel III reforms reflected in the final rules include an increase in the risk-based capital requirements and certain changes to capital components and the calculation of risk-weighted assets. Effective January 1, 2015, banking organizations like the Company and American River Bankmust comply with new minimum capital ratio requirements to be phased-in between January 1, 2015and January 1, 2019, which would consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets ("leverage") ratio of 4%. In addition, a "capital conservation buffer," is established which when fully phased-in will require maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer will increase the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new buffer requirement will be phased-in between January 1, 2016and 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. The federal bank regulatory agencies also implemented changes to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital ratios begin to show signs of weakness. These changes will take effect January 1, 2015and will require insured depository institutions to meet the following increased capital ratio requirements in order to qualify as "well capitalized:" (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
Assuming the final rules were in effect at
46 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 it 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
June 30, 2014and 2013. Liquidity
Liquidity management refers to the Company's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company's liquidity position. Federal funds lines, short-term investments and securities, and loan and lease repayments contribute to liquidity, along with deposit increases, while loan and lease funding and deposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit at
June 30, 2014were approximately $32,616,000and $6,285,000, 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 June 30, 2014, consolidated liquid assets totaled $233.2 millionor 39.2% of total assets compared to $221.6 millionor 37.4% of total assets on December 31, 2014. In addition to liquid assets, the Company maintains two short-term unsecured lines of credit in the amount of $17,000,000with two of its correspondent banks. At June 30, 2014, the Company had $17,000,000available under these credit lines. Additionally, the Bank is a member of the FHLB. At June 30, 2014, the Bank could have arranged for up to $81,741,000in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At June 30, 2014, the Company had advances, borrowings and commitments (including letters of credit) outstanding of $16.800,000, leaving $64,941,000available under these FHLB secured borrowing arrangements. American River Bankalso 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 June 30, 2014, the Company's borrowing capacity at the Federal Reserve Bankwas $19,842,000. 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. The Bank has established a master repurchase agreement with a correspondent bank to enable such transactions. Furthermore, the Bank can pledge additional unencumbered securities to borrow from the Federal Reserve Bank of San Franciscoand 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
June 30, 2014and December 31, 2013, 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 $38,901,000and $38,044,000at June 30, 2014and December 31, 2013, respectively. As a percentage of net loans and leases these off-balance sheet items represent 15.8% and 15.1%, respectively. 47
The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results.
American River Banksharesmaintains a website where certain information about the Company is posted. Through the website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments thereto, as well as Section 16 Reports and amendments thereto, are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission(the "SEC"). These reports are free of charge and can be accessed through the address www.americanriverbank.com by clicking on the Investor Relations/SEC Filings link located at that address. Once you have selected the SEC Filings link you will have the option to access the Section 16 Reports or the other above-referenced reports filed by the Company by selecting the appropriate link.