American River Bankshares
Annual Report 2015

Plain-text annual report

2015 Annual Report Giving Business More Reach TABLE OF CONTENTS Letter from the Chairman and CEO Locations and Lending Area Total Return Performance Our Team Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Report of Management on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets, December 31, 2015 and 2014 Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and 2013 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 2013 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2015, 2014 and 2013 Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013 Notes to Consolidated Financial Statements Selected Quarterly Information 1 2 2 3 4 5 28 29 30 31 32 33 34 36 83 ANNUAL REPORT COPIES.  American River Bankshares will provide its security holders and interested parties, without charge, a copy of its 2015 Annual Report on Form 10-K, including the financial statements and schedules thereto, as filed with the Securities and Exchange Commission. To request a copy by mail, please contact American River Bankshares. To view a pdf version online, please go to our web site at www.envisionreports.com/AMRB.   2015 YEAR IN REVIEW Dear Valued Shareholder, In our letter to you last year, we highlighted our desire for consistent loan growth meant to drive our net interest income, while at the same time keeping our overhead expenses stable. We are happy to report that in 2015, success in these two areas was substantive and will be our ongoing focus. We believe it is also important to continue investment in the relevant technological advancements within our industry as well as the cultivation of the American River Bankshares team of professionals, our most important asset. SHAREHOLDER VALUE. For the year ended December 31, 2015, the Company increased earnings per share by 30% to $0.70 per share. The drivers included an increase in net interest income and a decrease in overhead expenses compounded by a significant repurchase of our common stock. Total share appreciation in 2015 was 12% and tangible book value per share grew to $9.50 at year end. EARNINGS PER SHARE DRIVER. The majority of our income is derived from net interest income, which increased by $1.2 million in 2015. Low interest rates continue to put pressure on our interest income but we were successful in our loan growth, securities portfolio return and in controlling cost of deposits. Being smart with our overhead is of paramount importance and this past year we were able to reduce overhead by $800,000. We focused on the utilization of technology to drive efficiencies while keeping our client experience top-notch. These two critical actions contributed to a 21% increase in net income in 2015. The share repurchase program results enabled us to leverage this solid income growth even further. In 2015, we repurchased 791,000 shares which helped with the 30% growth in earnings per share. BALANCE SHEET GROWTH. Core deposits* grew by $23 million for the year with the growth coming from noninterest-bearing deposits, which grew 22% or $35 million. This clearly demonstrates our success within our business banking niche. Loans outstanding increased by $31 million for the year as a result of a solid increase of 30% in loan fundings. Loan growth has been a priority and while we are pleased with the results, we are mindful of credit standards and pricing discipline. The keys to our continued momentum are to increase net interest income while at the same time controlling overhead expense. The growth in our Company will be driven by an aggressive sales effort coupled with an extraordinary client experience provided by service- oriented employees who are given the tools and training needed to excel in this area. Staying current with, and providing for our clients’ technological needs also contributes to this extraordinary client experience. We thank you for your continued investment and for the trust and confidence you have placed in our Company. Sincerely, Charles D. Fite Chairman of the Board David T. Taber President & CEO *The Company considers all deposits except time deposits as core deposits. 1OUR LOCATIONS TOTAL RETURN PERFORMANCE American River Bankshares NASDAQ Composite SNL Bank NASDAQ 12/31/10 12/31/11 75.83 99.21 88.73 100.00 100.00 100.00 Source: SNL Financial LC, Charlottesville, VA 12/31/12 12/31/13 12/31/14 12/31/15 176.33 201.40 169.94 157.50 163.75 152.00 157.00 188.03 157.42 115.17 116.82 105.75 2OUR TEAM AMERICAN RIVER BANK AND BANKSHARES BOARD OF DIRECTORS AMERICAN RIVER BANK LEADERSHIP TEAM Charles D. Fite Chairman of the Board President, Fite Development Co. William A. Robotham, CPA Vice-Chairman of the Board Executive Partner, Pisenti & Brinker LLP Stephen H. Waks, Esq. Corporate Secretary Attorney-at-Law and Owner, Waks Law Corporation Kimberly A. Box President & CEO, Kamere, Inc. Robert J. Fox, CPA Retired Partner, Gallina LLP David T. Taber President & CEO, American River Bankshares Roger J. Taylor, DDS Retired Dentist Director, Taylor’s Investment Company Philip A. Wright President & Owner, Wright Investments Inc. dba Wright Realty Michael A. Ziegler President & CEO, PRIDE Industries ANNUAL MEETING The 2016 annual meeting of American River Bankshares will be held at 3:00 p.m. on May 19, 2016 at: Rancho Cordova City Hall American River Room North 2729 Prospect Park Drive Rancho Cordova, CA 95670 David T. Taber President & CEO Kevin B. Bender EVP & Chief Operating Officer Mitchell A. Derenzo EVP & Chief Financial Officer Loren E. Hunter EVP & Chief Credit Officer Lisa R. Cisneros SVP & Retail Banking Manager Erica C. Fernandez SVP & Commercial Banking Manager STOCK LISTING American River Bankshares trades on the NASDAQ Global Select Stock Market under the symbol “AMRB” INVESTOR RELATIONS American River Bankshares 3100 Zinfandel Drive, Suite 450 Rancho Cordova, CA 95670 (916) 851-0123 investor.relations@americanriverbank.com www.AmericanRiverBank.com TRANSFER AGENCY Computershare Trust Company P.O. Box 43070 Providence, RI 02940-3070 (800) 962 4284 www-us.computershare.com/Investor/ 3Selected Financial Data. FINANCIAL SUMMARY-The following table presents certain consolidated financial information concerning the business of the Company and its subsidiaries. This information should be read in conjunction with the Consolidated Financial Statements, the notes thereto, and Management’s Discussion and Analysis included in this report. All per share data has been retroactively restated to reflect stock dividends and stock splits. As of and for the Years Ended December 31, (In thousands, except per share amounts and ratios) Operations Data: Net interest income Provision for loan and lease losses Noninterest income Noninterest expenses Income before income taxes Income tax expense Net income Share Data: Earnings per share – basic Earnings per share – diluted Cash dividends per share (1) Book value per share Tangible book value per share Balance Sheet Data: Assets Loans and leases, net Deposits Shareholders’ equity 2015 2014 2013 2012 2011 $ $ $ $ $ $ $ $ 20,007 — 2,015 14,080 7,942 2,674 5,268 0.70 0.70 0.00 11.72 9.50 634,640 289,102 530,690 86,075 $ $ $ $ $ $ $ $ 18,797 (541) 2,177 14,862 6,653 2,292 4,361 0.54 0.54 0.00 11.08 9.06 617,754 258,057 510,693 89,647 $ $ $ $ $ $ $ $ 17,391 200 2,015 14,891 4,315 1,258 3,057 0.34 0.34 0.00 10.25 8.33 592,753 251,747 483,690 87,020 $ $ $ $ $ $ $ $ 19,405 1,365 2,774 16,747 4,067 860 3,207 0.34 0.34 0.00 10.08 8.33 596,389 252,118 478,256 93,994 $ $ $ $ $ $ $ $ 21,591 3,625 2,108 16,301 3,773 1,269 2,504 0.25 0.25 0.00 9.51 7.85 581,518 293,731 462,285 94,099 Financial Ratios: Return on average equity Return on average tangible equity Return on average assets Efficiency ratio (2) Net interest margin (2) (3) Net loans and leases to deposits Net charge-offs (recoveries) to average loans & leases Non-performing loans and leases to total loans and leases (4) Allowance for loan and lease losses to total loans and leases Average equity to average assets Dividend payout ratio (1) Capital Ratios: Leverage capital ratio Tier 1 risk-based capital ratio Total risk-based capital ratio 6.03% 7.42% 0.85% 62.87% 3.63% 54.48% 0.12% 0.56% 1.69% 14.02% 0% 10.97% 19.34% 20.59% 4.98% 6.12% 0.72% 69.96% 3.54% 50.53% (0.20%) 0.63% 2.01% 14.47% 0% 11.60% 21.60% 22.85% 3.38% 4.13% 0.52% 75.61% 3.45% 52.05% 0.25% 0.77% 2.08% 15.31% 0% 11.88% 21.95% 23.20% 3.42% 4.15% 0.55% 73.69% 3.91% 52.72% 0.93% 2.12% 2.24% 15.97% 0% 12.82% 23.87% 25.13% 2.74% 3.35% 0.43% 67.18% 4.36% 63.54% 1.29% 4.46% 2.34% 15.81% 0% 13.09% 21.52% 22.78% (1) On July 27, 2009, the Company announced that the Board of Directors suspended the payment of cash dividends, until such time that it was prudent to reestablish the payment of cash dividends. (2) Fully taxable equivalent. (3) Excludes the amortization of intangible assets. (4) Non-performing loans and leases consist of loans and leases past due 90 days or more and still accruing and nonaccrual loans and leases. 4Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Statements Regarding Forward-Looking Statements Certain matters discussed or incorporated by reference in this Annual Report including, but not limited to, matters described herein, 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 materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) the legislation promulgated by the United States Congress and actions taken by governmental agencies, including the United States Department of the Treasury, to deal with challenges to the U.S. financial system; (2) 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; (3) variances in the actual versus projected growth in assets and return on assets; (4) potential loan and lease losses; (5) potential expenses associated with resolving non-performing assets as well as regulatory changes; (6) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds; (7) competitive effects; (8) potential declines in fee and other noninterest income earned associated with economic factors as well as regulatory changes; (9) 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; (10) changes in the regulatory environment including increased capital and regulatory compliance requirements and further government intervention in the U.S. financial system; (11) changes in business conditions and inflation; (12) changes in securities markets, public debt markets, and other capital markets; (13) potential data processing, cybersecurity and other operational systems failures, breach or fraud; (14) potential decline in real estate values in our operating markets; (15) 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, negative financial and economic conditions, natural disasters, and disruption of power supplies and communications; (16) changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations; (17) projected business increases following any future strategic expansion could be lower than expected; (18) the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings; (19) 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; and (20) 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” our 2015 Form 10-K and other cautionary statements and information set forth in this report should be carefully considered and understood as being applicable to all related forward-looking statements contained in this report, when evaluating the business prospects of the Company and its subsidiaries. Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission (the “SEC”) on Forms 10-K, 10-Q and 8-K. 5Critical Accounting Policies General The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. We use historical loss data and the economic environment as factors, among others, in determining the inherent loss that may be present in our loan and lease portfolio. Actual losses could differ significantly from the factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. Allowance for Loan and Lease Losses The allowance for loan and lease losses is an estimate of probable credit losses inherent in the Company’s credit portfolio that have been incurred as of the balance-sheet date. The allowance is based on two basic principles of accounting: (1) “Accounting for Contingencies,” which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) the “Receivables” topic, which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance for loan and lease losses is determined based upon estimates that can and do change when the actual risk, loss events, or changes in other factors, occur. The analysis of the allowance uses a historical loss view as an indicator of future losses and as a result could differ from the actual losses incurred in the future. If the allowance for loan and lease losses falls below that deemed adequate (by reason of loan and lease growth, actual losses, the effect of changes in risk factors, or some combination of these), the Company has a strategy for supplementing the allowance for loan and lease losses, over the short-term. For further information regarding our allowance for loan and lease losses, see “Allowance for Loan and Lease Losses Activity.” Stock-Based Compensation The Company recognizes compensation expense over the service period in an amount equal to the fair value of all share-based payments which consist of stock options and restricted stock awarded to directors and employees. The fair value of each stock option award is estimated on the date of grant and amortized over the service period using a Black-Scholes-Merton based option valuation model that requires the use of assumptions. Critical assumptions that affect the estimated fair value of each award include expected stock price volatility, dividend yields, option life and the risk-free interest rate. The fair value of each restricted award is estimated on the date of award and amortized over the service period. 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 at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2015, 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. 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 income taxes. 6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. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company conducted an analysis to assess the need for a valuation allowance at December 31, 2015, and determined that no valuation allowance was required. As part of this assessment, all available evidence, including both positive and negative, was considered to determine whether based on the weight of such evidence, a valuation allowance on the Company’s deferred tax assets was needed. A valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of a deferred tax asset will not be realized. The future realization of the deferred tax asset depends on the existence of sufficient taxable income within the carryback and carry forward periods. 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 taken are not offset or aggregated with other positions. 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 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. Only tax positions that meet the more- likely-than-not recognition threshold are recognized. The election has been made to record interest expense related to tax exposures in tax expense, if applicable, and the exposure for penalties related to tax exposures in tax expense, if applicable. Overview The Company recorded net income in 2015 of $5,268,000, an increase of $907,000 (20.8%) from $4,361,000 in 2014. Diluted earnings per share were $0.70 for 2015 and $0.54 for 2014. For 2015, the Company realized a return on average equity of 6.03% and a return on average assets of 0.85%, as compared to 4.98% and 0.72%, respectively, in 2014. Net income for 2014 increased $1,304,000 (42.7%) from $3,057,000 in 2013. Diluted earnings per share for 2013 were $0.34. For 2013, the Company realized a return on average equity of 3.38% and return on average assets of 0.52%. Table One below provides a summary of the components of net income for the years indicated (dollars in thousands): Table One: Components of Net Income Interest income* Interest expense Net interest income* Provision for loan and lease losses Noninterest income Noninterest expense Provision for income taxes Tax equivalent adjustment Net income Average total assets Net income as a percentage of average total assets * Fully taxable equivalent basis (FTE) 2015 2014 2013 $ $ $ 21,340 (961) 20,379 — 2,015 (14,080) (2,674) (372) 5,268 623,049 0.85% $ $ $ 20,242 (1,168) 19,074 541 2,177 (14,862) (2,292) (277) 4,361 605,247 0.72% $ $ $ 19,170 (1,490) 17,680 (200) 2,015 (14,891) (1,258) (289) 3,057 590,411 0.52% Under accounting principles generally accepted in the United States of America all share and per share data is adjusted for stock dividends and stock splits. There were no stock dividends or stock splits in 2015, 2014 or 2013. 7During 2015, total assets of the Company increased $16,886,000 (2.7%) from $617,754,000 at December 31, 2014 to $634,640,000 at December 31, 2015. At December 31, 2015, net loans totaled $289,102,000, up $31,045,000 (12.0%) from the ending balance of $258,057,000 at December 31, 2014. Deposits increased $19,997,000 or 3.9% from $510,693,000 at December 31, 2014 to $530,690,000 at December 31, 2015. Shareholders’ equity decreased $3,572,000 or 4.0% from $89,647,000 at December 31, 2014 to $86,075,000 at December 31, 2015. The Company ended 2015 with a leverage capital ratio of 11.0% and a total risk-based capital ratio of 20.6% compared to a leverage capital ratio of 11.6% and a total risk-based capital ratio of 22.9% at the end of 2014. Results of Operations Net Interest Income and Net Interest Margin Net interest income represents the excess of interest and fees earned on interest earning assets (loans, securities, Federal funds sold and interest-bearing deposits in other banks) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. The Company’s fully taxable equivalent net interest margin was 3.63% in 2015, 3.54% in 2014, and 3.45% in 2013. The fully taxable equivalent net interest income was up $1,312,000 (6.9%), from $19,067,000 in 2014 to $20,379,000 in 2015. The fully taxable equivalent net interest income was up $1,387,000 (7.8%), from $17,680,000 in 2013 to $19,067,000 in 2014. The fully taxable equivalent interest income component increased $1,098,000 (5.4%) from $20,242,000 in 2014 to $21,340,000 in 2015. The increase in the fully taxable equivalent interest income for 2015 compared to the same period in 2014 is comprised of two components - rate (down $285,000) and volume (up $1,383,000). The rate decrease primarily occurred in the loan portfolio. While average loans increased by $25,830,000 (10.2%) from $253,898,000 during 2014 to $279,728,000 during 2015, due to the overall lower interest rate environment, the new loans added were at lower yields than the existing loans. Yield on loans decreased from 5.37% in 2014 to 5.01% in 2015 and contributed a decrease of $1,076,000 in loan interest income. The decrease of $1,076,000 in interest income created from the decrease in rates on the loan balances was partially offset by an increase in rates on the investment portfolio resulting in an increase of $790,000 related to the investments. This increase in investment income due to rates 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. The volume increase of $1,383,000 was primarily from the increase in average loans mentioned above ($1,466,000) and partially offset by a decrease in investments ($83,000). When compared to 2014, average investment securities decreased $3,092,000 (1.1%) from $284,436,000 in 2014 compared to $281,344,000 in 2015. The fully taxable equivalent interest income component increased from $19,170,000 in 2013 to $20,235,000 in 2014, representing a 5.6% increase. The increase in the fully taxable equivalent interest income for 2014 compared to the same period in 2013 is comprised of two components - rate (up $591,000) and volume (up $474,000). 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 $1,211,000 in additional interest income related to rate. The average yield on investments increased from 1.93% in 2013 to 2.32% in 2014. The increase in interest income created from the investment portfolio was partially offset by a decrease in rates on the loan balances. The average yield on loans decreased from 5.61% to 5.37% and was caused by principal reductions from normal payments and paydowns from loans being loaned out at lower market rates. The volume increase of $474,000 was also primarily related to the investments. Average investment balances were up $26,273,000 (10.2%) from $258,164,000 in 2013 to $284,436,000 in 2014. Funds received from the increase in deposit balances were primarily deployed in the investment portfolio. 8Interest expense was $207,000 (17.7%) lower in 2015 compared to 2014, decreasing from $1,168,000 to $961,000. The primary decrease in interest expense relates to lower rates (down $222,000). Rates paid on interest bearing liabilities decreased 6 basis points from 0.33% to 0.27% in 2014 compared to 2015. The average balances on interest bearing liabilities were $356,052,000 (or $180,000 and 0.1% higher) in 2015 compared to $355,872,000 in 2014. The higher balances had only a slight impact on the overall interest expense. Interest expense was $322,000 (21.6%) lower in 2014 compared to 2013, decreasing from $1,490,000 to $1,168,000. The average balances on interest bearing liabilities was 1.9% higher in 2014 ($355,872,000) compared to 2013 ($349,329,000). The slightly higher balances, however, did not increase interest expense as the increases occurred in lower cost checking and savings accounts, which were slightly offset by decreases in higher cost time deposits and other borrowings. Despite the increase in average interest bearing balances the Company experienced a decrease in interest expense of $95,000 due to this increase in interest checking and money market balances offset by the decrease in time deposits and other borrowings. The overall decrease in interest expense was also due to lower rates, which accounted for a $227,000 decrease in interest expense for 2014 compared to 2013. Rates paid on interest-bearing liabilities decreased 10 basis points from 0.43% in 2013 to 0.33% in 2014. Table Two, Analysis of Net Interest Margin on Earning Assets, and Table Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are provided to enable the reader to understand the components and past trends of the Company’s interest income and expenses. Table Two provides an analysis of net interest margin on earning assets setting forth average assets, liabilities and shareholders’ equity; interest income earned and interest expense paid and average rates earned and paid; and the net interest margin on earning assets. Table Three sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume), computed on a daily average basis, and changes in average interest rates. 9Table Two: Analysis of Net Interest Margin on Earning Assets Year Ended December 31, (Taxable Equivalent Basis) (dollars in thousands) Assets: Earning assets: Taxable loans and leases (1) Tax-exempt loans and leases (2) Taxable investment Securities Tax-exempt investment securities (2) Corporate stock Federal funds sold Interest bearing deposits in other banks Total earning assets Cash & due from banks Other assets Allowance for loan & lease losses Liabilities & Shareholders’Equity: Interest bearing liabilities: NOW & MMDA Savings Time deposits Other borrowings Total interest bearing liabilities Demand deposits Other liabilities Total liabilities Shareholders’ equity 2015 Interest $ 13,547 481 6,280 1,015 12 — 5 21,340 244 29 544 144 961 Avg Balance $ 270,267 9,461 255,137 26,128 79 — 994 562,066 26,313 39,941 (5,271) $ 623,049 $ 196,120 58,910 86,930 14,092 356,052 173,130 6,537 535,719 87,330 $ 623,049 2014 Interest $ 13,609 29 5,528 1,057 15 — 4 20,242 Avg Yield Avg Balance 5.01% $ 253,434 464 5.08% 257,308 2.46% 27,051 3.88% 77 15.19% — — 0.50% 1,000 539,334 3.80% 28,533 42,924 (5,544) Avg Yield Avg Balance 5.37% $ 252,807 — 6.25% 229,518 2.15% 28,607 3.91% 38 19.48% — — 0.40% 898 511,868 3.75% 37,609 46,703 (5,769) $ 605,247 $ 590,411 2013 Interest $ 14,191 — 3,822 1,142 12 — 3 19,170 Avg Yield 5.61% — 1.67% 3.99% 31.58% — 0.33% 3.75% 420 40 561 147 1,168 0.12% $ 201,412 53,806 0.05% 89,392 0.63% 1.02% 11,262 355,872 0.27% 155,537 6,275 517,684 87,563 $ 605,247 0.21% $ 185,671 51,432 0.07% 95,415 0.63% 1.31% 16,811 349,329 0.33% 144,710 5,978 500,017 90,394 $ 590,411 475 67 655 293 1,490 0.26% 0.13% 0.69% 1.74% 0.43% Net interest income & margin (3) $ 20,379 3.63% $ 19,074 3.54% $ 17,680 3.45% (1) Loan and lease interest includes loan and lease fees of $322,000, $307,000 and $119,000 in 2015, 2014 and 2013, respectively. (2) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% in 2015, 2014 and 2013. (3) Net interest margin is computed by dividing net interest income by total average earning assets. 10Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses Year ended December 31, 2015 over 2014 (dollars in thousands) Increase (decrease) in interest income and expense due to change in: Interest-earning assets: Taxable net loans and leases (1)(2) Tax-exempt net loans and leases (3) Taxable investment securities Tax-exempt investment securities (3) Corporate stock Federal funds sold & other Interest bearing deposits in other banks Total Interest-bearing liabilities: Demand deposits Savings deposits Time deposits Other borrowings Total Interest differential Year Ended December 31, 2014 over 2013 (dollars in thousands) Increase (decrease) in interest income and expense due to change in: Interest-earning assets: Net loans and leases (1)(2) Taxable investment securities Tax-exempt investment securities (3) Corporate stock Federal funds sold & other Interest bearing deposits in other banks Total Interest-bearing liabilities: Demand deposits Savings deposits Time deposits Other borrowings Total Interest differential Volume Rate (4) 904 562 (47) (36) — — — 1,383 (11) 4 (15) 37 15 1,368 $ $ (966) (110) 799 (6) (3) — 1 (285) (165) (15) (2) (40) (222) (63) Volume Rate (4) 61 463 (62) 12 — — 474 40 3 (41) (97) (95) 569 $ $ (621) 1,243 (23) (9) — 1 591 (95) (30) (53) (49) (227) 818 $ $ $ $ Net Change $ (62) 452 752 (42) (3) — 1 1,098 (176) (11) (17) (3) (207) 1,305 $ Net Change (560) $ 1,706 (85) 3 — 1 1,065 (55) (27) (94) (146) (322) 1,387 $ (1) The average balance of non-accruing loans and leases is immaterial as a percentage of total loans and leases and has been included in net loans and leases. (2) Loan and lease fees of $322,000, $307,000 and $119,000 for the years ended December 31, 2015, 2014 and 2013, respectively, have been included in the interest income computation. (3) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% in 2015, 2014 and 2013. (4) The rate/volume variance has been included in the rate variance. 11Provision for Loan and Lease Losses The Company experienced net loan and lease losses of $326,000 or 0.12% of average loans and leases during 2015 compared to net loan and lease recoveries of $496,000 or 0.20% of average loans and leases during 2014. As a result of the improving credit quality over the past several years and a reduction in historical loan loss rates the Company did not require any loan or lease loss provision in 2015. As a result of the recoveries in 2014, the Company reduced the allowance for loan and lease losses by recording a negative provision for loan and lease losses of $541,000. The level of non-performing loans and leases, which began to increase during the economic cycle of 2007 through 2010, reached a high of $22,571,000 at December 31, 2010, but has decreased to $1,643,000 at December 31, 2015. For additional information see the “Nonaccrual, Past Due and Restructured Loans and Leases.” While the level of non-performing loans and leases has decreased, there remains a challenging economy in the Company’s market areas and in the United States, in general. This may potentially negatively impact the Company’s borrowers and as a result the Company has maintained the ALLL at a level that is higher than the long- term historical averages. For additional information see the “Allowance for Loan and Lease Losses Activity.” Service Charges and Fees and Other 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 Service charges on deposit accounts Rental income from OREO properties Merchant fee income Earnings on bank-owned life insurance Life insurance death benefit Gain on sale, impairment and call of securities Other Year Ended December 31, 2014 2013 2015 $ $ 498 335 378 316 — 251 237 2,015 $ $ 562 365 413 284 99 208 246 2,177 $ $ 590 316 443 247 118 36 265 2,015 Noninterest income decreased $162,000 (7.4%) to $2,015,000 in 2015 from the 2014 level. The decrease from 2014 to 2015 was primarily related to lower fees from service charges on deposit accounts (down $64,000 or 11.4%) and no life insurance death benefits in 2015 as compared to $99,000 in 2014. The decrease in service charges is related to a decrease in insufficient funds income. Noninterest income increased $162,000 (8.0%) to $2,177,000 in 2014 from the 2013 level. The increase from 2013 to 2014 was primarily related to income from security sales which increased from $36,000 in 2013 to $208,000 in 2014. In addition, rental income from OREO properties increased from $316,000 in 2013 to $365,000 in 2014. Salaries and Benefits Salaries and benefits were $8,528,000 (down $248,000 or 2.8%) for 2015 as compared to $8,776,000 in 2014. The decrease in salary and benefits was due in part to lower incentive compensation expense and lower employee benefits. Incentive accruals decreased $182,000, from $672,000 in 2014 to $490,000 in 2015 and other employee benefits decreased $107,000 (7.0%) from $1,529,000 in 2014 to $1,422,000 in 2015. The decrease in incentive compensation was primarily due to the Company not reaching all of the incentive targets in 2015. The decrease in other employee benefits, which includes health care related benefits, 401(k) matching, and employee placement fees, was primarily related to lower employee placement fees paid in 2015. Salaries and benefits were $8,776,000 (up $260,000 or 3.1%) for 2014 as compared to $8,516,000 in 2013. The increase in salary and benefits was due in part to increased incentive compensation expense and higher employee benefits partially offset by a decrease in core salaries. Incentive accruals increased $54,000, from $618,000 in 2013 to $672,000 in 2014 and other employee benefits increased $162,000 (11.9%) from $1,367,000 in 2013 to $1,529,000 in 2014. Salaries decreased $66,000 (1.1%) from $6,048,000 in 2013 to $5,982,000 in 2014. The increase in incentive compensation was primarily due to an increase in the Company’s net income in relationship to incentive targeted net income goals. The increase in other employee benefits, which includes health care related benefits, 401(k) matching, and employee placement fees, was primarily related to higher employee placement fees paid in 2014 to attract lending officers and a chief credit officer. The decrease in salaries is related to a lower number of employees. Average full-time equivalent employees decreased from 106 during 2013 to 102 during 2014. 12Other Real Estate Owned The total other real estate owned (“OREO”) expense in 2015 was $322,000 (down $42,000 or 11.5%) compared to $364,000 in 2014. The primary reason for the decrease in OREO related expenses is due to the sale of a number of properties, including office buildings which have high operating expenses and lower property write-downs. In 2015, write-downs were $76,000 compared to $165,000 in 2013. This decrease is related to a fewer number of owned properties and some stability in the real estate market. Operating expenses on the properties held in 2015 totaled $245,000 compared to $430,000 in 2014. In 2014, the gains on sale, which offset the overall OREO expense, were higher than in 2015. Gains from properties sold in 2014 totaled $231,000 compared to a loss of $1,000 in 2015. The total OREO expense in 2014 was $364,000 (down $572,000 or 61.1%) compared to $936,000 in 2013. The primary reason for the decrease in OREO related expenses is due to the sale of a number of properties, including office buildings which have high operating expenses and lower write-downs due to updated property valuations. In 2014, the gains on sale, which offset the overall OREO expense, were higher than in 2013. In 2014, write-downs were $165,000 compared to $293,000 in 2013. This decrease is related to a fewer number of owned properties and some stability in the real estate market. Gains from properties sold in 2014 totaled $231,000 compared to $44,000 in 2013 and operating expenses on the properties held in 2014 totaled $430,000 compared to $686,000 in 2013. Occupancy, Furniture and Equipment Occupancy expense decreased $5,000 (0.4%) during 2015 to $1,183,000, compared to $1,188,000 in 2014. Furniture and equipment expense decreased $34,000 (4.7%) during 2015 to $690,000 compared to $724,000 in 2014. The decrease in the furniture and equipment expense resulted from lower depreciation on the Company’s furniture and equipment. Occupancy expense decreased $24,000 (2.0%) during 2014 to $1,188,000, compared to $1,212,000 in 2013. Furniture and equipment expense decreased $34,000 (4.5%) during 2014 to $724,000 compared to $758,000 in 2013. The decrease in the furniture and equipment expense resulted from lower depreciation on the Company’s furniture and equipment. Regulatory Assessments Regulatory assessments include fees paid to the California Department of Business Oversight (the “DBO”) and the Federal Deposit Insurance Corporation (the “FDIC”). FDIC assessments decreased $39,000 (10.7%) during 2015 to $324,000, compared to $363,000 in 2014. The majority of this decrease relates to a lower assessment rate as a result of lower nonperforming assets. The assessments paid to the DBO in 2015 were $71,000 compared to $70,000 in 2014. FDIC assessments increased $51,000 (16.3%) during 2014 to $363,000, compared to $312,000 in 2013. The majority of this increase relates to an adjustment to the accrual based upon an updated analysis performed in 2013 revealing that the accrual should be reduced. This adjustment occurred in 2013 and did not reoccur in 2014. The assessments paid to the DBO in 2014 were $70,000, no change from 2013. Other Expenses Table Five below provides a summary of the components of the other noninterest expenses for the periods indicated (dollars in thousands): Professional fees Outsourced item processing Directors’ expense Telephone and postage Stationery and supplies Advertising and promotion Other operating expenses Year Ended December 31, 2014 2013 2015 $ $ 863 360 402 368 143 164 662 2,962 $ $ 1,182 355 394 357 193 160 736 3,377 $ $ 933 357 348 329 240 284 596 3,087 13Other expenses were $2,962,000 (down $415,000 or 12.3%) for 2015 as compared to $3,377,000 for 2014. The decrease in other expenses occurred primarily in the professional expense category. Professional expenses, which primarily include legal, accounting and other professional services, decreased $319,000 (27.0%), from $1,182,000 in 2014 to $863,000 in 2015. Legal expenses decreased $255,000 (61.6%) from $414,000 in 2014 to $255,000 during 2015. This decrease is primarily related to a lower number of problem loan credits and OREO properties. The overhead efficiency ratio on a taxable equivalent basis for 2015 was 62.9% as compared to 70.0% in 2014. Other expenses were $3,377,000 (up $290,000 or 9.4%) for 2014 as compared to $3,087,000 for 2013. The increase in other expenses occurred primarily in the professional expense category. Professional expenses increased $249,000 (26.7%), from $933,000 in 2013 to $1,182,000 in 2014. Legal expenses increased $182,000 (78.4%) from $232,000 in 2013 to $414,000 during 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 on a taxable equivalent basis for 2014 was 70.0% as compared to 75.6% in 2013. Provision for Income Taxes The effective tax rate on income was 33.7%, 34.5%, and 29.2% in 2015, 2014 and 2013, respectively. The effective tax rate differs from the federal statutory tax rate due to state tax expense (net of federal tax effect) of $516,000, $419,000, and $197,000 in these years. Tax-exempt income of $1,412,000, $1,194,000, and $1,213,000 from investment securities, loans, and bank-owned life insurance in these years helped to reduce the effective tax rate. The higher level of income taxes and effective tax rate in 2014 compared to 2013 resulted from the Company realizing significantly less benefits of Enterprise Zone credits on our State tax return as the program has been significantly reduced and an increase in taxable income in 2014. Taxable income increased from $4,315,000 in 2013 to $6,653,000 in 2014. Balance Sheet Analysis The Company’s total assets were $634,640,000 at December 31, 2015 as compared to $617,754,000 at December 31, 2014, representing an increase of $16,886,000 (2.7%). The average balances of total assets during 2015 were $623,049,000, up $17,802,000 or 2.9% from the 2014 total of $605,247,000. Investment Securities The Company classifies its investment securities as trading, held-to-maturity or available-for-sale. The Company’s intent is to hold all securities classified as held-to-maturity until maturity and management believes that it has the ability to do so. Securities classified as available-for-sale may be sold to implement asset/liability management strategies as part of our contingency funding plan and in response to changes in interest rates, prepayment rates and similar factors. Table Six below summarizes the values of the Company’s investment securities held on December 31 of the years indicated. The Company did not have any investment securities classified as trading in any of the years indicated below. Table Six: Investment Securities Composition (dollars in thousands) Available-for-sale (at fair value) Debt securities: US Government Agencies and US Government-Sponsored Agencies Obligations of states and political subdivisions Corporate debt securities Equity securities: Corporate stock Total available-for-sale investment securities Held-to-maturity (at amortized cost) Debt securities: US Government Agencies and US Government-Sponsored Agencies Total held-to-maturity investment securities 2015 2014 2013 $ $ $ $ 246,185 26,013 1,551 70 273,819 623 623 $ $ $ $ 261,115 26,289 1,583 77 289,064 862 862 $ $ $ $ 244,160 26,903 1,609 119 272,791 1,185 1,185 14See Table Fifteen, “Securities Maturities and Weighted Average Yields,” for a breakdown of the investment securities by maturity and the corresponding weighted average yields. Loans and Leases The Company concentrates its lending activities in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) lease financing receivable; (7) agriculture; and (8) consumer loans. At December 31, 2015, these categories accounted for approximately 12%, 68%, 8%, 5%, 5%, 0%, 1% and 1%, respectively, of the Company’s loan portfolio. This mix was relatively unchanged compared to 10%, 73%, 5%, 3%, 5%, 1%, 1% and 2%, respectively, at December 31, 2014. Continuing focus in the Company’s market area, new borrowers developed through the Company’s marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company originating approximately $80 million in new loans in 2015. This production was partially offset by normal pay downs and payoffs, but still resulted in an overall net increase in net loans and leases of $31.0 million (12.0%) from December 31, 2014. The market in which the Company operates has begun to show demand for credit products as the continued low rate environment and expectations for economic expansion have increased refinancing as well as new loan activity. The Company reported net increases in balances for commercial loans ($11,009,000 or 43.7%), commercial real estate ($5,720,000 or 3.0%), multi-family real estate ($9,327,000 or 65.8%), real estate construction ($6,505,000 or 81.0%), and residential real estate ($891,000 or 6.7%), and decreases in lease financing receivable ($554,000 or 43.1), agriculture ($451,000 or 15.6%), and consumer loans ($1,794,000 or 36.5%). Table Seven below summarizes the composition of the loan and lease portfolio for the past five years as of December 31. Table Seven: Loan and Lease Portfolio Composition (dollars in thousands) Commercial Real estate: Commercial Multi-family Construction Residential Lease financing receivable Agriculture Consumer Deferred loan fees, net Allowance for loan and lease losses Total net loans and leases 2015 2014 $ 36,195 $ 25,186 December 31, 2013 $ 24,545 2012 2011 $ 30,811 $ 42,108 199,591 23,494 14,533 14,200 732 2,431 3,122 294,298 (221) (4,975) 289,102 $ 193,871 14,167 8,028 13,309 1,286 2,882 4,916 263,645 (287) (5,301) 258,057 $ 184,204 11,085 9,633 17,703 1,344 3,120 5,772 257,406 (313) (5,346) 251,747 $ 180,126 9,155 6,918 17,701 1,509 3,340 8,569 258,129 (230) (5,781) 252,118 $ 204,043 7,580 10,356 19,695 1,725 4,583 10,984 301,074 (302) (7,041) 293,731 $ 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 Bank officers, directors and employees to compete with other financial institutions. The Company makes loans and leases to borrowers whose applications include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment. Commercial loans consist of credit lines for operating needs and working capital and loans for equipment or vehicle purchases. Consumer loans include traditional consumer products such as secured and unsecured personal loans and loans to finance the purchase of autos, boats and recreational vehicles. Construction loans are generally comprised of commitments to customers within the Company’s service area for construction of owner-occupied commercial properties. Other real estate loans consist primarily of loans secured by first trust deeds on commercial or multi-family properties, typically with maturities from 3 to 10 years and original loan-to-value ratios generally from 65% to 75%. In general, except in the case of loans under SBA programs, the Company does not make long-term mortgage loans. 15“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 December 31, 2015 and December 31, 2014. Average loans and leases in 2015 were $279,728,000 which represents an increase of $25,830,000 (10.2%) compared to the average in 2014. Average loans and leases in 2014 were $253,898,000 which represents an increase of $1,091,000 (0.4%) compared to the average in 2013. Risk Elements The Company assesses and manages credit risk on an ongoing basis through a total credit culture that emphasizes excellent credit quality, extensive internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant to periodically review the existing loan and lease portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company’s loan and lease portfolio is critical for profitability and growth. Management strives to continue its emphasis on credit quality in the loan and lease approval process, through active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan and lease review and grading system that functions to continually assess the credit risk inherent in the loan and lease portfolio. Ultimately, underlying trends in economic and business cycles influence credit quality. American River Bank’s business is concentrated in the Sacramento Metropolitan Statistical Area, which is a diversified economy, but with a large State of California government presence and employment base; in Sonoma County, which is focused on businesses within the two communities in which the Bank has offices (Santa Rosa and Healdsburg); and in Amador County, in which the Bank is primarily focused on businesses within the three communities in which it has offices (Jackson, Pioneer, and Ione). The economy of Sonoma County is diversified with professional services, manufacturing, agriculture and real estate investment and construction, while the economy of Amador County is reliant upon government, services, retail trade, manufacturing industries and Indian gaming. The Company has recently entered the Santa Clara, Contra Costa, and Alameda County markets with loan productions offices in San Ramon and San Jose. The economies of Santa Clara, Contra Costa and Alameda Counties 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. 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 December 31, 2015 and 87% at December 31, 2014. Management believes that the residential land portion of the Company’s loan portfolio carries more than the normal credit risk, due primarily to curtailed demand for new and resale residential property, relative to pre-recession levels, a resulting oversupply of unsold residential land, 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. 16A decline in the economy in general, or decline in real estate values in the Company’s primary market areas, in particular, could have an adverse impact on the collectability of real estate loans and require an increase in the provision for loan and lease losses. This could adversely affect the Company’s future prospects, results of operations, profitability and stock price. Management believes that its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no assurance that losses will not occur. The Company’s loan practices and underwriting standards include, but are not limited to, the following: (1) maintaining a thorough understanding of the Company’s 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. Nonaccrual, Past Due and Restructured Loans and Leases Management places loans and leases on nonaccrual status when they become 90 days past due or if a loss is expected, unless the loan or lease is well secured and in the process of collection. Loans and leases are partially or fully charged off when, in the opinion of management, collection of such amount appears unlikely. The recorded investments in non-performing loans and leases, which includes nonaccrual loans and leases and loans and leases that were 90 days or more past due and on accrual, totaled $1,643,000 and $1,653,000 at December 31, 2015 and 2014, respectively. Of the $1,643,000 in non-performing loans and leases at December 31, 2015, there were four real estate loans totaling $1,493,000, four consumer loans totaling $120,000 and a single commercial loan totaling $30,000. At December 31, 2014, the $1,653,000 in non-performing loans consisted of three real estate loans totaling $845,000; two commercial loans totaling $666,000 and three consumer loans totaling $142,000. The net interest due on nonaccrual loans and leases but excluded from interest income was approximately $145,000 during 2015, $116,000 during 2014, and $327,000 during 2013. Interest income recognized from payments received on nonaccrual loans and leases was approximately $59,000 in 2015, $84,000 in 2014 and $161,000 in 2013. Table Eight below sets forth nonaccrual loans and leases and loans and leases past due 90 days or more and on accrual as of year-end for the past five years. Table Eight: Non-Performing Loans and Leases (dollars in thousands) Past due 90 days or more and still accruing: Commercial Real estate Lease financing receivable Consumer and other Nonaccrual: Commercial Real estate Lease financing receivable Consumer and other Total non-performing loans and leases 2015 2014 December 31, 2013 2012 2011 $ $ — — — — 30 1,493 — 120 1,643 $ $ — — — — 666 845 — 142 1,653 $ $ 80 — — — 766 977 — 156 1,979 $ $ — — — — 2,352 2,897 3 222 5,474 $ $ — — — — 2,775 9,809 17 822 13,423 There were no loan or lease concentrations in excess of 10% of total loans and leases not otherwise disclosed as a category of loans and leases as of December 31, 2015. Management is not aware of any potential problem loans, which were accruing and current at December 31, 2015, 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. 17Management monitors the Company’s performance metrics including the ratios related to non-performing loans and leases. From 2008 to 2010, the Company experienced an increase in non-performing loans and leases. In 2011, the focused efforts of the previous years resulted in a decrease in these levels. In 2012, 2013, 2014 and 2015, the level of non-performing loans and leases continued to decrease to a level below the amount reported at December 31, 2008. However, the variations in the amount of non-performing loans and leases does not directly impact the level of the Company’s allowance for loan and lease losses as management monitors each of the loans and leases for loss potential or probability of loss on an individual basis using accounting principles generally accepted in the United States of America. Impaired Loans and Leases The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the original contractual terms of the loan or lease agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan or lease discounted at the loan’s or lease’s original effective interest rate, (ii) the observable market price of the impaired loan or lease, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans or leases that are collectively evaluated for credit risk. In assessing whether a loan or lease is impaired, the Company typically reviews loans or leases graded substandard or lower with outstanding principal balances in excess of $100,000, as well as loans considered troubled debt restructures with outstanding principal balances in excess of $25,000. The Company identifies troubled debt restructures by reviewing each renewal, modification, or extension of a loan with a screening document. This document is designed to identify any characteristics of such a loan that would qualify it as a troubled debt restructure. If the characteristics are not present that would qualify a loan as a troubled debt restructure, it is deemed to be a modification. The recorded investment in loans and leases that were considered to be impaired totaled $21,365,000 at December 31, 2015 and had a related valuation allowance of $899,000. The average recorded investment in impaired loans and leases during 2015 was approximately $20,818,000. As of December 31, 2014, the recorded investment in loans and leases that were considered to be impaired totaled $25,120,000 and had a related valuation allowance of $1,603,000. The average recorded investment in impaired loans and leases during 2014 was approximately $24,127,000. As of December 31, 2013, the recorded investment in loans and leases that were considered to be impaired totaled $27,034,000 and had a related valuation allowance of $1,598,000. The average recorded investment in impaired loans and leases during 2013 was approximately $27,975,000. 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. 18The ALLL totaled $4,975,000 or 1.69% of total loans and leases at December 31, 2015, $5,301,000 or 2.01% of total loans and leases at December 31, 2014, and $5,346,000 or 2.08% at December 31, 2013. The decrease in the allowance for loan and lease losses from $5,346,000 at December 31, 2013 to $4,975,000 at December 31, 2015, was mainly due to a decrease in historical losses impacting the loss factor used in calculating the reserve on loans collectively valued for impairment. The Company establishes general and specific reserves in accordance with accounting principles generally accepted in the United States of America. The ALLL is composed of categories of the loan and lease portfolio based on loan type and loan rating; however, the entire allowance is available to cover actual loan and lease losses. While management uses available information to recognize possible losses on loans and leases, future additions to the allowance may be necessary, based on changes in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require the Company to provide additions to the allowance based on their judgment of information available to them at the time of their examination. The allowance for loans and leases as a percentage of non-performing loans and leases was 302.8% at December 31, 2015 and 320.7% at December 31, 2014. The allowance for loans and leases as a percentage of impaired loans and leases was 23.3% at December 31, 2015 and 21.1% at December 31, 2014. Of the total non-performing and impaired loans and leases outstanding as of December 31, 2015, there were $4,757,000 in loans or leases that had been reduced by partial charge-offs of $816,000. At December 31, 2015, there was $12,607,000 in impaired loans or leases that did not carry a specific reserve. Of this amount, $3,900,000 were loans or leases that had previous partial charge-offs and $8,707,000 in loans or leases that were analyzed and determined not to require a specific reserve or charge-off because the collateral value or discounted cash flow value exceeded the loan or lease balance. Prior to 2013, the Company had been operating in a market that had experienced significant decreases in real estate values of commercial, residential, land, and construction properties. As such, the Company continues to focus on monitoring collateral values for those loans considered collateral dependent. The collateral evaluations performed by the Company are updated as necessary, which is generally once every twelve months, and are reviewed by a qualified credit officer. The Company’s policy with regard to loan or lease charge-offs continues to be that a loan or lease is charged off against the ALLL when management believes that the collectability of the principal is unlikely. As previously discussed in the “Impaired Loans and Leases” section, certain loans are evaluated for impairment. Generally, if a loan is collateralized by real estate, and considered collateral dependent, the impaired portion will be charged off to the allowance for loan and lease losses unless it is in the process of collection, in which case a specific reserve may be warranted. If the collateral is other than real estate and considered impaired, a specific reserve may be warranted. It is the policy of management to maintain the allowance for loan and lease losses at a level believed to be adequate for known and inherent risks in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Formula allocations are calculated by applying historical loss factors to outstanding loans with similar characteristics. Historical loss factors are based upon the Company’s loss experience. These historical loss factors are adjusted for changes in the business cycle and for significant factors that, in management’s judgment, affect the collectability of the loan portfolio as of the evaluation date. The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions. Based on information currently available, management believes that the allowance for loan and lease losses is prudent and adequate. However, no prediction of the ultimate level of loans and leases charged off in future periods can be made with any certainty. During the fourth quarter of 2015, the Company made a specific enhancement to its methodology for determining the general reserve component of the ALLL. The enhancement related specifically to the methodology used to calculate the qualitative factors with respect to non-impaired loans graded watch, special mention and substandard by eliminating the use of multipliers. The ALLL methodology was also revised to add an additional qualitative factor, by loan grade, in calculating the general reserve component of the ALLL. Management believes that the allocation of the ALLL to each loan risk grade, within each loan type has become more precise under the methodology enhancement. The implementation of the ALLL model revision did not have a material impact on the calculation of the required allowance for loan losses as of December 31, 2015. Table Nine below summarizes, for the periods indicated, the activity in the ALLL. 19Table Nine: Allowance for Loan and Lease Losses (dollars in thousands) 2015 Year Ended December 31, 2013 2012 2014 2011 Average loans and leases outstanding $ 279,728 $ 253,898 $ 252,807 $ 282,136 $ 323,310 Allowance for loan & lease losses at beginning of period Loans and leases charged off: Commercial Real estate Consumer Lease financing receivable Total Recoveries of loans and leases previously charged off: Commercial Real estate Consumer Lease financing receivable Total Net loans and leases (recovered) charged off (Reductions) additions to allowance (credited) charged to operating expenses Allowance for loan and lease losses at end of $ 5,301 $ 5,346 $ 5,781 $ 7,041 $ 7,585 609 — 6 1 616 123 165 2 — 290 326 — — — 76 — 76 256 163 150 3 572 (496) (541) 377 534 1 26 938 215 88 — — 303 635 200 302 2,038 505 9 2,854 21 172 30 6 229 2,625 1,365 713 3,765 — 220 4,698 163 346 — 20 529 4,169 3,625 period $ 4,975 $ 5,301 $ 5,346 $ 5,781 $ 7,041 Ratio of net charge-offs to average loans and leases outstanding Provision for loan and lease losses to average loans and leases outstanding Allowance for loan and lease losses to total loans and leases, at end of period Allowance for loan and lease losses to non- 0.12% (0.20%) 0.25% 0.93% 1.29% — (0.21%) 0.08% 0.48% 1.12% 1.69% 2.01% 2.08% 2.24% 2.34% performing loans and leases, at end of period 302.80% 320.69% 270.14% 105.61% 52.45% As part of its loan review process, management has allocated the overall allowance based on specific identified problem loans and leases, qualitative factors, uncertainty inherent in the estimation process and historical loss data. A risk exists that future losses cannot be precisely quantified or attributed to particular loans or leases or classes of loans and leases. Management continues to evaluate the loan and lease portfolio and assesses current economic conditions that will affect management’s conclusion as to future allowance levels. Table Ten below summarizes the allocation of the allowance for loan and lease losses for the five years ended December 31, 2015. 20Table Ten: Allowance for Loan and Lease Losses by Loan Category (dollars in thousands) Commercial Real estate Agriculture Consumer Lease financing receivable Unallocated Total Commercial Real estate Agriculture Consumer Lease financing receivable Unallocated Total $ $ $ $ December 31, 2015 December 31, 2014 December 31, 2013 Percent of loans in each category to total loans Percent of loans in each category to total loans Amount Percent of loans in each category to total loans Amount Amount 860 3,729 77 78 1 230 4,975 12% $ 86% 1% 1% — — 100% $ 1,430 3,429 62 124 2 254 5,301 10% $ 86% 1% 2% 1% — 100% $ 885 4,010 80 161 4 206 5,346 10% 86% 1% 2% 1% — 100% December 31, 2012 December 31, 2011 Percent of loans in each category to total loans Percent of loans in each category to total loans Amount Amount 1,351 3,835 87 262 3 243 5,781 12% $ 83% 1% 3% 1% — 100% $ 1,536 4,545 167 348 79 366 7,041 14% 80% 1% 4% 1% — 100% The allocation presented should not be interpreted as an indication that charges to the allowance for loan and lease losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan and lease category represents the total amounts available for charge-offs that may occur within these categories. Other Real Estate Owned The balance in OREO at December 31, 2015 consisted of three properties acquired through foreclosure. The balance in OREO at December 31, 2014 consisted of seven properties. During 2015, the Company received $1,153,000 from the net proceeds of the sale of four OREO properties with net losses of $1,000 in the aggregate recognized on these sales and, prior to sale, there was a write-down of $156,000 to the OREO allowance and $76,000 to expense on two of the four properties. Furthermore, there were capitalized costs of $126,000 on a single existing property. There was $3,551,000 in other real estate owned at December 31, 2015 with no valuation allowance and $4,803,000 in other real estate owned at December 31, 2014 with a valuation allowance of $156,000. Deposits At December 31, 2015, total deposits were $530,690,000 representing an increase of $19,997,000 (3.9%) from the December 31, 2014 balance of $510,693,000. The Company’s deposit growth plan for 2015 was to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing money market and interest-bearing checking, and savings accounts, while continuing to focus on reducing overall interest expense. Due to these efforts, the Company experienced increases during 2015 in noninterest-bearing demand ($34,850,000 or 22.4%), interest-bearing checking ($462,000 or 0.8%), and savings ($241,000 or 0.4%) and decreases in money market ($12,439,000 or 8.4%) and time deposit ($3,117,000 or 3.6%) accounts. The decrease in money market accounts is related to the plan to reduce interest expense as the Company evaluated the rate structure on some of the higher cost money market accounts and reduced the interest rates on some relationships. 21Other Borrowed Funds Other borrowings outstanding as of December 31, 2015 consist of advances from the Federal Home Loan Bank (the “FHLB”). The following table summarizes these borrowings (dollars in thousands): Short-term borrowings: FHLB advances Long-term borrowings: FHLB advances $ $ 2015 2014 2013 Amount Rate Amount Rate Amount Rate 3,500 1.28% $ 3,500 0.92% $ 8,000 2.15% 7,500 1.24% $ 7,500 1.39% $ 8,000 1.47% The maximum amount of short-term borrowings at any month-end during 2015, 2014 and 2013, was $11,500,000, $3.500,000, and $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): Amount Maturity Average rates Short-term 3,500 $ 2016 1.28% $ Long-term 7,500 2017 to 2019 1.24% The Company has the ability to enter into letters of credit with the FHLB. There were no letters of credit outstanding as of December 31, 2015 or 2014. There were no draws upon any letter of credit in 2015 or 2014 and management does not expect to draw upon these sources of liquidity in the foreseeable future. Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company’s capital position represents the level of capital available to support continuing operations and expansion. On January 17, 2014, the Company approved and authorized a stock repurchase program for 2014 (the “2014 Program”). The 2014 Program authorized the repurchase during 2014 of up to 5% of the outstanding shares of the Company’s common stock. During 2014, the Company repurchased 424,462 shares of its common stock at an average price of $9.77 per share. On January 21, 2015, the Company approved and authorized a stock repurchase program for 2015 (the “2015 Program”). The 2015 Program authorized the repurchase during 2015 of up to 5% of the outstanding shares of the Company’s common stock. In addition, on July 15, 2015, the Company approved and authorized an additional amount of 5% to be purchased under the 2015 Program. During 2015, the Company repurchased 790,989 shares of its common stock at an average price of $9.92 per share. On January 20, 2016, the Company approved and authorized a stock repurchase program for 2016 (the “2016 Program”). The 2016 Program authorized the repurchase during 2016 of up to 5% of the outstanding shares of the Company’s common stock, or approximately 367,182 shares based on the 7,343,649 shares outstanding as of December 31, 2015. Any repurchases under the 2016 Program will be made from time to time by the Company in the open market as conditions allow. All such transactions will be structured to comply with Commission Rule 10b-18 and all shares repurchased under the 2016 Program will be retired. The number, price and timing of the repurchases will be at the Company’s sole discretion and the 2016 Program may be re-evaluated depending on market conditions, capital and liquidity needs or other factors. Based on such re-evaluation, the Board of Directors may suspend, terminate, modify or cancel the 2016 Program at any time without notice. The Company did not repurchase any shares in 2011 or 2010 and repurchased 575,389 shares in 2012 and 849,404 shares in 2013. Share amounts have been adjusted for stock dividends and/or splits. The Company and American River Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation. Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and American River Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of December 31, 2015 and 2014, the most recent regulatory notification categorized American River Bank as well capitalized under the regulatory framework for prompt corrective action plan. There are no conditions or events since that notification that management believes have changed the Bank’s categories. 22At December 31, 2015, shareholders’ equity was $86,075,000, representing a decrease of $3,572,000 (5.1%) from $89,647,000 at December 31, 2014. The decrease resulted from a decrease in other comprehensive income of $1,268,000 as a result of the decrease in the unrealized gain on securities due to an increase in interest rates, additions from net income of $5,269,000 for the period and the stock based compensation of $271,000, offset by repurchases of common stock of $7,843,000. In 2014, shareholders’ equity increased $2,627,000 (3.0%) from $87,020,000 at December 31, 2013. The increase resulted from the additions from net income for the period, an increase in other comprehensive income, and an increase in stock based compensation exceeding the repurchases of common stock. Table Eleven below lists the Company’s actual capital ratios at December 31, 2015 and 2014, as well as the minimum capital ratios for capital adequacy. Table Eleven: Capital Ratios Capital to Risk-Adjusted Assets Leverage ratio Tier 1 Risk-Based Capital Total Risk-Based Capital At December 31, 2015 2015 11.0% 11.6% 19.3% 21.6% 20.6% 22.9% Minimum Regulatory Capital Requirements 4.00% 6.00% 8.00% Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet future needs. At December 31, 2015, American River Bank’s ratios were in excess of the regulatory definition of “well capitalized.” Management believes that the Company’s capital is adequate to support current operations and anticipated growth and currently foreseeable future capital requirements of the Company and its subsidiaries. In July 2013, the federal bank regulatory agencies issued interim final rules that revised and replaced the then current risk-based capital requirements in order to implement the “Basel III” regulatory capital reforms released by the Basel Committee on Banking Supervision and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Basel III reforms reflected in the final rules included 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, bank holding companies with consolidated assets of $1 Billion or more and banks like American River Bank were required to comply with new minimum capital ratio requirements to be phased-in between January 1, 2015 and January 1, 2019, which would consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%. In addition, a “capital conservation buffer,” 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, 2016 and January 1, 2019. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases. 23Market Risk Management Overview. Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its loan, investment and deposit functions. The goal for managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk. The Board of Directors has overall responsibility for the interest rate risk management policies. The Company has an Enterprise Risk Management Committee, made up of Company management that establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits and investing in securities. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments. The Company uses simulation models to forecast earnings, net interest margin and market value of equity. Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer- modeling techniques, with specialized software built for this specific purpose for financial institutions, the Company is able to estimate the potential impact of changing interest rates on earnings, net interest margin and market value of equity. A balance sheet is prepared using detailed inputs of actual loans, securities and interest-bearing liabilities (i.e. deposits/borrowings). The balance sheet is processed using multiple interest rate scenarios. The scenarios include a rising rate forecast, a flat rate forecast and a falling rate forecast which take place within a one-year time frame. The net interest income is measured over a one and a two year periods assuming a gradual change in rates over the twelve-month horizon. The simulation modeling attempts to estimate changes in the Company’s net interest income utilizing a detailed current balance sheet. After a review of the model results as of December 31, 2015, the Company does not consider the fluctuations from the base case, to have a material impact on the Company’s projected results and are within the tolerance levels outlined in the Company’s interest rate risk polices. The simulations of earnings do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as reasonable estimates of interest rate risk. Interest Rate Sensitivity Analysis Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the current portfolio that are subject to repricing at various time horizons. The differences are known as interest sensitivity gaps. A positive cumulative gap may be equated to an asset sensitive position. An asset sensitive position in a rising interest rate environment will cause a bank’s interest rate margin to expand. This results as floating or variable rate loans reprice more rapidly than fixed rate certificates of deposit that reprice as they mature over time. Conversely, a declining interest rate environment will cause the opposite effect. A negative cumulative gap may be equated to a liability sensitive position. A liability sensitive position in a rising interest rate environment will cause a bank’s interest rate margin to contract, while a declining interest rate environment will have the opposite effect. Inflation The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company through its effect on market rates of interest, which affects the Company’s ability to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which may be generated in the future. In addition to its effects on interest rates, inflation increases overall operating expenses. Inflation has not had a material effect upon the results of operations of the Company during the years ended December 31, 2015, 2014 and 2013. 24Liquidity Liquidity management refers to the Company’s ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company’s liquidity position. Federal funds lines, short-term investments and securities, and loan and lease repayments contribute to liquidity, along with deposit increases, while loan and lease funding and deposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit at December 31, 2015 were approximately $26,730,000 and $238,000, respectively. Such loan commitments relate primarily to revolving lines of credit and other commercial loans and to real estate construction loans. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale. On December 31, 2015, consolidated liquid assets totaled $229.7 million or 36.2% of total assets compared to $234.7 million or 38.0% of total assets on December 31, 2014. In addition to liquid assets, the Company maintains short-term lines of credit in the amount of $17,000,000 with two of its correspondent banks. At December 31, 2015, the Company had $17,000,000 available under these credit lines. Additionally, American River Bank is a member of the FHLB. At December 31, 2015, American River Bank could have arranged for up to $89,326,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At December 31, 2015, the Company had $78,326,000 available under these secured borrowing arrangements. American River Bank also has a secured borrowing arrangement with the Federal Reserve Bank. The borrowing can be secured by pledging selected loans and investment securities. Based on the amount of assets pledged at the Federal Reserve Bank at December 31, 2015, the Company’s borrowing capacity was $11,371,000. The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits. Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The Company can sell any of its unpledged securities held in the available-for-sale category to meet liquidity needs. These securities are also available to pledge as collateral for borrowings if the need should arise. American River Bank can also pledge additional securities to borrow from the Federal Reserve Bank and the FHLB. The maturity distribution of certificates of deposit is set forth in Table Thirteen below for the period presented. These deposits are generally more rate sensitive than other deposits and, therefore, are more likely to be withdrawn to obtain higher yields elsewhere if available. Table Thirteen: Certificates of Deposit Maturities December 31, 2015 (dollars in thousands) Three months or less Over three months through six months Over six months through twelve months Over twelve months Total Less than $250,000 8,971 $ 6,555 6,561 15,657 37,744 $ Over $250,000 28,205 $ 5,312 4,135 9,175 46,827 $ Loan and lease demand also affects the Company’s liquidity position. Table Fourteen below presents the maturities of loans and leases for the period indicated. 25Table Fourteen: Loan and Lease Maturities (Gross Loans and Leases) December 31, 2015 (dollars in thousands) Commercial Real estate Agriculture Consumer Leases Total One year or less One year through five years $ $ 4,197 23,277 103 807 99 28,483 $ $ 18,722 62,065 2,328 1,957 633 85,705 Over five years 13,276 $ 166,476 — 358 — 180,110 $ Total 36,195 251,818 2,431 4,122 732 294,298 $ $ Loans and leases shown above with maturities greater than one year include $169,728,000 of variable interest rate loans and $96,087,000 of fixed interest rate loans and leases. The carrying amount, maturity distribution and weighted average yield of the Company’s investment securities available-for-sale and held-to-maturity portfolios are presented in Table Fifteen below. The yields on tax-exempt obligations have been computed on a tax equivalent basis. Yields may not represent actual future income to be recorded. Timing of principal prepayments on mortgage-backed securities may increase or decrease depending on market factors and the borrowers’ ability to make unscheduled principal payments. Fast prepayments on bonds that were purchased with a premium will result in a lower yield and slower prepayments on premium bonds will result in a higher yield, the opposite would be true for bonds purchased at a discount. Table Fifteen does not include FHLB Stock, which does not have stated maturity dates or readily available market values. The balance in FHLB Stock at December 31, 2015, 2014 and 2013 was $3,779,000, $3,686,000 and $3,248,000, respectively. Table Fifteen: Securities Maturities and Weighted Average Yields (Taxable Equivalent Basis) December 31, 2015 2014 2013 (dollars in thousands) Available-for-sale securities: State and political subdivisions Maturing within 1 year Maturing after 1 year but within 5 years Maturing after 5 years but within 10 years Maturing after 10 years U.S. Government Agencies and U.S.-Sponsored Agencies Other Maturing after 1 year but within 5 years Non-maturing Total investment securities Held-to-maturity securities: U.S. Government Agencies and U.S.-Sponsored Agencies Total investment securities Carrying Amount Weighted Average Yield Carrying Amount Weighted Average Yield Carrying Amount Weighted Average Yield $ 494 3,746 15,543 6,230 2.40% $ 5.93% 4.29% 4.29% 176 2,401 12,608 11,104 7.14% $ 5.10% 4.46% 4.04% 346 2,357 12,067 12,133 246,185 2.11% 261,115 2.12% 244,160 1,551 70 $ 273,819 1,583 4.88% 0.00% 77 2.35% $ 289,064 1,609 4.88% 0.00% 119 2.34% $ 272,791 $ $ 623 623 4.68% $ 4.68% $ 862 862 4.60% $ 4.60% $ 1,185 1,185 7.54% 4.98% 4.72% 4.14% 2.09% 4.88% 0.00% 2.34% 4.54% 4.57% The carrying values of available-for-sale securities include net unrealized gains of $3,504,000, $5,618,000 and $1,872,000 at December 31, 2015, 2014 and 2013, respectively. The carrying values of held-to-maturity securities do not include unrealized gains or losses; however, the net unrecognized gains at December 31, 2015, 2014 and 2013 were $46,000, $60,000 and $78,000, respectively. 26Off-Balance Sheet Arrangements The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. As of December 31, 2015, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. At origination, real estate commitments are generally secured by property with a loan-to-value ratio of 55% to 75%. In addition, the majority of the Company’s commitments have variable interest rates. The following financial instruments represent off- balance-sheet credit risk: Commitments to extend credit (dollars in thousands): Revolving lines of credit secured by 1-4 family residences Commercial real estate, construction and land development commitments secured by real estate Other unused commitments, principally commercial loans Letters of credit December 31, 2015 2014 $ $ $ 727 13,999 12,004 26,730 238 $ $ $ 1,447 16,206 14,986 32,639 356 The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for loans included on the consolidated balance sheets. Certain financial institutions have elected to use special purpose vehicles (“SPV”) to dispose of problem assets. The SPV is typically a subsidiary company with an asset and liability structure and legal status that makes its obligations secure even if the parent corporation goes bankrupt. Under certain circumstances, these financial institutions may exclude the problem assets from their reported impaired and non-performing assets. The Company does not use those vehicles or any other structures to dispose of problem assets. Contractual Obligations The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under non- cancelable operating leases are noted in Table Sixteen below. Table Sixteen below presents certain of the Company’s contractual obligations as of December 31, 2015. Included in the table are amounts payable under the Company’s Deferred Compensation Plan, Deferred Fees Plan and salary continuation agreements listed in the “Other Long-Term Liabilities…” category. At December 31, 2015, these amounts represented $4,089,000 most of which is anticipated to be primarily payable at least five years in the future. Table Sixteen: Contractual Obligations (dollars in thousands) Long-Term Debt Capital Lease Obligations Operating Leases Purchase Obligations Certificates of Deposit Other Long-Term Liabilities Reflected on the Company’s Balance Sheet under GAAP Total Payments due by period $ Total 11,000 — 2,208 — 84,571 4,089 101,868 $ Less than 1 year 3,500 — 767 — 59,739 173 64,179 $ $ 1-3 years 5,500 — 709 — 17,579 192 23,980 $ $ 3-5 years 2,000 — 303 — 7,239 91 9,633 $ $ More than 5 years — — 429 — 14 3,633 4,076 $ $ 27Report of Management on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, presented in conformity with accounting principles generally accepted in the United States of America. In making this assessment, management used the criteria applicable to the Company as set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control—Integrated Framework. Based upon such assessment, management believes that, as of December 31, 2015, the Company’s internal control over financial reporting is effective based upon those criteria. This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K. David T. Taber President and Chief Executive Officer Mitchell A. Derenzo Executive Vice President and Chief Financial Officer 28REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Crowe Horwath LLP Independent Member Crowe Horwath International The Shareholders and Board of Directors American River Bankshares Rancho Cordova, California We have audited the accompanying consolidated balance sheets of American River Bankshares and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American River Bankshares and subsidiaries as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Sacramento, California February 25, 2016 29AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2015 and 2014 (Dollars in thousands) ASSETS Cash and due from banks Interest-bearing deposits in banks Investment securities (Note 5): Available-for-sale, at fair value Held-to-maturity, at amortized cost Loans and leases, less allowance for loan and lease losses of $4,975 in 2015 and $5,301 in 2014 (Notes 6, 7, 12 and 17) Premises and equipment, net (Note 8) Federal Home Loan Bank of San Francisco stock Other real estate owned, net Goodwill (Note 4) Bank-owned life insurance (Note 16) Accrued interest receivable and other assets (Notes 11 and 16) LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Noninterest-bearing Interest-bearing (Note 9) Total deposits Short-term borrowings (Note 10) Long-term borrowings (Note 10) Accrued interest payable and other liabilities (Note 16) Total liabilities Commitments and contingencies (Note 12) Shareholders’ equity (Notes 13 and 14): Common stock - no par value; 20,000,000 shares authorized; issued and outstanding – 7,343,649 shares in 2015 and 8,089,615 shares in 2014 Retained earnings Accumulated other comprehensive income, net of taxes (Note 5) Total shareholders’ equity See accompanying notes to consolidated financial statements. 2015 2014 $ 23,727 750 $ 22,449 1,000 273,819 623 289,102 1,407 3,779 3,551 16,321 14,483 7,078 289,064 862 258,057 1,518 3,686 4,647 16,321 14,167 5,983 $ 634,640 $ 617,754 $ 190,548 340,142 $ 155,698 354,995 530,690 510,693 3,500 7,500 6,875 3,500 7,500 6,414 548,565 528,107 49,554 34,418 2,103 86,075 57,126 29,150 3,371 89,647 $ 634,640 $ 617,754 30AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2015, 2014 and 2013 (Dollars in thousands, except per share data) Interest income: Interest and fees on loans and leases: Taxable Exempt from Federal income taxes Interest on deposits in banks Interest and dividends on investment securities: Taxable Exempt from Federal income taxes Total interest income Interest expense: Interest on deposits (Note 9) Interest on borrowings Total interest expense Net interest income Provision for loan and lease losses (Note 7) 2015 2014 2013 $ 13,547 364 5 6,292 760 20,968 817 144 961 $ 13,609 22 4 5,528 802 19,965 1,021 147 1,168 $ 14,191 — 3 3,822 865 18,881 1,197 293 1,490 20,007 18,797 17,391 — (541) 200 Net interest income after provision for loan and lease losses 20,007 19,338 17,191 Noninterest income: Service charges Gain on sale and call of investment securities (Note 5) Income from other real estate owned properties Other income (Note 15) Total noninterest income Noninterest expense: Salaries and employee benefits (Notes 6 and 16) Other real estate expense Occupancy (Notes 8, 12 and 17) Furniture and equipment (Notes 8 and 12) Regulatory assessments Other expense (Notes 4 and 15) Total noninterest expense Income before provision for income taxes Provision for income taxes (Note 11) Net income Basic earnings per share (Note 13) Diluted earnings per share (Note 13) Cash dividends per share of issued and outstanding common stock 498 251 335 931 2,015 8,528 322 1,183 690 395 2,962 14,080 7,942 2,674 5,268 0.70 0.70 — $ $ $ $ 562 208 365 1,042 2,177 8,776 364 1,188 724 433 3,377 14,862 6,653 2,292 4,361 0.54 0.54 — $ $ $ $ 590 36 316 1,073 2,015 8,516 936 1,212 758 382 3,087 14,891 4,315 1,258 3,057 0.34 0.34 — $ $ $ $ See accompanying notes to consolidated financial statements. 31AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the Years Ended December 31, 2015, 2014 and 2013 (Dollars in thousands) 2015 2014 2013 $ 5,268 $ 4,361 $ 3,057 Net income Other comprehensive income (loss): (Decrease) increase in net unrealized gains on investment securities Deferred tax benefit (expense) (Decrease) increase in net unrealized gains on investment securities, net of tax Reclassification adjustment for realized gains included in net income Tax effect Realized gains, net of tax (1,863) 745 (1,118) (251) 101 (150) 3,954 (1,581) 2,373 (208) 83 (125) Total other comprehensive (loss) income (1,268) 2,248 Comprehensive income (loss) $ 4,000 $ 6,609 $ See accompanying notes to consolidated financial statements. (5,234) 2,094 (3,140) (36) 14 (22) (3,162) (105) 32AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2015, 2014 and 2013 (Dollars in thousands) Common Stock Shares Amount Retained Earnings Accumulated Other Comprehensive Income (Net of Taxes) Total Share holders’ Equity Balance, January 1, 2013 9,327,203 $ 67,977 $ 21,732 $ 4,285 $ 93,994 3,057 — 3,057 Net income Other comprehensive loss, net of tax: Net change in unrealized gains on available-for-sale investment securities (Note 5) Retirement of common stock (Note 13) Net restricted stock award activity and related compensation expense Stock option compensation expense — — — — (849,404) (7,000) 11,448 — 111 20 — — — Balance, December 31, 2013 8,489,247 61,108 24,789 Net income Other comprehensive income, net of tax: Net change in unrealized gains on available-for-sale investment securities (Note 5) Retirement of common stock (Note 13) Net restricted stock award activity and related compensation expense Stock option compensation expense — — — — (424,462) (4,148) 24,830 — 147 19 4,361 — — — — Balance, December 31, 2014 8,089,615 57,126 29,150 Net income Other comprehensive loss, net of tax: Net change in unrealized gains on available-for-sale investment securities (Note 5) Retirement of common stock (Note 13) Net restricted stock award activity and related compensation expense Stock option compensation expense — — — — (790,989) (7,843) 45,023 — 236 35 5,268 — — — — (3,162) — — 1,123 — 2,248 — — — 3,371 — (1,268) — — — (3,162) (7,000) 111 20 87,020 4,361 2,248 (4,148) 147 19 89,647 5,268 (1,268) (7,843) 236 35 Balance, December 31, 2015 7,343,649 $ 49,554 $ 34,418 $ 2,103 $ 86,075 See accompanying notes to consolidated financial statements. 33AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2015, 2014 and 2013 (Dollars in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses (Decrease) increase in deferred loan and lease origination fees, net Depreciation and amortization Amortization of investment security premiums and discounts, net Gain on sale and call of investment securities Increase in cash surrender value of life insurance policies Gain on life insurance death benefit Deferred income tax expense (benefit) Stock-based compensation expense Loss (gain) on sale or write-down of other real estate owned (Increase) decrease in accrued interest receivable and other assets Increase (decrease) in accrued interest payable and other liabilities Net cash provided by operating activities Cash flows from investing activities: Proceeds from the sale of available-for-sale investment securities Proceeds from called available-for-sale investment securities Proceeds from matured available-for-sale investment securities Purchases of available-for-sale investment securities Proceeds from principal repayments for available-for-sale mortgage-backed securities Proceeds from principal repayments for held-to-maturity mortgage-backed securities Purchases of bank owned life insurance Net decrease (increase) in interest-bearing deposits in banks Net increase in loans and leases Net proceeds from sale of other real estate owned Death benefit from life insurance policy Capitalized additions to other real estate Purchases of equipment Net (increase) decrease in FHLB stock 2015 2014 2013 $ 5,268 $ 4,361 $ 3,057 — (66) 430 3,160 (251) (316) — 473 271 70 (723) 461 8,777 (541) (26) 438 4,647 (208) (284) (99) (74) 166 (66) 298 371 8,983 23,764 — 175 (62,958) 23,804 1,160 105 (83,049) 200 83 518 5,774 (36) (247) (118) 244 131 116 1,821 (96) 11,447 8,851 590 905 (119,972) 49,242 41,014 57,664 239 — 250 (30,979) 1,153 — (127) (319) (93) 324 (1,350) — (5,932) 2,283 252 (54) (456) (438) 934 — (250) (1,741) 7,516 419 (186) (130) 6 Net cash used in investing activities (19,653) (22,337) (45,394) (Continued) 34AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2015, 2014 and 2013 (Dollars in thousands) Cash flows from financing activities: Net increase in demand, interest-bearing and savings deposits Net decrease in time deposits Cash paid to repurchase common stock Decrease in long-term borrowings (Decrease) increase in short-term borrowings Net cash provided by (used in) financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 2015 2014 2013 $ 23,114 (3,117) (7,843) — — 12,154 1,278 22,449 $ 31,545 (4,542) (4,148) (500) (4,500) 17,855 4,501 17,948 $ 10,185 (4,751) (7,000) (8,000) 6,000 (3,566) (37,513) 55,461 Cash and cash equivalents at end of year $ 23,727 $ 22,449 $ 17,948 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest expense Income taxes Non-cash investing activities: Real estate acquired through foreclosure $ $ $ 961 2,495 — $ $ $ 1,234 2,415 189 $ $ $ 1,527 1,575 1,829 See accompanying notes to consolidated financial statements. 35AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE BUSINESS OF THE COMPANY American River Bankshares (the “Company”) was incorporated under the laws of the State of California in 1995 under the name of American River Holdings and changed its name in 2004 to American River Bankshares. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. As a community oriented regional bank holding company, the principal communities served are located in Sacramento, Placer, Yolo, El Dorado, Amador, and Sonoma counties. In addition, the Company has loan production offices in San Jose and San Ramon, which serve Santa Clara, Alameda and Contra Costa counties. The Company owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank (“ARB” or the “Bank”). ARB was incorporated in 1983. ARB accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services. ARB operates four full-service banking offices in Sacramento County, one full-service banking office in Placer County, two full-service banking offices in Sonoma County, and three full-service banking offices in Amador County. The Company also owns one inactive subsidiary, American River Financial. ARB does not offer trust services or international banking services and does not plan to do so in the near future. The deposits of ARB are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The accounting and reporting policies of the Company and its subsidiaries conform with accounting principles generally accepted in the United States of America and prevailing practices within the financial services industry. Reclassifications Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2015. Reclassifications had no affect on prior year net income or shareholders’ equity. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and accounts among the Company and its subsidiaries have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 36AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash and Cash Equivalents For the purpose of the statement of cash flows, cash and due from banks and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold for one-day periods. Interest-Bearing Deposits in Banks Interest-bearing deposits in banks mature within one year and are carried at cost. Investment Securities Investments are classified into the following categories: (cid:120) Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity. (cid:120) Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums. Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value. There were no transfers during the years ended December 31, 2015 and 2014. Gains or losses on the sale of investment securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For debt securities, once a decline in value is determined to be other than temporary and management does not intend to sell the security or it is more likely than not that management will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that management will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings. For equity securities, the entire amount of impairment is recognized through earnings. Federal Home Loan Bank Stock Investments in Federal Home Loan Bank of San Francisco (the “FHLB”) stock are carried at cost and are redeemable at par with certain restrictions. Investments in FHLB stock are necessary to participate in FHLB programs. 37AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans and Leases Loans and leases that management has both the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amounts outstanding, adjusted for unearned income, deferred loan origination fees and costs, purchase premiums and discounts, write-downs and the allowance for loan and lease losses. Loan and lease origination fees, net of certain deferred origination costs, and purchase premiums and discounts are recognized as an adjustment to the yield of the related loans and leases. For all classes of loans and leases, the accrual of interest is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payment requirements within an acceptable time frame relative to the terms stated in the loan agreement. Upon such discontinuance, all unpaid accrued interest is reversed against current income unless the loan or lease is well secured and in the process of collection. Interest received on nonaccrual loans and leases is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans and leases are restored to accrual status when the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Direct financing leases are carried net of unearned income. Income from leases is recognized by a method that approximates a level yield on the outstanding net investment in the lease. Loan Sales and Servicing Included in the loan and lease portfolio are Small Business Administration (“SBA”) loans and Farm Service Agency guaranteed loans that may be sold in the secondary market. At the time the loan is sold, the related right to service the loan is either retained, with the Company earning future servicing income, or released in exchange for a one-time servicing-released premium. Loans subsequently transferred to the loan portfolio are transferred at the lower of cost or fair value at the date of transfer. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method. There were no loans held for sale at December 31, 2015 and 2014. SBA and Farm Service Agency loans with unpaid balances of $202,000 and $233,000 were being serviced for others as of December 31, 2015 and 2014, respectively. The Company also serviced loans that are participated with other financial institutions totaling $7,942,000 and $8,136,000 as of December 31, 2015 and 2014, respectively. Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold or securitized with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are initially recorded at fair value and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing assets are periodically evaluated for impairment. Servicing assets were not considered material for disclosure purposes at December 31, 2015 and 2014. Allowance for Loan and Lease Losses The allowance for loan and lease losses is an estimate of probable credit losses inherent in the Company’s credit portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan and lease losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is typically recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired credits and general reserves for inherent probable losses related to credits that are not impaired. 38AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan and Lease Losses (Continued) For all classes of the portfolio, a loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principle and interest payments when due. Impaired loans are individually evaluated to determine the extent of impairment, if any, except for smaller-balance loans that are collectively evaluated for credit risk. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the credit’s original interest rate, except that as a practical expedient, it may measure impairment based on a credit’s observable market price, or the fair value of the collateral if the credit is collateral dependent. A loan or lease is collateral dependent if the repayment of the credit is expected to be provided solely by the sale or operation of the underlying collateral. For all portfolio segments, a restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Company grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans or leases that are reported as TDRs are considered impaired and measured for impairment as described above. For all portfolio segments, the determination of the general reserve for loans and leases that are not impaired is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the credit portfolio, and probable losses inherent in the portfolio taken as a whole. During the fourth quarter of 2015, the Company made a specific enhancement to its methodology for determining the general reserve component of the ALLL. The enhancement related specifically to the methodology used to calculate the qualitative factors with respect to non-impaired loans graded watch, special mention and substandard by eliminating the use of multipliers. The ALLL methodology was also revised to add an additional qualitative factor, by loan grade, in calculating the general reserve component of the ALLL. Management believes that the allocation of the ALLL to each loan risk grade, within each loan type has become more precise under the methodology enhancement. The implementation of the ALLL model revision did not have a material impact on the calculation of the required allowance for loan losses as of December 31, 2015. The Company determines a separate allowance for each portfolio segment. These portfolio segments include commercial, real estate construction (including land and development loans), residential real estate, multi-family real estate, commercial real estate, leases, agriculture, and consumer loans. The allowance for loan and lease losses attributable to each portfolio segment, which includes both impaired credits and credits that are not impaired, is combined to determine the Company’s overall allowance, which is included as a component of loans and leases on the consolidated balance sheet and available for all loss exposures. The Company assigns a risk rating to all loans and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual credit. The risk ratings can be grouped into six major categories, defined as follows: Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention. 39AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan and Lease Losses (Continued) Watch – A watch credit is a loan or lease that otherwise meets the definition of a standard or minimum acceptable quality loan, but which requires more than normal attention due to any of the following items: deterioration of borrower financial condition less severe than those warranting more adverse grading, deterioration of repayment ability and/or collateral value, increased leverage, adverse effects from a downturn in the economy, local market or industry, adverse changes in local or regional employer, management changes (including illness, disability, and death), and adverse legal action. Payments are current per the terms of the agreement. If conditions persist or worsen, a more severe risk grade may be warranted. Special Mention – A special mention credit is a loan or lease that has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Company’s position at some future date. Special Mention credits are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Substandard – A substandard credit is a loan or lease that is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Credits classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include inadequate cash flow or collateral support, a project’s lack of marketability, failure to complete construction on time or a project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful – Credits classified as doubtful are loans or leases that have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Loss – Credits classified as loss are loans or leases considered uncollectible and charged off immediately. The general reserve component of the allowance for loan and lease losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below. Real Estate- Commercial – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations. Real Estate- Construction – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects. Real Estate- Multi-family – Multi-family loans are non-construction term mortgages for the acquisition, refinance, or improvement of residential rental properties with generally more than 4 dwelling units. Underwriting is generally based on borrower creditworthiness, sufficiency of net operating income to service the bank loan payment, and a prudent loan-to-value ratio, among other factors. 40AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan and Lease Losses (Continued) Real Estate- Residential – Residential loans are generally loans to purchase or refinance 1-4 unit single-family residences, either owner-occupied or investor-owned. Some residential loans are short term to match their intended source of repayment through sale or refinance. The remainder are fixed or floating-rate term first mortgages with an original maturity between 2 and 10 years, generally with payments based on a 25-30 year amortization. Commercial – Commercial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Lease Financing Receivable – Leases originated by the bank are non-consumer finance leases (as contrasted with operating leases) for the acquisition of titled and non-titled business equipment. Leases are generally amortized over a period from 36 to 84 months, depending on the useful life of the equipment acquired. Residual (balloon) payments at lease end range from 0-20% of original cost, and are a non-optional obligation of the lessee. Lessees are contractually responsible for all costs, expenses, taxes, and liability associated with the leased equipment. Agricultural – Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of the Company and borrowers: commodity prices and weather conditions. Consumer – The consumer loan portfolio is comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made directly for consumer purchases, but business loans granted for the purchase of heavy equipment or industrial vehicles may also be included. Also included in the consumer loan portfolio are home equity lines of credit. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s primary regulators, the FDIC and the California Department of Business Oversight, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations. 41AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates probable incurred losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet. Other Real Estate Owned (OREO) Other real estate owned includes real estate acquired in full or partial settlement of loan obligations. When property is acquired, any excess of the recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property less estimated selling costs is charged against the allowance for loan and lease losses. A valuation allowance for losses on other real estate may be maintained to provide for temporary declines in value. The valuation allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or writedowns resulting from permanent impairments are recorded in other income or expense as incurred. During 2015, the Company received $1,153,000 in net proceeds from the sale of other real estate owned with net losses of $1,000 recognized on the sale. During 2014, the Company received $2,283,000 in net proceeds from the sale of other real estate owned with net gains of $231,000 recognized on the sale. The recorded investment in other real estate owned totaled $3,551,000 and $4,647,000 at December 31, 2015 and 2014, respectively, and had related valuation allowances of zero and $156,000, respectively. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Land is not depreciated. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful life of the building and improvements is forty years. The useful lives of furniture, fixtures and equipment are estimated to be three to ten years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. Impairment of long-lived assets is evaluated by management based upon an event or changes in circumstances surrounding the underlying assets which indicate long-lived assets may be impaired. Goodwill and Intangible Assets Business combinations involving the Company’s acquisition of equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisition and is not deductible for tax purposes. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2015, the Company had one reporting unit and that reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Bank-Owned Life Insurance The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. 42AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes. The Company accounts for income taxes using the balance sheet method, under which deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable, results in the income tax expense for the current year. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Based upon the Company’s analysis of available evidence, the Company determined that it is “more likely than not” that all of the deferred income tax assets as of December 31, 2015 and 2014 will be fully realized and therefore no valuation allowance was recorded. The Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income. Comprehensive Income Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income consists of net income and other comprehensive income. Unrealized gains and losses on the Company’s available-for-sale investment securities are included in other comprehensive income (loss), adjusted for realized gains or losses included in net income. Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the consolidated statements of comprehensive income. Earnings Per Share Basic earnings per share (“EPS”), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or restricted stock, result in the issuance of common stock that share in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options and restricted stock in computing diluted EPS. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the consolidated financial statements. There were no stock splits or stock dividends in 2015, 2014 or 2013. Stock-Based Compensation At December 31, 2015, the Company had two stock-based compensation plans, which are described more fully in Note 13. Compensation expense, net of related tax benefits, recorded in 2015, 2014 and 2013 totaled 43AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock-Based Compensation (Continued) $176,000, $107,000 and $84,000, or $0.02, $0.01 and $0.01 per diluted share, respectively. Compensation expense is recognized over the vesting period on a straight line accounting basis. The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton based option valuation model that uses the assumptions noted in the following table. Because Black-Scholes-Merton based option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate the dividend yield, option life and forfeiture rate within the valuation model. The expected option life represents the period of time that options granted are expected to be outstanding. The risk-free rate for the period representing the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Dividend yield Expected volatility Risk-free interest rate Expected option life in years Weighted average fair value of options granted during the year 2015 2014 0.0% 28.1% 1.92% 7 3.24 $ 0.0% 20.7% 2.10% 7 2.44 $ There were no options granted in 2013 under either stock-based compensation plans. Restricted stock awards are grants of shares of the Company’s common stock that are subject to forfeiture until specific conditions or goals are met. Conditions may be based on continuing employment or service and/or achieving specified performance goals. During the period of restriction, Plan participants holding restricted share awards have voting and cash dividend rights. The restrictions lapse in accordance with a schedule or with other conditions determined by the Board of Directors as reflected in each award agreement. Upon the vesting of each restricted stock award, the Company issues the associated common shares from its inventory of authorized common shares. All outstanding awards under the Plan immediately vest in the event of a change of control of the Company. The shares associated with any awards that fail to vest become available for re-issuance under the Plan. The following is a summary of stock-based compensation information as of or for the years ended December 31, 2015, 2014 and 2013: Total intrinsic value of options exercised Aggregate cash received for option exercises Total fair value of options vested Total compensation cost, options and restricted stock Tax benefit recognized Net compensation cost, options and restricted stock Total compensation cost for nonvested option awards not yet recognized Weighted average years for compensation cost for nonvested options to be recognized Total compensation cost for restricted stock not yet recognized Weighted average years for compensation cost for restricted stock to be recognized $ $ $ $ $ $ $ $ 2015 2014 (Dollars in thousands) $ — $ — $ $ $ $ $ $ $ — 24 271 94 176 165 2.0 530 1.6 $ $ $ $ $ $ $ — 14 166 59 107 104 2.1 273 1.2 2013 — — 40 131 47 84 38 1.1 173 1.0 44AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Operating Segments While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. Recently Issued Financial Accounting Pronouncements Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure--In January 2014, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (the “Update”) 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. Under this Update, FASB amended existing guidance to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments in this Update were effective for annual reporting periods beginning after December 15, 2014, including interim periods within that reporting period. The effects of adopting this Update did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows. Revenue from Contracts with Customers (Topic 606)--In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This Update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The amendments within this update are effective for the quarter ending March 31, 2018. The Company is currently in the process of evaluating the impact of the adoption of this update, but does not expect a material impact on its consolidated financial position, results of operations or cash flows. Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)--In January 2016, the FASB issued Update 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). Under this Update, FASB enhanced the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This Update contains several provisions, including but not limited to 1) require equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminated the requirement to disclose the method(s) and significant assumptions used to estimate fair value; and 4) require separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The Update is effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that this Update will have on its consolidated financial position, results of operations or cash flows. 45AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2015 and December 31, 2014. They indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands): December 31, 2015 Financial assets: Cash and due from banks Interest-bearing deposits in banks Available-for-sale securities Held-to-maturity securities FHLB stock Loans and leases, net Accrued interest receivable Financial liabilities: Deposits: Noninterest-bearing Savings Money market NOW accounts Time Deposits Short-term borrowings Long-term borrowings Accrued interest payable $ $ Carrying Amount 23,727 750 273,819 623 3,779 289,102 1,885 190,548 59,061 135,186 61,324 84,571 3,500 7,500 60 Fair Value Measurements Using: Level 2 Level 3 Level 1 $ $ 23,727 — 24 — N/A — — 190,548 59,061 135,186 61,324 — 3,500 — — $ $ — 752 273,795 669 N/A — 1,077 — — — — 85,165 — 7,502 60 $ $ — — — — N/A 292,444 808 — — — — — — — — $ $ Total 23,727 752 273,819 689 N/A 292,444 1,885 190,548 59,061 135,186 61,324 85,165 3,500 7,502 60 46AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) December 31, 2014 Financial assets: Cash and due from banks Interest-bearing deposits in banks Available-for-sale securities Held-to-maturity securities FHLB stock Loans and leases, net Accrued interest receivable Financial liabilities: Deposits: Noninterest-bearing Savings Money market NOW accounts Time, $100,000 or more Short-term borrowings Long-term borrowings Accrued interest payable $ $ Carrying Amount 22,449 1,000 289,064 862 3,686 258,057 1,858 155,698 58,820 147,625 60,862 87,688 3,500 7,500 59 Fair Value Measurements Using: Level 2 Level 3 Level 1 $ $ 22,449 — 28 — N/A — — 155,698 58,820 147,625 60,862 — 3,500 — — $ $ — 1,002 289,036 922 N/A — 1,150 — — — — 88,485 — 7,567 59 $ $ — — — — N/A 261,421 708 — — — — — — — — $ $ Total 22,449 1,002 289,064 922 N/A 261,421 1,858 155,698 58,820 147,625 60,862 88,485 3,500 7,567 59 Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The following methods and assumptions were used by the Company to estimate the fair values of its financial instruments at December 31, 2015 and December 31, 2014: Cash and due from banks: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1. Interest-bearing deposits in banks: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions and are classified as Level 2. Investment securities: For investment securities, fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers and are classified as Level 2. FHLB stock: FHLB stock is not publically traded, as such, it is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. 47AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) Loans and leases: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality also resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. Deposits: The fair values disclosed for demand deposits (e.g. interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amount) resulting in a Level 1 classification. For time deposits, the fair values for fixed rate certificates of deposit are estimated using a discounted cash flow methodology that applies market interest rates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification. Short-term and long-term borrowings: The fair value of short-term borrowings is estimated to be the carrying amount and is classified as Level 1. The fair value of long-term borrowings is estimated using a discounted cash flow analysis using interest rates currently available for similar debt instruments and are classified as Level 2. Accrued interest receivable and payable: The carrying amount of accrued interest receivable and accrued interest payable approximates fair value resulting in a Level 2 or 3 classification consistent with the asset or liability with which it is associated. Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments was not material at December 31, 2015 and December 31, 2014. They are excluded from the following tables. Assets and liabilities measured at fair value on a recurring and non-recurring basis are presented in the following table: (Dollars in thousands) December 31, 2015 Assets and liabilities measured on a recurring basis: Available-for-sale securities: U.S. Government Agencies and Sponsored Agencies Corporate Debt Securities Obligations of states and political subdivisions Corporate stock Total recurring Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total Gains (Level 1) (Level 2) (Level 3) (Losses) Fair Value $ 246,185 1,551 $ — $ 246,185 1,551 — $ 26,013 70 $ 273,819 $ — 24 24 26,013 46 $ 273,795 $ — $ — $ — — — — — — — — 48AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) (Dollars in thousands) December 31, 2015 Assets and liabilities measured on a nonrecurring basis: Impaired loans: Real estate: Commercial Other real estate owned: Commercial Land Fair Value 3,900 2,522 1,029 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total Gains (Level 1) (Level 2) (Level 3) (Losses) — — — — — — 3,900 (334) 2,522 1,029 — — (334) Total nonrecurring $ 7,451 $ — $ — $ 7,451 $ (Dollars in thousands) December 31, 2014 Assets and liabilities measured on a recurring basis: Available-for-sale securities: U.S. Government Agencies and Sponsored Agencies Corporate Debt Securities Obligations of states and political subdivisions Corporate stock Total recurring Assets and liabilities measured on a nonrecurring basis: Impaired loans: Commercial Real estate: Commercial Other real estate owned: Commercial Land Total nonrecurring Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total Gains (Level 1) (Level 2) (Level 3) (Losses) Fair Value $ 261,115 1,583 26,289 77 $ 289,064 $ $ — $ 261,115 1,583 — — 28 28 26,289 49 $ 289,036 $ $ — $ — — — — $ $ 666 $ — $ — $ 666 $ 286 — — 286 — — — — — 14 — 243 2,252 3,447 $ $ — — — $ — — — $ 243 2,252 3,447 $ — (60) (46) 49AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) U.S. Government Agencies and Sponsored Agencies consist predominately of residential mortgage-backed securities. There were no transfers between Levels 1 and 2 during the years ended December 31, 2015 or December 31, 2014. The following methods were used to estimate the fair value of each class of financial instrument above: Available-for-sale securities – Fair values for investment securities are based on quoted market prices, if available, and are considered Level 1, or evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and are considered Level 2. Pricing applications apply available information, as applicable, through processes such as benchmark curves, benchmarking to like securities, sector groupings and matrix pricing. Impaired loans – The fair value of collateral dependent impaired loans adjusted for specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring impaired loans is the sales comparison approach less a reserve for past dues taxes and selling costs ranging from 8% to 10%. Other real estate owned – 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 real estate 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 OREO is the sales comparison approach less selling costs ranging from 8% to 10%. 4. GOODWILL AND OTHER INTANGIBLE ASSETS At December 31, 2015 and 2014, goodwill totaled $16,321,000. Goodwill is evaluated annually for impairment and was most recently evaluated in December 2011 under the provisions of the codification Topic 350, Goodwill and Other Intangibles. Management determined that no impairment recognition was required for the years ended December 31, 2015, 2014 and 2013. At December 31, 2015 and 2014, the Company did not have other intangible assets. 50AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities at December 31, 2015 and 2014 consisted of the following (dollars in thousands): Available-for-Sale Debt securities: U.S. Government Agencies and Sponsored Agencies Obligations of states and political subdivisions Corporate Debt Securities Equity securities: Corporate stock Debt securities: U.S. Government Agencies and Sponsored Agencies Obligations of states and political subdivisions Corporate Debt Securities Equity securities: Corporate stock 2015 Gross Unrealized Gains Gross Unrealized Losses Amortized Cost $ $ 244,056 24,706 1,502 51 $ 3,059 1,307 49 19 (930) — — — Estimated Fair Value $ 246,185 26,013 1,551 70 $ 270,315 $ 4,434 $ (930) $ 273,819 2014 Gross Unrealized Gains Gross Unrealized Losses Amortized Cost $ $ 257,002 24,886 1,504 54 $ 4,715 1,423 79 23 (602) (20) — — Estimated Fair Value $ 261,115 26,289 1,583 77 $ 283,446 $ 6,240 $ (622) $ 289,064 U.S. Government Agencies and U.S. Government-sponsored Agencies consist predominately of residential mortgage-backed securities. Net unrealized gains on available-for-sale investment securities totaling $3,504,000 were recorded, net of $1,401,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2015. Proceeds and gross realized gains from the sale, impairment and call of available-for-sale investment securities for the year ended December 31, 2015 totaled $23,764,000 and $251,000, respectively. There were no transfers of available-for-sale investment securities during the year ended December 31, 2015. Net unrealized gains on available-for-sale investment securities totaling $5,618,000 were recorded, net of $2,247,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2014. Proceeds and gross realized gains from the sale, impairment and call of available-for-sale investment securities for the year ended December 31, 2014 totaled $24,964,000 and $208,000, respectively. There were no transfers of available-for-sale investment securities during the year ended December 31, 2014. 51AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENT SECURITIES (Continued) Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the year ended December 31, 2013 totaled $9,441,000 and $36,000, respectively. Held-to-Maturity Debt securities: 2015 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Government Agencies and Sponsored Agencies $ 623 $ 46 $ — $ 669 2014 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Debt securities: U.S. Government Agencies and Sponsored Agencies $ 862 $ 60 $ — $ 922 There were no sales or transfers of held-to-maturity investment securities for the years ended December 31, 2015, 2014 and 2013. The amortized cost and estimated fair value of investment securities at December 31, 2015 by contractual maturity are shown below (dollars in thousands). Within one year After one year through five years After five years through ten years After ten years Investment securities not due at a single maturity date: U.S. Government Agencies and Sponsored Agencies Corporate stock Available-for-Sale Held-to-Maturity Amortized Cost Estimated Fair Value Amortized Cost $ 490 5,140 14,621 5,957 Estimated Fair Value $ 494 5,298 15,542 6,230 244,056 51 246,185 70 $ 270,315 $ 273,819 $ $ 623 — 623 $ $ 669 — 669 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. 52AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENT SECURITIES (Continued) Investment securities with amortized costs totaling $56,836,000 and $65,732,000 and estimated fair values totaling $57,665,000 and $67,039,000 were pledged to secure State Treasury funds on deposit, public agency and bankruptcy trustee deposits and borrowing arrangements (see Note 10) at December 31, 2015 and 2014, respectively. Investment securities with unrealized losses at December 31, 2015 and 2014 are summarized and classified according to the duration of the loss period as follows (dollars in thousands): Available-for-Sale Debt securities: U.S. Government Agencies and Sponsored Agencies Obligations of states and political subdivisions Available-for-Sale Debt securities: U.S. Government Agencies and Sponsored Agencies Obligations of states and political subdivisions 2015 Less than 12 Months Unrealized Fair Losses Value 12 Months or More Fair Value Unrealized Losses Total Fair Value Unrealized Losses $ 93,265 — $ 93,265 $ $ (813) — $ 5,251 — (813) $ 5,251 $ $ (117) — $ 98,516 — (117) $ 98,516 $ $ (930) — (930) 2014 Less than 12 Months Fair Value Unrealized Losses 12 Months or More Fair Value Unrealized Losses Total Fair Value Unrealized Losses $ 57,145 — $ 57,145 $ $ (503 ) — $ 10,006 649 (503) $ 10,655 $ $ (99) (20) $ 67,151 649 (119) $ 67,800 $ $ (602) (20) (622) At December 31, 2015, the Company held 223 securities of which 45 were in a loss position for less than twelve months and three were in a loss position for twelve months or more. Of these securities, all are mortgage-backed securities. The unrealized loss on the Company’s investments in securities is primarily driven by interest rates. Because the decline in market value is attributable to a change in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, management does not consider these investments to be other-than-temporarily impaired. 53AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. LOANS AND LEASES Outstanding loans and leases are summarized as follows (dollars in thousands): Real estate – commercial Real estate – construction Real estate – multi-family Real estate – residential Commercial Lease financing receivable Agriculture Consumer Deferred loan and lease origination fees, net Allowance for loan and lease losses December 31, 2015 2014 $ 199,591 14,533 23,494 14,200 36,195 732 2,431 3,122 $ 193,871 8,028 14,167 13,309 25,186 1,286 2,882 4,916 294,298 263,645 (221) (4,975) (287) (5,301) $ 289,102 $ 258,057 Certain loans are pledged as collateral for available borrowings with the FHLB and the Federal Reserve Bank of San Francisco (the “FRB”). Pledged loans totaled $160,626,000 and $147,254,000 at December 31, 2015 and 2014, respectively (see Note 10). The components of the Company’s lease financing receivable are summarized as follows (dollars in thousands): Future lease payments receivable Residual interests Unearned income Net lease financing receivable Future lease payments receivable are as follows (dollars in thousands): Year Ending December 31, 2016 2017 2018 2019 2020 Total lease payments receivable December 31, 2015 2014 774 — (42) 732 $ $ 1,358 13 (85) 1,286 $ $ 352 211 178 33 — 774 $ $ Salaries and employee benefits totaling $257,000, $244,000 and $315,000 have been deferred as loan and lease origination costs for the years ended December 31, 2015, 2014 and 2013, respectively. 54AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES The following tables show the activity in the allowance for loan and lease losses for the years ended December 31, 2015, 2014 and 2013 and the allocation of the allowance for loan and lease losses as of December 31, 2015, 2014 and 2013 by portfolio segment and by impairment methodology (dollars in thousands): Commercial Commercial Multi-Family Construction Residential Leases Agriculture Consumer Unallocated Total December 31, 2015 Real Estate Other Allowance for Loan and Lease Losses Beginning balance Provision for loan losses Loans charged-off Recoveries Ending balance allocated to portfolio segments Ending balance: Individually evaluated for impairment Ending balance: Collectively evaluated for impairment Loans Ending balance Ending balance: Individually evaluated for impairment Ending balance: Collectively evaluated for impairment $ $ $ $ $ 1,430 (84) (609) 123 2,317 $ — — 52 $ 130 98 — — $ 583 230 — — $ 399 $ (193) — 113 2 — (1) — $ 62 15 — — $ 124 (42) (6) 2 $ 254 (24) — — 5,301 — (616) 290 860 $ 2,369 $ 228 $ 813 $ 319 $ 1 $ 77 $ 78 $ 230 $ 4,975 25 $ 598 $ 5 $ — $ 204 $ — $ 38 $ 29 $ — $ 899 835 $ 1,771 $ 223 $ 813 $ 115 $ 1 $ 39 $ 49 $ 230 $ 4,076 $ 36,195 $ 199,591 $ 23,494 $ 14,533 $ 14,200 $ 732 $ 2,431 $ 3,122 $ — $294,298 $ 121 $ 17,866 $ 488 $ — $ 2,452 $ — $ 370 $ 68 $ — $ 21,365 $ 36,074 $ 181,725 $ 23,006 $ 14,533 $ 11,748 $ 732 $ 2,061 $ 3,054 $ — $272,933 55AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) Commercial Commercial Multi-Family Construction Residential Leases Agriculture Consumer Unallocated Total December 31, 2014 Real Estate Other Allowance for Loan and Lease Losses Beginning balance Provision for loan losses Loans charged-off Recoveries Ending balance allocated to portfolio segments Ending balance: Individually evaluated for impairment Ending balance: Collectively evaluated for impairment Loans Ending balance Ending balance: Individually evaluated for impairment Ending balance: Collectively evaluated for impairment $ $ $ $ $ 885 289 — 256 2,401 $ (135) — 51 $ 242 (205) — 93 $ 542 39 — 2 $ 825 $ (443) — 17 4 (5) — 3 $ 80 (18) — — $ 161 (111) (76) 150 206 48 — — $ 5,346 (541) (76) 572 1,430 $ 2,317 $ 130 $ 583 $ 399 $ 2 $ 62 $ 124 $ 254 $ 5,301 344 $ 949 $ 38 $ — $ 237 $ — $ 13 $ 22 $ — $ 1,603 1,086 $ 1,368 $ 92 $ 583 $ 162 $ 2 $ 49 $ 102 $ 254 $ 3,698 $ 25,186 $ 193,871 $ 14,167 $ 8,028 $ 13,309 $1,286 $ 2,882 $ 4,916 $ — $263,645 $ 769 $ 20,457 $ 496 $ — $ 2,862 $ — $ 381 $ 155 $ — $ 25,120 $ 24,417 $ 173,414 $ 13,671 $ 8,028 $ 10,447 $1,286 $ 2,501 $ 4,761 $ — $238,525 56AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) Commercial Commercial Multi-Family Construction Residential Leases Agriculture Consumer Unallocated Total December 31, 2013 Real Estate Other Allowance for Loan and Lease Losses Beginning balance Provision for loan losses Loans charged-off Recoveries Ending balance allocated to portfolio segments Ending balance: Individually evaluated for impairment Ending balance: Collectively evaluated for impairment Loans Ending balance Ending balance: Individually evaluated for impairment Ending balance: Collectively evaluated for impairment $ $ $ $ $ 1,351 (304) (377) 215 2,526 $ 327 (476) 24 $ 238 4 — — $ 594 (73) — 21 $ 477 $ 363 (58) 43 3 2 (1) — $ 87 (7) — — $ 262 (75) (26) — $ 243 (37) — — 5,781 200 (938) 303 885 $ 2,401 $ 242 $ 542 $ 825 $ 4 $ 80 $ 161 $ 206 $ 5,346 392 $ 792 $ 108 $ — $ 276 $ — $ — $ 30 $ — $ 1,598 493 $ 1,609 $ 134 $ 542 $ 549 $ 4 $ 80 $ 131 $ 206 $ 3,748 $ 24,545 $ 184,204 $ 11,085 $ 9,633 $ 17,703 $1,344 $ 3,120 $ 5,772 $ — $257,406 $ 1,736 $ 19,919 $ 1,650 $ 248 $ 3,316 $ — $ — $ 165 $ — $ 27,034 $ 22,809 $ 164,285 $ 9,435 $ 9,385 $ 14,387 $1,344 $ 3,120 $ 5,607 $ — $230,372 57AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) The following tables show the loan portfolio allocated by management’s internal risk ratings as of December 31, 2015 and 2014 (dollars in thousands): December 31, 2015 Credit Risk Profile by Internally Assigned Grade Commercial Commercial Multi-Family Construction Residential Leases Agriculture Consumer Total Real Estate Other Credit Exposure $ Grade: Pass Watch Special mention Substandard Doubtful 32,216 $ 1,073 — 2,906 — 172,755 $ 17,318 8,363 1,155 — 23,001 $ 493 — — — 6,371 $ 8,162 — — — 10,593 $ 732 $ 2,099 697 811 — — — — — 2,061 $ 370 — — — 2,136 $249,865 29,893 9,493 5,047 — 378 433 175 — Total $ 36,195 $ 199,591 $ 23,494 $ 14,533 $ 14,200 $ 732 $ 2,431 $ 3,122 $294,298 December 31, 2014 Credit Risk Profile by Internally Assigned Grade Commercial Commercial Multi-Family Construction Residential Leases Agriculture Consumer Total Real Estate Other Credit Exposure $ Grade: Pass Watch Special mention Substandard Doubtful 20,179 $ 1,280 101 3,626 — 163,091 $ 13,724 13,583 3,473 — 13,663 $ 504 — — — 3,327 $ 4,372 329 — — 9,364 $1,286 $ 2,504 603 838 — — — — — 2,501 $ — 381 — — 3,424 $216,835 23,425 1,041 15,265 268 8,120 183 — — Total $ 25,186 $ 193,871 $ 14,167 $ 8,028 $ 13,309 $1,286 $ 2,882 $ 4,916 $263,645 58AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) The following tables show an aging analysis of the loan portfolio at December 31, 2015 and 2014 (dollars in thousands): December 31, 2015 30-59 Days 60-89 Days Past Due Past Due Past Due Greater Than 90 Days Total Past Due Past Due Greater Than 90 Days and Current Total Loans Accruing Nonaccrual $ — $ — $ 30 $ 30 $ 36,165 $ 36,195 $ — $ 30 — — — — — — 367 359 — — — — — — 499 — — 338 — — — 858 198,733 — 23,494 — 14,533 13,862 338 199,591 23,494 14,533 14,200 732 — — 2,431 2,755 367 732 2,431 3,122 — — — — — — — 1,155 — — 338 — — 120 $ 367 $ 359 $ 867 $ 1,593 $292,705 $ 294,298 $ — $ 1,643 Commercial: Commercial Real estate: Commercial Multi-family Construction Residential Other: Leases Agriculture Consumer Total 59AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) December 31, 2014 Past Due Greater 30-59 Days 60-89 Days Past Due Past Due Than 90 Days Total Past Due Current Total Loans Accruing Nonaccrual Past Due Greater Than 90 Days and Commercial: Commercial Real estate: Commercial Multi-family Construction Residential Other: Leases Agriculture Consumer Total $ 513 $ — $ 666 $ 1,179 $ 24,007 $ 25,186 $ — $ 666 507 — — — — — 135 — — — — — — — 507 — — 338 — — — 1,014 192,857 — 14,167 — 8,028 12,971 338 193,871 14,167 8,028 13,309 — 1,286 — 2,882 4,781 135 1,286 2,882 4,916 — — — — — — — 507 — — 338 — — 142 $ 1,155 $ — $ 1,511 $ 2,666 $260,979 $ 263,645 $ — $ 1,653 60AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) The following tables show information related to impaired loans as of and for the years ended December 31, 2015, 2014 and 2013 (dollars in thousands): With no related allowance recorded: Commercial Real estate: Commercial Residential Other: Consumer With an allowance recorded: Commercial Real estate: Commercial Multi-family Residential Other: Agriculture Consumer Total: Commercial Real estate: Commercial Multi-family Residential Other: Agriculture Consumer December 31, 2015 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized $ — $ — $ $ $ $ $ 12,269 338 — 12,607 121 5,597 488 2,114 370 68 8,758 121 17,866 488 2,452 370 68 $ $ $ $ 12,902 338 — 13,240 121 5,693 488 2,201 370 68 8,941 121 18,595 488 2,539 370 68 $ $ $ $ — — — — — 25 598 5 204 38 29 899 25 598 5 204 38 29 $ — $ $ $ $ $ 12,345 338 — 12,683 99 4,953 492 2,140 375 76 8,135 99 17,298 492 2,478 375 76 $ $ $ $ — 595 — — 595 9 320 29 91 18 — 467 9 915 29 91 18 — $ 21,365 $ 22,181 $ 899 $ 20,818 $ 1,062 61AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) With no related allowance recorded: Commercial Real estate: Commercial Residential Other: Consumer With an allowance recorded: Commercial Real estate: Commercial Multi-family Residential Other: Agriculture Consumer Total: Commercial Real estate: Commercial Multi-family Residential Other: Agriculture Consumer December 31, 2014 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized $ — $ — $ $ $ $ $ 10,684 338 37 11,059 769 9,773 496 2,524 381 118 14,061 769 20,457 496 2,862 381 155 $ $ $ $ 10,882 338 37 11,257 769 9,773 496 2,524 381 118 14,061 769 20,655 496 2,862 381 155 $ $ $ $ — — — — — 344 949 38 237 13 22 1,603 344 949 38 237 13 22 $ — $ $ $ $ $ 10,512 340 37 10,889 758 8,917 501 2,553 386 123 13,238 758 19,429 501 2,893 386 160 $ $ $ $ 3 518 7 2 530 4 562 20 114 21 2 723 7 1,080 20 121 21 4 $ 25,120 $ 25,318 $ 1,603 $ 24,127 $ 1,253 62AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) December 31, 2013 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized $ 577 $ 577 $ $ $ $ $ 10,921 248 37 11,783 1,159 8,998 1,650 3,316 128 15,251 1,736 19,919 1,650 248 3,316 165 $ $ $ $ 11,119 248 37 11,981 1,159 8,998 1,743 3,316 128 15,344 1,736 20,117 1,743 248 3,316 165 $ $ $ $ — — — — — 392 792 108 276 30 1,598 392 792 108 — 276 30 $ 665 $ $ $ $ $ 11,614 256 37 12,572 1,240 9,008 1,665 3,354 136 15,403 1,905 20,622 1,665 256 3,354 173 $ $ $ $ 11 11 — 1 23 10 196 39 70 1 316 21 207 39 70 2 With no related allowance recorded: Commercial Real estate: Commercial Construction Other: Consumer With an allowance recorded: Commercial Real estate: Commercial Multi-family Residential Other: Consumer Total: Commercial Real estate: Commercial Multi-family Construction Residential Other: Consumer $ 27,034 $ 27,325 $ 1,598 $ 27,975 $ 339 The recorded investment in loans and leases that were considered to be impaired totaled $21,365,000 at December 31, 2015 and had a related valuation allowance of $899,000. The average recorded investment in impaired loans and leases during 2015 was approximately $20,818,000. The recorded investment in loans and leases that were considered to be impaired totaled $25,120,000 at December 31, 2014 and had a related valuation allowance of $1,603,000. The average recorded investment in impaired loans and leases during 2014 was approximately $24,127,000. 63AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) Non-accrual loans and leases totaled approximately $1,643,000 and $1,653,000 at December 31, 2015 and 2014, respectively. There were no loans and leases past due 90 days or more and still accruing interest at December 31, 2015 and December 31, 2014. Interest income on non-accrual loans is generally recognized on a cash basis and was approximately $59,000, $84,000 and $161,000 for the years ended December 31, 2015, 2014 and 2013. Interest foregone on non-accrual loans was approximately $145,000, $116,000 and $324,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Troubled Debt Restructurings During the period ended December 31, 2015, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate or an extension of the maturity date. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from three years to nine years. Modifications involving an extension of the maturity date were for periods ranging from six months to nine years. The following table presents loans by class modified as troubled debt restructurings during the year ended December 31, 2015 (dollars in thousands): Troubled debt restructurings: Commercial Consumer Real estate – residential Real estate – commercial Total Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Loans 1 1 2 1 5 $ $ $ 26 23 407 644 26 23 407 644 1,100 $ 1,100 The troubled debt restructurings described above increased the allowance for loan and lease losses by $59,000 and resulted in no charge-offs of during the year ended December 31, 2015. The Company has not committed to lend additional amounts as of December 31, 2015 to borrowers with outstanding loans that are classified as troubled debt restructurings. There were no payment defaults on troubled debt restructurings within 12 months following the modification during the year ended December 31, 2015. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. 64AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) Troubled Debt Restructurings (Continued) The following table presents loans by class modified as troubled debt restructurings during the year ended December 31, 2014 (dollars in thousands): Troubled debt restructurings: Commercial Real estate – commercial Total Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Loans 2 8 10 $ $ 50 5,787 5,837 $ $ 50 5,787 5,837 The troubled debt restructurings described above increased the allowance for loan and lease losses by $263,000 and resulted in no charge-offs of during the year ended December 31, 2014. The Company has not committed to lend additional amounts as of December 31, 2014 to borrowers with outstanding loans that are classified as troubled debt restructurings. There were no payment defaults on troubled debt restructurings within 12 months following the modification during the year ended December 31, 2014. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. 65AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. PREMISES AND EQUIPMENT Premises and equipment consisted of the following (dollars in thousands): Land Building and improvements Furniture, fixtures and equipment Leasehold improvements Less accumulated depreciation and amortization December 31, 2015 2014 $ $ 206 845 5,831 1,565 8,447 (7,040) 206 855 5,577 1,533 8,171 (6,653) $ 1,407 $ 1,518 Depreciation and amortization included in occupancy and furniture and equipment expense totaled $430,000, $438,000 and $518,000 for the years ended December 31, 2015, 2014 and 2013, respectively. 9. INTEREST-BEARING DEPOSITS Interest-bearing deposits consisted of the following (dollars in thousands): Savings Money market NOW accounts Time, $250,000 or more Other time December 31, 2015 2014 $ 59,061 135,186 61,324 46,827 37,744 $ 58,820 147,625 60,862 48,287 39,401 $ 340,142 $ 354,995 The Company held $29,000,000 in certificates of deposit for the State of California as of December 31, 2015 and 2014. This amount represents 5.5% of total deposit balances at December 31, 2015 and 5.7% at December 31, 2014. 66AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. INTEREST-BEARING DEPOSITS (Continued) Aggregate annual maturities of time deposits are as follows (dollars in thousands): Year Ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 59,739 10,908 6,671 4,314 2,925 14 $ 84,571 Interest expense recognized on interest-bearing deposits consisted of the following (dollars in thousands): Savings Money market NOW accounts Time Deposits 10. BORROWING ARRANGEMENTS Year Ended December 31, 2015 2014 2013 $ $ $ 29 218 26 544 $ 40 383 36 562 68 435 40 654 817 $ 1,021 $ 1,197 The Company has $17,000,000 in unsecured short-term borrowing arrangements to purchase Federal funds with two of its correspondent banks. There were no advances under the borrowing arrangements as of December 31, 2015 and 2014. In addition, the Company has a line of credit available with the FHLB which is secured by pledged mortgage loans (see Note 6) and investment securities (see Note 5). Borrowings may include overnight advances as well as loans with a term of up to thirty years. Advances totaling $11,000,000 were outstanding from the FHLB at December 31, 2015, bearing fixed interest rates ranging from 0.45% to 1.91% and maturing between January 19, 2016 and July 12, 2019. Advances totaling $11,000,000 were outstanding from the FHLB at December 31, 2014, bearing fixed interest rates ranging from 0.24% to 1.91% and maturing between March 16, 2015 and July 12, 2019. Amounts available under the borrowing arrangement with the FHLB at December 31, 2015 and 2014 totaled $78,326,000 and $67,228,000, respectively. In addition, the Company entered into a secured borrowing agreement with the FRB in 2008. The borrowing arrangement is secured by pledging selected loans (see Note 6) and investment securities (see Note 5). There were no advances outstanding as of December 31, 2015 and 2014. Amounts available under the borrowing arrangement with the FRB at December 31, 2015 and 2014 totaled $11,371,000 and $17,335,000, respectively. 67AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. BORROWING ARRANGEMENTS (Continued) The following table summarizes these borrowings (dollars in thousands): Short-term portion of borrowings Long-term borrowings December 31, 2015 2014 Weighted Average Rate Amount 1.28% $ 1.24% 3,500 7,500 1.26% $ 11,000 Weighted Average Rate 0.92% 1.39% 1.24% Amount $ $ 3,500 7,500 11,000 Maturities on these borrowings are as follows (dollars in thousands): Year Ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 3,500 3,500 2,000 2,000 — — $ 11,000 11. INCOME TAXES The provision for (benefit from) income taxes for the years ended December 31, 2015, 2014, and 2013 consisted of the following (dollars in thousands): 2015 Current Deferred Provision for income taxes 2014 Current Deferred Provision for income taxes Federal State Total $ $ $ $ 1,482 409 1,891 1,754 (99) 1,655 $ $ $ $ 719 64 783 612 25 637 $ $ $ $ 2,201 473 2,674 2,366 (74) 2,292 68AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. INCOME TAXES (Continued) 2013 Current Deferred Provision for income taxes Deferred tax assets (liabilities) consisted of the following (dollars in thousands): Deferred tax assets: Allowance for loan and lease losses Other real estate owned Deferred compensation Other Total deferred tax assets Deferred tax liabilities: Unrealized gains on available-for-sale investment securities Future liability of state deferred tax assets Deferred loan costs Federal Home Loan Bank stock dividends Premises and equipment Total deferred tax liabilities Net deferred tax assets Federal State Total $ $ 797 162 959 $ $ $ 217 82 299 $ $ 1,014 244 1,258 December 31, 2015 2014 $ 2,275 30 2,519 252 5,076 (1,401) (160) (223) (211) (273) (2,268) 2,422 287 2,502 165 5,376 (2,247) (215) (223) (211) (45) (2,941) $ 2,808 $ 2,435 The Company and its subsidiaries file income tax returns in the United States and California jurisdictions. There are currently no pending federal, state or local income tax examinations by tax. Furthermore, with few exceptions, the Company is no longer subject to the examination by federal taxing authorities for the years ended before December 31, 2012 and by state and local taxing authorities for years before December 31, 2011. The unrecognized tax benefits and changes therein and the interest and penalties accrued by the Company as of December 31, 2015 were not significant. 69AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. INCOME TAXES (Continued) The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate of 34% in 2015, 2014 and 2013 to income before income taxes. The significant items comprising these differences consisted of the following: Federal income tax statutory rate State franchise tax, net of Federal tax effect Tax benefit of interest on loans to/investments in states and political subdivisions Tax-exempt income from life insurance policies Equity compensation expense Other Effective tax rate 12. COMMITMENTS AND CONTINGENCIES Leases Year Ended December 31, 2015 2014 2013 34.0% 6.5% (4.5)% (1.3)% 0.1% (1.1)% 33.7% 34.0% 6.3% (4.0)% (1.9)% 0.1% — 34.5% 34.0% 4.6% (6.5)% (2.9)% 0.1% (0.1)% 29.2% The Company leases branch facilities, administrative offices and various equipment under noncancelable operating leases which expire on various dates through the year 2024. Certain of the leases have five year renewal options. One of the branch facilities is leased from a current member of the Company’s Board of Directors (see Note 17). Future minimum lease payments are as follows (dollars in thousands): Year Ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 767 451 258 155 148 429 $ 2,208 Rental expense included in occupancy, furniture and equipment expense totaled $837,000, $872,000 and $865,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Financial Instruments With Off-Balance-Sheet Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet. 70AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. COMMITMENTS AND CONTINGENCIES (Continued) Financial Instruments With Off-Balance-Sheet Risk (Continued) The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the consolidated balance sheet. The following financial instruments represent off-balance-sheet credit risk (dollars in thousands): Commitments to extend credit: Revolving lines of credit secured by 1-4 family residences Commercial real estate, construction and land development commitments secured by real estate Other unused commitments, principally commercial loans Standby letters of credit December 31, 2015 2014 $ 727 $ 1,447 13,999 12,004 26,730 238 $ $ 16,206 14,986 32,639 356 $ $ At inception, real estate commitments are generally secured by property with a loan to value ratio of 55% to 75%. In addition, the majority of the Company’s commitments have variable interest rates. Commitments to extend credit are agreements to lend to a client as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each client’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, equipment and deeds of trust on real estate and income-producing commercial properties. Standby letters of credit are conditional commitments issued to guarantee the performance or financial obligation of a client to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients. Significant Concentrations of Credit Risk The Company grants real estate mortgage, real estate construction, commercial, agricultural and consumer loans to clients throughout Northern California. In management’s judgment, a concentration exists in real estate-related loans which represented approximately 86% and 87% of the Company’s loan portfolio at December 31, 2015 and 2014, respectively. A continued substantial decline in the economy in general, or a continued decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on collectability of these loans. However, personal and business income represents the primary source of repayment for a majority of these loans. 71AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. COMMITMENTS AND CONTINGENCIES (Continued) Correspondent Banking Agreements The Company maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. The Company had $4,126,000 in uninsured deposits at December 31, 2015. The Company had $4,082,000 in uninsured deposits at December 31, 2014. Contingencies The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company. 13. SHAREHOLDERS’ EQUITY Earnings Per Share A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows (dollars and shares in thousands, except per share data): For the Year Ended December 31, 2015 Basic earnings per share Weighted Average Number of Shares Outstanding Net Income Per-Share Amount $ 5,268 7,561 $ 0.70 Effect of dilutive stock-based compensation — 18 Diluted earnings per share December 31, 2014 Basic earnings per share $ 5,268 7,579 $ 0.70 $ 4,361 8,130 $ 0.54 Effect of dilutive stock-based compensation — 14 Diluted earnings per share December 31, 2013 Basic earnings per share $ 4,361 8,144 $ 0.54 $ 3,057 8,888 $ 0.34 Effect of dilutive stock-based compensation — 6 Diluted earnings per share $ 3,057 8,894 $ 0.34 Stock options for 188,735 shares, 211,024 shares and 277,923 shares of common stock were not considered in computing diluted earnings per common share for the years ended December 31, 2015, 2014 and 2013, respectively, because they were antidilutive. 72AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. SHAREHOLDERS’ EQUITY (Continued) Stock Based Compensation In 2000, the Board of Directors adopted and the Company’s shareholders approved a stock option plan (the “2000 Plan”), under which 171,950 options remain outstanding at December 31, 2015. 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. The total number of authorized shares that are available for issuance under the 2010 Plan is 1,395,985. The 2010 Plan provides for the following types of stock-based awards: incentive stock options; nonqualified stock options; stock appreciation rights; restricted stock; restricted performance stock; unrestricted Company stock; and performance units. Awards granted under the 2000 Plan were either incentive stock options or nonqualified stock options. The 2010 Plan and the 2000 Plan (collectively the “Plans”), under which equity incentives may be granted to employees and directors under incentive and nonstatutory agreements, require that the option price may not be less than the fair value of the stock at the date the option is granted. The option awards under the Plans expire on dates determined by the Board of Directors, but not later than ten years from the date of award. The vesting period is generally five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding option awards under the Plans are exercisable until their expiration; however, no new options will be awarded under the 2000 Plan. The Plans do not provide for the settlement of awards in cash and new shares are issued upon exercise of an option. A summary of the outstanding and nonvested stock option activity for the year ended December 31, 2015 is as follows: Outstanding Nonvested Balance, January 1, 2015 Options granted Options vested Options expired or canceled Balance, December 31, 2015 Weighted Average Exercise Price Per Share $ $ $ $ $ 16.27 9.56 2.40 18.11 15.19 Shares 271,700 26,427 (10,017) (49,716) 248,411 Shares 43,118 26,427 59,528 A summary of options as of December 31, 2015 is as follows: Nonvested: Weighted average exercise price of nonvested stock options Aggregate intrinsic value of nonvested stock options Weighted average remaining contractual term in years of nonvested stock options Vested: Number of vested stock options Number of options expected to vest Weighted average exercise price per share Aggregate intrinsic value Weighted average remaining contractual term in years Weighted Average Grant Date Fair Value Per Share $ $ $ 2.41 3.24 2.78 $ $ 8.96 96,563 8.60 188,883 56,216 $ 17.15 $ 135,879 2.13 73AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. SHAREHOLDERS’ EQUITY (Continued) Stock Based Compensation (Continued) Range of Exercise Prices $7.07- $11.66 $11.67- $18.10 $18.11 - $24.07 Restricted Stock Number of Options Outstanding December 31, 2015 Weighted Average Remaining Contractual Life Number of Options Exercisable December 31, 2015 118,808 42,669 86,934 248,411 6.45 years 2.15 years 0.65 years 59,280 42,669 86,934 188,883 There were 45,023 shares of restricted stock awarded during 2015. Of the 45,023 restricted common shares, 12,552 will vest one year from the date of the award and 11,939 will vest 20% per year from the date of the award. The remaining 20,532 are considered performance based awards. The awards can be earned based upon the stock performance of the Company’s common stock in relationship to the common stock of the Company’s peer group. The number of shares can be adjusted by up to 150% of the award if outstanding performance is reached or can be forfeited if minimum performance is not reached. The awards vest one year and a day after the two year performance period or January 1, 2018. The weighted average contractual term over which the restricted stock will vest is 1.64 years. There were 24,830 shares of restricted stock awarded during 2014. Of the 24,830 restricted common shares, 13,560 will vest one year from the date of the award and 11,270 will vest 20% per year from the date of the award. The weighted average contractual term over which the restricted stock will vest is 1.22 years. Restricted Stock Nonvested at January 1, 2015 Awarded Vested Cancelled Nonvested at December 31, 2015 Weighted Average Grant Date Fair Value $ $ $ $ 8.31 9.49 8.36 9.21 Shares 32,838 45,023 (20,344) 57,517 The shares awarded to employees and directors under the restricted stock agreements vest on applicable vesting dates only to the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated. New shares are issued upon vesting of the restricted common stock. 74AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. REGULATORY MATTERS Dividends Upon declaration by the Board of Directors of the Company, all shareholders of record will be entitled to receive dividends. There is no assurance, however, that any dividends will be paid in the future since they are subject to regulatory restrictions, and dependent upon earnings, financial condition and capital requirements of the Company and its subsidiaries. There were no cash dividends declared or paid in 2015, 2014 or 2013. As a California corporation, the Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law (the “Corporation Law”). The Corporation Law provides that neither a corporation nor any of its subsidiaries shall make a distribution to the corporation’s shareholders unless the board of directors has determined in good faith either of the following: (1) the amount of retained earnings of the corporation immediately prior to the distribution equals or exceeds the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount; or (2) immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount. The good faith determination of the board of directors may be based upon (1) financial statements prepared on the basis of reasonable accounting practices and principles, (2) a fair valuation, or (3) any other method reasonable under the circumstances; provided, that a distribution may not be made if the corporation or subsidiary making the distribution is, or is likely to be, unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature. The term “preferential dividends arrears amount” means the amount, if any, of cumulative dividends in arrears on all shares having a preference with respect to payment of dividends over the class or series to which the applicable distribution is being made, provided that if the articles of incorporation provide that a distribution can be made without regard to preferential dividends arrears amount, then the preferential dividends arrears amount shall be zero. The term “preferential rights amount” means the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights, including accrued but unpaid dividends, of other shareholders upon dissolution that are superior to the rights of the shareholders receiving the distribution, provided that if the articles of incorporation provide that a distribution can be made without regard to any preferential rights, then the preferential rights amount shall be zero. In addition, the California Financial Code restricts the total dividend payment of any state banking corporation in any calendar year to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. In addition, subject to prior regulatory approval, any state banking corporation may request an exception to this restriction. Regulatory Capital The Company and ARB are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the FDIC. Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and American River Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of December 31, 2015 and 2014, the most recent regulatory notification categorized American River Bank as well capitalized under the regulatory framework for prompt corrective action plan. There are no conditions or events since that notification that management believes have changed the Bank’s categories. 75AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. REGULATORY MATTERS (Continued) Regulatory Capital (Continued) Effective January 1, 2015, bank holding companies with consolidated assets of $1 Billion or more and banks like American River Bank must comply with new minimum capital ratio requirements to be phased-in between January 1, 2015 and January 1, 2019, which would consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%. In addition, a “capital conservation buffer,” 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, 2016 and January 1, 2019. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases. 76AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. REGULATORY MATTERS (Continued) Regulatory Capital (Continued) To be categorized as well capitalized, ARB must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk- based and Tier 1 leverage ratios as set forth in the table below. Management believes that the Company and ARB met all their capital adequacy requirements as of December 31, 2015 and 2014. December 31, 2015 2014 Amount Ratio (Dollars in thousands) Amount Ratio Leverage Ratio American River Bankshares and Subsidiaries Minimum regulatory requirement American River Bank Minimum requirement for “Well-Capitalized” institution Minimum regulatory requirement Common Equity Tier 1 Risk-Based Capital Ratio American River Bank Minimum requirement for “Well-Capitalized” institution Minimum regulatory requirement Tier 1 Risk-Based Capital Ratio American River Bankshares and Subsidiaries Minimum regulatory requirement American River Bank Minimum requirement for “Well-Capitalized” institution Minimum regulatory requirement Total Risk-Based Capital Ratio American River Bankshares and Subsidiaries Minimum regulatory requirement American River Bank Minimum requirement for “Well-Capitalized” institution Minimum regulatory requirement $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 67,651 24,673 68,079 30,826 24,661 68,079 23,237 16,065 67,651 20,988 68,079 28,559 21,420 72,031 27,984 72,548 35,750 28,559 11.0% $ 4.0% $ 69,955 24,112 11.0% $ 70,216 5.0% $ 4.0% $ 30,125 24,100 19.1% 6.5% 4.5% 19.3% $ 6.0% $ 69,955 12,957 19.1% $ 70,216 8.0% $ 6.0% $ 19,419 12,946 20.6% $ 8.0% $ 74,020 26,014 20.3% $ 74,277 10.0% $ 8.0% $ 32,490 25,992 11.6% 4.0% 11.7% 5.0% 4.0% N/A N/A N/A 21.6% 4.0% 21.7% 6.0% 4.0% 22.9% 8.0% 22.9% 10.0% 8.0% 77AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. OTHER NONINTEREST INCOME AND EXPENSE Other noninterest income consisted of the following (dollars in thousands): Merchant fee income Increase in cash surrender value of life insurance policies (Note 16) Other Year Ended December 31, 2015 2014 2013 $ $ 378 316 237 931 $ $ 413 284 345 1,042 $ $ 443 247 383 1,073 Other noninterest expense consisted of the following (dollars in thousands): Professional fees Outsourced item processing Directors’ expense Telephone and postage Stationery and supplies Advertising and promotion Other operating expenses 16. EMPLOYEE BENEFIT PLANS American River Bankshares 401(k) Plan Year Ended December 31, 2015 2014 2013 $ $ $ 863 360 402 368 143 164 662 1,182 355 394 357 193 160 736 933 357 348 329 240 284 596 $ 2,962 $ 3,377 $ 3,087 The American River Bankshares 401(k) Plan has been in place since January 1, 1993 and is available to all employees. Under the plan, the Company will match 100% of each participant’s contribution up to 3% of annual compensation plus 50% of the next 2% of annual compensation. Employer Safe Harbor matching contributions are 100% vested upon entering the plan. The Company’s contributions totaled $202,000, $178,000 and $181,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Employee Stock Purchase Plan The Company contracts with an administrator for an Employee Stock Purchase Plan which allows employees to purchase the Company’s stock at fair market value as of the date of purchase. The Company bears all costs of administering the Plan, including broker’s fees, commissions, postage and other costs actually incurred. 78AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. EMPLOYEE BENEFIT PLANS (Continued) American River Bankshares Deferred Compensation Plan The Company has established a Deferred Compensation Plan for certain members of the management team and a Deferred Fee Agreement for Non-Employee Directors for the purpose of providing the opportunity for participants to defer compensation. Participants of the management team, who are selected by a committee designated by the Board of Directors, may elect to defer annually a minimum of $5,000 or a maximum of eighty percent of their base salary and all of their cash bonus. Directors may also elect to defer up to one hundred percent of their monthly fees. The Company bears all administration costs and accrues interest on the participants’ deferred balances at a rate based on U.S. Government Treasury rates plus 4.0%. This rate was 5.65% at December 31, 2015. Deferred compensation, including interest earned, totaled $2,837,000 and $2,690,000 at December 31, 2015 and 2014, respectively. The expense recognized under this plan totaled $156,000, $150,000 and $117,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Salary Continuation Plan The Company has agreements to provide certain current executives, or their designated beneficiaries, with annual benefits for up to 15 years after retirement or death. These benefits are substantially equivalent to those available under life insurance policies purchased by the Company on the lives of the executives. The Company accrues for these future benefits from the effective date of the agreements until the executives’ expected final payment dates in a systematic and rational manner. As of December 31, 2015 and 2014, the Company had accrued $1,252,000 and $1,179,000, respectively, for potential benefits payable. This payable approximates the then present value of the benefits expected to be provided at retirement and is included in accrued interest payable and other liabilities on the consolidated balance sheet. The expense recognized under this plan totaled $168,000, $142,000 and $170,000 for the years ended December 31, 2015, 2014 and 2013, respectively. In connection with these plans, the Company invested in single premium life insurance policies with cash surrender values totaling $14,483,000 and $14,167,000 at December 31, 2015 and 2014, respectively. On the consolidated balance sheet, the cash surrender value of life insurance policies is included in accrued interest receivable and other assets. Tax-exempt income on these policies, net of expense, totaled approximately $316,000, $383,000 and $365,000 for the years ended December 31, 2015, 2014 and 2013, respectively. In 2014 and 2013, $99,000 and $118,000, respectively, of this tax-exempt income was from the death benefit proceeds of life insurance policies on former employees or directors. 17. RELATED PARTY TRANSACTIONS During the normal course of business, the Company enters into transactions with related parties, including Directors and affiliates. The following is a summary of the aggregate activity involving related party borrowers during 2015 (dollars in thousands): Balance, January 1, 2015 Disbursements Amounts repaid Balance, December 31, 2015 $ 3,821 — (789) $ 3,032 There are no undisbursed commitments to related parties as of December 31, 2015. The Company also leases one of its branch facilities from a current member of the Company’s Board of Directors. Rental payments to the Director totaled $108,000, $107,000 and $105,000 for the years ended December 31, 2015, 2014 and 2013, respectively. 79AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS December 31, 2015 and 2014 (Dollars in thousands) ASSETS Cash and due from banks Investment in subsidiaries Other assets Liabilities: Other liabilities Total liabilities LIABILITIES AND SHAREHOLDERS’ EQUITY Shareholders’ equity: Common stock Retained earnings Accumulated other comprehensive income, net of taxes Total shareholders’ equity 2015 2014 $ 191 86,503 333 $ 378 89,908 277 $ 87,027 $ 90,563 $ $ 952 952 916 916 49,554 34,418 2,103 86,075 57,126 29,150 3,371 89,647 $ 87,027 $ 90,563 80AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF INCOME For the Years Ended December 31, 2015, 2014 and 2013 (Dollars in thousands) Income: Dividends declared by subsidiaries – eliminated in consolidation Management fee from subsidiaries – eliminated in consolidation Other income $ Total income Expenses: Professional fees Directors’ expense Other expenses Total expenses Income before equity in undistributed income of subsidiaries Equity in (distributed) undistributed income of subsidiaries Income before income taxes Income tax benefit Net income 2015 2014 2013 $ 7,900 — — 7,900 97 285 204 586 7,314 (2,287) 5,027 241 4,250 — — 4,250 89 280 212 581 3,669 453 4,122 239 $ 6,000 — — 6,000 91 247 205 543 5,457 (2,623) 2,834 223 $ 5,268 $ 4,361 $ 3,057 81AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2015, 2014 and 2013 (Dollars in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating 2015 2014 2013 $ 5,268 $ 4,361 $ 3,057 activities: Distributed (undistributed) earnings of subsidiaries Equity-based compensation expense (Increase) decrease in other assets Increase (decrease) in other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchase of equipment Sale of equipment Net cash provided by investing activities Cash flows from financing activities: Cash paid to repurchase common stock Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year 2,287 271 (206) 36 7,656 — — — (7,843) (7,843) (187) 378 (453) 166 (44) 80 4,110 — — — (4,148) (4,148) (38) 416 Cash and cash equivalents at end of year $ 191 $ 378 $ 2,623 131 1,004 (60) 6,755 — — — (7,000) (7,000) (245) 661 416 82Selected Quarterly Information (Unaudited) (In thousands, except per share and price range of common stock) 2015 Interest income Net interest income Provision for loan and lease losses Noninterest income Noninterest expense Income before taxes Net income Basic earnings per share Diluted earnings per share Cash dividends per share Price range, common stock 2014 Interest income Net interest income Provision for loan and lease losses Noninterest income Noninterest expense Income before taxes Net income Basic earnings per share Diluted earnings per share Cash dividends per share Price range, common stock March 31, June 30, September 30, December 31, $ $ $ 4,902 4,654 — 585 3,813 1,426 956 $ 5,283 5,039 — 507 3,415 2,131 1,386 5,458 5,218 — 490 3,432 2,276 1,469 5,325 5,096 — 433 3,420 2,109 1,457 $ .12 .12 — $ 9.23-9.98 $ .18 .18 — $ 9.10-9.95 $ .20 .20 — $ 9.15-10.35 $ .20 .20 — $ 9.40-11.19 $ $ $ 4,996 4,692 — 502 3,653 1,541 1,006 5,067 4,776 — 508 3,699 1,585 1,035 $ 4,966 4,679 (200) 520 3,662 1,737 1,124 4,936 4,650 (341) 647 3,848 1,790 1,196 $ .12 .12 — $ 8.92-10.29 $ .13 .13 — $ 8.21-9.75 $ .14 .14 — $ 8.42-9.63 $ .15 .15 — $ 9.05-9.99 83  Giving Business More Reach AmericanRiverBank.com 

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