American River Bankshares Annual Report 2018

Plain-text annual report

2018 Annual Report Giving Business More Reach TABLE OF CONTENTS Letter from the Chairman and CEO Locations and Lending Area 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, 2018 and 2017 Consolidated Statements of Income for the Years Ended December 31, 2018, 2017 and 2016 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016 Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016 Notes to Consolidated Financial Statements Selected Quarterly Information 1 2 3 4 5 27 28 30 31 32 33 34 36 86 ANNUAL REPORT COPIES. American River Bankshares will provide its security holders and interested parties, without charge, a copy of its 2018 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. 2018 YEAR IN REVIEW Dear Valued Shareholder, In our letter to you last year, we announced the change in our executive leadership and the new plan to drive growth. We are happy to report that in 2018 we added new relationships that resulted in an increase in both deposits and loans outstanding. We made progress toward our three primary objectives which were to assess the Company needs, identify and increase staffing levels where needed, and be more visible in the markets we serve. With 2019 underway, we are continuing to invest in the operational and technological opportunities within our industry as well as the development of the American River Bankshares team. SHAREHOLDER VALUE. The Company continued the Stock Repurchase Program which resulted in the Company repurchasing 306,618 shares in 2018 and the quarterly cash dividend program, paying out $0.20 per share for the year. EARNINGS PER SHARE DRIVER. For the year ended December 31, 2018, the Company experienced an increase in earnings per share by 66% from $0.50 per share in 2017 to $0.83 per share in 2018. Highlights include an increase in net interest income, which increased by $1.3 million year over year and strong credit quality. At December 31, 2018, we had just $27,000 in nonaccrual loans and no loans past due 30 days or longer. This strong credit quality position allowed us to reduce the required provisions for loan losses from $450,000 in 2017 to $175,000 in 2018. We also benefitted from the reduced Federal tax rate that went into effect on January 1, 2018. Our income tax expense decreased from $3,252,000 in 2017 to $1,574,000 in 2018. These factors contributed to a 53.2% increase in net income for 2018. BALANCE SHEET GROWTH. In 2018, deposits grew by $34.6 million and net loans increased $9.8 million. This increase in loans is strongly associated with our decisions to augment our lending expertise with new talented executives and relationship managers and to realign our lending support staff. The results from 2018 begin to demonstrate the desired efforts of our growth plan. The positive outcomes are attributed to the addition of highly skilled team members able to produce rapid results among a team replete with seasoned experts known for delivering high client satisfaction. We are grateful for your continued investment and ongoing confidence you place with us. Sincerely, Charles D. Fite Chairman of the Board David E. Ritchie, Jr. President & CEO 1OUR LOCATIONS ANNUAL MEETING The 2019 annual meeting of American River Bankshares will be held at 4:00 p.m. on May 16, 2019 at: Sacramento Marriott Rancho Cordova Folsom Room 11211 Point East Drive Rancho Cordova, CA 95742 2OUR 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 Former Executive Partner, Pisenti & Brinker LLP Stephen H. Waks, Esq. Corporate Secretary Attorney-at-Law; Owner of Stephen H. Waks, Inc. dba Waks Law Firm Nicolas C. Anderson Chief Executive Officer Capitol Digital/Califorensics Kimberly A. Box President & Chief Executive Officer, Gatekeeper Innovation, Inc. Jeffery Owensby Partner, Kennaday Leavitt Owensby PC David E. Ritchie, Jr. President & Chief Executive Officer, American River Bankshares Philip A. Wright President & Owner, Wright Investments Inc. dba Wright Realty Michael A. Ziegler President & Chief Executive Officer, PRIDE Industries David E. Ritchie, Jr. President & Chief Executive Officer Kevin B. Bender EVP & Chief Operating Officer Lisa R. Cisneros EVP & Retail Banking Manager Mitchell A. Derenzo EVP & Chief Financial Officer Dan C. McGregor EVP & Chief Credit Officer Dennis F. Raymond, Jr. EVP & Chief Lending Officer 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/ 3Selected 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 2018 2017 2016 2015 2014 $ $ $ $ $ $ $ $ 20,646 175 1,513 15,510 6,474 1,574 4,900 0.83 0.83 0.20 12.75 9.97 688,092 318,516 590,674 74,721 $ $ $ $ $ $ $ $ 19,353 450 1,596 14,049 6,450 3,252 3,198 0.50 0.50 0.20 12.54 9.88 655,622 308,713 556,080 76,921 $ $ $ $ $ $ $ $ 20,243 (1,344) 2,045 13,836 9,796 3,392 6,404 0.95 0.94 0.00 12.59 10.14 651,450 324,086 544,806 83,850 $ $ $ $ $ $ $ $ 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 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 Nonperforming 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 6.77% 8.74% 0.72% 69.35% 3.41% 53.92% 0.08% 0.01% 1.36% 10.62% 24% 8.94% 16.11% 17.29% 3.91% 4.88% 0.49% 65.84% 3.39% 55.52% 0.25% 0.60% 1.43% 12.53% 40% 9.45% 18.08% 19.34% 7.60% 9.43% 1.00% 60.81% 3.62% 59.49% (0.39%) 0.01% 1.47% 13.20% 0% 10.50% 19.02% 20.27% 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% (1) On January 25, 2017, the Company reinstated the payment of quarterly cash dividends. (2) (3) (4) Nonperforming loans and leases consist of loans and leases past due 90 days or more and still accruing and nonaccrual loans and leases. Fully taxable equivalent. Excludes the amortization of intangible assets. 4Management’s Discussion and Analysis of Financial Condition and Results of Operations. This discussion should be read in conjunction with “Item 1. Business-Cautionary Statements Regarding Forward-Looking Statements,” “Item 1A. Risk Factors,” and “Item 8. Financial Statements and Supplementary Data” in our 2018 Form 10-K filed with the Securities and Exchange Commission on February 21, 2019. Use of Non-GAAP Financial Measures This Annual Report contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP. These measures include tangible book value and taxable equivalent basis. Management has presented these non-GAAP financial measures in this Annual Report because it believes that they provide useful and comparative information to assess trends in the Company’s financial position reflected in the results and facilitate comparison of our performance with the performance of our peers. Net Interest Margin and Efficiency Ratio (non-GAAP financial measures) In accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation of net interest margin and the efficiency ratio. The Company believes the presentation of net interest margin on a taxable equivalent basis using a 21% effective tax rate for 2018 and 34% effective tax rate for 2017 and 2016 allows comparability of net interest margin with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and tax-exempt loans and investments. The efficiency ratio is a measure of a banking company’s overhead as a percentage of its revenue. The Company derives this ratio by dividing total noninterest expense by the sum of the taxable equivalent net interest income and the total noninterest income. Tangible Equity (non-GAAP financial measures) Tangible common stockholders’ equity (tangible book value) excludes goodwill and other intangible assets. The Company believes the exclusion of goodwill and other intangible assets to create “tangible equity” facilitates the comparison of results for ongoing business operations. The Company’s management internally assesses its performance based, in part, on these non-GAAP financial measures. The following table sets forth a reconciliation of total shareholders' equity to tangible shareholder's equity for the periods presented. Reconciliation to Tangible Common Shareholders’ Equity: Total shareholders’ equity Less: Other intangible assets (goodwill) Tangible common shareholders’ equity Critical Accounting Policies General 2018 December 31, 2017 (dollars in thousands) 2016 $ $ 74,721 (16,321) 58,400 $ $ 76,921 (16,321) 60,600 $ $ 83,850 (16,321) 67,529 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. 5Allowance for Loan and Lease Losses The allowance for loan and lease losses is an estimate of probable credit losses inherent in the Company’s credit portfolio that have been incurred as of the balance-sheet date. The allowance is based on two basic principles of accounting: (1) “Accounting for Contingencies,” which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) the “Receivables” topic, which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance for loan and lease losses is determined based upon estimates that can and do change when the actual risk, loss events, or changes in other factors, occur. The analysis of the allowance uses a historical loss view as an indicator of future losses and as a result could differ from the actual losses incurred in the future. If the allowance for loan and lease losses falls below that deemed adequate (by reason of loan and lease growth, actual losses, the effect of changes in risk factors, or some combination of these), the Company has a strategy for supplementing the allowance for loan and lease losses, over the short-term. For further information regarding our allowance for loan and lease losses, see “Allowance for Loan and Lease Losses Activity.” Stock-Based Compensation The Company recognizes compensation expense over the service period in an amount equal to the fair value of all share-based payments which consist of stock options and restricted stock awarded to directors and employees. The fair value of each stock option award is estimated on the date of grant and amortized over the service period using a Black-Scholes-Merton based option valuation model that requires the use of assumptions. Critical assumptions that affect the estimated fair value of each award include expected stock price volatility, dividend yields, option life and the risk-free interest rate. The fair value of each restricted award is estimated on the date of award and amortized over the service period. Overview The Company recorded net income in 2018 of $4,900,000, an increase of $1,702,000 (53.2%) from $3,198,000 in 2017. Diluted earnings per share were $0.83 for 2018 and $0.50 for 2017. For 2018, the Company realized a return on average equity of 6.77% and a return on average assets of 0.72%, compared to 3.91% and 0.49%, respectively, in 2017. Net income for 2017 decreased $3,206,000 (50.1%) from $6,404,000 in 2016. Diluted earnings per share for 2016 were $0.94. For 2016, the Company realized a return on average equity of 7.60% and return on average assets of 1.00%. 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 (expense) income 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) 2018 2017 2016 $ $ $ 22,449 (1,596) 20,853 (175) 1,513 (15,510) (1,574) (207) 4,900 681,630 0.72% $ $ $ 20,804 (1,061) 19,743 (450) 1,596 (14,049) (3,252) (390) 3,198 652,720 0.49% $ $ $ 21,618 (910) 20,708 1,344 2,045 (13,836) (3,392) (465) 6,404 638,276 1.00% 6During 2018, total assets of the Company increased $32,470,000 (5.0%) from $655,622,000 at December 31, 2017 to $688,092,000 at December 31, 2018. At December 31, 2018, net loans totaled $318,516,000, an increase of $9,803,000 (3.2%) from the ending balance of $308,713,000 at December 31, 2017. Deposits increased $34,594,000 or 6.2% from $556,080,000 at December 31, 2017 to $590,674,000 at December 31, 2018. Shareholders’ equity decreased $2,200,000 or 2.9% from $76,921,000 at December 31, 2017 to $74,721,000 at December 31, 2017. The Company ended 2018 with a leverage capital ratio of 8.9% and a total risk-based capital ratio of 17.3% compared to a leverage capital ratio of 9.5% and a total risk-based capital ratio of 19.3% at the end of 2017. 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 3.41% in 2018, 3.39% in 2017, and 3.62% in 2016. The fully taxable equivalent net interest income increased $1,110,000 (5.6%), from $19,743,000 in 2017 to $20,853,000 in 2018. The fully taxable equivalent net interest income decreased $965,000 (4.7%), from $20,708,000 in 2016 to $19,743,000 in 2017. The fully taxable equivalent interest income component increased $1,645,000 (7.9%) from $20,804,000 in 2017 to $22,449,000 in 2018. The increase in the fully taxable equivalent interest income for 2018 compared to the same period in 2017 is comprised of two components - rate (up $1,764,000) and volume (down $119,000). The primary driver in this rate increase was an increase in the yield on loans which saw an increase from 4.57% in 2017 to 4.72% in 2018 and an increase in the yield on investments, which saw an increase from 2.36% in 2017 to 2.66% in 2018. The increased yield in 2018 compared to 2017 was due to the overall higher interest rate environment. The yield on earning assets increased from 3.57% during 2017 to 3.67% during 2018. The increase in yield from the loans and investments was partially offset by an increase in the balances of Federal funds sold. Federal funds sold balances increased from zero in 2017 to an average balance of $18,688,000 in 2018. However, the yield on these lower earning Federal fund balances was 1.86%, thus partially reducing the overall yield on earning assets. The volume decrease of $119,000 was primarily from a decrease in loans ($515,000), partially offset by an increase in investment balances ($391,000). Average loans balances decreased $11,266,000, (or 3.5%), from $319,631,000 during 2017 to $308,365,000 during 2018 and the average investment balances increased $21,344,000, (or 8.2%), from $261,554,000 during 2017 to $282,898,000 in 2018. The fully taxable equivalent interest income component decreased $814,000 (3.8%) from $21,618,000 in 2016 to $20,804,000 in 2017. The decrease in the fully taxable equivalent interest income for 2017 compared to the same period in 2016 is comprised of two components - rate (down $1,337,000) and volume (up $523,000). The rate decrease primarily occurred in the loan and investment portfolios. While average loans increased by $12,894,000 (4.2%) from $306,737,000 during 2016 to $319,631,000 during 2017, due to the overall lower interest rate environment in 2017, the new loans added were at lower yields than the existing loans. The yield on loans decreased from 4.88% in 2016 to 4.57% in 2017 and contributed to a decrease of $961,000 in loan interest income. The investment portfolio also contributed to the decrease in interest income. The yield on the investments decreased from 2.51% in 2016 to 2.36% in 2017 and contributed to a decrease of $379,000 in interest income. This decrease in investment income due to rates can also be attributed to the lower overall rate environment as proceeds from paid down securities were invested at lower rates. The volume increase of $523,000 was primarily from the increase of $12,894,000 in average loans mentioned above contributing $600,000 in interest income and partially offset by the decrease in investments reducing interest income by $80,000. When compared to 2016, average investment securities decreased $2,622,000 (1.0%) from $264,176,000 in 2016 compared to $261,554,000 in 2017, as a portion of these funds helped fund the increase in loans. Interest expense was $535,000 (or 50.4%) higher in 2018 compared to 2017, increasing from $1,061,000 to $1,596,000. The $535,000 increase in interest expense during 2018 compared to 2017 was due to higher rates (up $531,000) and higher volume (up $4,000). The increase in interest expense can be attributed to an increase in rates paid on deposit and borrowing balances during a higher interest rate environment. Rates paid on interest bearing liabilities increased 11 basis points from 0.30% to 0.41% for 2017 compared to 2018. The largest increase due to rates occurred in the time deposits. Some of these time deposits are indexed to the three- or six-month treasury rates which have increased over the past twelve months. Interest expense on time deposits increased by $367,000, (or 52.9%), from $694,000 in 2017 to $1,061,000 in 2018 while the average time deposit balances decreased by $1,634,000, (or 2.0%), from $81,056,000 in 2017 to $79,422,000 in 2018. 7Interest expense was $151,000 (16.6%) higher in 2017 compared to 2016, increasing from $910,000 to $1,061,000. The primary increase in interest expense relates to higher rates (up $177,000). Rates paid on interest bearing liabilities increased four basis points from 0.26% to 0.30% in 2017 compared to 2016. The average balances on interest bearing liabilities were $358,756,000 (or $7,661,000 and 2.2% higher) in 2017 compared to $351,095,000 in 2016. Despite the slightly higher average balances, the Company experienced a slight decrease in interest expense of $26,000 due to volume as a result of a decrease in the higher cost time deposits and other borrowings. Time deposits decreased from $83,144,000 in 2016 to $81,056,000 in 2017 and had a $14,000 impact on the decrease in interest expense due to volume and other borrowings decreased from $17,201,000 in 2016 to $15,522,000 in 2017 and had an $18,000 impact on the decrease in interest expense due to volume. 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. Table Two: Analysis of Net Interest Margin on Earning Assets Year Ended December 31, 2018 Avg Balance Interest Avg Yield Avg Balance 2017 Interest Avg Yield Avg Balance 2016 Interest Avg Yield (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 $ 294,114 14,251 264,247 $ 13,924 632 6,901 4.73% $ 305,345 14,286 4.43% 238,710 2.61% $ 13,947 667 5,287 4.57% $ 289,699 4.67% 17,038 240,149 2.21% $ 14,008 967 5,755 18,651 — 18,688 1,745 611,696 34,535 39,822 (4,423) 611 — 348 33 22,449 3.28% — 1.86% 1.89% 3.67% 22,789 55 — 1,258 582,443 35,876 39,201 (4,800) 874 16 — 13 20,804 3.84% 29.09% — 1.03% 3.57% 867 14 — 7 21,618 23,952 75 — 996 571,909 33,806 37,753 (5,192) 4.84% 5.68% 2.40% 3.62% 18.67% — 0.70% 3.78% $ 681,630 $ 652,720 $ 638,276 272 26 1,061 237 1,596 $ 219,742 71,742 79,422 15,533 386,439 215,721 7,062 609,222 72,408 $ 681,630 0.12% $ 197,298 64,880 0.04% 81,056 1.34% 1.53% 15,522 358,756 0.41% 204,565 7,583 570,904 81,816 $ 652,720 139 22 694 206 1,061 0.07% $ 190,237 60,543 0.03% 83,114 0.86% 1.33% 17,201 351,095 0.30% 196,434 6,494 554,023 84,253 $ 638,276 146 19 565 180 910 0.08% 0.03% 0.68% 1.05% 0.26% Net interest income & margin (3) $ 20,853 3.41% $ 19,743 3.39% $ 20,708 3.62% (1) (2) Loan and lease interest includes loan and lease fees of $533,000, $238,000 and $253,000 in 2018, 2017 and 2016, respectively. Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes. The effective federal statutory tax rate was 21% in 2018 and 34% in 2017 and 2016. (3) Net interest margin is computed by dividing net interest income by total average earning assets. 8Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses Year ended December 31, 2018 over 2017 (dollars in thousands) Increase (decrease) in interest income and expense due to change in: Interest-earning assets: Volume Rate (4) Net Change Taxable net loans and leases (1)(2) Tax-exempt net loans and leases (3) Taxable investment securities Tax-exempt investment securities (3) Corporate stock Federal funds sold 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, 2017 over 2016 (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 Interest bearing deposits in other banks Total Interest-bearing liabilities: Demand deposits Savings deposits Time deposits Other borrowings Total Interest differential $ $ $ $ (513) (2) 566 (159) (16) — 5 (119) 16 2 (14) — 4 (123) Volume 757 (156) (34) (42) (4) — 2 523 5 1 (14) (18) (26) 549 $ $ $ $ 490 (33) 1,048 (104) — 348 15 1,764 117 2 381 31 531 1,233 Rate (4) (818) (144) (434) 49 6 — 4 (1,337) (12) 2 143 44 177 (1,514) $ $ $ $ (23) (35) 1,614 (263) (16) 348 20 1,645 133 4 367 31 535 1,110 Net Change (61) (300) (468) 7 2 — 6 (814) (7) 3 129 26 151 (965) (1) (2) (3) (4) 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. Loan and lease fees of $533,000, $238,000 and $253,000 for the years ended December 31, 2018, 2017 and 2016, respectively, have been included in the interest income computation. Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes. The effective federal statutory tax rate was 21% in 2018 and 34% in 2017 and 2016. The rate/volume variance has been included in the rate variance. 9Provision for Loan and Lease Losses The Company experienced net loan and lease losses of $261,000 or 0.08% of average loans and leases during 2018, compared to net loan and lease losses of $794,000 or 0.25% of average loans and leases during 2017. To support the net losses in 2018 and 2017, the Company recorded provisions for loan and lease losses of $175,000 and $450,000, respectively during 2017 and 2018. The Company experienced net loan and lease recoveries of $1,191,000 or 0.39% of average loans and leases during 2016 and as a result was able to record a negative provision for loan and lease losses of $1,344,000. The level of nonperforming loans and leases, which began to increase during the economic cycle of 2007 through 2010, reached a high of $22,571,000 at December 31, 2010, but has decreased to $27,000 at December 31, 2018. For additional information see the “Nonaccrual, Past Due and Restructured Loans and Leases” and the “Allowance for Loan and Lease Losses Activity.” Noninterest Income Table Four below provides a summary of the components of noninterest income for the periods indicated (dollars in thousands): Table Four: Components of Noninterest Income Service charges on deposit accounts Income from OREO properties Merchant fee income Earnings on bank-owned life insurance Gain on sale and impairment of securities Other Year Ended December 31, 2017 2016 2018 $ 476 — 422 307 31 277 $ 1,513 $ 465 — 411 317 161 242 $ 1,596 $ 502 279 377 322 314 251 $ 2,045 Noninterest income decreased $83,000 (5.2%) to $1,513,000 in 2018 from $1,596,000 in 2017. The decrease from 2017 to 2018 was primarily related to lower gains on sale of securities. Gain on sales of securities decreased $130,000 (81.3%) from 2017 to 2018. Noninterest income decreased $449,000 (22.0%) to $1,596,000 in 2017 from $2,045,000 in 2016. The decrease from 2016 to 2017 was primarily related to lower gains on sale of securities and lower earnings on OREO properties. Gain on sales of securities decreased $153,000 (48.7%) from 2016 to 2017 and income from OREO properties decreased $279,000 (100.0%) during that same time period. The decrease in OREO income resulted from the sale of the Bank’s only remaining income producing OREO property in the first quarter of 2016. Noninterest Expense Salaries and Benefits Salaries and benefits were $10,203,000 (up $1,283,000 or 14.4%) for 2018, compared to $8,920,000 in 2017. The increase in salaries and benefits expense resulted from filling some vacant positions, hiring additional relationship managers, creating a position for a Chief Lending Officer in December 2017, and normal cost of living increases and promotions. Average full-time equivalent employees was 97 during 2018 compared to 93 during 2017. Employer benefit expenses, such as insurance, 401(k) matching and incentives and payroll taxes increased commensurate with the increased staffing levels. Salaries and benefits were $8,920,000 (up $485,000 or 5.7%) for 2017, compared to $8,435,000 in 2016. The increase in salary and benefits was due in part to expenses related to a change in the Company’s Chief Executive Officer during the fourth quarter of 2017. This leadership change was announced on October 27, 2017, on a Form 8-K filed with the Securities and Exchange Commission. The leadership change resulted in salary and benefit expenses of $597,000 in 2017. The expenses related to the leadership change were partially offset by lower salary expenses. Salary expenses decreased $206,000 (3.5%) from $5,853,000 in 2016 to $5,647,000 in 2017. The decrease in salaries resulted from a lower number of average full time equivalent employees, which decreased from 98 in 2016 to 93 in 2017. 10Other Real Estate Owned The total other real estate owned (“OREO”) expense in 2018 was $20,000 (down $24,000 or 54.5%) compared to $44,000 in 2017. The primary reason for the decrease in OREO related expenses was due to the sale of one of the properties in the third quarter of 2017. Operating expenses on the properties held in 2017 totaled $52,000 compared to $16,000 in 2018. In 2017, the gains on sale, which offset the overall OREO expense, were $8,000 compared to zero in 2018. There were no write-downs on any of the properties held during 2017 compared to write-downs of $4,000 in 2018. At December 31, 2018, the Company held one property with a book value of $957,000. The total OREO expense in 2017 was $44,000 (down $202,000 or 82.1%) compared to $246,000 in 2016. The primary reason for the decrease in OREO related expenses was due to the sale of a number of properties, including office buildings which have high operating expenses, and lower property write-downs. Operating expenses on the properties held in 2017 totaled $52,000 compared to $128,000 in 2016. In 2017, the gains on sale, which offset the overall OREO expense, were lower than in 2016. Gains from properties sold in 2017 totaled $8,000 compared to a $258,000 in 2016. There were no write- downs on any of the properties held during 2017 compared to write-downs of $376,000 in 2016. At December 31, 2017, the Company held one property with a book value of $961,000. Occupancy, Furniture and Equipment Occupancy expense decreased $3,000 (0.3%) during 2018 to $1,050,000, compared to $1,053,000 in 2017. Furniture and equipment expense decreased $33,000 (5.6%) during 2018 to $553,000 compared to $586,000 in 2017. The decrease in occupancy and furniture and equipment expense decrease resulted from lower depreciation expense on premises and equipment leased or owned by the Company. Occupancy expense decreased $122,000 (10.4%) during 2017 to $1,053,000, compared to $1,175,000 in 2016. Furniture and equipment expense decreased $66,000 (10.1%) during 2017 to $586,000 compared to $652,000 in 2016. The decrease in occupancy resulted from the Company renewing leases at more favorable terms or relocating branch offices to smaller locations. The furniture and equipment expense decrease resulted from lower depreciation expense on equipment owned by the Company. Regulatory Assessments Regulatory assessments include fees paid to the California Department of Business Oversight (the “DBO”) and the Federal Deposit Insurance Corporation (the “FDIC”). FDIC assessments decreased $4,000 (1.9%) during 2018 to $202,000, compared to $206,000 in 2017. The assessments paid to the DBO in 2018 were $77,000, compared to an expense of $74,000 in 2017. FDIC assessments decreased $50,000 (19.5%) during 2017 to $206,000, compared to $256,000 in 2016. The majority of this decrease resulted from a lower assessment rate as a result of the Deposit Insurance Fund achieving the FDIC’s target level of 1.15% during 2016, which resulted in lower assessments for community banks such as American River Bank. The assessments paid to the DBO in 2017 were $74,000, compared to an expense of $72,000 in 2016. 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 $ 2016 Year Ended December 31, 2017 $ 1,140 319 427 360 135 175 610 $ 3,166 2018 $ 1,158 315 514 409 140 480 388 $ 3,404 995 366 417 357 141 129 595 $ 3,000 11Other expenses were $3,404,000 (up $238,000 or 7.5%) for 2018, compared to $3,166,000 for 2017. The increase in other expenses occurred primarily in the advertising and promotion expense category. Advertising and promotion expense increased $305,000 (174.3%), from $175,000 in 2017 to $480,000 in 2018. Much of this increase is related to the expenses to sponsor community events and other promotional activities as the Company is focusing more effort in our markets to strengthen our brand. The overhead efficiency ratio on a taxable equivalent basis for 2018 was 69.4% compared to 65.8% in 2017. Other expenses were $3,166,000 (up $166,000 or 5.5%) for 2017, compared to $3,000,000 for 2016. The increase in other expenses occurred primarily in the professional expense category. Professional expenses, which primarily include legal, accounting and other professional services, increased $145,000 (14.6%), from $995,000 in 2016 to $1,140,000 in 2017. Much of this increase is related to the leadership change that occurred during the fourth quarter of 2017 resulting in professional expenses of $78,000 and fees paid in 2017 related to strategic planning consulting of $38,000. The overhead efficiency ratio on a taxable equivalent basis for 2017 was 65.8% compared to 60.8% in 2016. Provision for Income Taxes The effective tax rate on income was 24.3%, 50.4%, and 34.6% in 2018, 2017 and 2016, respectively. The effective tax rate differs from the federal statutory tax rate due to state tax expense (net of federal tax effect) of $523,000, $420,000, and $697,000 in these years. Tax-exempt income of $1,315,000, $1,471,000, and $1,681,000 from investment securities, loans, and bank-owned life insurance in these years helped to reduce the effective tax rate. The lower effective tax rate in 2018 compared to prior years results from the new lower corporate federal income tax rate of 21% effective January 1, 2018, which was a reduction from the Company’s 2017 and 2016 rate of 34%. The higher effective tax rate in 2017 compared to 2016 resulted from the Company recording an income tax expense adjustment of $1,220,000 related to “H.R.1” commonly referred to as the Tax Cuts and Jobs Act that was signed into law on December 22, 2017. The adjustment relates to revaluing the Company’s net deferred tax assets using the new lower corporate federal income tax rate of 21%. The Company’s taxable income in 2018 was $6,474,000 up slightly from $6,450,000 in 2017, however, the combined federal and State income tax expense decreased $1,678,000 (51.6%) from $3,252,000 in 2017 to $1,574,000 in 2018. Excluding the $1,220,000 adjustment related to H.R.1, the tax expense would have been $2,032,000 in 2017. Comparing the actual expense of $1,574,000 in 2018 to the adjusted expense of $2,032,000 in 2017 points out the benefit of the lower 21% federal tax rate. Balance Sheet Analysis The Company’s total assets were $688,092,000 at December 31, 2018 compared to $655,622,000 at December 31, 2017, representing an increase of $32,470,000 (5.0%). The average balances of total assets during 2018 were $681,630,000, up $28,910,000 or 4.4% from the 2017 average balances of total assets of $652,720,000. 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. 12Table 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 U. S Treasury 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 2018 2017 2016 $ $ $ $ 269,049 14,400 6,508 4,976 — 294,933 292 292 $ $ $ $ 232,869 22,715 6,626 — 112 262,322 378 378 $ $ $ $ 229,785 22,612 1,519 — 104 254,020 483 483 Net unrealized losses on available-for-sale investment securities totaling $2,664,000 were recorded, net of $788,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2018 and net unrealized gains on available-for-sale investment securities totaling $456,000 were recorded, net of $135,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2017. Management periodically evaluates each investment security in a loss position for other than temporary impairment relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Management has the ability and intent to hold securities with established maturity dates until recovery of fair value, which may be until maturity, and believes it will be able to collect all amounts due according to the contractual terms for all of the underlying investment securities; therefore, management does not consider these investments to be other-than-temporarily impaired. See Table Fifteen, “Securities Maturities and Weighted Average Yields,” for a breakdown of the investment securities by maturity and the corresponding weighted average yields. Loans and Leases The Company concentrates its lending activities in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) lease financing receivable; (7) agriculture; and (8) consumer loans. At December 31, 2018, these categories accounted for approximately 9%, 62%, 18%, 2%, 5%, 0%, 1% and 3%, respectively, of the Company’s loan portfolio. This mix was relatively unchanged compared to approximately 8%, 59%, 25%, 2%, 5%, 0%, 1% and 0%, respectively, at December 31, 2016. Also, as noted in Table 7 below, the Company’s primary focus is commercial and real estate loans, however, in 2018 the Company was selected by a lender that specializes in classic and collector cars. The company began funding these loans during the third quarter of 2018 and recorded $10,791,000 during 2018 and account for the increase in consumer loans. Continuing focus in the Company’s market area, new borrowers developed through the Company’s marketing efforts, an upgraded lending team in 2018, and credit extensions expanded to existing borrowers resulted in the Company originating approximately $104 million in loans compared to $30 million in 2017. This production was offset by normal pay downs and payoffs, and resulted in an overall net increase in net loans and leases of $9.8 million (3.2%) from December 31, 2017. The market in which the Company operates has shown increased demand for credit products as the relatively low rate environment and expectations for economic expansion have increased refinancing as well as new loan activity. Table Seven below summarizes the composition of the loan and lease portfolio for the past five years as of December 31. 13Table 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 and costs, net Allowance for loan and lease losses Total net loans and leases 2018 2017 $ 29,650 $ 25,377 December 31, 2016 $ 35,374 2015 2014 $ 36,195 $ 25,186 199,894 56,139 5,685 16,338 32 4,419 10,714 322,871 37 (4,392) 318,516 185,452 78,025 5,863 15,813 205 1,713 945 313,393 (202) (4,478) 308,713 $ $ 191,129 73,373 9,180 15,718 404 2,302 1,650 329,130 (222) (4,822) 324,086 $ 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 $ A significant portion of the Company’s loans and leases are direct loans and leases made to individuals and local businesses. The Company relies substantially on networking, local promotional activity, and personal contacts by American River Bank officers, directors and employees to compete with other financial institutions. The Company makes loans and leases to borrowers whose applications include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment. Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products. Consumer loans include a range of traditional consumer loan products such as personal lines of credit and homeowner equity lines of credit and loans to finance purchases of autos (including classic and collectors autos), boats, recreational vehicles, mobile homes and various other consumer items. Construction loans are generally comprised of commitments to customers within the Company’s service area for construction of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans consist primarily of loans secured by first trust deeds on commercial, multi-family, and residential properties typically with maturities from 3 to 10 years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily of vineyard loans. In general, except in the case of loans under SBA programs or Farm Services Agency guarantees, the Company does not make long-term mortgage loans. Average loans and leases in 2018 were $308,365,000, which represents a decrease of $11,266,000 (3.5%) compared to the average in 2017. Average loans and leases in 2017 were $319,631,000, which represents an increase of $12,894,000 (4.2%) compared to the average in 2016. 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 serviced markets in Santa Clara, Contra Costa, and Alameda Counties through a loan production office. In the fourth quarter of 2016, the Company discontinued operating the loan production office, however, the Company continues to service loans originated through these offices. The economies of Santa Clara, Contra Costa and Alameda Counties are diversified with professional services, manufacturing, technology related companies, real estate investment and construction. 14The Company has significant extensions of credit and commitments to extend credit that are secured by real estate. The ultimate repayment of these loans is generally dependent on personal or business cash flows or the sale or refinancing of the real estate. The Company monitors the effects of current and expected market conditions and other factors on the collectability of real estate loans. The more significant factors management considers involve the following: lease rates and terms, vacancy rates, absorption and sale rates and capitalization rates; real estate values, supply and demand factors, and rates of return; operating expenses; inflation and deflation; and sufficiency of repayment sources independent of the real estate including, in some instances, personal guarantees. In extending credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flows or from proceeds from the sale of selected assets of the borrowers. The Company’s requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management’s evaluation of the creditworthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. The Company secures its collateral by perfecting its security interest in business assets, obtaining deeds of trust, or outright possession among other means. In management’s judgment, a concentration exists in real estate loans which represented approximately 87% of the Company’s loan and lease portfolio at December 31, 2018 and 91% at December 31, 2017. Management believes that the residential land portion of the Company’s loan portfolio carries a reasonable level of credit risk. As of December 31, 2018, outstanding unimproved residential land commitments were $4,889,000 (or just 1.5% of the total real estate loans). Of the $4,889,000, $2,097,000 (43%) was represented by one amortizing loan, which was considered well-secured, with a favorable loan-to-value ratio. Management currently believes that it maintains its allowance for loan and lease losses at levels adequate to reflect the loss risk inherent in its total loan portfolio. A decline in the economy in general, or decline in real estate values in the Company’s market areas, in particular, could have an adverse impact on the collectability of real estate loans and require an increase in the provision for loan and lease losses. This could adversely affect the Company’s future prospects, results of operations, profitability and stock price. Management believes that its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no assurance that losses will not occur. The Company’s loan practices and underwriting standards include, but are not limited to, the following: (1) maintaining a thorough understanding of the Company’s market area and originating a significant majority of its loans within that area, (2) maintaining a thorough understanding of borrowers’ knowledge, capacity, and market position in their field of expertise, (3) basing real estate loan approvals not only on market demand for the project, but also on the borrowers’ capacity to support the project financially in the event it does not perform to expectations (whether sale or income performance), and (4) maintaining conforming and prudent loan-to-value and loan-to-cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Company’s lending officers or contracted third-party professionals. Nonaccrual, Past Due and Restructured Loans and Leases Management places loans and leases on nonaccrual status when they become 90 days past due or if a loss is expected, unless the loan or lease is well secured and in the process of collection. Loans and leases are partially or fully charged off when, in the opinion of management, collection of such amount appears unlikely. The recorded investments in nonperforming loans and leases, which includes nonaccrual loans and leases and loans and leases that were 90 days or more past due and on accrual, totaled $27,000 and $1,892,000 at December 31, 2018 and 2017, respectively. The $27,000 in nonperforming loans and leases at December 31, 2018 were comprised of one commercial loan relationship with two loans totaling $27,000, both of which were current to terms. At December 31, 2017, the $1,892,000 in nonperforming loans consisted of one commercial loan totaling $1,597,000, one commercial real estate loan totaling $289,000, and one consumer loan totaling $6,000. At December 31, 2018, there were no loans that were 30 days or more past due. 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. 15Table Eight: Nonperforming 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 nonperforming loans and leases 2018 2017 December 31, 2016 2015 2014 $ $ — — — — 27 — — — 27 $ $ — — — — 1,597 289 — 6 1,892 $ $ — — — — — — — 19 19 $ $ — — — — 30 1,493 — 120 1,643 $ $ — — — — 666 845 — 142 1,653 Restructured loans considered performing and accruing at December 31, 2018, 2017, 2016, 2015 and 2014, were $6,626,000, $6,799,000, $7,975,000, $8,062,000, and $13,098,000, respectively. Interest income recognized from payments received on nonaccrual loans and leases was approximately $43,000 in 2018, $2,000 in 2017 and $115,000 in 2016. 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, 2018. Management is not aware of any potential problem loans, which were accruing and current at December 31, 2018, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms and that would result in a significant loss to the Company apart from those loans identified in the Bank’s impairment analysis. Management monitors the Company’s performance metrics including the ratios related to nonperforming loans and leases. From 2008 to 2010, the Company experienced an increase in nonperforming loans and leases. In 2011, the focused efforts of the previous years resulted in a decrease in these levels. From 2012 to 2018, the level of nonperforming loans and leases continued to decrease to a level below the amount reported at December 31, 2008. However, the variations in the amount of nonperforming loans and leases does not directly impact the level of the Company’s allowance for loan and lease losses as management monitors each of the loans and leases for loss potential or probability of loss on an individual basis using accounting principles generally accepted in the United States of America. Impaired Loans and Leases The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the original contractual terms of the loan or lease agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan or lease discounted at the loan’s or lease’s original effective interest rate, (ii) the observable market price of the impaired loan or lease, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans or leases that are collectively evaluated for credit risk. In assessing whether a loan or lease is impaired, the Company typically reviews loans or leases graded substandard or lower with outstanding principal balances in excess of $100,000, as well as loans considered troubled debt restructures with outstanding principal balances in excess of $25,000. The Company identifies troubled debt restructures by reviewing each renewal, modification, or extension of a loan with a screening document. This document is designed to identify any characteristics of such a loan that would qualify it as a troubled debt restructure. If the characteristics are not present that would qualify a loan as a troubled debt restructure, it is deemed to be a modification. The recorded investment in loans and leases that were considered to be impaired totaled $8,702,000 at December 31, 2018 and had a related valuation allowance of $185,000. The average recorded investment in impaired loans and leases during 2018 was approximately $8,847,000. As of December 31, 2017, the recorded investment in loans and leases that were considered to be impaired totaled $13,757,000 and had a related valuation allowance of $355,000. The average recorded investment in impaired loans and leases during 2017 was approximately $14,046,000. As of December 31, 2016, the recorded investment in loans and leases that were considered to be impaired totaled $17,297,000 and had a related valuation allowance of $421,000. The average recorded investment in impaired loans and leases during 2016 was approximately $17,503,000. 16Allowance for Loan and Lease Losses Activity The Company maintains an allowance for loan and lease losses (“ALLL”) to cover probable losses inherent in the loan and lease portfolio, which is based upon management’s estimate of those losses. The ALLL is established through a provision for loan and lease losses and is increased by provisions charged against current earnings and recoveries and reduced by charge-offs. Actual losses for loans and leases can vary significantly from this estimate. The methodology and assumptions used to calculate the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change. The adequacy of the ALLL and the level of the related provision for loan and lease losses is determined based on management’s judgment after consideration of numerous factors including, but not limited to: (i) local and regional economic conditions, (ii) the financial condition of the borrowers, (iii) loan impairment and the related level of expected charge-offs, (iv) evaluation of industry trends, (v) industry and other concentrations, (vi) loans and leases which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management, (vii) continuing evaluations of the performing loan portfolio, (viii) ongoing review and evaluation of problem loans identified as having loss potential, (ix) quarterly review by the Board of Directors, and (x) assessments by banking regulators and other third parties. Management and the Board of Directors evaluate the ALLL and determine its appropriate level considering objective and subjective measures, such as knowledge of the borrower’s business, valuation of collateral, the determination of impaired loans or leases and exposure to potential losses. The ALLL totaled $4,392,000 or 1.36% of total loans and leases at December 31, 2018, $4,478,000 or 1.43% of total loans and leases at December 31, 2017, and $4,822,000 or 1.47% at December 31, 2016. The decrease in the allowance for loan and lease losses from $4,478,000 at December 31, 2017 to $4,392,000 at December 31, 2018, was mainly due to a decrease in historical losses impacting the loss factor used in calculating the reserve on loans collectively valued for impairment and a reduction in the valuation allowances held for impaired loans. 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 was 162.7 times the nonperforming loans and leases at December 31, 2018 compared to 2.4 times the nonperforming loans and leases at December 31, 2017. The allowance for loans and leases as a percentage of impaired loans and leases was 50.5% at December 31, 2018 and 32.6% at December 31, 2017. Of the total nonperforming and impaired loans and leases outstanding as of December 31, 2018, there were $822,000 in loans or leases that had been reduced by partial charge-offs of $400,000. At December 31, 2018, there was $5,968,000 in impaired loans or leases that did not carry a specific reserve. Of this amount, $493,000 were loans or leases that had previous partial charge-offs and $5,475,000 were loans or leases that were analyzed and determined not to require a specific reserve or charge-off because the collateral value or discounted cash flow value exceeded the loan or lease balance. Prior to 2013, the Company had been operating in a market that had experienced significant decreases in real estate values of commercial, residential, land, and construction properties. As such, the Company continues to focus on monitoring collateral values for those loans considered collateral dependent. The collateral evaluations performed by the Company are updated as necessary, which is generally once every twelve months, and are reviewed by a qualified credit officer. The Company’s policy with regard to loan or lease charge-offs continues to be that a loan or lease is charged off against the ALLL when management believes that the collectability of the principal is unlikely. As previously discussed in the “Impaired Loans and Leases” section, certain loans are evaluated for impairment. Generally, if a loan is collateralized by real estate, and considered collateral dependent, the impaired portion will be charged off to the allowance for loan and lease losses unless it is in the process of collection, in which case a specific reserve may be warranted. If the collateral is other than real estate and considered impaired, a specific reserve may be warranted. 17It is the policy of management to maintain the allowance for loan and lease losses at a level believed to be adequate for known and inherent risks in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Formula allocations are calculated by applying historical loss factors to outstanding loans with similar characteristics. Historical loss factors are based upon the Company’s loss experience. These historical loss factors are adjusted for changes in the business cycle and for significant factors that, in management’s judgment, affect the collectability of the loan portfolio as of the evaluation date. The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions. Based on information currently available, management believes that the allowance for loan and lease losses is prudent and adequate. However, no prediction of the ultimate level of loans and leases charged off in future periods can be made with any certainty. Table Nine below summarizes, for the periods indicated, the activity in the ALLL. Table Nine: Allowance for Loan and Lease Losses (dollars in thousands) Average loans and leases outstanding 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 charged off (recovered) Additions (reductions) to allowance charged (credited) to operating expenses Allowance for loan and lease losses at end of period Ratio of net charge-offs (recoveries) 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 nonperforming 2018 308,365 4,478 $ $ $ $ 2017 319,631 Year Ended December 31, 2016 306,737 $ 4,822 $ 4,975 2015 279,728 5,301 $ $ $ $ 213 — 69 — 282 12 8 — 1 21 261 1,073 — — — 1,073 6 228 4 41 279 794 175 4,392 $ 450 4,478 $ — 93 34 — 127 660 534 124 — 1,318 (1,191) (1,344) 4,822 609 — 6 1 616 123 165 2 — 290 326 — 4,975 $ $ 2014 253,898 5,346 — — 76 — 76 256 163 150 3 572 (496) (541) 5,301 0.08% 0.06% 0.25% 0.14% (0.39%) (0.44%) 0.12% — (0.20%) (0.21%) 1.36% 1.43% 1.47% 1.69% 2.01% loans and leases, at end of period 16,266.67% 236.68% 25,378.95% 302.80% 320.69% 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, 2018. 18Table Ten: Allowance for Loan and Lease Losses by Loan Category December 31, 2018 (dollars in thousands) December 31, 2017 December 31, 2016 Commercial Real estate Agriculture Consumer Lease financing receivable Unallocated Total Commercial Real estate Agriculture Consumer Lease financing receivable Unallocated Total $ $ $ $ Percent of loans in each category to total loans Amount Percent of loans in each category to total loans Amount Percent of loans in each category to total loans Amount 668 3,165 88 192 — 279 4,392 9% $ 87% 1% 3% — — 100% $ 447 3,695 31 14 — 291 4,478 8% $ 91% 1% — — — 100% $ 855 3,600 64 24 1 278 4,822 12% 86% 1% 1% — — 100% December 31, 2015 December 31, 2014 Percent of loans in each category to total loans Amount Percent of loans in each category to total loans 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% 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, 2018 and 2017 consisted of one property acquired through foreclosure. During 2018, the Company received and updated appraisal on the one property and reduced the balance by $4,000 through a charge to expense. During 2018, the Company did not acquire any OREO properties. There was $957,000 in OREO at December 31, 2018 with no valuation allowance and $961,000 in OREO at December 31, 2017 with no valuation allowance. Deposits At December 31, 2018, total deposits were $590,674,000 representing an increase of $34,594,000 (6.2%) from the December 31, 2017 balance of $556,080,000. The Company’s deposit growth plan for 2018 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 2018 in interest-bearing checking ($4,780,000 or 7.4%), money market ($15,799,000 or 12.2%), savings ($6,392,000 or 9.7%), and time deposit ($8,406,000 or 10.5%) and decreases in noninterest-bearing demand ($783,000 or 0.4%) accounts. 19Other Borrowed Funds Other borrowings outstanding as of December 31, 2018 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 2018 2017 2016 Amount Rate Amount Rate Amount Rate $ $ 5,000 1.32% 10,500 2.02% $ $ 3,500 1.39% 12,000 1.41% $ $ 3,500 12,000 1.01% 1.24% The maximum amount of short-term borrowings at any month-end during 2018, 2017 and 2016, was $6,500,000, $3,500,000, and $25,500,000, respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of rates and maturities on FHLB advances (dollars in thousands): Amount Maturity Average rates Short-term 5,000 $ 2019 1.32% Long-term $ 10,500 2020 to 2023 2.02% 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, 2018 or 2017. There were no amounts drawn upon any letter of credit in 2018 or 2017 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 25, 2017, the Company approved and authorized a stock repurchase program for 2017 (the “2017 Program”). The 2017 Program authorized the repurchase during 2017 of up to 5% of the outstanding shares of the Company’s common stock. In addition, on October 18, 2017, the Company approved and authorized an additional amount of 5% to be purchased under the 2017 Program. During 2017, the Company repurchased 574,748 shares of its common stock at an average price of $14.99 per share. On January 24, 2018, the Company approved and authorized a stock repurchase program for 2018 (the “2018 Program”). The 2018 Program authorized the repurchase during 2018 of up to 5% of the outstanding shares of the Company’s common stock. During 2018, the Company repurchased 308,618 shares of its common stock at an average price of $15.52 per share. The Company did not repurchase any shares in 2011 or 2010 and repurchased 575,389 shares in 2012, 849,404 shares in 2013, 424,462 in 2014, 790,989 shares in 2015, and 716,897 shares in 2016. 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, 2018 and 2017, the most recent regulatory notification categorized American River Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s categories. 20At December 31, 2018, shareholders’ equity was $74,721,000, representing a decrease of $2,200,000 (2.9%) from $76,921,000 at December 31, 2017. The decrease in 2018 resulted from repurchases of common stock of $4,773,000, the payment of cash dividends of $1,188,000, and a decrease in other comprehensive income of $1,555,000, as a result of the decrease in the unrealized gain on securities due to an increase in interest rates, exceeding the additions from net income of $4,900,000 for the period and the stock based compensation of $416,000. In 2017, shareholders’ equity decreased $6,929,000 (8.2%) from $83,850,000 at December 31, 2016. The decrease in 2017 resulted from the reductions in other comprehensive income, payment of cash dividends, and repurchases of common stock exceeding the additions from net income for the period and the increase in stock based compensation expense. Table Eleven below lists the Company’s and American River Bank’s actual capital ratios at December 31, 2018 and 2017, as well as the minimum capital ratios for capital adequacy for American River Bank. The ratio for the minimum regulatory requirement includes the capital conservation buffer of 1.875% as of December 31, 2018 and 1.25% as of December 31, 2017. Table Eleven: Capital Ratios American River Bankshares: Leverage ratio Tier 1 Risk-Based Capital Total Risk-Based Capital American River Bank: Leverage ratio Common Equity Tier 1 Capital Tier 1 Risk-Based Capital Total Risk-Based Capital At December 31, Minimum Regulatory Capital Requirements 2018 2017 2018 2017 8.9% 16.1% 17.3% 9.0% 16.2% 16.2% 17.4% 9.5% 18.1% 19.3% 9.3% 17.7% 17.7% 19.0% N/A N/A N/A 5.9% 6.4% 7.9% 9.9% N/A N/A N/A 5.3% 5.8% 7.3% 9.3% 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, 2018, American River Bank’s ratios were in excess of the regulatory definition of “well capitalized.” Management believes that the Company’s capital is adequate to support current operations and anticipated growth and currently foreseeable future capital requirements of the Company and its subsidiaries. Effective January 1, 2015, bank holding companies with consolidated assets of $1 Billion or more ($3 Billion or more effective August 30, 2018) and banks like American River Bank must comply with new minimum capital ratio requirements to be phased-in between January 1, 2015 and January 1, 2019, which consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6%; (iii) a total capital to total risk weighted assets ratio of 8%; and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%. In addition, a “capital conservation buffer,” 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. The buffer requirement for 2018 was 1.875% and became fully phased in on January 1, 2019, increasing to 2.50%. 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. 21Market 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 one-year and two-year periods assuming a gradual change in rates over the twelve-month horizon. The simulation modeling attempts to estimate changes in the Company’s net interest income utilizing a detailed current balance sheet. Table Twelve below summarizes the effect on net interest income (NII) of a ±100 and ±200 basis point change in interest rates as measured against a constant rate (no change) scenario. Table Twelve: Interest Rate Risk Simulation of Net Interest as of December 31, 2018 (dollars in thousands) Variation from a constant rate scenario +100bp +200bp -100bp -200bp $ Change in NII from Current 12 Month Horizon $ Change in NII from Current 24 Month Horizon $ $ $ $ 195 349 (605) (1,154) $ $ $ $ 591 1,042 (1,550) (3,211) After a review of the model results as of December 31, 2018, 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. 22Inflation 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, 2018, 2017 and 2016. 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, 2018 were approximately $34,276,000 and $361,000, 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, 2018, consolidated liquid assets totaled $226.5 million or 32.9% of total assets compared to $226.3 million or 34.5% of total assets on December 31, 2017. 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, 2018, the Company had $17,000,000 available under these credit lines. Additionally, American River Bank is a member of the FHLB. At December 31, 2018, American River Bank could have arranged for up to $122,762,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At December 31, 2018, the Company had $107,262,000 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, 2018, the Company’s borrowing capacity was $8,340,000. 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. 23Table Thirteen: Certificates of Deposit Maturities December 31, 2018 (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 Over $250,000 $ $ 7,965 4,831 5,691 12,572 31,059 $ $ 5,054 26,329 15,046 10,599 57,028 Loan and lease demand also affects the Company’s liquidity position. Table Fourteen below presents the maturities of loans and leases for the period indicated. Table Fourteen: Loan and Lease Maturities (Gross Loans and Leases) December 31, 2018 (dollars in thousands) Commercial Real estate Agriculture Consumer Leases Total One year or less 4,019 19,445 17 1 32 23,514 $ $ One year through five years $ $ 10,970 82,443 907 321 — 94,641 Over five years $ $ 14,661 176,168 3,495 10,392 — 204,716 Total 29,650 278,056 4,419 10,714 32 322,871 $ $ Loans and leases shown above with maturities greater than one year include $185,731,000 of variable interest rate loans and $113,626,000 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, 2018, 2017 and 2016 was $3,932,000, $3,932,000 and $3,779,000, respectively. 24Table Fifteen: Securities Maturities and Weighted Average Yields (Taxable Equivalent Basis) December 31, (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 Treasury securities Maturing within 1 year U.S. Government Agencies and U.S.-Sponsored Agencies Other Maturing after 1 year but within 5 years Maturing after 5 years but within 10 years Non-maturing Total investment securities Held-to-maturity securities: U.S. Government Agencies and U.S.-Sponsored Agencies Total investment securities 2018 Carrying Amount Weighted Average Yield 2017 Weighted Average Yield Carrying Amount 2016 Weighted Average Yield Carrying Amount $ 255 1,141 9,831 3,173 4,976 269,049 2,434 4,074 — $ 294,933 $ $ 292 292 5.06% $ 5.06% 6.03% 6.33% — 3,018 14,389 5,307 2.30% 2.69% — 232,869 2.49% 5.53% — 2,469 4,158 112 2.88% $ 262,322 — 2.23% 4.42% 4.11% — 2.10% $ 580 2,328 14,486 5,218 — 229,785 2.72% 1,519 4.56% 1,519 104 0.00% 2.32% $ 254,020 5.40% $ 5.40% $ 378 378 5.46% $ 5.46% $ 483 483 5.39% 4.35% 4.36% 3.23% — 2.04% 4.88% 4.88% 0.00% 2.35% 5.43% 5.43% The carrying values of available-for-sale securities include net unrealized (losses) gains of ($2,664,000), ($456,000) and $916,000 at December 31, 2018, 2017 and 2016, respectively. The carrying values of held-to-maturity securities do not include unrealized gains or losses; however, the net unrecognized gains at December 31, 2018, 2017 and 2016 were $14,000, $26,000 and $38,000, respectively. Off-Balance Sheet Arrangements The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. As of December 31, 2018, 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: 25Commitments 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, 2018 2017 $ $ $ 47 21,185 13,044 34,276 361 $ $ $ 175 3,565 7,183 10,923 121 The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for loans included on the consolidated balance sheets. Certain financial institutions have elected to use special purpose vehicles (“SPV”) to dispose of problem assets. The SPV is typically a subsidiary company with an asset and liability structure and legal status that makes its obligations secure even if the parent corporation goes bankrupt. Under certain circumstances, these financial institutions may exclude the problem assets from their reported impaired and nonperforming assets. The Company does not use those vehicles or any other structures to dispose of problem assets. Contractual Obligations The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under non-cancelable operating leases are noted in Table Sixteen below. Table Sixteen below presents certain of the Company’s contractual obligations as of December 31, 2018. 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 Total 15,500 — 3,940 — 88,087 4,612 112,139 $ $ Payments due by period Less than 1 year $ $ 5,000 — 747 — 64,916 370 71,033 1-3 years 3-5 years $ $ 7,000 — 1,348 — 14,439 784 23,571 $ $ 3,500 — 915 — 8,732 789 13,936 $ $ More than 5 years — — 930 — — 2,669 3,599 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, 2018, these amounts represented $4,612,000 most of which is anticipated to be primarily payable at least five years in the future. 26Report 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, 2018, 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, 2018, the Company’s internal control over financial reporting is effective based upon those criteria. The Company’s independent registered public accounting firm that audited the Company’s financial statements included in this Annual Report has issued an audit report on the Company’s internal control over financial reporting. David E. Ritchie, Jr. President and Chief Executive Officer Mitchell A. Derenzo Executive Vice President and Chief Financial Officer 27REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Crowe LLP Independent Member Crowe Global Shareholders and Board of Directors American River Bankshares Rancho Cordova, California Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of American River Bankshares and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 28Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We have served as the Company’s auditor since 2011. Crowe LLP Sacramento, California February 21, 2019 29AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2018 and 2017 (Dollars in thousands) ASSETS Cash and due from banks Federal funds sold Total cash and cash equivalents Interest-bearing deposits in banks Investment securities (Note 5): Available-for-sale, at fair value Held-to-maturity, at amortized cost; fair value of $306 in 2018 and $404 in 2017 Loans and leases, less allowance for loan and lease losses of $4,392 in 2018 and $4,478 in 2017 (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 – 5,858,428 shares in 2018 and 6,132,362 shares in 2017 Retained earnings Accumulated other comprehensive loss, net of taxes (Note 5) Total shareholders’ equity See accompanying notes to consolidated financial statements. 2018 2017 $ $ $ 20,987 7,000 27,987 1,746 294,933 292 318,516 1,071 3,932 957 16,321 15,429 6,908 688,092 214,745 375,929 590,674 5,000 10,500 7,197 $ $ $ 38,467 — 38,467 1,746 262,322 378 308,713 1,158 3,932 961 16,321 15,122 6,502 655,622 215,528 340,552 556,080 3,500 12,000 7,121 613,371 578,701 30,103 46,494 (1,876) 74,721 34,463 42,779 (321) 76,921 $ 688,092 $ 655,622 30AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2018, 2017 and 2016 (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 on Federal funds sold 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) Net interest income after provision for loan and lease losses Noninterest income: Service charges Gain on sale 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 (Note 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) 2018 2017 2016 $ $ $ $ 13,924 529 33 348 6,901 507 22,242 1,359 237 1,596 20,646 175 20,471 476 31 — 1,006 1,513 10,203 20 1,050 553 280 3,404 15,510 6,474 1,574 4,900 0.83 0.83 $ $ $ $ 13,947 499 13 — 5,300 655 20,414 855 206 1,061 19,353 450 18,903 465 161 — 970 1,596 8,920 44 1,053 586 280 3,166 $ 14,008 723 7 — 5,769 646 21,153 730 180 910 20,243 (1,344) 21,587 502 314 279 950 2,045 8,435 246 1,175 652 328 3,000 14,049 13,836 6,450 3,252 3,198 0.50 0.50 $ $ $ 9,796 3,392 6,404 0.95 0.94 See accompanying notes to consolidated financial statements. 31AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2018, 2017 and 2016 (Dollars in thousands) Net income Other comprehensive income: Decrease in net unrealized gains on investment securities Deferred tax benefit Decrease in net unrealized gains on investment securities, net of tax Reclassification adjustment for realized gains included in net income Tax effect Realized gains, net of tax Total other comprehensive (loss) Comprehensive income 2018 2017 2016 $ 4,900 $ 3,198 $ 6,404 (2,225) 691 (1,534) (31) 10 (21) (1,555) (1,211) 491 (720) (161) 64 (97) (817) (2,274) 905 (1,369) (314) 124 (190) (1,559) $ 3,345 $ 2,381 $ 4,845 See accompanying notes to consolidated financial statements. 32AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2018, 2017 and 2016 (Dollars in thousands) Common Stock Shares Amount Retained Earnings Accumulated Other Comprehensive Income (Loss) (Net of Taxes) Total Shareholders’ Equity Balance, January 1, 2016 7,343,649 $ 49,554 $ 34,418 $ 2,103 $ 86,075 Net income Other comprehensive loss, net of tax (Note 5) — — — — Retirement of common stock (Note 13) Net restricted stock award activity and related compensation expense (Note 13) Stock options exercised (Note 13) Stock option compensation expense (Note 13) (716,897) (7,414) 33,474 1,500 — 291 13 40 Balance, December 31, 2016 6,661,726 42,484 Net income Other comprehensive loss, net of tax (Note 5) Disproportionate tax effect resulting from H.R.1 Tax Act (Note 2) Payment of cash dividend, $0.20 per share (Note 14) Retirement of common stock (Note 13) Net restricted stock award activity and related compensation expense (Note 13) Stock options exercised (Note 13) Stock option compensation expense (Note 13) — — — — (574,748) 3,486 41,898 — — — — — (8,641) 248 351 21 Balance, December 31, 2017 6,132,362 34,463 Net income Other comprehensive loss, net of tax (Note 5) Payment of cash dividend, $0.20 per share (Note 14) Retirement of common stock (Note 13) Net restricted stock award activity and related compensation expense (Note 13) Stock options exercised (Note 13) Stock option compensation expense (Note 13) — — — (306,618) 11,374 21,310 — — — — (4,773) 196 189 28 6,404 — — — — — 40,822 3,198 — 48 (1,293) — 4 — — 42,779 4,900 — (1,188) — 3 — — — (1,559) — — — — 544 — (817) (48) — — — — — (321) — (1,555) — — — — — 6,404 (1,559) (7,414) 291 13 40 83,850 3,198 (817) — (1,293) (8,641) 252 351 21 76,921 4,900 (1,555) (1,188) (4,773) 199 189 28 Balance, December 31, 2018 5,858,428 $ 30,103 $ 46,494 $ (1,876) $ 74,721 See accompanying notes to consolidated financial statements. 33AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2018, 2017 and 2016 (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 of investment securities Increase in cash surrender value of life insurance policies Deferred income tax expense (benefit) Stock-based compensation expense Loss (gain) on sale or write-down of other real estate owned Fair value adjustment to acquired 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 Net (increase) decrease in interest-bearing deposits in banks Net (increase) decrease in loans and leases Proceeds from sale of loans Purchases of loans Net proceeds from sale of other real estate owned Purchases of equipment Net increase in FHLB stock 2018 2017 2016 $ 4,900 $ 3,198 $ 6,404 175 (239) 265 2,404 (31) (307) 333 227 4 — (125) 76 7,682 27,003 2,139 — (110,615) 44,321 86 — (290) 1,349 (10,799) — (178) — 450 (20) 333 3,246 (161) (317) 1,247 273 (8) — (537) (173) 7,531 31,289 145 1,930 (89,273) 43,150 105 (747) 14,944 — — 395 (129) (153) (1,344) 1 420 2,940 (314) (322) (283) 331 118 (239) 1,734 419 9,865 12,655 1,550 1,100 (47,292) 46,570 140 (249) (33,064) — — 1,747 (375) — (17,218) Net cash (used in) provided by investing activities (46,984) 1,656 See accompanying notes to consolidated financial statements. 34AMERICAN RIVER BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2018, 2017 and 2016 (Dollars in thousands) Cash flows from financing activities: Net increase in demand, interest-bearing and savings deposits Net increase (decrease) in time deposits Cash paid to repurchase common stock Proceeds from exercised options (Decrease) increase in long-term borrowings Increase in long-term borrowings Cash dividends paid Net cash provided by financing activities (Decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 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 or deed in lieu of foreclosure Loans resulting from sale of other real estate owned 2018 2017 2016 $ $ $ $ $ $ 26,198 8,396 (4,773) 189 (1,500) 1,500 (1,188) 28,822 (10,480) 38,467 27,987 1,598 1,095 — — $ $ $ $ $ $ 14,552 (3,278) (8,641) 351 — — (1,293) 1,691 10,878 27,589 38,467 1,058 2,375 — — $ $ $ $ $ $ 15,728 (1,612) (7,414) 13 4,500 — — 11,215 3,862 23,727 27,589 908 2,790 1,109 1,686 See accompanying notes to consolidated financial statements. 35AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE BUSINESS OF THE COMPANY American River Bankshares (the “Company”) was incorporated under the laws of the State of California in 1995 under the name of American River Holdings and changed its name in 2004 to American River Bankshares. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. As a community oriented regional bank holding company, the principal communities served are located in Sacramento, Placer, Yolo, El Dorado, Amador, and Sonoma counties. The Company owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank (“ARB” or the “Bank”). ARB was incorporated in 1983. ARB accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services. ARB operates four full-service banking offices in Sacramento County, one full-service banking office in Placer County, two full-service banking offices in Sonoma County, and three full-service banking offices in Amador County. The Company also owns one inactive subsidiary, American River Financial. ARB does not offer trust services or international banking services and does not plan to do so in the near future. The deposits of ARB are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and prevailing practices within the financial services industry. Reclassifications Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2018. Reclassifications did not affect prior year net income or shareholders’ equity. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and accounts among the Company and its subsidiaries have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 36AMERICAN 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:  Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity.  Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost. Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value. There were no transfers during the years ended December 31, 2018 and 2017. 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. 37AMERICAN 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, 2018 and 2017. SBA and Farm Service Agency loans with unpaid balances of $109,000 and $138,000 were being serviced for others as of December 31, 2018 and 2017, respectively. The Company also serviced loans that are participated with other financial institutions totaling $7,815,000 and $7,941,000 as of December 31, 2018 and 2017, 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, 2018 and 2017. 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. 38AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan and Lease Losses (Continued) For all classes of the portfolio, a loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Factors considered by management in determining impairment include payment status, and the probability of collecting scheduled principle and interest payments when due. Impaired loans are individually evaluated to determine the extent of impairment, if any, except for smaller-balance loans that are collectively evaluated for credit risk. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the credit’s original interest rate, the credit’s observable market price, or the fair value of the collateral if the credit is collateral dependent. A loan or lease is collateral dependent if the repayment of the credit is expected to be provided solely by the sale or operation of the underlying collateral. For all portfolio segments, a restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Company grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans or leases that are reported as TDRs are considered impaired and measured for impairment as described above. For all portfolio segments, the determination of the general reserve for loans and leases that are not impaired is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the credit portfolio, and probable losses inherent in the portfolio taken as a whole. The Company determines a separate allowance for each portfolio segment. These portfolio segments include commercial, real estate construction (including land and development loans), residential real estate, multi-family real estate, commercial real estate, leases, agriculture, and consumer loans. The allowance for loan and lease losses attributable to each portfolio segment, which includes both impaired credits and credits that are not impaired, is combined to determine the Company’s overall allowance, which is included as a component of loans and leases on the consolidated balance sheet and available for all loss exposures. The Company assigns a risk rating to all loans and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual credit. The risk ratings can be grouped into six major categories, defined as follows: Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention. Watch – A watch credit is a loan or lease that otherwise meets the definition of a standard or minimum acceptable quality loan, but which requires more than normal attention due to any of the following items: deterioration of borrower financial condition less severe than those warranting more adverse grading, deterioration of repayment ability and/or collateral value, increased leverage, adverse effects from a downturn in the economy, local market or industry, adverse changes in local or regional employer, management changes (including illness, disability, and death), and adverse legal action. Payments are current per the terms of the agreement. If conditions persist or worsen, a more severe risk grade may be warranted. 39AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan and Lease Losses (Continued) Special Mention – A special mention credit is a loan or lease that has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Company’s position at some future date. Special Mention credits are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Substandard – A substandard credit is a loan or lease that is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Credits classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include inadequate cash flow or collateral support, a project’s lack of marketability, failure to complete construction on time or a project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful – Credits classified as doubtful are loans or leases that have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Loss – Credits classified as loss are loans or leases considered uncollectible and charged off immediately. The general reserve component of the allowance for loan and lease losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below. Real Estate- Commercial – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations. Real Estate- Construction – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects. Real Estate- Multi-family – Multi-family loans are non-construction term mortgages for the acquisition, refinance, or improvement of residential rental properties with generally more than 4 dwelling units. Underwriting is generally based on borrower creditworthiness, sufficiency of net operating income to service the bank loan payment, and a prudent loan-to-value ratio, among other factors. 40AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan and Lease Losses (Continued) Real Estate- Residential – Residential loans are generally loans to purchase or refinance 1-4 unit single-family residences, either owner-occupied or investor-owned. Some residential loans are short term to match their intended source of repayment through sale or refinance. The remainder are fixed or floating-rate term first mortgages with an original maturity between 2 and 10 years, generally with payments based on a 25-30 year amortization. Commercial – Commercial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Lease Financing Receivable – Leases originated by the bank are non-consumer finance leases (as contrasted with operating leases) for the acquisition of titled and non-titled business equipment. Leases are generally amortized over a period from 36 to 84 months, depending on the useful life of the equipment acquired. Residual (balloon) payments at lease end range from 0-20% of original cost, and are a non-optional obligation of the lessee. Lessees are contractually responsible for all costs, expenses, taxes, and liability associated with the leased equipment. Agricultural – Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of the Company and borrowers: commodity prices and weather conditions. Consumer – The consumer loan portfolio is comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made directly for consumer purchases, but business loans granted for the purchase of heavy equipment or industrial vehicles may also be included. Also included in the consumer loan portfolio are home equity lines of credit and loans purchased from a specialty lender that originates classic and collector auto loans. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s primary regulators, the FDIC and the California Department of Business Oversight, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations. Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates probable incurred losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet. 41AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Other Real Estate Owned (OREO) Other real estate owned includes real estate acquired in full or partial settlement of loan obligations. When property is acquired, any excess of the recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property less estimated selling costs is charged against the allowance for loan and lease losses. Any excess of the fair value over the loan balance less estimated selling costs is recorded as noninterest income-other income. A valuation allowance for losses on other real estate may be maintained to provide for temporary declines in value. The valuation allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or write-downs resulting from permanent impairments are recorded in other income or expense as incurred. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Land is not depreciated. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful life of the building and improvements is forty years. The useful lives of furniture, fixtures and equipment are estimated to be three to ten years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. Impairment of long-lived assets is evaluated by management based upon an event or changes in circumstances surrounding the underlying assets which indicate long-lived assets may be impaired. Goodwill and Intangible Assets Business combinations involving the Company’s acquisition of equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisition and is not deductible for tax purposes. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2018, 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. 42AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes. The Company accounts for income taxes using the balance sheet method, under which deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable, results in the income tax expense for the current year. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On December 22, 2017, President Trump signed into law “H.R.1” commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). During 2017, the Company recorded an income tax expense adjustment of $1,220,000 related to the Tax Act. The adjustment relates to revaluing the Company’s net deferred tax assets using the new lower corporate federal income tax rate of 21% which became effective January 1, 2018, a reduction from the Company’s 2017 rate of 34%. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized. “More likely than not” is defined as greater than a 50% 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, 2018 and 2017 will be fully realized and therefore no valuation allowance was recorded. The Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income. Comprehensive Income Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income consists of net income and other comprehensive income (loss). Unrealized gains and losses on the Company’s available-for-sale investment securities are included in other comprehensive income (loss), adjusted for realized gains or losses included in net income, net of tax. Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the consolidated statements of comprehensive income. Earnings Per Share Basic earnings per share (“EPS”), which excludes dilution, is computed by dividing income available to common shareholders by the weighted- average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or restricted stock, result in the issuance of common stock that share in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options and restricted stock in computing diluted EPS. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the consolidated financial statements. 43AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) There were no stock splits or stock dividends in 2018, 2017 or 2016. Stock-Based Compensation At December 31, 2018, the Company had two stock-based compensation plans, which are described more fully in Note 13. Compensation expense recorded in 2018, 2017, and 2016 totaled $227,000, $273,000 and $331,000, respectively. Compensation expense is recognized over the vesting period on a straight line accounting basis. The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton based option valuation model that uses the assumptions noted in the 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. 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 In May 2014, the Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that supersedes nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that: (1) removes inconsistencies and weaknesses in revenue requirements; (2) provides a more robust framework for addressing revenue issues; (3) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provides more useful information to users of financial statements through improved disclosure requirements; and (5) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB issued targeted updates to clarify specific implementation issues of ASU 2014- 09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow- Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” The Company has assessed its revenue streams and reviewed its contracts that could potentially be affected by the ASU including deposit related fees, interchange fees, and merchant income, to determine the impact the new guidance has on the Company’s financial position, results of operations or cash flows. The Company adopted ASU No. 2014-09 on January 1, 2018. The effects of adopting ASU No. 2014- 09 did not change the amounts of revenue recorded for the Company’s in-scope revenue streams. 44AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application was permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above were not permitted. The Company adopted ASU No. 2016-01 on January 1, 2018. The effects of adopting ASU No. 2016-01 resulted in the Company using the exit price notion for valuing financial instruments in 2018, but did not have a material impact on the Company’s financial position, results of operations or cash flows. In February 2016, the FASB issued ASU No. 2016-02, “Leases.” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 was effective for interim and annual reporting periods beginning after December 15, 2018; early adoption was permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. Based on evaluation of the Company’s current lease obligations, the Company has determined that the provisions of ASU No. 2016-02 resulted in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities. The Company currently leases nine of its office leases under operating leases. The Company adopted ASU No. 2016-02 on January 1, 2019. The Company’s present value of future lease payments as of January 1, 2019 is $3,570,000, to be recorded as a right-of-use asset with an offsetting liability. The effects of adopting ASU No. 2016-02 did not have a material impact on the Company’s financial position, results of operations or cash flows. 45AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, evaluating its current IT systems, and purchasing a software solution. The Company intends to begin processing information with the new CECL specific software during the first part of 2019 and to disclose potential impact of this modeling once it becomes available. Revenue From Contracts With Customers As discussed above, on January 1, 2018 the Company adopted ASC Topic 606, as revised under ASU’s 2014-09, 2014-08 and 2016-20, using the modified retrospective method as of January 1, 2018. Other income disclosures for periods beginning after January 1, 2018 are presented under revised ASC Topic 606, which have not materially changed from the prior year amounts. Consistent with Topic 606, noninterest income covered by this guidance is recognized as services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services. 46AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Deposit Service Charges — Deposit service charges primarily consist of fees earned from our treasury management services. These services include bill pay, ACH, positive pay, lockbox, remote deposit capture, online banking and cash vault, among others. Customers are given the option to pay for these services in cash or by offsetting the fees for these services against an earnings credit that is given for maintaining noninterest-bearing deposits. The Company’s performance obligations on its treasury services are satisfied either at the time of the transaction or over the course of a month. Most customers pay deposit charges on a monthly basis. Merchant and Bankcard Fees — The Company earns various types of network transaction fees from third party payment network providers which consist of (i) interchange fees earned from the payment network as a debit card issuer and (ii) ongoing merchant fees earned by the Company for referring our clients to the payment processing provider which allows our clients to accept credit cards as a form of payment. The Company is an issuer of debit cards only as it relates to Merchant and Bankcard fees. Interchange income, which is settled on a daily basis, is recognized as settlement occurs. Chargebacks have not historically been, nor are they expected to be significant to the overall fee revenue and are recognized upon occurrence. Referral and merchant fees are recognized when the transaction occurs. 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, 2018 and December 31, 2017. They indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In 2018, the Company adopted the provisions of Accounting Standard Update 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires the Company to use the exit price notion when measuring the fair value of financial instruments. The Company used the exit price notion for valuing financial instruments in 2018 and the entry price notion for valuing financial instruments in 2017. 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): 47AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) December 31, 2018 Financial assets: Cash and due from banks Federal funds sold 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 December 31, 2017 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 Fair Value Measurements Using: Level 2 Level 1 Level 3 Total $ $ $ $ 20,987 7,000 1,746 294,933 292 3,932 318,516 1,959 214,745 72,522 145,831 69,489 88,087 5,000 10,500 63 Carrying Amount 38,467 1,746 262,322 378 3,932 308,713 1,956 215,528 66,130 130,032 64,709 79,681 3,500 12,000 65 $ $ $ $ 20,987 7,000 — 4,976 — N/A — — 214,745 72,522 145,831 69,489 — 5,000 — — $ $ — — 1,746 289,957 306 N/A — 1,044 — — — — 88,078 — 10,733 63 $ $ — — — — — N/A 315,235 915 — — — — — — — — Fair Value Measurements Using: Level 2 Level 1 Level 3 38,467 — 66 — N/A — — 215,528 66,130 130,032 64,709 — 3,500 — — $ $ — 1,750 262,256 404 N/A — 1,124 — — — — 79,614 — 11,978 65 $ $ — — — — N/A 317,900 832 — — — — — — — — $ $ $ $ 20,987 7,000 1,746 294,933 306 N/A 315,235 1,959 214,745 72,522 145,831 69,489 88,078 5,000 10,733 63 Total 38,467 1,750 262,322 404 N/A 317,900 1,956 215,528 66,130 130,032 64,709 79,614 3,500 11,978 65 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. 48AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) The following methods and assumptions were used by the Company to estimate the fair values of its financial instruments at December 31, 2017: Cash and due from banks: The carrying amounts of cash and short-term instruments, including Federal funds sold, 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. 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, 2017. They are excluded from the following tables. 49AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) Assets and liabilities measured at fair value on a recurring and non-recurring basis are presented in the following table: (Dollars in thousands) December 31, 2018 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Assets and liabilities measured on a recurring basis: Available-for-sale securities: U.S. Government Agencies and Sponsored Agencies Corporate Debt Securities Obligations of states and political subdivisions U.S. Treasury bonds $ $ 269,049 6,508 14,400 4,976 — — — 4,976 $ 269,049 6,508 14,400 — $ Total recurring $ 294,933 $ 4,976 $ 289,957 $ — — — — — $ $ — — — — — December 31, 2018 Fair Value Assets and liabilities measured on a nonrecurring Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) basis: Impaired loans: Real estate: Commercial Other real estate owned: Land Total nonrecurring $ $ 5,274 957 6,231 $ $ — — — $ $ — — — $ $ 5,274 $ 957 6,231 $ — (4) (4) 50AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) (Dollars in thousands) December 31, 2017 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Assets and liabilities measured on a recurring basis: Available-for-sale securities: U.S. Government Agencies and Sponsored Agencies Corporate Debt Securities Obligations of states and political subdivisions Corporate stock Total recurring $ 232,869 6,626 $ 22,715 112 $ 262,322 $ — — — 66 66 $ 232,869 6,626 $ 22,715 46 $ 262,256 $ — — — — — $ $ — — — — — December 31, 2017 Fair Value Assets and liabilities measured on a nonrecurring Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) basis: Impaired loans: Commercial Real estate: Commercial Residential Other real estate owned: Land Total nonrecurring $ 1,598 $ 178 329 961 3,066 $ $ — — — — — $ $ — — — — — $ 1,598 $ (1,073) 178 329 — — 961 3,066 $ — (1,073) $ 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, 2018 or December 31, 2017. 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. 51AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) 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, 2018 and 2017, goodwill totaled $16,321,000. Goodwill is evaluated annually for impairment under the provisions of the codification Topic 350, Goodwill and Other Intangibles. The most recent annual assessment was performed as of December 31, 2018, and at that time, the Company’s reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Management determined that no impairment recognition was required for the years ended December 31, 2018, 2017 and 2016. At December 31, 2018 and 2017, the Company did not have other intangible assets. 52AMERICAN 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, 2018 and 2017 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 U.S. Treasury securities Debt securities: U.S. Government Agencies and Sponsored Agencies Obligations of states and political subdivisions Corporate Debt Securities Equity securities: Corporate stock 2018 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ $ 271,685 14,440 6,493 4,979 $ 984 165 74 — (3,620) (205) (59) (3) $ 269,049 14,400 6,508 4,976 $ 297,597 $ 1,223 $ (3,887) $ 294,933 2017 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ 233,956 22,281 6,490 $ 51 $ 1,184 528 160 61 (2,271) (94) (24) — $ 232,869 22,715 6,626 112 $ 262,778 $ 1,933 $ (2,389) $ 262,322 U.S. Government Agencies and U.S. Government-sponsored Agencies consist predominately of residential mortgage-backed securities. Net unrealized losses on available-for-sale investment securities totaling $2,664,000 were recorded, net of $788,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2018. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the year ended December 31, 2018 totaled $27,003,000 and $31,000, respectively. There were no transfers of available-for-sale investment securities during the year ended December 31, 2018. Net unrealized gains on available-for-sale investment securities totaling $456,000 were recorded, net of $135,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2017. Proceeds and gross realized gains from the sale, impairment and call of available-for-sale investment securities for the year ended December 31, 2017 totaled $31,434,000 and $161,000, respectively. There were no transfers of available-for-sale investment securities during the year ended December 31, 2017. 53AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENT SECURITIES (Continued) Proceeds and gross realized gains from the sale, impairment and call of available-for-sale investment securities for the year ended December 31, 2016 totaled $14,205,000 and $314,000, respectively. Held-to-Maturity Debt securities: 2018 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Government Agencies and Sponsored Agencies $ 292 $ 14 $ — $ 306 2017 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Debt securities: U.S. Government Agencies and Sponsored Agencies $ 378 $ 26 $ — $ 404 There were no sales or transfers of held-to-maturity investment securities for the years ended December 31, 2018, 2017 and 2016. The amortized cost and estimated fair value of investment securities at December 31, 2018 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 Available-for-Sale Held-to-Maturity Amortized Cost Estimated Fair Value Amortized Cost $ 5,234 3,595 13,923 3,160 25,912 Estimated Fair Value $ 5,231 3,575 13,905 3,173 25,884 271,685 269,049 $ 297,597 $ 294,933 $ $ 292 292 $ $ 306 306 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. 54AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. INVESTMENT SECURITIES (Continued) Investment securities with amortized costs totaling $88,460,000 and $55,834,000 and estimated fair values totaling $87,351,000 and $56,021,000 were pledged to secure State Treasury funds on deposit, public agency and bankruptcy trustee deposits and borrowing arrangements (see Note 10) at December 31, 2018 and 2017, respectively. Investment securities with unrealized losses at December 31, 2018 and 2017 are summarized and classified according to the duration of the loss period as follows (dollars in thousands): Less than 12 Months Fair Value Unrealized Losses 2018 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale Debt securities: U.S. Government Agencies and Sponsored Agencies Obligations of states and political subdivisions U.S. Treasury securities Corporate bonds Available-for-Sale Debt securities: U.S. Government Agencies and Sponsored Agencies Obligations of states and political subdivisions Corporate bonds $ 39,267 $ (310) $ 138,894 $ (3,310) $ 178,161 $ (3,620) 2,168 4,976 497 (28) (3) (4) 5,583 — 1,938 (177) — (55) 7,751 4,976 2,435 (205) (3) (59) $ 46,908 $ (345) $ 146,415 $ (3,542) $ 193,323 $ (3,887) Less than 12 Months Fair Value Unrealized Losses 2017 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses $ 119,455 $ (1,148) $ 49,258 $ (1,123) $ 168,713 $ (2,271) 1,130 1,967 (9) (24) 4,654 — (85) — 5,784 1,967 (94) (24) $ 122,552 $ (1,181) $ 53,912 $ (1,208) $ 176,464 $ (2,389) At December 31, 2018, the Company held 220 securities of which 26 were in a loss position for less than twelve months and 97 were in a loss position for twelve months or more. These 97 securities consisted of mortgage-backed, corporate and municipal securities. The unrealized loss on the Company’s investments in securities is primarily driven by interest rates. Because the decline in market value is attributable to a change in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, management does not consider these investments to be other-than-temporarily impaired. 55AMERICAN 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 and costs, net Allowance for loan and lease losses December 31, 2018 2017 $ 199,894 5,685 56,139 16,338 29,650 32 4,419 10,714 $ 185,452 5,863 78,025 15,813 25,377 205 1,713 945 322,871 313,393 37 (4,392) (202) (4,478) $ 318,516 $ 308,713 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 $194,431,000 and $209,889,000 at December 31, 2018 and 2017, 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, 2019 Total lease payments receivable $ $ 33 33 December 31, 2018 2017 $ $ 33 — (1) 32 $ $ 211 — (6) 205 Salaries and employee benefits totaling $357,000, $177,000 and $289,000 have been deferred as loan and lease origination costs for the years ended December 31, 2018, 2017 and 2016, respectively. 56AMERICAN 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, 2018, 2017 and 2016 and the allocation of the allowance for loan and lease losses as of December 31, 2018, 2017 and 2016 by portfolio segment and by impairment methodology (dollars in thousands): Commercial Commercial Real Estate Multi- Family Construction December 31, 2018 Other Residential Leases Agriculture Consumer Unallocated Total 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 $ $ $ $ $ 447 422 (213) 12 $ 2,174 (68) — 8 $ 1,047 (483) — — $ 269 (2) — — 205 15 — — $ — $ (1) — 1 $ 31 57 — — $ 14 247 (69) — 291 (12) — — $ 4,478 175 (282) 21 668 $ 2,114 $ 564 $ 267 $ 220 $ — $ 88 $ 192 $ 279 $ 4,392 — $ 132 $ — $ — $ 53 $ — $ — $ — $ — $ 185 668 $ 1,982 $ 564 $ 267 $ 167 $ — $ 88 $ 192 $ 279 $ 4,207 $ 29,650 $ 199,894 $56,139 $ 5,685 $ 16,338 $ 32 $ 4,419 $ 10,714 $ — $322,871 $ — $ 7,783 $ — $ — $ 919 $ — $ — $ — $ — $ 8,702 $ 29,650 $ 192,111 $56,139 $ 5,685 $ 15,419 $ 32 $ 4,419 $ 10,714 $ — $314,169 57AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) Commercial Commercial Real Estate Multi- Family Construction December 31, 2017 Other Residential Leases Agriculture Consumer Unallocated Total 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 $ $ $ $ $ 855 659 (1,073) 6 $ $ 2,050 (104) — 228 851 196 — — $ 446 (177) — — $ $ 253 (48) — — 1 (42) — 41 $ 64 (33) — — $ 24 (14) — 4 278 13 — — $ 4,822 450 (1,073) 279 447 $ 2,174 $ 1,047 $ 269 $ 205 $ — $ 31 $ 14 $ 291 $ 4,478 — $ 261 $ 21 $ — $ 73 $ — $ — $ — $ — $ 355 447 $ 1,913 $ 1,026 $ 269 $ 132 $ — $ 31 $ 14 $ 291 $ 4,123 $ 25,377 $ 185,452 $78,025 $ 5,863 $ 15,813 $ 205 $ 1,713 $ 945 $ — $313,393 $ 1,598 $ 10,070 $ 474 $ — $ 1,615 $ — $ — $ — $ — $ 13,757 $ 23,779 $ 175,382 $77,551 $ 5,863 $ 14,198 $ 205 $ 1,713 $ 945 $ — $299,636 58AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) Commercial Commercial Real Estate Multi- Family Construction December 31, 2016 Other Residential Leases Agriculture Consumer Unallocated Total 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 $ $ $ $ $ 860 (665) — 660 $ $ 2,369 (653) (93) 427 228 623 — — $ 813 (474) — 107 $ $ 319 (66) — — 1 — — — $ 77 (13) — — $ 78 (144) (34) 124 230 48 — — $ 4,975 (1,344) (127) 1,318 855 $ 2,050 $ 851 $ 446 $ 253 $ 1 $ 64 $ 24 $ 278 $ 4,822 11 $ 246 $ 2 $ — $ 133 $ — $ 29 $ — $ — $ 421 844 $ 1,804 $ 849 $ 446 $ 120 $ 1 $ 35 $ 24 $ 278 $ 4,401 $ 35,374 $ 191,129 $73,373 $ 9,180 $ 15,718 $ 404 $ 2,302 $ 1,650 $ — $329,130 $ 157 $ 14,154 $ 482 $ — $ 2,147 $ — $ 357 $ — $ — $ 17,297 $ 35,217 $ 176,975 $72,891 $ 9,180 $ 13,571 $ 404 $ 1,945 $ 1,650 $ — $311,833 59AMERICAN 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, 2018 and 2017 (dollars in thousands): December 31, 2018 Credit Risk Profile by Internally Assigned Grade Real Estate Other Credit Exposure Commercial Commercial Multi- Family Construction Residential Leases Agriculture Consumer Total Grade: Pass Watch Special mention Substandard Doubtful $ 29,570 53 — 27 — $ 185,548 13,118 1,087 141 — $52,301 3,838 — — — $ $ 5,685 — — — — $ 15,373 965 — — — $ 32 — — — — 4,419 — — — — $ 10,691 22 1 — — $303,619 17,996 1,088 168 — Total $ 29,650 $ 199,894 $56,139 $ 5,685 $ 16,338 $ 32 $ 4,419 $ 10,714 $322,871 December 31, 2017 Credit Risk Profile by Internally Assigned Grade Real Estate Other Credit Exposure Commercial Commercial Multi-Family Construction Residential Leases Agriculture Consumer Total Grade: Pass Watch Special mention Substandard Doubtful $ $ 23,617 96 66 — 1,598 $ 164,815 18,083 2,265 289 — $ 73,644 4,381 — — — $ 5,863 — — — — $ $ 13,767 1,507 539 — — 205 — — — — $ 1,713 — — — — 713 $284,337 24,222 155 2,940 70 7 296 1,598 — Total $ 25,377 $ 185,452 $ 78,025 $ 5,863 $ 15,813 $ 205 $ 1,713 $ 945 $313,393 60AMERICAN 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, 2018 and 2017 (dollars in thousands): 30-59 Days Past Due 60-89 Days Past Due Past Due Greater Than 90 Days Total Past Due Current Total Loans Past Due Greater Than 90 Days and Accruing Nonaccrual December 31, 2018 Commercial: Commercial $ — $ — $ — $ — $ 29,650 $ 29,650 $ — $ Real estate: Commercial Multi-family Construction Residential Other: Leases Agriculture Consumer — — — — — — — — — — — — — — — — — — — — — — — — — — — — 199,894 56,139 5,685 16,338 32 4,419 10,714 199,894 56,139 5,685 16,338 32 4,419 10,714 — — — — — — — Total $ — $ — $ — $ — $ 322,871 $ 322,871 $ — $ 27 — — — — — — — 27 61AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) 30-59 Days Past Due 60-89 Days Past Due Past Due Greater Than 90 Days Total Past Due Current Total Loans Past Due Greater Than 90 Days and Accruing Nonaccrual December 31, 2017 Commercial: Commercial $ — $ — $ — $ — $ 25,377 $ 25,377 $ — $ 1,597 Real estate: Commercial Multi-family Construction Residential Other: Leases Agriculture Consumer — — — 146 — — 1 — — — — — — — 289 — — — — — — 289 — — 146 — — 1 185,163 78,025 5,863 15,667 205 1,713 944 185,452 78,025 5,863 15,813 205 1,713 945 — — — — — — — 289 — — — — — 6 Total $ 147 $ — $ 289 $ 436 $ 312,957 $ 313,393 $ — $ 1,892 62AMERICAN 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, 2018, 2017 and 2016 (dollars in thousands): With no related allowance recorded: Commercial Real estate: Commercial Multi-family 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, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized $ — $ — $ $ $ $ $ 5,645 — 323 — 5,968 — 2,138 — 596 — — 2,734 — 7,783 — 919 — — $ $ $ $ 5,879 — 410 — 6,289 — 2,217 — 596 — — 2,813 — 8,096 — 1,006 — — $ $ $ $ — — — — — — — 132 — 53 — — 185 — 132 — 53 — — $ — $ $ $ $ $ 5,711 — 326 — 6,037 — 2,199 — 611 — — 2,810 — 7,910 — 937 — — $ $ $ $ $ 8,702 $ 9,102 $ 185 $ 8,847 $ 4 283 — 18 — 305 — 133 — 29 — — 162 4 416 — 47 — — 467 63AMERICAN 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 Multi-family 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, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized $ 1,598 $ 2,671 $ $ $ $ $ 5,674 — 329 — 7,601 — 4,396 474 1,286 — — 6,156 1,598 10,070 474 1,615 — — $ $ $ $ 5,907 — 416 — 8,994 — 4,483 474 1,286 — — 6,243 2,671 10,390 474 1,702 — — $ $ $ $ — — — — — — — 261 21 73 — — 355 — 261 21 73 — — $ 1,808 $ $ $ $ $ 5,701 — 331 — 7,840 — 4,435 476 1,295 — — 6,206 1,808 10,136 476 1,626 — — $ $ $ $ $ 13,757 $ 15,237 $ 355 $ 14,046 $ 108 281 — 19 2 410 — 249 33 62 — — 344 108 530 33 81 — 2 754 64AMERICAN 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 Multi-family 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, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized $ — $ — $ $ $ $ $ 10,910 — 334 — 11,244 157 3,244 482 1,813 357 — 6,053 157 14,154 482 2,147 357 — $ $ $ $ 11,540 — 421 — 11,961 157 3,336 482 1,813 357 — 6,145 157 14,876 482 2,234 357 — $ $ $ $ — — — — — — 11 246 2 133 29 — 421 11 246 2 133 29 — $ — $ $ $ $ $ 11,011 — 337 — 11,348 161 3,308 485 1,837 364 — 6,155 161 14,319 485 2,174 364 — $ $ $ $ $ 17,297 $ 18,106 $ 421 $ 17,503 $ — 558 1 15 3 577 11 168 33 87 21 — 320 11 726 34 102 21 3 897 Interest income on non-accrual loans is generally recognized on a cash basis and was approximately $43,000, $2,000 and $115,000 for the years ended December 31, 2018, 2017 and 2016. 65AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued) Troubled Debt Restructurings There was one modification made during the period ended December 31, 2018 and one modification made during the period ended December 31, 2017 that were considered as troubled debt restructurings. The modification of the terms of the loan in 2018 was a term out of a line of credit to an amortizing loan with a rate reduction. The loan had a pre-modification and post-modification outstanding recorded investment of $18,000. The modification of the terms of the loan in 2017 included a reduction of the stated interest rate for eighteen months according to a bankruptcy court- order as part of a debtor-in-possession financing agreement. The loan had a pre-modification and post-modification outstanding recorded investment of $2,692,000. In 2017, the balance of the loan was reduced by principal payments of $57,000 and by a charge-off to the loan and lease allowance of $1,073,000 resulting in a net balance of $1,562,000. As of December 31, 2018 and 2017, the Company has a recorded investment in troubled debt restructurings of $6,642,000 and $8,403,000, respectively. The Company has allocated $185,000 and $72,000 of specific allowance for those loans at December 31, 2018 and 2017 and has not committed to lend additional amounts The Company has not committed to lend additional amounts as of December 31, 2018 or December 31, 2017 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, 2018 and 2017 except for one payment default on the troubled debt restructuring made in 2017 with a loan balance of $1,562,000. The loan was subsequently reduced $213,000 through charge-off to the loan and lease allowance and sold for no further loss at $1,349,000. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. 8. PREMISES AND EQUIPMENT Premises and equipment consisted of the following (dollars in thousands): Land Building and improvements Furniture, fixtures and equipment Leasehold improvements Less accumulated depreciation and amortization December 31, 2018 2017 $ $ 206 886 6,169 1,721 8,982 206 853 6,058 1,690 8,807 (7,911) (7,649) $ 1,071 $ 1,158 Depreciation and amortization included in occupancy and furniture and equipment expense totaled $265,000, $333,000 and $420,000 for the years ended December 31, 2018, 2017 and 2016, respectively. 66AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 2018 2017 $ 72,522 145,831 69,489 57,028 31,059 $ 66,130 130,032 64,709 45,826 33,855 $ 375,929 $ 340,552 The Company held $29,000,000 in certificates of deposit for the State of California as of December 31, 2018 and 2017. This amount represents 4.9% of total deposit balances at December 31, 2018 and 5.2% at December 31, 2017. Aggregate annual maturities of time deposits are as follows (dollars in thousands): Year Ending December 31, 2019 2020 2021 2022 2023 Thereafter $ 64,916 5,923 8,516 3,640 5,092 — $ 88,087 Interest expense recognized on interest-bearing deposits consisted of the following (dollars in thousands): Savings Money market NOW accounts Time Deposits Year Ended December 31, 2017 2016 2018 $ $ 26 257 15 1,061 $ 22 123 16 694 $ 1,359 $ 855 $ 19 128 18 565 730 67AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. BORROWING ARRANGEMENTS The Company has $17,000,000 in unsecured short-term borrowing arrangements to purchase Federal funds with two of its correspondent banks. There were no advances under the borrowing arrangements as of December 31, 2018 and 2017. 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 $15,500,000 were outstanding from the FHLB at December 31, 2018, bearing fixed interest rates ranging from 1.18% to 3.17% and maturing between April 30, 2019 and November 24, 2023. Advances totaling $15,500,000 were outstanding from the FHLB at December 31, 2017 bearing fixed interest rates ranging from 1.18% to 1.90% and maturing between July 20, 2018 and April 12, 2021. Amounts available under the borrowing arrangement with the FHLB at December 31, 2018 and 2017 totaled $107,262,000 and $117,546,000, 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, 2018 and 2017. Amounts available under the borrowing arrangement with the FRB at December 31, 2018 and 2017 totaled $8,340,000 and $9,085,000, respectively. The following table summarizes these borrowings (dollars in thousands): Short-term portion of borrowings Long-term borrowings Maturities on these borrowings are as follows (dollars in thousands): Year Ending December 31, 2019 2020 2021 2022 Thereafter December 31, 2018 2017 Weighted Average Rate Weighted Average Rate Amount 1.32% 2.02% 1.79% $ $ 3,500 12,000 15,500 1.39% 1.41% 1.41% Amount $ $ 5,000 10,500 15,500 $ 5,000 5,000 2,000 — 3,500 $ 15,500 68AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. INCOME TAXES The provision for income taxes for the years ended December 31, 2018, 2017 and 2016 consisted of the following (dollars in thousands): 2018 Current Deferred Provision for income taxes 2017 Current Deferred Provision for income taxes 2016 Current Deferred Provision for income taxes Federal State Total $ $ $ $ $ $ 733 205 938 1,397 1,222 2,619 2,701 (308) 2,393 $ $ $ $ $ $ 508 128 636 608 25 633 974 25 999 $ $ $ $ $ $ 1,241 333 1,574 2,005 1,247 3,252 3,675 (283) 3,392 69AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. INCOME TAXES (Continued) Deferred tax assets (liabilities) consisted of the following (dollars in thousands): Deferred tax assets: Allowance for loan and lease losses Unrealized gains on available-for-sale investment securities Deferred compensation Future state tax deduction Other Total deferred tax assets Deferred tax liabilities: Deferred loan costs Federal Home Loan Bank stock dividends Other real estate owned Premises and equipment Total deferred tax liabilities Net deferred tax assets December 31, 2018 2017 $ $ 1,328 787 1,695 110 48 3,968 (291) (139) (50) (24) (504) 1,354 135 1,807 132 100 3,528 (136) (139) (51) (57) (383) $ 3,464 $ 3,145 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, 2015 and by state and local taxing authorities for years before December 31, 2014. There were no unrecognized tax benefits accrued by the Company as of December 31, 2018. The Company does not expect to have any unrecognized tax benefits in the next twelve months. The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate of 21% in 2018 and 34% in 2017 and 2016 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 Effect of Federal rate reduction on deferred tax assets 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 Year Ended December 31, 2017 2018 2016 21.0% 8.1% — (3.3)% (1.0)% 0.1% (0.6)% 24.3% 34.0% 6.5% 19.0% (6.1)% (1.7)% 0.1% (1.4)% 50.4% 34.0% 7.1% — (4.7)% (1.1)% 0.1% (0.8)% 34.6% 70AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK Leases 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, 2019 2020 2021 2022 2023 Thereafter $ 747 689 659 633 282 930 $ 3,940 Rental expense included in occupancy, furniture and equipment expense totaled $753,000, $755,000 and $858,000 for the years ended December 31, 2018, 2017 and 2016, respectively. Financial Instruments With Off-Balance-Sheet Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the consolidated balance sheet. The following financial instruments represent off-balance- sheet credit risk (dollars in thousands): 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, 2018 2017 $ $ $ 47 21,185 13,044 34,276 361 $ $ $ 175 3,565 7,183 10,923 121 At inception, real estate loan commitments are generally secured by property with a loan to value ratio of 55% to 75%. In addition, the majority of the Company’s commitments have variable rates. 71AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK (Continued) Financial Instruments With Off-Balance-Sheet Risk (Continued) 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 87% and 91% of the Company’s loan portfolio at December 31, 2018 and 2017, 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. Correspondent Banking Agreements The Company maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. The Company had $9,175,000 in uninsured deposits at December 31, 2018. The Company had $6,882,000 in uninsured deposits at December 31, 2017. 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. 72AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. SHAREHOLDERS’ EQUITY Earnings Per Share A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows (dollars and shares in thousands, except per share data): For the Year Ended December 31, 2018 Basic earnings per share Effect of dilutive stock-based compensation Diluted earnings per share December 31, 2017 Basic earnings per share Effect of dilutive stock-based compensation Diluted earnings per share December 31, 2016 Basic earnings per share Effect of dilutive stock-based compensation Diluted earnings per share Weighted Average Number of Shares Outstanding Net Income Per-Share Amount $ $ $ $ $ $ 4,900 — 4,900 3,198 — 3,198 6,404 — 6,404 5,871 38 5,909 6,349 78 6,427 6,747 36 6,783 $ $ $ $ $ $ 0.83 0.83 0.50 0.50 0.95 0.94 No shares were antidilutive for the year ended December 31, 2018. Stock options for 34,736 shares and 98,783 shares of common stock were not considered in computing diluted earnings per common share for the years ended December 31, 2017 and 2016, respectively, because they were antidilutive. 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 11,140 options remain outstanding at December 31, 2018. On March 17, 2010, the Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan was approved by the Company’s shareholders on May 20, 2010. At December 31, 2018, the total number of authorized shares that are available for issuance under the 2010 Plan is 1,287,096. 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. Remaining awards granted under the 2000 Plan are 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. 73AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. SHAREHOLDERS’ EQUITY (Continued) Stock Based Compensation (Continued) The vesting period is generally five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding option awards under the 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. There were no options granted in 2016, 2017 or 2018 under either stock-based compensation plans. A summary of the outstanding and nonvested stock option activity for the year ended December 31, 2018 is as follows: Outstanding Nonvested Balance, January 1, 2018 Options granted Options vested Options exercised Options expired or canceled Balance, December 31, 2018 Weighted Average Exercise Price Per Share $ $ $ $ $ $ 11.26 — — 8.89 15.68 8.71 Shares 14,738 — (7,602) — — 7,136 Shares 97,543 — — (21,310) (35,135) 41,098 A summary of options as of December 31, 2018 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 $ $ $ $ $ $ $ $ $ $ 2.93 — 2.92 — — 2.94 9.29 33,238 6.02 33,962 14,738 8.59 182,036 3.54 74AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. SHAREHOLDERS’ EQUITY (Continued) Stock Based Compensation (Continued) Range of Exercise Prices $7.07- $8.59 $8.60- $16.19 Restricted Stock Number of Options Outstanding December 31, 2018 16,542 34,023 41,098 Weighted Average Remaining Contractual Life 1.19 years 5.85 years Number of Options Exercisable December 31, 2018 16,542 17,420 33,962 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, 2018, 2017 and 2016: There were 22,514 shares of restricted stock awarded during 2018. Of the 22,514 restricted common shares, 8,535 will vest one year from the date of the award, 11,599 will vest 33% per year from the date of the award, and 2,380 will vest 20% per year from the date of the award. The weighted average contractual term over which the restricted stock will vest is 2.45 years. There were 32,315 shares of restricted stock awarded during 2017. Of the 32,315 restricted common shares, 7,862 will vest one year from the date of the award, 7,333 will vest 33% per year from the date of the award, and 2,087 will vest 20% per year from the date of the award. The remaining 15,033 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 15,033 awards are related to the 2017-2018 performance period and were forfeited as the Company did not meet the minimum performance target or the employee was terminated prior to the end of the performance period. The weighted average contractual term over which the restricted stock will vest is 1.50 years. 75AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. SHAREHOLDERS’ EQUITY (Continued) Restricted Stock (Continued) Restricted Stock Nonvested at January 1, 2018 Awarded Vested Cancelled Nonvested at December 31, 2018 Weighted Average Grant Date Fair Value $ $ $ $ $ 12.27 15.44 13.26 14.54 14.60 Shares 49,053 22,514 (27,899) (11,140) 32,528 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. 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 Stock Repurchase Program 2018 2017 (Dollars in thousands) 2016 137 189 14 227 53 171 17 1.0 318 0.8 $ $ $ $ $ $ $ $ 235 351 57 273 99 174 47 1.0 284 1.1 $ $ $ $ $ $ $ $ 3 13 41 331 116 215 99 1.3 376 1.6 $ $ $ $ $ $ $ $ On January 25, 2017, the Company approved and authorized a stock repurchase program for 2017 (the “2016 Program”). The 2017 Program authorized the repurchase during 2017 of up to 5% of the outstanding shares of the Company’s common stock. In addition, on October 18, 2017, the Company approved and authorized an additional amount of 5% to be purchased under the 2017 Program. During 2017, the Company repurchased 574,748 shares of its common stock at an average price of $14.99 per share. On January 24, 2018, the Company approved and authorized a stock repurchase program for 2018 76AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. SHAREHOLDERS’ EQUITY (Continued) Stock Repurchase Program (Continued) (the “2018 Program”). The 2018 Program authorized the repurchase during 2018 of up to 5% of the outstanding shares of the Company’s common stock. During 2018, the Company repurchased 308,618 shares of its common stock at an average price of $15.52 per share. 14. REGULATORY MATTERS Dividends Upon declaration by the Board of Directors of the Company, all shareholders of record will be entitled to receive dividends. Beginning in January of 2017, the Company reinstated paying quarterly cash dividends on its common stock. In 2018 and 2017, the Company declared cash dividends in the amount of $0.05 per common share for each quarter, totaling $0.20 per common share for the years ended December 31, 2018 and 2017. 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 2016. 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. 77AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. REGULATORY MATTERS (Continued) Dividends (Continued) In addition, the California Financial Code restricts the total dividend payment of any state banking corporation in any calendar year to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. In addition, subject to prior regulatory approval, any state banking corporation may request an exception to this restriction. Regulatory Capital The Company and ARB are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the FDIC. Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and American River Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of December 31, 2018 and 2017, the most recent regulatory notification categorized American River Bank as well capitalized under the regulatory framework for prompt corrective action plan. There are no conditions or events since that notification that management believes have changed the Bank’s categories. Effective January 1, 2015, bank holding companies with consolidated assets of $1 Billion or more ($3 Billion or more effective August 30, 2018) and banks like American River Bank must comply with new minimum capital ratio requirements to be phased-in between January 1, 2015 and January 1, 2019, which would consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%. In addition, a “capital conservation buffer,” 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. 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, 2018 and 2017. 78AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. REGULATORY MATTERS (Continued) Regulatory Capital (Continued) Leverage Ratio American River Bankshares and Subsidiaries 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 American River Bank Minimum requirement for “Well-Capitalized” institution Minimum regulatory requirement* Total Risk-Based Capital Ratio American River Bankshares and Subsidiaries American River Bank Minimum requirement for “Well-Capitalized” institution Minimum regulatory requirement* 2018 Amount December 31, Ratio (Dollars in thousands) Amount 2017 Ratio $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 60,276 60,704 33,700 39,597 60,704 24,307 23,839 60,276 60,704 29,916 29,449 64,668 65,096 37,395 36,928 8.9% 9.0% 5.0% 5.9% 16.2% 6.5% 6.4% 16.1% 16.2% 8.0% 7.9% 17.3% 17.4% 10.0% 9.9% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 60,921 60,041 32,215 33,826 60,041 22,038 19,495 60,921 60,041 27,123 24,581 65,135 64,282 33,928 31,383 9.5% 9.3% 5.0% 5.3% 17.7% 6.5% 5.8% 18.1% 17.7% 8.0% 7.3% 19.3% 19.0% 10.0% 9.3% * Ratio for regulatory requirement includes the capital conservation buffer of 1.875% as of December 31, 2018 and 1.25% as of December 31, 2017. 79AMERICAN 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 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, 2017 2018 2016 422 307 277 1,006 $ $ 411 317 242 970 $ $ Year Ended December 31, 2017 2016 2018 $ $ 1,158 315 514 409 140 480 388 1,140 319 427 360 135 175 610 377 322 251 950 995 366 417 357 141 129 595 $ 3,404 $ 3,166 $ 3,000 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 $230,000, $196,000 and $195,000 for the years ended December 31, 2018, 2017 and 2016, 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. 80AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. EMPLOYEE BENEFIT PLANS (Continued) American River Bankshares Deferred Compensation Plan The Company has established a Deferred Compensation Plan for certain members of the management team and a Deferred Fee Agreement for Non- Employee Directors for the purpose of providing the opportunity for participants to defer compensation. Participants of the management team, who are selected by a committee designated by the Board of Directors, may elect to defer annually a minimum of $5,000 or a maximum of eighty percent of their base salary and all of their cash bonus. Directors may also elect to defer up to one hundred percent of their monthly fees. The Company bears all administration costs and accrues interest on the participants’ deferred balances at a rate based on U.S. Government Treasury rates plus 4.0%. This rate was 6.20% and 5.93% for 2018 and 2017, respectively. Deferred compensation, including interest earned, totaled $3,211,000 and $3,216,000 at December 31, 2018 and 2017, respectively. The expense recognized under this plan totaled $199,000, $183,000 and $168,000 for the years ended December 31, 2018, 2017 and 2016, 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, 2018 and 2017, the Company had accrued $1,402,000 and $1,474,000, 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 $85,000, $234,000 and $178,000 for the years ended December 31, 2018, 2017 and 2016, respectively. In connection with these current and former plans, the Company invested in single premium life insurance policies with cash surrender values totaling $15,429,000 and $15,122,000 at December 31, 2018 and 2017, respectively. Tax-exempt income on these policies, net of expense, totaled approximately $307,000, $317,000 and $322,000 for the years ended December 31, 2018, 2017 and 2016, respectively. 81AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 2018 (dollars in thousands): Balance, January 1, 2018 Disbursements Amounts repaid Balance, December 31, 2018 $ $ 708 — (32) 676 There are no undisbursed commitments to related parties as of December 31, 2018. The Company also leases one of its branch facilities from a current member of the Company’s Board of Directors. Rental payments to the Director totaled $76,000, $76,000 and $110,000 for the years ended December 31, 2018, 2017 and 2016, respectively. 82AMERICAN RIVER BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS December 31, 2018 and 2017 (Dollars in thousands) ASSETS Cash and due from banks Investment in subsidiaries Other assets LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Other liabilities Total liabilities Shareholders’ equity: Common stock Retained earnings Accumulated other comprehensive loss, net of taxes Total shareholders’ equity 2018 2017 $ 261 75,149 172 $ 1,605 76,040 264 $ 75,582 $ 77,909 $ $ 861 861 988 988 30,103 46,494 (1,876) 34,463 42,779 (321) 74,721 76,921 $ 75,582 $ 77,909 83AMERICAN 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, 2018, 2017 and 2016 (Dollars in thousands) Income: Dividends declared by subsidiaries – eliminated in consolidation $ 4,845 $ 11,118 $ 7,675 2018 2017 2016 Total income Expenses: Professional fees Directors’ expense Other expenses Total expenses Income before equity in undistributed income of subsidiaries Equity in undistributed (dividends in excess of) income of subsidiaries Income before income taxes Income tax benefit Net income 4,845 11,118 7,675 155 361 218 734 4,111 562 4,673 227 142 282 226 650 10,468 (7,554) 2,914 284 91 285 203 579 7,096 (930) 6,166 238 $ 4,900 $ 3,198 $ 6,404 84AMERICAN 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, 2018, 2017 and 2016 (Dollars in thousands) 2018 2017 2016 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: (Equity in undistributed) dividends in excess of income of subsidiaries Equity-based compensation expense Increase in other assets (Decrease) increase in other liabilities $ 4,900 $ 3,198 $ 6,404 (562) 227 (10) (127) 7,554 273 (95) (1) 930 331 (235) 39 Net cash provided by operating activities 4,428 10,929 7,469 Cash flows from financing activities: Proceeds from exercised options Cash dividends paid Cash paid to repurchase common stock Net cash used in financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year 189 (1,188) (4,773) (5,772) (1,344) 1,605 351 (1,293) (8,641) (9,583) 1,346 259 Cash and cash equivalents at end of year $ 261 $ 1,605 $ 13 — (7,414) (7,401) 68 191 259 85Selected Quarterly Information (Unaudited) (In thousands, except per share and price range of common stock) 2018 2017 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 Interest income Net interest income Provision for loan and lease losses Noninterest income Noninterest expense Income before taxes Net income (loss) (1) Basic earnings (loss) per share Diluted earnings (loss) per share Cash dividends per share Price range, common stock March 31, June 30, September 30, December 31, $ $ 5,066 4,737 — 372 3,350 1,759 1,353 $ 5,498 5,120 — 380 3,828 1,672 1,269 $ 5,666 5,257 50 377 4,003 1,581 1,153 6,012 5,532 125 384 4,329 1,462 1,125 $ 0.23 0.22 0.05 $ 12.21-16.48 $ 0.22 0.22 0.05 $ 14.95-17.50 $ 0.20 0.20 0.05 $ 14.90-17.48 $ 0.19 0.19 0.05 $ 10.50-15.65 $ $ $ 5,053 4,811 — 419 3,430 1,800 1,184 5,121 4,869 — 439 3,368 1,940 1,297 $ 5,082 4,803 300 377 3,312 1,568 1,109 5,158 4,870 150 361 3,939 1,142 (392) $ 0.18 0.18 0.05 $ 13.09-15.90 $ 0.20 0.20 0.05 $ 13.46-15.20 $ 0.18 0.17 0.05 $ 12.97-14.55 $ (0.06) (0.06) 0.05 $ 13.95-15.69 (1) The net loss in the fourth quarter of 2017 results from the increased expenses related to management changes and tax related expenses as the Company was required to write-down a portion of its deferred tax assets to comply with “H.R.1” commonly referred to as the Tax Cuts and Jobs Act. 86Giving Business More Reach AmericanRiverBank.com

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