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Central Valley Community Bancorp2019 Annual Report
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TABLE OF CONTENTS
2019 Year In Review
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, 2019 and 2018
Consolidated Statements of Income for the
Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in
Shareholders’ Equity for the Years Ended
December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Selected Quarterly Information
1
2
3
4
5
28
29
31
32
33
34
35
37
85
ANNUAL REPORT COPIES. American River Bankshares will provide its security holders and
interested parties, without charge, a copy of its 2019 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.
2019 YEAR IN REVIEW
We are pleased to report our 2019 results that demonstrate the outcome of the growth plan
we unveiled the prior year.
As projected, we experienced growth in both deposits and loans. This growth tells only part
of the story. Our attention to both current and new client relationships was rewarded with
a revitalized interest in American River Bank. This interest resulted in satisfying the
financial needs of the communities we serve and successfully driving up the interest income
by providing innovative lending solutions.
Financial Highlights from 2019
Net income was $5.5 million, an increase of $600,000 (12.2%) from $4.9 million in 2018.
Net loans increased $75.3 million (23.6%) and core deposits* increased $28.4 million
(5.7%) over 2018.
Net interest income was $23.2 million, compared to $20.6 million for the twelve months
ended December 31, 2018. This reflects a net interest margin of 3.60% for 2019
compared to 3.41% in 2018.
Loan and lease losses allowance at December 31, 2019 was $5.1 million (1.29% of total
loans and leases), compared to $4.4 million (1.36% of total loans and leases) at December
31, 2018. There were no nonperforming loans at December 31, 2019 and just $27,000 at
December 31, 2018.
Shareholders’ equity was $82.9 million compared to $74.7 million at December 31, 2018.
Tangible book value per share was $11.29 compared to $9.97 at December 31, 2018.
Book value per share was $14.06 per share compared to $12.75 per share at December
31, 2018.
The Company continued the quarterly cash dividend by paying a $0.07 per share cash
dividend on November 12, 2019. Cash dividends per share for the year ended December
31, 2019 were $0.24, compared to $0.20 for the year ended December 31, 2018.
The Company continues to maintain strong capital ratios. Our Leverage ratio was 9.2%;
the Tier 1 Risk-Based Capital ratio was 14.8%; and the Total Risk-Based Capital ratio
was 15.9%.
Looking back, 2019 was considered a successful year for the Company. We made solid
progress despite the challenges of low interest rates, experienced industry-wide, and those
unique to our geographic area including devastating fires and unpredictable power outages.
Already in 2020 the Coronavirus has caused, and will continue to cause, economic distress.
Be assured, our leadership team is prepared for the upcoming challenges. We continue to
be responsive and adjust to the ever changing and uncertain environment.
We are grateful to our employees who have worked together and embraced our growth
plan. Their commitment to deliver high quality service played a major role in our success in
2019.
On behalf of the Directors and employees at American River Bankshares, thank you for
your confidence and support.
Charles D. Fite
Chairman of the Board
David E. Ritchie, Jr.
President & CEO
*The Company considers all deposits except time deposits as core deposits.
1 OUR LOCATIONS
ANNUAL MEETING
The 2020 annual meeting of American River Bankshares will be held at
4:00 p.m. on Thursday, May 21, 2020.
2
OUR TEAM
AMERICAN RIVER BANK AND
BANKSHARES BOARD OF
DIRECTORS
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
Nicolas C. Anderson
Chief Executive Officer
ArcherHall
Kimberly A. Box
President & Chief Executive Officer,
Gatekeeper Innovation, Inc.
Jeffery Owensby
Mediator and Arbitrator, Judicate West
Julie A. Raney, Esq.
Deputy General Counsel, Sutter Health
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
AMERICAN RIVER BANK
LEADERSHIP TEAM
David E. Ritchie, Jr.
President & Chief Executive Officer
Kevin B. Bender
EVP & Chief Operating Officer
Lisa R. Cisneros
EVP, Retail Banking
Mitchell A. Derenzo
EVP & Chief Financial Officer
Dan C. McGregor
EVP & Chief Credit Officer
Gregory N. Patton
EVP, Commercial Banking
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/
HOLDERS
As of February 6, 2020 there were
approximately 2,544 shareholders of
record of the Company’s common stock.
3
Selected Financial Data.
FINANCIAL SUMMARY-The following table presents certain consolidated financial information concerning the
business of the Company and its subsidiaries. This information should be read in conjunction with the Consolidated
Financial Statements, the notes thereto, and Management's Discussion and Analysis included in this report.
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
Financial Ratios:
Return on average equity
Return on average tangible equity
Return on average assets
Efficiency ratio (2)
Net interest margin (2)
Net loans and leases to deposits
Net (recoveries) charge-offs to average
loans & leases
Nonperforming loans and leases to total
loans and leases (3)
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
2019
2018
2017
2016
2015
$
$
23,209
660
1,688
16,846
7,391
1,891
5,500
$
$
20,646
175
1,513
15,510
6,474
1,574
4,900
$
$
19,353
450
1,596
14,049
6,450
3,252
3,198
$
20,243 $
(1,344)
2,045
13,836
9,796
3,392
$
6,404 $
20,007
-
2,015
14,080
7,942
2,674
5,268
$ 0.94
$ 0.94
$ 0.24
$ 14.06
$ 11.29
$ 0.83
$ 0.83
$ 0.20
$ 12.75
$ 9.97
0.50
$
$ 0.50
$ 0.20
$ 12.54
9.88
$
$ 0.95 $ 0.70
$ 0.94 $ 0.70
$ 0.00 $ 0.00
$ 12.59 $ 11.72
$ 10.14 $ 9.50
$ 720,353 $ 688,092
318,516
590,674
74,721
393,802
604,837
82,909
$ 655,622
308,713
556,080
76,921
$ 651,450 $ 634,640
289,102
530,690
86,075
324,086
544,806
83,850
6.92%
8.71%
0.78%
67.09%
3.60%
65.11%
6.77%
8.74%
0.72%
69.35%
3.41%
53.92%
3.91%
4.88%
0.49%
65.84%
3.39%
55.52%
7.60%
9.43%
1.00%
60.81%
3.62%
59.49%
6.03%
7.42%
0.85%
62.87%
3.63%
54.48%
(0.02%)
0.08%
0.25%
(0.39%)
0.12%
0.00%
0.01%
0.60%
0.01%
0.56%
1.29%
11.30%
26%
9.16%
14.77%
15.94%
1.36%
10.62%
24%
8.94%
16.11%
17.29%
1.43%
12.53%
40%
9.45%
18.08%
19.34%
1.47%
13.20%
0%
1.69%
14.02%
0%
10.50%
19.02%
20.27%
10.97%
19.34%
20.59%
(1) On January 25, 2017, the Company reinstated the payment of quarterly cash dividends.
(2) Fully taxable equivalent.
(3) Nonperforming loans and leases consist of loans and leases past due 90 days or more and still accruing and nonaccrual loans
and leases.
4 Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 2019 Form 10-K filed with the Securities and Exchange Commission on February 21, 2020.
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 used in the computation of the net interest margin and efficiency ratio. Management has
presented these non-GAAP financial measures in this Form 10K 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.
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
$
$
December 31,
2018
(dollars in thousands)
$
74,721
$
2019
82,909
2017
76,921
(16,321 )
66,588
$
(16,321)
58,400
$
(16,321)
60,600
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 2019
and 2018 and a 34% effective tax rate for 2017, allows comparability of net interest margin with industry peers by
eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and
tax-exempt loans and investments. The efficiency ratio is a measure of a banking company’s overhead as a
percentage of its revenue. The Company derives this ratio by dividing total noninterest expense by the sum of the
taxable equivalent net interest income and the total noninterest income.
Reconciliation of Annualized Net Interest Margin, Fully Tax Equivalent (non-GAAP)
(dollars in thousands)
Net interest income (GAAP)
Tax equivalent adjustment
Net interest income - tax equivalent
adjusted (non-GAAP)
Average earning assets
Net interest margin (GAAP)
Net interest margin (non-GAAP)
2019
$ 23,209
214
December 31,
2018
$ 20,646
207
2017
$ 19,353
390
$ 23,423
$ 20,853
$ 19,743
$ 650,627
3.57%
3.60%
$ 611,696
3.38%
3.41%
$ 582,443
3.32%
3.39%
5
Reconciliation of Non-GAAP Measure – Efficiency Ratio
(dollars in thousands)
Net interest income (GAAP)
Tax equivalent adjustment
Net interest income – tax-equivalent
adjusted (non-GAAP)
Noninterest income
Total income
Total noninterest expense
Efficiency ratio, fully tax-equivalent
(non-GAAP)
Critical Accounting Policies
General
2019
$ 23,209
214
$ 23,423
1,688
25,111
16,846
December 31,
2018
$ 20,646
207
$ 20,853
1,513
22,366
15,510
2017
$ 19,353
390
$ 19,743
1,596
21,339
14,049
67.09%
69.35%
65.84%
The Company's financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to
a significant extent, financial information that is based on measures of the financial effects of transactions and events
that have already occurred. We use historical loss data and the economic environment as factors, among others, in
determining the inherent loss that may be present in our loan and lease portfolio. Actual losses could differ
significantly from the factors that we use. In addition, GAAP itself may change from one previously acceptable
method to another method. Although the economics of our transactions would be the same, the timing of events that
would impact our transactions could change.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of probable credit losses inherent in the Company's
credit portfolio that have been incurred as of the balance-sheet date. The allowance is based on two basic principles
of accounting: (1) “Accounting for Contingencies,” which requires that losses be accrued when it is probable that a
loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) the “Receivables”
topic, which requires that losses be accrued on impaired loans based on the differences between the value of
collateral, present value of future cash flows or values that are observable in the secondary market and the loan
balance.
The allowance for loan and lease losses is determined based upon estimates that can and do change when the
actual risk, loss events, or changes in other factors, occur. The analysis of the allowance uses a historical loss view
as an indicator of future losses and as a result could differ from the actual losses incurred in the future. If the
allowance for loan and lease losses falls below that deemed adequate (by reason of loan and lease growth, actual
losses, the effect of changes in risk factors, or some combination of these), the Company has a strategy for
supplementing the allowance for loan and lease losses, over the short-term. For further information regarding our
allowance for loan and lease losses, see “Allowance for Loan and Lease Losses Activity.”
Stock-Based Compensation
The Company recognizes compensation expense over the service period in an amount equal to the fair value
of all share-based payments which consist of stock options and restricted stock awarded to directors and employees.
The fair value of each stock option award is estimated on the date of grant and amortized over the service period
using a Black-Scholes-Merton based option valuation model that requires the use of assumptions. Critical
assumptions that affect the estimated fair value of each award include expected stock price volatility, dividend yields,
option life and the risk-free interest rate. The fair value of each restricted award is estimated on the date of award
and amortized over the service period.
Overview
The Company recorded net income in 2019 of $5,500,000, an increase of $600,000 (12.2%) from $4,900,000
in 2018. Diluted earnings per share were $0.94 for 2019 and $0.83 for 2018. For 2019, the Company realized a
return on average equity of 6.92% and a return on average assets of 0.78%, compared to 6.77% and 0.72%,
respectively, in 2018.
6
Net income for 2018 increased $1,702,000 (53.2%) from $3,198,000 in 2017. Diluted earnings per share for
2017 were $0.50. For 2017, the Company realized a return on average equity of 3.91% and return on average assets
of 0.49%. 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)
2019
$ 25,884
(2,461)
23,423
2018
$ 22,449
(1,596)
20,853
(660)
1,688
(16,846)
(1,891)
(214)
$ 5,500
(175)
1,513
(15,510)
(1,574)
(207)
$ 4,900
2017
$ 20,804
(1,061)
19,743
(450)
1,596
(14,049)
(3,252)
(390)
$ 3,198
$ 703,205
$ 681,630
$ 652,720
0.78%
0.72%
0.49%
During 2019, total assets of the Company increased $32,261,000 (4.7%) from $688,092,000 at December 31,
2018 to $720,353,000 at December 31, 2019. At December 31, 2019, net loans totaled $393,802,000, an increase of
$75,286,000 (23.6%) from the ending balance of $318,516,000 at December 31, 2018. Deposits increased
$14,163,000 or 2.4% from $590,674,000 at December 31, 2018 to $604,837,000 at December 31, 2019.
Shareholders’ equity increased $8,188,000 or 11.0% from $74,721,000 at December 31, 2018 to $82,909,000 at
December 31, 2019. The Company ended 2019 with a leverage capital ratio of 9.2% and a total risk-based capital
ratio of 15.9% compared to a leverage capital ratio of 8.9% and a total risk-based capital ratio of 17.3% at the end of
2018.
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 3.60% in 2019, 3.41% in 2018, and 3.39%
in 2017. The fully taxable equivalent net interest income increased $2,570,000 (12.3%), from $20,853,000 in 2018
to $23,423,000 in 2019. 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 interest income component increased $3,435,000 (15.3%) from $22,449,000 in
2018 to $25,884,000 in 2019. The increase in the fully taxable equivalent interest income for 2019 compared to the
same period in 2018 is comprised of two components - rate (up $1,335,000) and volume (up $2,100,000). The
primary driver in this rate increase was an increase in the yield on loans which saw an increase from 4.72% in 2018 to
4.95% in 2019 and an increase in the yield on investments, which saw an increase from 2.66% in 2018 to 2.81% in
2019. The increased yield in 2019 compared to 2018 was due to the overall higher interest rate environment. The
yield on earning assets increased from 3.67% during 2018 to 3.98% during 2019. The volume increase of $2,100,000
was primarily from an increase in loans ($2,394,000) and interest-bearing deposits in banks ($153,000), partially
offset by a decrease in investment balances ($103,000) and Federal funds ($345,000). Average loans balances
increased $50,964,000, (or 16.5%), from $308,365,000 during 2018 to $359,329,000 during 2019, average interest-
bearing deposits in banks increased $168,000, (or 509.1%), from $33,000 during 2018 to $201,000 during 2019
average investment balances decreased $1,602,000, (or 0.6%), from $282,898,000 during 2018 to $281,296,000 in
7 2019, and average Federal funds decreased $18,515,000, (or 99.1%), from $18,688,000 during 2018 to $173,000 in
2019.
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.
Interest expense was $865,000 (or 54.2%) higher in 2019 compared to 2018, increasing from $1,596,000 to
$2,461,000. The $865,000 increase in interest expense during 2019 compared to 2018 was due to higher rates (up
$745,000) and higher volume (up $120,000). 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 22 basis points from 0.41% to 0.63% for 2018 compared to 2019. The largest increase due to
rates occurred in interest checking and money market accounts and in the time deposits. The rate paid on interest
checking and money market accounts increased from 0.14% during 2018 to 0.34% during 2019 and accounted for
$300,000 of the $745,000 increase attributed to rates. The rate paid on time deposit accounts increased from 1.86%
during 2018 to 2.89% during 2019 and accounted for $342,000 of the $745,000 increase attributed to rates. The
volume increase of $120,000 was attributed to an increase in average time deposit balances which increased from
$79,422,000 during 2018 to $85,723,000 during 2019 and accounted for $84,000 of the $120,000 increase and an
increase in average other borrowings which increased from $15,533,000 during 2018 to $18,430,000 during 2019 and
accounted for $44,000 of the $120,000 increase.
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.
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.
8
Table Two: Analysis of Net Interest Margin on Earning Assets
Year Ended December 31,
(Taxable Equivalent Basis)
(dollars in thousands)
Avg
Balance
2019
Interest
Avg
Yield
Avg
Balance
201 8
Interest
Avg
Yield
Avg
Balance
2017
Interest
Avg
Yield
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
$ 338,775
20,554
$ 16,834
942
4.97% $ 294,114 $ 13,924
632
14,251
4.58%
4.73%
4.43%
$ 305,345
14,286
$ 13,947
667
4.57%
4.67%
271,779
7,589
2.79%
264,247
6,901
2.61%
238,710
5,287
2.21%
9,517
-
173
9,829
650,627
16,440
40,878
(4,740)
313
-
5
3.29%
-
2.89%
18,651
-
18,688
611
-
348
3.28%
-
1.86%
22,789
55
-
874
16
-
3.84%
29.09%
-
201
25,884
2.04%
3.98%
33
22,449
1.89%
3.67%
1,745
611,696
34,535
39,822
(4,423)
$ 681,630
1,258
582,443
35,876
39,201
(4,800)
$ 652,720
13
20,804
1.03%
3.57%
Total average assets
$ 703,205
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
Total average liabilities and
shareholders' equity
Net interest income &
margin (3)
$ 212,499
74,304
85,723
18,430
563
28
1,487
383
0.26% $ 219,742
71,742
0.04%
1.73%
79,422
2.08% 15,533
272
26
1,061
237
0.12%
0.04%
1.34%
1.53%
$ 197,298
64,880
81,056
15,522
139
22
694
206
0.07%
0.03%
0.86%
1.33%
390,956
222,616
10,136
623,708
79,497
$ 703,205
2,461
0.63%
1,596 0.41%
386,439
215,721
7,062
609,222
72,408
$ 681,630
358,756
204,565
7,583
570,904
81,816
$ 652,720
1,061
0.30%
$ 23,423
3.60%
$ 20,853
3.41%
$ 19,743
3.39%
(1) Loan and lease interest includes loan and lease fees of $257,000, $533,000 and $238,000 in 2019, 2018 and 2017, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal income
taxes. The effective federal statutory tax rate was 21% in 2019 and 2018 and 34% in 2017.
(3) Net interest margin is computed by dividing net interest income by total average earning assets.
9
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
Year ended December 31, 2019 over 2018 (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)
Federal funds sold
Interest-bearing deposits in other banks
Total interest on earning assets
Interest-bearing liabilities:
Interest checking and money market
Savings deposits
Time deposits
Other borrowings
Total interest on interest-bearing liabilities
Interest differential
Volume
$ 2,114
280
197
(299)
(345)
153
2,100
(9)
1
84
44
120
$ 1,980
Year Ended December 31, 2018 over 2017 (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 on earning assets
Interest-bearing liabilities:
Interest checking and money market
Savings deposits
Time deposits
Other borrowings
Total interest on interest-bearing liabilities
Interest differential
Volume
$ (513)
(2)
566
(159)
(16)
-
5
(119)
16
2
(14)
-
4
(123)
$
Rate (4)
$ 796
30
491
1
2
15
1,335
300
1
342
102
745
$ 590
Rate (4)
$ 490
(33)
1,048
(104)
-
348
15
1,764
117
2
381
31
531
$ 1,233
Net Change
$ 2,910
310
688
(298)
(343)
168
3,435
291
2
426
146
865
$ 2,570
Net Change
$
(23)
(35)
1,614
(263)
(16)
348
20
1,645
133
4
367
31
535
$ 1,110
(1) The average balance of non-accruing loans and leases is immaterial as a percentage of total loans and leases and
has been included in net loans and leases.
(2) Loan and lease fees of $257,000, $533,000 and $238,000 for the years ended December 31, 2019, 2018 and 2017,
respectively, have been included in the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is
exempt from federal income taxes. The effective federal statutory tax rate was 21% in 2019 and 2018 and 34% in
2017.
(4) The rate/volume variance has been included in the rate variance.
10
Provision for Loan and Lease Losses
The Company experienced net loan and lease recoveries of $86,000 or -0.02% of average loans and leases
during 2019 and recorded a provision for loan and lease losses of $660,000 to support the Company’s loan growth
during the year. 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 2018 and 2017. 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 zero at December 31, 2019. 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
Merchant fee income
Earnings on bank-owned life insurance
Gain on sale of securities
Other
_____Year Ended December 31,
2019
2018
2017
$
558 $
391
334
115
290
476 $
422
307
31
277
465
411
317
161
242
$
1,688 $
1,513 $
1,596
Noninterest income increased $175,000 (11.6%) to $1,688,000 in 2019 from $1,513,000 in 2018. The
increase from 2018 to 2019 was primarily related to higher gains on sale of securities which increased $84,000
(271.0%) from 2018 to 2019 and an increase in service charges on deposit accounts which increased $82,000
(17.2%) from $476,000 in 2018 to $558,000 in 2019.
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 Expense
Salaries and Benefits
Salaries and benefits were $11,316,000 (up $1,113,000 or 10.9%) for 2019, compared to $10,203,000 in
2018. The increase in salaries and benefits expense resulted from a full year of salary and benefits for new hires in
2018 including additional relationship managers and lending support personnel, as well as, increased incentive
payments to the relationship managers due to the increased loan production in 2019. Salary expense in 2019 also
includes normal cost of living increases and promotions. Average full-time equivalent employees was 102 during
2019 compared to 97 during 2018. 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 $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.
11
Other Real Estate Owned
The total other real estate owned (“OREO”) expense in 2019 was $134,000 (up $114,000 or 570.0%)
compared to $20,000 in 2018. The primary reason for the increase in OREO related expense was due to the
$111,000 write-down of the Company’s lone remaining property in 2019 after receipt of an updated property
valuation report. Operating expenses on the properties in 2019 totaled $23,000 compared to $16,000 in 2018. Write-
downs on the property totaled $4,000 in 2018. At December 31, 2019, the Company held one property with a book
value of $846,000.
The total 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.
Occupancy, Furniture and Equipment
Occupancy expense decreased $27,000 (2.6%) during 2019 to $1,023,000, compared to $1,050,000 in 2018.
Furniture and equipment expense decreased $11,000 (2.0%) during 2019 to $542,000 compared to $553,000 in 2018.
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 $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.
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 $154,000 (76.2%) during
2019 to $48,000, compared to $202,000 in 2018. The assessments paid to the DBO in 2019 were $78,000, compared
to an expense of $78,000 in 2018. The decrease in FDIC assessments in 2019 is due to the receipt of the FDIC’s
Small Bank Assessment Credits during the year as the Deposit Insurance Fund Reserve Ratio exceeded 1.35%.
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 $78,000, compared to an expense of $74,000 in 2017.
Other Expenses
Table Five below provides a summary of the components of the other noninterest expenses for the periods
indicated (dollars in thousands):
Professional fees
Outsourced item processing
Directors' expense
Telephone and postage
Stationery and supplies
Advertising and promotion
Other operating expenses
Year Ended December 31,
2019
2018
2017
$
1,226 $
322
518
328
138
599
574
1,158 $
315
514
409
140
561
307
$
3,705 $
3,404 $
1,140
319
427
360
135
228
557
3,166
Other expenses were $3,705,000 (up $301,000 or 8.8%) for 2019, compared to $3,404,000 for 2018. The
increase in other expenses occurred primarily in the professional fees (up $68,000) and bank charges (up $233,000)
(which is included in the other operating expenses line item). The increase in professional expenses is related to
more services being provided by the Company’s network administrator. The higher bank charges relate to lower
12
average balances maintained by the Company in these accounts in 2019 resulting in higher service charges and the
interest earned on these balances began to increase in 2018 due to the higher interest rate environment and continued
into 2019, as a result, in 2019 the Company began being recording this as interest income on deposits held in other
banks. Partially offsetting these increases was a reduction in telephone expense which decreased $91,000 (26.6%)
from $342,000 in 2018 to $251,000 in 2019 and relates to the Company converted to a more cost-effective telephone
system. The overhead efficiency ratio on a taxable equivalent basis for 2019 was 67.1% compared to 69.4% in 2018.
Other 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 $333,000 (146.1%), from $228,000 in 2017 to $561,000 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.
Provision for Income Taxes
The effective tax rate on income was 25.6%, 24.3%, and 50.4% in 2019, 2018 and 2017, respectively. The
effective tax rate differs from the federal statutory tax rate due to state tax expense (net of federal tax effect) of
$610,000, $523,000, and $420,000 in these years. Tax-exempt income of $1,361,000, $1,315,000, and $1,471,000
from investment securities, loans, and bank-owned life insurance in these years helped to reduce the effective tax
rate. The higher effective tax rate in 2019 compared 2018 is related to the tax treatment of equity based
compensation under Accounting Standards Update 2016-09 (“ASU 2016-09”). Under ASU 2016-09, if the market
value of the Company’s stock price on the date restricted stock vests is higher than the Company’s stock price on the
date the restricted stock was awarded the Company receives a tax credit for the difference in values and if the market
price on the vesting date is lower than the stock price on the award date the Company recognizes additional tax
expense. During 2018, the Company recognized a $166,000 tax credit under ASU 2016-09 and in 2019 the
Company recognized a $34,000 tax credit under ASU 2016-09.
The lower effective tax rate in 2018 compared to 2017 results from the lower corporate federal income tax
rate of 21% effective January 1, 2018, which was a reduction from the Company’s 2017 rate of 34%. The high
effective tax rate in 2017 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 $720,353,000 at December 31, 2019 compared to $688,092,000 at
December 31, 2018, representing an increase of $32,261,000 (4.7%). The average balances of total assets during
2019 were $703,205,000, up $21,575,000 or 3.2% from the 2018 average balances of total assets of $681,630,000.
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.
13
Table Six: Investment Securities Composition
(dollars in thousands)
__
Available-for-sale (at fair value)
Debt securities:
US Government Agencies and US
Government-Sponsored Agencies
Obligations of states and political
subdivisions
Corporate debt securities
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
2019
2018
2017
$ 241,887
$ 269,049
$ 232,869
13,447
6,631
-
-
$ 261,965
14,400
6,508
4,976
22,715
6,626
-
-
$ 294,933
112
$ 262,322
$ 248
$ 248
$ 292
292
$
$ 378
$ 378
Net unrealized gains on available-for-sale investment securities totaling $2,554,000 were recorded, net of
$752,000 in tax liabilities, as accumulated other comprehensive income within shareholders' equity at December 31,
2019 and net unrealized losses on available-for-sale investment securities totaling $2,664,000 were recorded, net of
$788,000 in tax assets, as accumulated other comprehensive income within shareholders’ equity at December 31,
2018. 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, 2019,
these categories accounted for approximately 11%, 54%, 14%, 6%, 7%, 0%, 2% and 6%, respectively, of the
Company’s loan portfolio compared to approximately 9%, 62%, 18%, 2%, 5%, 0%, 1% and 3%, respectively, at
December 31, 2018. 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 purchasing loans from this lender during the third quarter of 2018 and recorded $10,791,000 during
2018 and $20,960,000 during 2019 and accounts 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 $149 million in loans in 2019 and $104 million in 2018 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 $75.3 million (23.6%) from December 31, 2018. 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.
14
Table Seven: Loan and Lease Portfolio Composition
(dollars in thousands)
Commercial
Real estate:
Commercial
Multi-family
Construction
Residential
Lease financing receivable
Agriculture
Consumer
Deferred loan fees and costs, net
Allowance for loan and lease losses
Total net loans and leases
2019
2018
December 31,
2017
2016
$ 43,019 $ 29,650 $ 25,377 $ 35,374
2015
$ 36,195
214,604
56,818
23,169
29,180
-
6,479
25,671
398,940
-
199,591
23,494
14,533
14,200
732
2,431
3,122
294,298
(221)
(4,975)
$ 393,802 $ 318,516 $ 308,713 $ 324,086 $ 289,102
185,452
78,025
5,863
15,813
205
1,713
945
313,393
(202)
(4,478)
199,894
56,139
5,685
16,338
32
4,419
10,714
322,871
37
(4,392)
191,129
73,373
9,180
15,718
404
2,302
1,650
329,130
(222)
(4,822)
(5,138)
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 collector’s 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 loans secured by real property. 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 2019 were $359,329,000, which represents an increase of $50,964,000 (16.5%)
compared to the average in 2018. Average loans and leases in 2018 were $308,365,000, which represents a decrease
of $11,266,000 (3.5%) compared to the $319,631,000 average balance in 2017.
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,
15
manufacturing, agriculture and real estate investment and construction, while the economy of Amador County is
reliant upon government, services, retail trade, manufacturing industries and Indian gaming.
The Company has significant extensions of credit and commitments to extend credit that are secured by real
estate. The ultimate repayment of these loans is generally dependent on personal or business cash flows or the sale or
refinancing of the real estate. The Company monitors the effects of current and expected market conditions and other
factors on the collectability of real estate loans. The more significant factors management considers involve the
following: lease rates and terms, vacancy rates, absorption and sale rates and capitalization rates; real estate values,
supply and demand factors, and rates of return; operating expenses; inflation and deflation; and sufficiency of
repayment sources independent of the real estate including, in some instances, personal guarantees.
In extending credit and commitments to borrowers, the Company generally requires collateral and/or
guarantees as security. The repayment of such loans is expected to come from cash flows or from proceeds from the
sale of selected assets of the borrowers. The Company’s requirement for collateral and/or guarantees is determined
on a case-by-case basis in connection with management’s evaluation of the creditworthiness of the borrower.
Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-
producing properties, residences and other real property. The Company secures its collateral by perfecting its
security interest in business assets, obtaining deeds of trust, or outright possession among other means.
In management's judgment, a concentration exists in real estate loans which represented approximately 81%
of the Company's loan and lease portfolio at December 31, 2019 and 87% at December 31, 2018. Management
believes that the residential land portion of the Company’s loan portfolio carries a reasonable level of credit risk. As
of December 31, 2019, outstanding unimproved residential land commitments were $6,184,000 (or just 1.9% of the
total real estate loans). Of the $6,184,000, $1,997,000 (32%) 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 zero and $27,000 at December 31, 2019
and 2018, 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, 2019 there were two loans totaling $75,000 30 days or more past due compared to no loans that were
30 days or more past due December 31, 2018.
Restructured loans considered performing and accruing at December 31, 2019, 2018, 2017, 2016 and 2015,
were $5,970,000, $6,626,000, $6,799,000, $7,975,000, and $8,062,000, respectively. 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.
16 Table 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
December 31,
2019
2018
2017
2016
2015
$
$
-
-
-
-
$
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
$ -
27
-
-
-
-
-
-
19
$ 27 $ 1,892 $ 19
1,597
289
-
6
$
-
-
-
-
30
1,493
-
120
$ 1,643
Interest income recognized from payments received on nonaccrual loans and leases was approximately
$1,000 in 2019, $43,000 in 2018 and $2,000 in 2017. 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, 2019.
Management is not aware of any potential problem loans, which were accruing and current at December 31, 2019,
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 2019, 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 $7,604,000 at
December 31, 2019 and had a related valuation allowance of $142,000. The average recorded investment in
impaired loans and leases during 2019 was approximately $7,845,000. As of December 31, 2018, the recorded
investment in loans and leases that were considered to be impaired totaled $8,702,000 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
17 recorded investment in impaired loans and leases during 2017 was approximately $14,046,000.
Allowance for Loan and Lease Losses Activity
The Company maintains an allowance for loan and lease losses (“ALLL”) to cover probable losses inherent
in the loan and lease portfolio, which is based upon management’s estimate of those losses. The ALLL is established
through a provision for loan and lease losses and is increased by provisions charged against current earnings and
recoveries and reduced by charge-offs. Actual losses for loans and leases can vary significantly from this estimate.
The methodology and assumptions used to calculate the allowance are continually reviewed as to their
appropriateness given the most recent losses realized and other factors that influence the estimation process. The
model assumptions and resulting allowance level are adjusted accordingly as these factors change.
The adequacy of the ALLL and the level of the related provision for loan and lease losses is determined
based on management’s judgment after consideration of numerous factors including, but not limited to: (i) local and
regional economic conditions, (ii) the financial condition of the borrowers, (iii) loan impairment and the related level
of expected charge-offs, (iv) evaluation of industry trends, (v) industry and other concentrations, (vi) loans and leases
which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by
management, (vii) continuing evaluations of the performing loan portfolio, (viii) ongoing review and evaluation of
problem loans identified as having loss potential, (ix) quarterly review by the Board of Directors, and (x) assessments
by banking regulators and other third parties. Management and the Board of Directors evaluate the ALLL and
determine its appropriate level considering objective and subjective measures, such as knowledge of the borrower’s
business, valuation of collateral, the determination of impaired loans or leases and exposure to potential losses.
The ALLL totaled $5,138,000 or 1.29% of total loans and leases at December 31, 2019, $4,392,000 or 1.36%
of total loans and leases at December 31, 2018, and $4,478,000 or 1.43% at December 31, 2017. The increase in the
allowance for loan and lease losses from $4,392,000 at December 31, 2018 to $5,138,000 at December 31, 2019, was
mainly due to the increase in loans outstanding at December 31, 2019. The Company establishes general and
specific reserves in accordance with accounting principles generally accepted in the United States of America. The
ALLL is composed of categories of the loan and lease portfolio based on loan type and loan rating; however, the
entire allowance is available to cover actual loan and lease losses. While management uses available information to
recognize possible losses on loans and leases, future additions to the allowance may be necessary, based on changes
in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's ALLL. Such agencies may require the Company to provide
additions to the allowance based on their judgment of information available to them at the time of their examination.
The allowance for loans and leases as a percentage of impaired loans and leases was 67.6% at December 31,
2019 and 50.5% at December 31, 2018. Of the total nonperforming and impaired loans and leases outstanding as of
December 31, 2019, there were $794,000 in loans or leases that had been reduced by partial charge-offs of $292,000.
At December 31, 2019, there was $5,848,000 in impaired loans or leases that did not carry a specific reserve.
Of this amount, $477,000 were loans or leases that had previous partial charge-offs and $5,371,000 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.
It is the policy of management to maintain the allowance for loan and lease losses at a level believed to be
adequate for known and inherent risks in the portfolio. Our methodology incorporates a variety of risk
considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that
management believes is appropriate at each reporting date. Formula allocations are calculated by applying historical
18 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)
2019
Year Ended December 31,
2017
2016
2018
2015
Average loans and leases outstanding
$ 359,329
$ 308,365
$ 319,631
$ 306,737
$ 279,728
Allowance for loan & lease losses at beginning
of period
Loans and leases charged off:
Commercial
Real estate
Consumer
Lease financing receivable
Total
Recoveries of loans and leases previously charged off:
Commercial
Real estate
Consumer
Lease financing receivable
Total
Net loans and leases (recovered) charged off
Additions (reductions) to allowance charged (credited) to
operating expenses
$ 4,392
$ 4,478
$ 4,822
$ 4,975
$ 5,301
-
-
-
-
-
7
11
68
-
86
(86)
660
213
-
69
-
282
12
8
-
1
21
261
175
1,073
-
-
-
1,073
6
228
4
41
279
794
450
-
93
34
-
127
660
534
124
-
1,318
(1,191)
(1,344)
609
-
6
1
616
123
165
2
-
290
326
-
Allowance for loan and lease losses at end of period
$ 5,138
$ 4,392
$ 4,478
$ 4,822
$ 4,975
Ratio of net (recoveries) charge-offs to average loans and
leases outstanding
Provision for loan and lease losses to average loans and
leases outstanding
Allowance for loan and lease losses to total loans and
leases, at end of period
Allowance for loan and lease losses to nonperforming
loans and leases, at end of period
(0.02%)
0.08%
0.25%
(0.39%)
0.12%
0.18%
0.06%
0.14%
(0.44%)
-
1.29%
1.36%
1.43%
1.47%
1.69%
N/A 16,266.67%
236.68% 25,378.95%
302.80%
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, 2019.
19 Table Ten: Allowance for Loan and Lease Losses by Loan Category
(dollars in thousands)
December 31, 2019
December 31, 2018
December 31, 2017
Percent of loans
in each category
to total loans
Amount
Percent of loans
in each category
Amount
to total loans Amount
Percent of loans
in each category
to total loans
Commercial
Real estate
Agriculture
Consumer
Lease financing receivable
Unallocated
Total
$ 950
3,502
107
334
-
245
$ 5,138
11%
81%
2%
6%
--
--
100%
$ 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%
December 31, 2016
December 31, 2015
Percent of loans
in each category
to total loans
Amount
Commercial
Real estate
Agriculture
Consumer
Lease financing receivable
Unallocated
Total
$ 855
3,600
64
24
1
278
$ 4,822
12%
86%
1%
1%
--
--
100%
Percent of loans
in each category
to total loans
12%
86%
1%
1%
--
--
100%
Amount
$ 860
3,729
77
78
1
230
$ 4,975
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 and Repossessed Assets
The balance in OREO at December 31, 2019 and 2018 consisted of one property acquired through
foreclosure. During 2018, the Company received an updated appraisal on the one property and reduced the balance
by $4,000 through a charge to OREO expense. During 2019, the Company received an updated appraisal on the one
property and reduced the balance by an additional $111,000 through a charge to OREO expense. During 2019, the
Company did not acquire any OREO properties. There was $846,000 in OREO at December 31, 2019 with no
valuation allowance and $957,000 in OREO at December 31, 2018 with no valuation allowance. During 2019, the
Company took possession of an automobile formerly held as collateral on a loan. The book value of the automobile
at December 31, 2019 was $517,000. Other than the $517,000 automobile, there were no other asset repossessed
during 2019 or 2018.
Deposits
At December 31, 2019, total deposits were $604,837,000 representing an increase of $14,163,000 (2.4%)
from the December 31, 2018 balance of $590,674,000. The Company’s deposit growth plan for 2019 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 an increase in non-time deposits (CD’s) balances of $28,441,000 (5.7%) from
$502,587,000 at December 31, 2018 to $531,028,000 at December 31, 2019. During 2019 the Company had
increased balances in noninterest-bearing checking ($12,310,000 or 5.7%), money market ($12,488,000 or 8.6%),
savings ($3,298,000 or 4.5%), and interest checking ($345,000 or 0.5%) and a decrease in time deposit ($14,278,000
or 16.2%).
20 Other Borrowed Funds
Other borrowings outstanding as of December 31, 2019 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
2019
2018
2017
Amount
Rate
Amount
Rate
Amount
Rate
$ 9,000
1.46% $ 5,000
1.32% $ 3,500
1.39%
$ 10,500
2.48% $ 10,500
2.02% $ 12,000
1.41%
The maximum amount of short-term borrowings at any month-end during 2019, 2018 and 2017, was
$16,000,000, $6,500,000, and $3,500,000, 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 Long-term
$ 10,500
$ 9,000
2020 2021 to 2023
1.46%
2.48%
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, 2019 or 2018. There were no amounts drawn upon any letter of credit in 2019 or
2018 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 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 have a repurchase program in 2019 and therefore did not
repurchase any shares in 2019.
The Company repurchased 575,389 shares in 2012, 849,404 shares in 2013, 424,462 in 2014, 790,989 shares
in 2015, 716,897 shares in 2016, and 574,748 shares in 2017. Share amounts have been adjusted for stock dividends
and/or splits. See Part II, Item 5, “Stock Repurchases” for more information regarding stock repurchases.
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, 2019 and 2018, 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.
At December 31, 2019, shareholders’ equity was $82,909,000, representing an increase of $8,188,000
(11.0%) from $74,721,000 at December 31, 2018. The increase in 2019 resulted from additions of net income of
$5,500,000, the increase in the unrealized gain on securities due to a decrease in interest rates of $3,668,000, and
21 stock based compensation of $433,000 exceeding the payment of cash dividends of $1,413,000. In 2018,
shareholders’ equity decreased $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.
Table Eleven below lists the Company’s and American River Bank’s actual capital ratios at December 31,
2019 and 2018, 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 2.50% as of December 31, 2019 and
1.875% as of December 31, 2018.
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,
2018
2019
Minimum Regulatory Capital Requirements
2019 2018
9.2%
14.8%
15.9%
9.3%
14.9%
14.9%
16.1%
8.9%
16.1%
17.3%
9.0%
16.2%
16.2%
17.4%
N/A
N/A
N/A
6.5%
7.0%
8.5%
10.5%
N/A
N/A
N/A
5.9%
6.4%
7.9%
9.9%
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, 2019, 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,” was established and has been fully phased-in as of January 1,
2019 and requires maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets
in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer increases the
minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii)
a total capital ratio of 10.5%. The buffer requirement was 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.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s
market risk arises primarily from interest rate risk inherent in its loan, investment and deposit functions. The goal for
managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining
a high quality balance sheet without exposing the Company to undue interest rate risk. The Board of Directors has
overall responsibility for the interest rate risk management policies. The Company has an Enterprise Risk
22 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, 2019
(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
$
$
$
$
370
686
(318)
(788)
$ 1,172
$ 2,097
$ (1,411)
$ (3,642)
After a review of the model results as of December 31, 2019, 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.
23 Inflation
The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or
other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation
primarily affects the Company through its effect on market rates of interest, which affects the Company’s ability to
attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and
potentially adversely affects capital adequacy because loan growth in inflationary periods can increase at rates higher
than the rate that capital grows through retention of earnings which may be generated in the future. In addition to its
effects on interest rates, inflation increases overall operating expenses. Inflation has not had a material effect upon
the results of operations of the Company during the years ended December 31, 2019, 2018 and 2017.
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, 2019 were
approximately $40,324,000 and $300,000, 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, 2019,
consolidated liquid assets totaled $141.5 million or 19.6% of total assets compared to $226.5 million or 32.9% of
total assets on December 31, 2018. 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, 2019, the Company had
$17,000,000 available under these credit lines. Additionally, American River Bank is a member of the FHLB. At
December 31, 2019, American River Bank could have arranged for up to $162,306,000 in secured borrowings from
the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At December 31,
2019, the Company had $143,406,000 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, 2019, the Company’s borrowing capacity was $8,642,000.
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.
24
Table Thirteen: Certificates of Deposit Maturities
December 31, 2019
(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
$ 6,900
3,998
5,758
10,935
$ 27,591
Over $250,000
$ 24,474
9,486
3,618
8,640
$ 46,218
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, 2019
(dollars in thousands)
Commercial
Real estate
Agriculture
Consumer
Total
One year
or less
$ 4,330
24,228
-
434
$ 28,992
One year through
five years
$ 13,674
110,738
150
591
$ 125,153
Over
five years
$ 25,015
188,805
6,329
24,646
$ 244,795
Total
$ 43,019
323,771
6,479
25,671
$ 398,940
Loans and leases shown above with maturities greater than one year include $220,545,000 of variable
interest rate loans and $149,403,000 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, 2019,
2018 and 2017 was $4,259,000, $3,932,000 and $3,932,000, respectively.
25
Table 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 within 1 year
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
2019
2018
2017
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
Carrying
Amount
Weighted
Average
Yield
$
-
-
$ 255
5.06%
$ -
-
952
3.70%
1,141
5.06%
3,018
2.23%
5,224
7,271
2.40%
2.81%
9,831
3,173
6.03%
6.33%
14,389
5,307
-
241,887
-
2.69%
4,976
269,049
2.30%
2.69%
-
232,869
4.42%
4.11%
-
2.10%
501
3.50%
-
-
-
-
2,003
2.24%
2,434
2.49%
2,469
2.72%
4,127
-
$ 261,965
5.53%
-
2.73%
4,074
-
$ 294,933
5.53%
-
4,158
112
2.88% $ 262,322
4.56%
0.00%
2.32%
$ 248
5.51%
$ 292
5.40% $ 378
5.46%
$ 248
5.51%
$ 292
5.40% $ 378
5.46%
The carrying values of available-for-sale securities include net unrealized gains (losses) of $2,544,000,
($2,664,000) and ($456,000) at December 31, 2019, 2018 and 2017, respectively. The carrying values of held-to-
maturity securities do not include unrealized gains or losses; however, the net unrecognized gains at December 31,
2019, 2018 and 2017 were $18,000, $14,000 and $26,000, 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, 2019, 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:
26 Commitments to extend credit (dollars in thousands):
Revolving lines of credit secured by
1-4 family residences
Commercial real estate, construction and land
development commitments secured by real estate
Other unused commitments, principally commercial loans
Letters of credit
December 31,
2019
2018
$
$
$
41 $
47
22,508
17,775
40,324 $
21,185
13,044
34,276
300 $
361
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, 2019.
Table Sixteen: Contractual Obligations
(dollars in thousands)
Payments due by period
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
Less than
1 year
$ 10,500 $
More than
5 years
-
-
769
-
54,234
1-3 years
$ 7,000 $ 3,500 $
3-5 years
-
1,446
-
12,521
-
555
-
7,054
-
-
657
-
-
-
3,427
-
73,809
4,665
384
800
799
2,682
Total
$ 92,401 $ 55,387 $ 21,767 $ 11,908 $ 3,339
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,
2019, these amounts represented $4,665,000 most of which is anticipated to be primarily payable at least five years in
the future.
27
Report of Management on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company (as defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended).
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has
assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2019, 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, 2019,
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
28 Crowe LLP
Independent Member Crowe Global
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2019 and 2018, 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, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2019 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, 2019, 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.
29 Definition 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.
Crowe LLP
We have served as the Company's auditor since 2011.
Sacramento, California
February 21, 2020
30
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2019 and 2018
(Dollars in thousands)
ASSETS
Cash and due from banks
Federal funds sold
Interest-bearing deposits in banks
Total cash and cash equivalents
Investment securities (Note 5):
Available-for-sale, at fair value
Held-to-maturity, at amortized cost; fair value of $266 in 2019
and $306 in 2018
Loans and leases, less allowance for loan and lease losses of
$5,138 in 2019 and $4,392 in 2018 (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 – 5,898,878 shares in 2019 and
5,858,428 shares in 2018
Retained earnings
Accumulated other comprehensive income (loss), net of taxes
(Note 5)
Total shareholders' equity
2019
2018
$
$
15,258
-
2,552
17,810
20,987
7,000
1,746
29,733
261,965
294,933
248
292
393,802
1,191
4,259
846
16,321
15,763
8,148
318,516
1,071
3,932
957
16,321
15,429
6,908
$
720,353
$
688,092
$
227,055
377,782
$
214,745
375,929
604,837
590,674
9,000
10,500
13,107
5,000
10,500
7,197
637,444
613,371
30,536
50,581
30,103
46,494
1,792
(1,876)
82,909
74,721
$
720,353
$
688,092
See accompanying notes to consolidated financial statements.
31
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2019, 2018 and 2017
(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
2019
2018
2017
$
$
16,834
781
201
5
7,589
260
$
13,924
529
33
348
6,901
507
13,947
499
13
-
5,300
655
25,670
22,242
20,414
2,078
383
2,461
1,359
237
1,596
855
206
1,061
23,209
20,646
19,353
Provision for loan and lease losses (Note 7)
660
175
450
Net interest income after provision for loan
and lease losses
22,549
20,471
18,903
Noninterest income:
Service charges
Gain on sale of investment securities (Note 5)
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)
558
115
1,015
1,688
11,316
134
1,023
542
126
3,705
16,846
7,391
1,891
5,500
0.94
0.94
$
$
$
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
$
$
$
465
161
970
1,596
8,920
44
1,053
586
280
3,166
14,049
6,450
3,252
3,198
0.50
0.50
$
$
$
See accompanying notes to consolidated financial statements.
32
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands)
Net income
Other comprehensive income (loss):
Increase (decrease) in net unrealized gains on investment
securities
Deferred tax (expense) benefit
Increase (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
2019
2018
2017
$
5,500
$
4,900
$
3,198
5,322
(1,573)
(2,225)
691
(1,211)
491
3,749
(1,534)
(720)
(115)
34
(81)
(31)
10
(21)
(161)
64
(97)
(817)
Total other comprehensive income (loss)
3,668
(1,555)
Comprehensive income
$
9,168
$
3,345
$
2,381
See accompanying notes to consolidated financial statements.
33
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands)
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
(Net of Taxes)
Total
Share-
holders'
Equity
Balance, January 1, 2017
6,661,726 $
42,484 $
40,822 $
544 $
83,850
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
3,198
-
48
(1,293)
-
4
-
-
-
(817)
(48)
-
-
-
-
-
3,198
(817)
-
(1,293)
(8,641)
252
351
21
Balance, December 31, 2017
6,132,362
34,463
42,779
(321)
76,921
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
4,900
-
(1,188)
-
3
-
-
-
(1,555)
-
-
-
-
-
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
Net income
Other comprehensive income, net of tax (Note 5)
Payment of cash dividend, $0.24 per share (Note 14)
Net restricted stock award activity and related
compensation expense (Note 13)
Stock options exercised (Note 13)
Stock option compensation expense (Note 13)
-
-
-
29,310
11,140
-
-
-
-
324
95
14
5,500
-
(1,413)
-
-
-
-
3,668
-
-
-
-
5,500
3,668
(1,413)
324
95
14
Balance, December 31, 2019
5,898,878 $
30,536 $
50,581 $
1,792 $
82,909
See accompanying notes to consolidated financial statements.
34
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2019, 2018 and 2017
(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
Change in deferred loan and lease origination
fees, costs and purchase premiums, 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 (benefit) expense
Stock-based compensation expense
Loss (gain) on sale or write-down of other real estate owned
Increase 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 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
2019
2018
2017
$
5,500
$
4,900
$
3,198
660
(384)
226
1,455
(115)
(334)
(752)
338
111
(523)
1,688
7,870
175
(239)
265
2,404
(31)
(307)
333
227
4
(125)
76
450
(20)
333
3,246
(161)
(317)
1,247
273
(8)
(537)
(173)
7,682
7,531
63,325
27,003
31,289
-
2,139
145
5,255
(75,732)
-
(110,615)
1,930
(89,273)
46,705
44,321
43,150
44
(54,598)
-
(20,964)
-
(346)
(327)
86
(290)
1,349
(10,799)
-
(178)
-
105
14,944
-
-
395
(129)
(153)
Net cash (used in) provided by investing activities
(36,638)
(46,984)
2,403
(Continued)
35
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands)
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings
deposits
Net (decrease) increase in time deposits
Cash paid to repurchase common stock
Proceeds from exercised options
Decrease in long-term borrowings
Increase in short-term borrowings
Cash dividends paid
2019
2018
2017
$
28,431
(14,268)
$
-
95
-
4,000
(1,413)
$
26,198
8,396
(4,773)
189
(1,500)
1,500
(1,188)
14,552
(3,278)
(8,641)
351
-
-
(1,293)
Net cash provided by financing
activities
16,845
28,822
1,691
(Decrease) increase in cash and cash equivalents
(11,923)
(10,480)
11,625
Cash and cash equivalents at beginning of year
29,733
40,213
28,588
Cash and cash equivalents at end of year
$
17,810
$
29,733
$
40,213
Supplemental disclosure of cash flow information:
Right of use asset and obligation recorded upon adoption
of ASU 2016-02
Addition to right of use asset and obligation recorded upon
renewal of existing lease
Cash paid during the year for:
Interest expense
Income taxes
Non-cash activities:
Real estate acquired through foreclosure, repossession or deed in
lieu of foreclosure
$
$
$
$
$
3,570
234
2,519
1,888
$
$
$
$
-
-
$
$
-
-
1,598
1,095
$
$
1,058
2,375
517
$
-
$
-
See accompanying notes to consolidated financial statements
36 AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
THE BUSINESS OF THE COMPANY
American River Bankshares (the "Company") was incorporated under the laws of the State of California in
1995 under the name of American River Holdings and changed its name in 2004 to American River
Bankshares. As a bank holding company, the Company is authorized to engage in the activities permitted
under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. As a community
oriented regional bank holding company, the principal communities served are located in Sacramento,
Placer, Yolo, El Dorado, Amador, and Sonoma counties.
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 2019.
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.
37
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
For the purpose of the statement of cash flows, cash and due from banks and Federal funds sold are
considered to be cash equivalents. Generally, Federal funds are sold for one-day periods. Interest-bearing
deposits in banks are also considered to be cash equivalents, 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, 2019 and 2018.
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 any equity securities, the entire amount of the fair value
adjustment 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.
38
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans and Leases
Loans and leases that management has both the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at the principal amounts outstanding, adjusted for unearned income, deferred
loan origination fees and costs, purchase premiums and discounts, write-downs and the allowance for loan
and lease losses. Loan and lease origination fees, net of certain deferred origination costs, and purchase
premiums and discounts are recognized as an adjustment to the yield of the related loans and leases.
For all classes of loans and leases, the accrual of interest is discontinued when, in the opinion of management,
there is an indication that the borrower may be unable to meet payment requirements within an acceptable
time frame relative to the terms stated in the loan agreement. Upon such discontinuance, all unpaid accrued
interest is reversed against current income unless the loan or lease is well secured and in the process of
collection. Interest received on nonaccrual loans and leases is either applied against principal or reported as
interest income, according to management's judgment as to the collectability of principal. Generally, loans
and leases are restored to accrual status when the obligation is brought current and has performed in
accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the
total contractual principal and interest is no longer in doubt.
Direct financing leases are carried net of unearned income. Income from leases is recognized by a method
that approximates a level yield on the outstanding net investment in the lease.
Loan Sales and Servicing
Included in the loan and lease portfolio are Small Business Administration ("SBA") loans and Farm Service
Agency guaranteed loans that may be sold in the secondary market. At the time the loan is sold, the related
right to service the loan is either retained, with the Company earning future servicing income, or released in
exchange for a one-time servicing-released premium. Loans subsequently transferred to the loan portfolio are
transferred at the lower of cost or fair value at the date of transfer. Any difference between the carrying
amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest
method. There were no loans held for sale at December 31, 2019 and 2018.
SBA and Farm Service Agency loans with unpaid balances of $78,000 and $109,000 were being serviced for
others as of December 31, 2019 and 2018, respectively. The Company also serviced loans that are
participated with other financial institutions totaling $4,042,000 and $7,815,000 as of December 31, 2019 and
2018, 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, 2019 and 2018.
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.
39
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan and Lease Losses (Continued)
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.
40
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan and Lease Losses (Continued)
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.
41
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan and Lease Losses (Continued)
Real Estate- Residential – Residential loans are generally loans to purchase or refinance 1-4 unit single-
family residences, either owner-occupied or investor-owned. Some residential loans are short term to match
their intended source of repayment through sale or refinance. The remainder are fixed or floating-rate term
first mortgages with an original maturity between 2 and 10 years, generally with payments based on a 25-30
year amortization.
Commercial – Commercial loans generally possess a lower inherent risk of loss than real estate portfolio
segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt
coverage is provided by business cash flows and economic trends influenced by unemployment rates and
other key economic indicators are closely correlated to the credit quality of these loans.
Lease Financing Receivable – Leases originated by the bank are non-consumer finance leases (as contrasted
with operating leases) for the acquisition of titled and non-titled business equipment. Leases are generally
amortized over a period from 36 to 84 months, depending on the useful life of the equipment acquired.
Residual (balloon) payments at lease end range from 0-20% of original cost, and are a non-optional obligation
of the lessee. Lessees are contractually responsible for all costs, expenses, taxes, and liability associated with
the leased equipment.
Agricultural – Loans secured by crop production and livestock are especially vulnerable to two risk factors
that are largely outside the control of the Company and borrowers: commodity prices and weather conditions.
Consumer – The consumer loan portfolio is comprised of a large number of small loans scheduled to be
amortized over a specific period. Most installment loans are made directly for consumer purchases, but
business loans granted for the purchase of heavy equipment or industrial vehicles may also be included. Also
included in the consumer loan portfolio are home equity lines of credit 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.
42
AMERICAN 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, 2019, 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.
43
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income
tax expense represents each entity's proportionate share of the consolidated provision for income taxes.
The Company accounts for income taxes using the balance sheet method, under which deferred tax assets and
liabilities are recognized for the tax consequences of temporary differences between the reported amounts of
assets and liabilities and their tax bases. 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% likelihood. 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, 2019 and 2018 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.
44
AMERICAN 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 2019, 2018 or 2017.
Stock-Based Compensation
At December 31, 2019, the Company had one stock-based compensation plan, which is described more fully
in Note 13. Compensation expense recorded in 2019, 2018, and 2017 totaled $338,000, $227,000 and
$273,000, 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 table in Footnote 13. 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 Company’s management monitors 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 June 2016, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2016-13,
"Measurement of Credit Losses on Financial Instruments." This ASU significantly changes how entities will
measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value
through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays
recognition of credit losses. The standard will replace today’s "incurred loss" approach with an "expected
loss" model. The new model, referred to as the current expected credit loss ("CECL") model, will apply to:
(1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet
credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan
commitments, and financial guarantees. The CECL model does not apply to available-for-sale ("AFS") debt
securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner
similar to what they do today, except that the losses will be recognized as allowances rather than reductions in
the amortized cost of the securities. As a result, entities will recognize changes to estimated credit losses
immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies
the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the
disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance
for 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 was
initially scheduled to become effective for the Company for interim and annual reporting periods beginning
after December 15, 2019, however, on November 15, 2019 the FASB issued ASU 2019-10 delaying the
effective date for smaller reporting companies, such as the Company, to interim and annual reporting periods
beginning after December 15, 2022; early adoption is still permitted for interim and annual reporting periods
beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is
effective (i.e., modified retrospective approach). While the Company is currently evaluating the
45
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the
Company's Consolidated Financial Statements, including if it will early adopt the standard, it has taken steps
to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering
pertinent data, consulting with outside professionals, evaluating its current IT systems, and purchasing a
software solution. The Company has imported current and historical data into the new software and is
currently validating the data and intends to begin processing information, on a test basis, with the new CECL
specific software during 2020 and 2021 and to disclose any material potential impact of this modeling once it
becomes available.
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, 2019 and December 31, 2018. 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 2019. 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):
46
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
FAIR VALUE MEASUREMENTS (Continued)
December 31, 2019
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:
Carrying
Amount
Fair Value Measurements Using:
Level 2
Level 3
Level 1
Total
$
15,258 $
15,258 $
- $
- $
15,258
2,552
261,965
248
4,259
393,802
1,929
-
-
-
N/A
-
-
2,552
261,965
266
N/A
-
780
-
-
-
N/A
396,089
1,149
Noninterest-bearing
Savings
Money market
NOW accounts
Time Deposits
Short-term borrowings
Long-term borrowings
Accrued interest payable
$
227,055 $
75,820
158,319
69,834
73,809
9,000
10,500
120
227,055 $
75,820
158,319
69,834
-
9,000
-
-
- $
-
-
-
73,924
-
10,717
120
- $
-
-
-
-
-
-
-
Carrying
Amount
Fair Value Measurements Using:
Level 2
Level 3
Level 1
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:
$
20,987 $
7,000
20,987 $
7,000
- $
-
- $
-
20,987
7,000
1,746
294,933
292
3,932
318,516
1,959
-
4,976
-
N/A
-
-
1,746
289,957
306
N/A
-
1,044
-
-
-
N/A
315,235
915
Noninterest-bearing
Savings
Money market
NOW accounts
Time Deposits
Short-term borrowings
Long-term borrowings
Accrued interest payable
$
214,745 $
72,522
145,831
69,489
88,087
5,000
10,500
63
214,745 $
72,522
145,831
69,489
-
5,000
-
-
- $
-
-
-
88,078
-
10,733
63
- $
-
-
-
-
-
-
-
Because no established 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.
2,552
261,965
266
N/A
396,089
1,929
227,055
75,820
158,319
69,834
73,924
9,000
10,717
120
Total
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
47
AMERICAN 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)
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Total Gains
(Losses)
December 31, 2019
Fair Value
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
$
241,887 $
6,631
13,447
Total recurring
$
261,965 $
-
-
-
-
$
241,887 $
6,631
13,477
$
-
-
-
$
261,965 $
-
$
-
-
-
-
December 31, 2019
Fair Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Total Gains
(Losses)
Assets and liabilities measured on a
nonrecurring basis:
Other Assets:
Repossessed asset
Other real estate owned:
Land
$
517 $
- $
- $
517 $
-
846
-
-
846
(111)
Total nonrecurring
$
1,363 $
-
$
-
$
1,363 $
(111)
48
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
FAIR VALUE MEASUREMENTS (Continued)
(Dollars in thousands)
December 31, 2018
Fair Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
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
$
-
-
269,049 $
6,508
14,400
4,976
-
4,976
14,400
-
$
-
-
-
-
Total recurring
$
294,933 $
4,976 $
289,957 $
-
$
-
-
-
-
-
December 31, 2018
Fair Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Total Gains
(Losses)
Assets and liabilities measured on a
nonrecurring basis:
Impaired loans:
Real estate:
Commercial
Other real estate owned:
Land
$
5,274 $
-
$
-
$
5,274 $
-
957
-
-
957
(4)
Total nonrecurring
$
6,231 $
-
$
-
$
6,231 $
(4)
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, 2019 or
December 31, 2018.
The following methods were used to estimate the fair value of each class of financial instrument above:
Available-for-sale securities – Fair values for investment securities are based on quoted market prices, if
available, and are considered Level 1, or evaluated using pricing models that vary by asset class and
incorporate available trade, bid and other market information and are considered Level 2. Pricing
applications apply available information, as applicable, through processes such as benchmark curves,
benchmarking to like securities, sector groupings and matrix pricing.
Impaired loans – The fair value of collateral dependent impaired loans adjusted for specific allocations of the
allowance for loan losses is generally based on recent real estate appraisals and/or evaluations. These
appraisals and/or evaluations may utilize a single valuation approach or a combination of approaches
including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal
process by the independent appraisers to adjust for differences between the comparable sales and income and
other available data. Such adjustments are usually significant and typically result in a Level 3 classification
49
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.
FAIR VALUE MEASUREMENTS (Continued)
of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring impaired
loans is the sales comparison approach less a reserve for past dues taxes and selling costs ranging from 8% to
10%.
Other assets and real estate owned – Other assets can contain non-real estate property obtained by
repossession of collateral in the case of a loan default and are measured at fair value, less costs to sell.
Certain commercial and residential real estate properties classified as OREO are measured at fair value, less
costs to sell. Fair values are based on recent appraisals and/or evaluations. These appraisals and/or
evaluations may use a single valuation approach or a combination of approaches including comparable sales,
cost and the income approach. Adjustments are routinely made in the appraisal process by the independent
appraisers to adjust for differences between the comparable sales and income and other available data. Such
adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining
fair value. The valuation technique used for all Level 3 nonrecurring other assets and OREO is the sales
comparison approach less selling costs ranging from 8% to 10%.
4.
GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2019 and 2018, 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, 2019, 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, 2019, 2018 and 2017.
At December 31, 2019 and 2018, the Company did not have other intangible assets.
50
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at December 31, 2019 and 2018
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
Debt securities:
U.S. Government Agencies
and Sponsored Agencies
Obligations of states and political
subdivisions
Corporate Debt Securities
U.S. Treasury securities
2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
239,617 $
3,371 $
(1,101) $
241,887
13,308
6,496
212
135
(73)
-
13,447
6,631
$
259,421 $
3,718 $
(1,174) $
261,965
2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
271,685 $
984 $
(3,620) $
269,049
14,440
6,493
4,979
165
74
-
(205)
(59)
(3)
14,400
6,508
4,976
$
297,597 $
1,223 $
(3,887) $
294,933
U.S. Government Agencies and U.S. Government-sponsored Agencies consist predominately of residential
mortgage-backed securities. Net unrealized gains on available-for-sale investment securities totaling
$2,544,000 were recorded, net of $752,000 in tax liabilities, as accumulated other comprehensive income
within shareholders' equity at December 31, 2019. Proceeds and gross realized gains from the sale and call of
available-for-sale investment securities for the year ended December 31, 2019 totaled $63,325,000 and
$115,000, respectively. There were no transfers of available-for-sale investment securities during the year
ended December 31, 2019.
Net unrealized losses on available-for-sale investment securities totaling $2,664,000 were recorded, net of
$788,000 in tax assets, 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 $29,142,000 and $31,000, respectively. There were
no transfers of available-for-sale investment securities during the year ended December 31, 2018.
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.
51
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
INVESTMENT SECURITIES (Continued)
Held-to-Maturity
Debt securities:
U.S. Government Agencies
and Sponsored Agencies
2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
248 $
18 $
- $
266
2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Debt securities:
U.S. Government Agencies
and Sponsored Agencies
$
292 $
14 $
- $
306
There were no sales or transfers of held-to-maturity investment securities for the years ended December 31,
2019, 2018 and 2017.
The amortized cost and estimated fair value of investment securities at December 31, 2019 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
Estimated
Fair
Value
$
500 $
2,937
9,196
7,171
19,804
501
2,955
9,351
7,271
20,078
239,617
241,887 $
248 $
$
259,421 $
261,965 $
248 $
266
266
Expected maturities will differ from contractual maturities because the issuers of the securities may have the
right to call or prepay obligations with or without call or prepayment penalties.
52
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.
INVESTMENT SECURITIES (Continued)
Investment securities with amortized costs totaling $127,307,000 and $88,460,000 and estimated fair values
totaling $129,643,000 and $87,351,000 were pledged to secure State Treasury funds on deposit, public
agency and bankruptcy trustee deposits and borrowing arrangements (see Note 10) at December 31, 2019 and
2018, respectively.
Investment securities with unrealized losses at December 31, 2019 and 2018 are summarized and classified
according to the duration of the loss period as follows (dollars in thousands):
2019
Less than 12 Months
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
Available-for-Sale
Debt securities:
U.S. Government Agencies
and Sponsored Agencies $
Obligations of states and
political subdivisions
65,082 $
(438) $
38,380 $
(663) $
103,462 $
(1,101)
8,060
(73)
-
-
8,060
(73)
$
73,142 $
(511) $
38,380 $
(663) $
111,522 $
(1,174)
2018
Less than 12 Months
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Total
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
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)
At December 31, 2019, the Company held 205 securities of which 41 were in a loss position for less than
twelve months and 29 were in a loss position for twelve months or more. These 29 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.
53
AMERICAN RIVER BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6.
LOANS AND LEASES
Outstanding loans and leases are summarized as follows (dollars in thousands):
Real estate – commercial
Real estate – construction
Real estate – multi-family
Real estate – residential
Commercial
Lease financing receivable
Agriculture
Consumer
Deferred loan and lease origination fees and costs, net
Allowance for loan and lease losses
$
December 31,
2019
2018
214,604 $
23,169
56,818
29,180
43,019
-
6,479
25,671
199,894
5,685
56,139
16,338
29,650
32
4,419
10,714
398,940
322,871
-
(5,138)
37
(4,392)
$
393,802 $
318,516
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 $220,918,000 and $194,431,000 at December 31, 2019
and 2018, respectively (see Note 10).
Salaries and employee benefits totaling $438,000, $357,000 and $177,000 have been deferred as loan and
lease origination costs for the years ended December 31, 2019, 2018 and 2017, respectively.
54
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