AMERICAN RIVER BANKSHARES The following is management's discussion and analysis of the significant changes inAmerican River Bankshares' (the "Company") balance sheet accounts betweenDecember 31, 2020 andMarch 31, 2021 and its income and expense accounts for the three-month periods endedMarch 31, 2021 and 2020. The discussion is designed to provide a better understanding of significant trends related to the Company's financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. This discussion and supporting tables and the consolidated financial statements and related notes appearing elsewhere in this report are unaudited. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within management's discussion and analysis. Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q including, but not limited to, matters described in this "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as amended, and subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as "believe," "expect," "anticipate," "intend," "may," "will," "should," "could," "would," and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ significantly from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following:
· The adverse effects of the COVID-19 pandemic on the economy, our business,
borrowers, customers and employees and the impact of local, state and federal
governments in response to the pandemic, including various government stimulus
packages;
· current and future legislation and regulation promulgated by
financial system;
· the risks presented by economic volatility and recession, which could adversely
affect credit quality, collateral values, including real estate collateral,
investment values, liquidity and loan originations and loan portfolio
delinquency rates;
· variances in the actual versus projected growth in assets and return on assets;
· potential loan losses;
· potential expenses associated with resolving nonperforming assets;
· changes in the interest rate environment including interest rates charged on
loans, earned on securities investments and paid on deposits and other borrowed
funds; · competitive effects;
· the effects of strategic transactions we are a party to;
· inadequate internal controls over financial reporting or disclosure controls
and procedures;
· changes in accounting policies and practices and the effects of adopting ASU
No. 2016-13, Measurement of Credit Losses on Financial Instruments ("CECL");
· potential declines in fee and other noninterest income earned associated with
economic factors;
· general economic conditions nationally, regionally, and within our operating
markets could be less favorable than expected or could have a more direct and
pronounced effect on us than expected and adversely affect our ability to
continue internal growth at historical rates and maintain the quality of our
earning assets;
· changes in the regulatory environment including increased capital and
regulatory compliance requirements and government intervention in the
financial system;
· changes in business conditions and inflation;
· changes in securities markets, public debt markets, and other capital markets;
· potential data processing, cybersecurity and other operational systems
failures, breach or fraud;
· potential decline in real estate values in our operating markets;
· the effects of uncontrollable events such as terrorism, the threat of terrorism
or the impact of military conflicts in connection with the conduct of the war
on terrorism by
earthquakes and wildfires), pandemic disease and viruses, and disruption of
power supplies and communications;
· changes in accounting standards, tax laws or regulations and interpretations of
such standards, laws or regulations;
· projected business increases following any future strategic expansion could be
lower than expected; 27
· the goodwill we have recorded in connection with acquisitions could become
impaired, which may have an adverse impact on our earnings;
· our ability to comply with any regulatory orders or requirements we may become
subject to;
· the effects and costs of litigation, regulatory, and other legal developments;
· the reputation of the financial services industry could experience
deterioration, which could adversely affect our ability to access markets for
funding and to acquire and retain customers;
· the possibility that the announced merger with Bank of Marin Bancorp ("
Bancorp") does not close when expected or at all because required regulatory,
shareholder or other approvals, financial tests or other conditions to closing
are not received or satisfied on a timely basis or at all;
· the businesses of the Company and
successfully or such integration may be more difficult, time-consuming or
costly than expected;
· changes in the Company's or
time of the merger, including as a result of financial performance, or more
generally due to broader stock market movements, and the performance of
financial companies and peer group companies;
· the risk that the benefits from the transaction may not be fully realized or
may take longer to realize than expected, or that expected revenue synergies
and cost savings from the announced merger with
realized or realized within the expected time frame, including as a result of
changes in general economic and market conditions, interest and exchange rates,
monetary policy, laws and regulations and their enforcement, the effect of
pandemic disease (including Covid-19) and the degree of competition in the
geographic and business areas in which the Company and
· the ability to promptly and effectively integrate the businesses of the Company
and
· the reaction to the merger transaction of the companies' clients, employees and
counterparties;
· diversion of time of directors, management and other employees on
merger-related issues; and
· the efficiencies we may expect to receive from any investments in personnel and
infrastructure may not be realized. The factors set forth under "Item 1A - Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should also be carefully considered and understood as being applicable to all related forward-looking statements contained in this Quarterly Report on Form 10-Q, when evaluating the business prospects of the Company and its subsidiaries. Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with theSecurities and Exchange Commission (the "SEC") on Forms 10-K, 10-Q and 8-K.
Merger with Bank of Marin Bancorp
OnApril 16, 2021 , the Company entered into a Merger Agreement that, upon the terms and subject to the conditions set forth therein, the Company will merge (the "Merger") with and into Bank of Marin Bancorp (theMarin Bancorp ") withMarin Bancorp surviving, followed immediately thereafter by the merger (the "Bank Merger") ofAmerican River Bank , with and into Bank of Marin, aCalifornia corporation and wholly-owned subsidiary ofMarin Bancorp , with Bank of Marin surviving. The Merger Agreement was approved by the Board of Directors of each of the Company andMarin Bancorp . 28 Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each outstanding share of the Company's common stock, excluding certain specified shares, will be converted into the right to receive 0.575 (the "Exchange Ratio") of a share ofMarin Bancorp common stock (the "Merger Consideration"). In addition, at the Effective Time, (i) each option to purchase shares of Company common stock, whether vested or unvested, that is outstanding immediately prior to the Effective Time will be canceled and exchanged for the right to receive an amount of cash equal to the product of (x) the total number of shares of Company common stock subject to such option and (y) the excess, if any, of (A) the product of (1) the volume weighted average price ofMarin Bancorp common stock on each of the last fifteen trading days ending on the second trading day immediately prior to the Effective Time, and (2) the Exchange Ratio, over (B) the exercise price per share under such option, less applicable taxes required to be withheld with respect to such payment; and (ii) any vesting conditions applicable to each outstanding restricted stock award and each outstanding restricted stock unit will accelerate in full, and each such restricted stock award and restricted stock unit will be treated as any other outstanding share of Company common stock entitled to receive the Merger Consideration. We cannot provide any assurance on whether or not the Merger will close in a timely fashion or at all.
Potential Impact of COVID-19
2020 began with optimism based off the progress made in 2019, but that was
stalled when the novel coronavirus pandemic ("COVID-19") arrived and created a
global health crisis that has set off an economic crisis causing significant
disruption in the local, national and global economies and financial markets.
Continuation and further spread of COVID-19 could cause additional quarantines,
shutdowns, reduction in business activity and financial transactions, labor
shortages, supply chain interruptions and overall economic and financial market
instability. The disruptions in the economy has impaired and may continue to
impair the ability of some of our borrowers to make their loan payments, which
could result in significant increases in delinquencies, defaults, foreclosures,
declining collateral values, and credit losses on our loans. Similarly, because
of changing economic and market conditions, we may be required to recognize
credit losses on the investment securities we hold as well. COVID-19 may also
continue to materially disrupt banking and other financial activity generally
and may result in a decline in demand for our products and services, including
loans and deposits which could negatively impact our liquidity position and our
growth strategy. Any one or more of these developments could have a material
adverse effect on our business, operations, consolidated financial condition,
and consolidated results of operations.
In response to the anticipated economic effects of COVID-19, the Board of
Governors of the Federal Reserve System (the "FRB") has taken a number of
actions that have significantly affected the financial markets in the United
States , including actions intended to result in substantial decreases in market
interest rates, including reducing the target federal funds range by 150 basis
points during the first quarter of 2020 to 0% and announcing further
quantitative easing in response to the expected economic downturn caused by
COVID-19. We expect that these reductions in interest rates, among other actions
of the FRB and the Federal government generally, especially if prolonged, will
adversely affect our net interest income, margins and profitability.
In addition to preparing the Company to handle the impact of the economic
crisis, protecting the health and wellbeing of our employees and the financial
viability of our clients, is now our highest priority. The Company quickly put
its pandemic plan into action to adjust to the impact of the health issues from
the COVID-19 pandemic on our employees and our clients. We have been working
with our clients by assisting them with loan payment deferrals and maintaining
service at all of our branch locations, subject to reduced operating hours. We
are encouraging the use of our digital and electronic channels and our night
depositories, all the while adhering to the ever-evolving State and Federal
guidelines. We have been participating in the Small Business Administration's
("SBA's") Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief
and Economic Security ("CARES") Act to help provide loans to our business
clients to provide them with additional working capital to enable them to retain
their employees.
We believe the COVID-19 pandemic has already impacted our local economy when
Federal, State and local shelter-in-place recommendations were enacted in our
markets in March 2020 causing many businesses to close and workers to be
furloughed or become unemployed. Essential purpose entities such as medical
professionals, food and agricultural businesses, and transportation and
logistical businesses were exempted from the closures; however, unemployment
rates increased in our local market area. Prior to the pandemic unemployment
rates were at all-time lows. At the end of February 2020 , the unemployment rate
in Sacramento County was 3.7%, in Sonoma County it was 2.8%, and in Amador
County it was 4.4%. By the end of May 2020 , these numbers increased to 14.1% in
Sacramento County , 12.7%, in Sonoma County , and 15.1% in Amador County . With
some businesses allowed to reopen these rates have decreased to 7.4% in
Sacramento County , 6.0%, in Sonoma County , and 7.4% in Amador County as of March
31, 2021 . While shelter-in-place restrictions were eased in our markets during
the second quarter of 2020, and just as many businesses were opening, new
restrictions were put in place, essentially eliminating the progress that had
been made until later in the third quarter when selected areas had the
restrictions eased again. New restrictions went in place throughout the State
later in 2020, which were then eased in January 2021 . With the successful
rollout of the pandemic vaccines, more business have been able to reopen inthe first quarter of 2021. 29 The Company has taken measures to protect the health and safety of its employees by implementing remote work arrangements to the full extent possible, and by adjusting banking offices hours and operational measures to promote social distancing. The Company will continue to analyze economic conditions in our geographic markets and perform stress testing of our investment and loan portfolios. The Company does not currently have a stock repurchase program in place. Our Board of Directors will evaluate whether or not to implement a program following such time that the economic impact of the COVID-19 has been assessed and minimized. OnApril 21, 2021 , the Company announced a$0.07 per share cash dividend payable onMay 19, 2021 to shareholders of record onMay 4, 2021 . Future cash dividend decisions will consider, among other business considerations, the impact of COVID-19 on the Company's capital and liquidity levels. Based on the Company's current capital levels, historical conservative underwriting policies, low loan-to-deposit ratio, concentration and geographical diversification of the loan portfolio, the Company currently expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic with sufficient liquidity and capital levels. While the Company is not exposed to large oil and gas, airline, or the entertainment industries we have been evaluating the exposure to potentially increased loan losses related to the COVID-19 pandemic and have identified the following industry segments most impacted by the pandemic as ofMarch 31, 2021 : Percentage of total non PPP loans Industry Loan Balance outstanding (1) Hospitality$ 918,000 0.2 % Churches$ 21,692,000 5.2 % Restaurants$ 5,725,000 1.4 % Eldercare$ 6,440,000 1.5 % School/childcare$ 5,355,000 1.3 % Recreation (golf/sportsclubs)$ 1,668,000 0.4 % Oil/Gas$ 8,924,000 (2) 2.1 %
(1) The PPP loans are 100% guaranteed by the SBA. By removing them from the total
loans outstanding in this calculation, we believe the table represents a more
reflective picture of the risk in the loan portfolio. The percentage of loans
outstanding is, therefore, calculated excluding the PPP loans from the total
loans. PPP loans as of
non-PPP loans were
(2) This total represents gas stations with convenience stores; gas station,
convenience store and car washes; auto restoration companies; gas station,
car washes; and drive though oil change and car wash facilities.
The Company is closely monitoring the effects of the pandemic on our loan and
deposit clients. We are focusing on assessing the risks in our loan portfolio
and working with our borrowers to minimize potential loan losses. We have
implemented loan programs to allow borrowers to defer loan principal and
interest payments. See "Working with Borrowers" for more information on loan
deferrals. During 2020, the Company funded 477 PPP loans totaling $80,154,000 ,
and in 2021, the Company funded 201 PPP loans totaling $25,465,000 . At March 31,
2021 , there were 368 PPP loans totaling $57,486,000 . The reduction in the March
31, 2021 balance represents loan forgiveness or loan paydowns.
Use of Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q ("Form 10Q") contains certain non-GAAP
(Generally Accepted Accounting Principles) financial measures in addition to
results presented in accordance with GAAP. These measures include the taxable
equivalent basis used in the computation of the net interest margin and
efficiency ratio. Management has presented these non-GAAP financial measures in
this Form 10Q because it believes that they provide useful and comparative
information to assess trends in the Company's financial position reflected in
the current quarter and year-to-date results and facilitate comparison of our
performance with the performance of our peers.
30
Net Interest Margin and Efficiency Ratio (non-GAAP financial measures)
In accordance with industry standards, certain designated net interest income
amounts are presented on a taxable equivalent basis, including the calculation
of net interest margin and the efficiency ratio. The Company believes the
presentation of net interest margin on a taxable equivalent basis using a 21%
effective tax rate allows comparability of net interest margin with industry
peers by eliminating the effect of the differences in portfolios attributable to
the proportion represented by both taxable and tax-exempt loans and investments.
The efficiency ratio is a measure of a banking company's overhead as a
percentage of its revenue. The Company derives this ratio by dividing total
noninterest expense by the sum of the taxable equivalent net interest income and
the total noninterest income.
Reconciliation of Annualized Net Interest Margin, Fully Tax Equivalent
(non-GAAP)
(dollars in thousands)
For the three months
ended March 31,
2021 2020
Net interest income (GAAP) $ 7,132 $ 6,188
Tax equivalent adjustment 47 56
Net interest income - tax equivalent adjusted (non-GAAP) $ 7,179 $ 6,244
Average earning assets $ 814,280 $ 669,974
Net interest margin (GAAP) 3.55 % 3.71 %Net interest margin (non-GAAP) 3.58 %
3.75 %
Reconciliation of Non-GAAP Measure - Efficiency Ratio
(dollars in thousands)
For the three months
ended March 31,
2021 2020
Net interest income (GAAP) $ 7,132 $ 6,188
Tax equivalent adjustment 47 56
Net interest income - tax-equivalent adjusted (non-GAAP)
$ 6,244 Noninterest income 591 452 Total income 7,770 6,696 Total noninterest expense 4,063 4,216
Efficiency ratio, fully tax-equivalent (non-GAAP) 52.29 %
62.96 % Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. We use historical loss data and the economic environment as factors, among others, in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of probable credit losses inherent in the Company's credit portfolio that have been incurred as of the balance-sheet date. The allowance is based on two basic principles of accounting: (1) "Accounting for Contingencies," which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) the "Receivables" topic, which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. 31 The allowance for loan losses is determined based upon estimates that can and do change when the actual risk, loss events, or changes in other factors, occur. The analysis of the allowance uses a historical loss view as an indicator of future losses and as a result could differ from the actual losses incurred in the future. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. For further information regarding our allowance for loan losses, see "Allowance for Loan Losses Activity."
The Company is a bank holding company registered under theBank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of theState of California in 1995. As a bank holding company, the Company is authorized to engage in the activities permitted under theBank Holding Company Act of 1956, as amended, and regulations thereunder. Its principal office is located at3100 Zinfandel Drive , Suite 450,Rancho Cordova, California 95670 and its telephone number is (916) 854-0123. The Company employed an equivalent of 95 full-time employees as ofMarch 31, 2021 . The Company owns 100% of the issued and outstanding common shares of its banking subsidiary,American River Bank (the "Bank"), and AmericanRiver Financial , aCalifornia corporation which has been inactive since its incorporation in 2003.American River Bank was incorporated and commenced business inFair Oaks, California , in 1983 and thereafter moved its headquarters toSacramento, California in 1985.American River Bank operates five full service offices inSacramento andPlacer Counties including the main office located at1545 River Park Drive , Suite 107,Sacramento and branch offices inSacramento ,Gold River , andRoseville ; two full service offices inSonoma County inHealdsburg andSanta Rosa ; and three full service offices inAmador County inJackson ,Pioneer ,
andIone . The Bank's deposits are insured by theFederal Deposit Insurance Corporation (the "FDIC") up to applicable legal limits.American River Bank does not offer trust services or international banking services and does not plan to do so in the near future.American River Bank's primary business is serving the commercial banking needs of small to mid-sized businesses within those counties listed above.American River Bank accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services.American River Bank owns 100% of two inactive companies, ARBCO and AmericanRiver Mortgage . ARBCO was formed in 1984 to conduct real estate development and has been inactive since 1995. AmericanRiver Mortgage has been inactive since its formation in 1994. During 2021 and 2020, the Company conducted no significant activities other than holding the shares of its subsidiaries. However, it is authorized, with the prior approval of theBoard of Governors of theFederal Reserve System (the "Federal Reserve Board"), the Company's principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking. The common stock of the Company is registered under the Securities Exchange Act of 1934, as amended, and is listed and traded on the Nasdaq Global Select Market under the symbol "AMRB." OnApril 16, 2021 , the Company entered into a Merger Agreement that, upon the terms and subject to the conditions set forth therein, the Company will merge with and intoMarin Bancorp as described above. Overview The Company recorded net income of$2,647,000 for the quarter endedMarch 31, 2021 , which was an increase of$1,215,000 (84.8%) compared to$1,432,000 reported for the same period of 2020. Diluted earnings per share for the first quarter of 2021 was$0.45 , an increase of 87.5% compared to the$0.24 per share reported in the first quarter of 2020. The return on average equity ("ROAE") and the return on average assets ("ROAA") for the first quarter of 2021 were 11.54% and 1.21%, respectively, as compared to 6.77% and 0.80%, respectively, for
the same period in 2020. 32 Total assets of the Company increased by$47,072,000 (5.4%) from$868,991,000 atDecember 31, 2020 to$916,063,000 atMarch 31, 2021 . Net loans totaled$468,718,000 atMarch 31, 2021 , a decrease of$3,135,000 (0.7%) from$471,853,000 atDecember 31, 2020 . Deposit balances atMarch 31, 2021 totaled$788,569,000 , an increase of$44,392,000 (6.0%) from$744,177,000 atDecember 31, 2020 . The Company ended the first quarter of 2021 with a leverage capital ratio of 8.5%, a Tier 1 capital ratio of 15.5%, and a total risk-based capital ratio of 16.7% compared to 8.3%, 15.0%, and 16.2%, respectively, atDecember 31, 2020 . Table One below provides a summary of the components of net income for the periods indicated (See the "Results of Operations" section that follows for an explanation of the fluctuations in the individual components).
Table One: Components of Net Income
(dollars in thousands)
For the three months ended
March 31,
2021 2020
Interest income* $ 7,401 $ 6,771
Interest expense (222 ) (527 )
Net interest income* 7,179 6,244
Provision for loan losses - (495 )
Noninterest income 591 452
Noninterest expense (4,063 ) (4,216 )
Provision for income taxes (1,013 ) (497 )
Tax equivalent adjustment (47 ) (56 )
Net income $ 2,647 $ 1,432
Average total assets $ 884,565 $ 721,439
Net income (annualized) as a percentage of average
total assets 1.21 % 0.80 %
*Fully taxable equivalent basis (FTE)
Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned on interest earning assets (loans, securities, Federal funds sold and investments in time deposits) over the interest paid on interest-bearing deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. The Company's net interest margin was 3.58% for the three months endedMarch 31, 2021 and 3.75% for the three months endedMarch 31, 2020 . The fully taxable equivalent interest income component for the first quarter of 2021 increased$630,000 (9.3%) to$7,401,000 compared to$6,771,000 for the three months endedMarch 31, 2020 . The increase in the fully taxable equivalent interest income for the first quarter of 2021 compared to the same period in 2020 is broken down by rate (down$762,000 ) and volume (up$1,392,000 ). The primary driver in this rate decrease was a decrease in the yield on loans, which led to a decrease of$174,000 , a decrease in the yield on investments, which led to a decrease of$476,000 , and a decrease in the yield on interest-bearing deposits in banks, which led to a decrease of$112,000 . The yield on loans decreased from 5.03% in the first three months of 2020 to a yield of 4.92% during the first three months of 2021; the yield on investments decreased from 2.69% in the first three months of 2020 to a yield of 2.06% during the first three months of 2021 and the yield on interest-bearing deposits in banks decreased from 1.59% in the first quarter of 2020 to 0.11% in the first quarter of 2021. The volume increase of$1,392,000 was primarily from an increase in loans ($1,059,000 ); an increase in investments ($248,000 ); and an increase in interest-bearing deposits in banks ($86,000 ). Average loans balances increased$84,889,000 , (or 21.4%), from$396,322,000 during the first quarter of 2020 to$481,211,000 during the first quarter of 2021; average investment balances increased$37,401,000 , (or 14.1%), from$265,037,000 during the first quarter of 2020 to$302,438,000 during the first quarter of 2021, and average balances in interest-bearing deposits in banks increased$22,016,000 , (or 255.6%), from$8,615,000 during the first quarter of 2020 to$30,631,000 during the first
quarter of 2021. 33 Interest expense was$222,000 or$305,000 (57.9%) lower in the first quarter of 2021 compared to$527,000 in the first quarter of 2020. The net$305,000 decrease in interest expense during the first quarter of 2021 compared to the first quarter of 2020 was predominantly rate related which reduced expense by$369,000 . This decrease was partially offset by volume which increased expense by$64,000 . Rates paid on interest bearing liabilities decreased 34 basis points from 0.54% to 0.20% for the first quarter of 2020 compared to the first quarter of 2021. Of the$369,000 decrease in interest expense related to rates,$175,000 is related to lower rates paid on interest checking and money market accounts and$147,000 was related to time deposit balances. The overall lower interest rate environment in short term rates contributed to this decrease in interest expense. Partially offsetting the decrease in expense due to rates was an increase due to volume as average interest bearing balances increased$60,515,000 (15.4%) from$392,517,000 in the first quarter of 2020 to$453,032,000 during the first quarter of 2021. Table Two, Analysis of Net Interest Margin on Earning Assets, and Table Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are provided to enable the reader to understand the components and trends of the Company's interest income and expenses. Table Two provides an analysis of net interest margin on earning assets setting forth average assets, liabilities and shareholders' equity; interest income earned and interest expense paid and average rates earned and paid; and the net interest margin on earning assets. Table Three sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates. Table Two: Analysis of Net Interest Margin on Earning Assets Three Months Ended March 31, 2021 2020 (Taxable Equivalent Basis) Avg Avg Avg Avg (dollars in thousands) Balance Interest Yield (4) Balance Interest Yield (4) Assets Earning assets: Taxable loans (1)$ 462,037 $ 5,604 4.92 %$ 372,826 $ 4,675 5.04 % Tax-exempt loans (2) 19,174 233 4.93 % 23,496 278 4.76 % Taxable investment securities 297,320 1,515 2.07 % 259,592 1,739 2.69 % Tax-exempt investment securities (2) 5,118 41 3.25 % 5,445 45 3.32 % Federal funds sold - - - - - - Interest-bearing deposits in banks 30,631 8 0.11 % 8,615 34 1.59 % Total earning assets 814,280 7,401 3.69 % 669,974 6,771 4.06 % Cash & due from banks 35,124 16,008 Other assets 41,906 40,675
Allowance for loan losses (6,745 ) (5,218 )
$ 884,565 $ 721,439
Liabilities & Shareholders' Equity
Interest bearing
liabilities:
Interest checking and money
market $ 266,895 61 0.09 % $ 230,222 204 0.36 %
Savings 91,076 6 0.03 % 74,530 7 0.04 %
Time deposits 74,274 93 0.51 % 70,787 229 1.30 %
Other borrowings 20,787 62 1.21 % 16,978 87 2.06 %
Total interest bearing
liabilities 453,032 222 0.20 % 392,517 527 0.54 %
Noninterest bearing demand
deposits 326,179 232,562
Other liabilities 12,346 11,282
Total liabilities 791,557 636,361
Shareholders' equity 93,008 85,078
$ 884,565 $ 721,439
Net interest income & margin
(3) $ 7,179 3.58%$ 6,244 3.75 %
(1) Loan interest includes loan fees of
during the three months ended
loan balances include non-performing loans.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain loans and securities that is exempt from federal income taxes. The
effective federal statutory tax rate was 21% for 2021 and 2020.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in the period (90 days for
2021 and 91 days for 2020) and annualized to actual days in the year (365
days for 2021 and 366 days for 2020).
34
Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses Three Months EndedMarch 31, 2021 over 2020 (dollars in thousands) Increase (decrease) due to change in: Interest-earning assets: Volume Rate (4) Net Change Taxable net loans (1)(2)$ 1,109 $ (180 ) $ 929 Tax-exempt net loans (3) (51 ) 6 (45 ) Taxable investment securities 251 (475 ) (224 )
Tax exempt investment securities (3) (3 ) (1 ) (4 ) Federal funds sold - - - Interest-bearing deposits in banks 86 (112 ) (26 ) Total 1,392 (762 ) 630 Interest-bearing liabilities: Interest checking and money market 32
(175 ) (143 ) Savings deposits 2 (3 ) (1 ) Time deposits 11 (147 ) (136 ) Other borrowings 19 (44 ) (25 ) Total 64 (369 ) (305 ) Interest differential$ 1,328 $ (393 ) $ 935
(1) The average balance of nonaccrual loans is immaterial as a percentage of
total loans and has been included in net loans.
(2) Loan interest includes loan fees of
during the three months ended
been included in the interest income computation. Includes
fees from PPP loans during the first quarter of 2021
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain loans and securities that is exempt from federal income taxes. The
effective federal statutory tax rate was 21% for 2021 and 2020.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan Losses
The Company did not provide a provision for loan losses in the first quarter of 2021 compared to$495,000 in the first quarter of 2020. The Company experienced net loan recoveries of$68,000 or (0.06%) (on an annualized basis) of average loans for the three months endedMarch 31, 2021 compared to net loan recoveries of$4,000 or (0.00%) (on an annualized basis) of average loans for the three months endedMarch 31, 2020 . The Company continues to experience an overall improvement in the credit quality of the loan portfolio and a reduction of credit losses, however, due to the uncertain economic impact on the Company's borrowers due to COVID-19, the$495,000 addition in 2020 to the provision for loan losses during the first quarter of 2020 was warranted. For additional information see the "Allowance for Loan Losses Activity" and "Potential Impact of COVID-19." The net loan recoveries, reduction in loan balances in the first quarter of 2021, and the progress made in the circulation of the pandemic vaccine allowed the Company to forgo and additions to the provision for loan losses in the first quarter of 2021
Noninterest Income
Table Four below provides a summary of the components of noninterest income for the periods indicated (dollars in thousands):
35
Table Four: Components of Noninterest Income
Three Months Ended
March 31,
2021 2020
Service charges on deposit accounts $ 164 $ 155
Gain on sale of securities 172 38
Merchant fee income 90 93
Bank owned life insurance 70 84
Other 95 82
Total noninterest income $ 591 $ 452
Noninterest income increased $139,000 (30.8%) to $591,000 for the three months
ended March 31, 2021 as compared to $452,000 for the three months ended March
31, 2020 . The increase in noninterest income was primarily related to higher
gain on sale of securities, which increased $134,000 (352.6%) from $38,000 in 2020 to$172,000 in 2021. Noninterest Expense Noninterest expense decreased$153,000 (3.6%) to a total of$4,063,000 in the first quarter of 2021 compared to$4,216,000 in the first quarter of 2020. Salary and employee benefits expense decreased$103,000 (3.6%) from$2,865,000 during the first quarter of 2020 to$2,762,000 during the first quarter of 2021. The decrease in salaries and benefits expense resulted from an increase in the deferral of direct loan origination costs, which reduced salary expense. Each PPP loan that was recorded had an associated loan origination cost. Total origination costs for the first quarter of 2021 were$212,000 compared to$82,000 for the first quarter of 2020. Of the$212,000 in deferred loan origination costs recorded in 2021,$140,700 was related to PPP loans. The benefit from the deferred loan origination costs was partially offset by normal cost of living increases and promotions. Average full-time equivalent employees was 95 during the first quarter of 2021 compared to 101 during the first quarter of 2020. On a quarter-over-quarter basis, occupancy expense increased$3,000 (1.2%) and furniture and equipment expense decreased$9,000 (6.3%).FDIC assessments increased$27,000 (100.0%) from the first quarter of 2020 to the first quarter of 2021. The increasedFDIC assessments result from theFDIC insurance fund reaching the target of 1.38% and the Company being able to use theSmall Bank Assessment Credits, awarded to banks likeAmerican River Bank , which essentially gave banks a credit for the assessments paid in the latter half of 2019 and for a partial amount of the expense for the first quarter of 2020. There were no assessment credits received in the first quarter of 2021. OREO related expenses decreased$1,000 (20.0%) from$5,000 in the first quarter of 2020 to$4,000 in the first quarter of 2021. Other expense decreased$70,000 (7.6%) from$920,000 in the first quarter of 2020 to$850,000 in the first quarter of 2021. There were numerous line items that make up the$70,000 decrease in other expenses including a$21,000 (131.3%) decrease in business development, which decreased from$37,000 in 2020 to$16,000 in 2021, and a$16,000 (40.0%) decrease in legal fees, which decreased from$40,000 in 2020 to$24,000 in 2021. The fully taxable equivalent efficiency ratio decreased from 63.0% for the first quarter of 2020 to 52.3% for the first quarter of 2021.
Provision for Income Taxes
Federal and state income taxes for the quarter endedMarch 31, 2021 increased$516,000 (103.8%) from$497,000 in the first quarter of 2020 to$1,013,000 in the first quarter of 2021. The effective tax rate for the quarter endedMarch 31, 2021 was 27.7% compared to 25.8% for the first quarter of 2020. The higher tax expense was related to the higher level of taxable income ($1,731,000 or 89.7%), which increased from$1,929,000 in 2020 to$3,660,000 in 2021. The higher effective tax rate in 2021 compared to 2020 is also related to the higher level of taxable income as well as a lower level of benefits from tax-exempt loans and investments (including investments in bank owned life insurance). Tax-exempt benefits decreased from$346,000 in 2020 to$296,000 in 2021.
Balance Sheet Analysis
The Company's total assets were$916,063,000 atMarch 31, 2021 as compared to$868,991,000 atDecember 31, 2021 , representing an increase of$47,072,000 (5.4%). The average assets for the three months endedMarch 31, 2021 were$884,565,000 , which represents an increase of$163,126,000 or 22.6% over the balance of$721,439,000 during the three-month period endedMarch 31, 2020 .
36 Cash and Cash Equivalents The balance held in cash and cash equivalents atMarch 31, 2021 , was$97,798,000 compared to$42,509,000 atDecember 31, 2020 an increase of$55,289,000 (130.1%). The primary reason for the increase in cash and cash equivalents sinceDecember 31, 2020 is directly related to the increase in deposit balances during the same period.Investment Securities
Table Five below summarizes the values of the Company's investment securities
held on
Table Five: Investment Securities Composition
(dollars in thousands)
March 31 , December
31,
Available-for-sale (at fair value) 2021 2020 Debt securities: US Government Agencies and Sponsored Agencies$ 266,487 $ 283,833 Obligations of states and political subdivisions 16,723 16,301 U. S Treasury securities 11,564 - Corporate bonds 6,854 6,832 Total available-for-sale investment securities$ 301,628 $ 306,966 Held-to-maturity (at amortized cost) Debt securities: US Government Agencies and Sponsored Agencies$ 10 $
12
Total held-to-maturity investment securities
12
The Company classifies its investment securities as available-for-sale or held-to-maturity. The Company's intent is to hold all securities classified as held-to-maturity until maturity and management believes that it has the ability to do so. Securities available-for-sale may be sold to implement asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Net unrealized gains on available-for-sale investment securities totaling$5,133,000 were recorded, net of$1,517,000 in tax liabilities, as accumulated other comprehensive loss within shareholders' equity atMarch 31, 2021 and net unrealized gains on available-for-sale investment securities totaling$8,739,000 were recorded, net of$2,583,000 in tax liabilities, as accumulated other comprehensive loss within shareholders' equity atDecember 31, 2020 . Management periodically evaluates each investment security in a loss position for other than temporary impairment relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Management has the ability and intent to hold securities with established maturity dates until recovery of fair value, which may be until maturity, and believes it will be able to collect all amounts due according to the contractual terms for all of the underlying investment securities; therefore, management does not consider these investments to be other-than-temporarily impaired.
Loans
The Company's historical lending activities have been in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) agriculture; and (7) consumer loans. The Company's continuing focus in our market area, new borrowers developed through the Company's marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company originating$25.9 million in new loans during the first quarter of 2021. In addition to the$25.9 million in new production the Company also originated 201 PPP loans totaling$25.5 million during the first quarter of 2021. This production was partially offset by pay downs and payoffs, and excluding the PPP loans resulted in an overall decrease in net loans of$4,702,000 (1.1%) fromDecember 31, 2020 . AtMarch 31, 2021 , gross PPP loans were$57,486,000 and had related fees of$1,354,000 , for a net balance of$56,132,000 . These PPP loans were recorded as commercial loans. AtMarch 31, 2021 , net loans excluding net PPP loans were$419,282,000 and total loans excluding total PPP loans were$420,030,000 . 37 A significant portion of the Company's loans are direct loans made to individuals and local businesses. The Company relies substantially on networking, local promotional activity, and personal contacts byAmerican River Bank officers, directors and employees to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment. Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products. Consumer loans include a range of traditional consumer loan products such as personal lines of credit and homeowner equity lines of credit and loans to finance purchases of autos (including classic and collectors autos), boats, recreational vehicles, mobile homes and various other consumer items. Construction loans are generally comprised of commitments to customers within the Company's service area for construction of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans consist primarily of loans secured by first trust deeds on commercial, multi-family, and residential properties typically with maturities from three to ten years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily of first trust deed loans on properties that produce grapes, fruit, and nut loans. In general, except in the case of loans under SBA programs orFarm Services Agency guarantees, the Company does not make long-term residential mortgage loans.
Table Six below summarizes the composition of the loan portfolio as of
Table Six: Loan Portfolio Composition
(dollars in thousands) March 31, 2021 December 31, 2020 Change in Percentage
$ % $ % dollars change
Commercial (1) $ 93,982 20 % $ 94,522 20 % $ (540 ) (0.6 %)
Real estate
Commercial 248,660 52 % 251,348 52 % (2,688 ) (1.1 %)
Multi-family 45,254 9 % 48,760 10 % (3,506 ) (7.2 %)
Construction 25,242 5 % 18,424 4 % 6,818 37.0 %
Residential 31,749 7 % 32,329 7 % (580 ) (1.8 %)
Agriculture 6,034 1 % 6,091 1 % (57 ) (0.9 %)
Consumer 26,595 6 % 28,804 6 % (2,209 ) (7.7 %)
Total loans 477,516 100 % 480,278 100 % (2,762 ) (0.6 %)Deferred loan (fees) and costs, net (2,102 ) (1,797
) (305 ) Allowance for loan losses (6,696 ) (6,628 ) (68 ) Total net loans$ 468,718 $ 471,853 $ (3,135 ) (0.7 %)
(1) Incudes PPP loans of
December 31, 2020 . Risk Elements
The Company assesses and manages credit risk on an ongoing basis through a total credit culture that emphasizes excellent credit quality, extensive internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant to periodically review the existing loan portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company's loan portfolio is critical for profitability and growth. Management strives to continue its emphasis on credit quality in the loan approval process, through active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio. 38 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 largeState of California government presence and employment base; inSonoma County , which is focused on businesses within the two communities in which the Bank has offices (Santa Rosa andHealdsburg ); and inAmador County , in which the Bank is primarily focused on businesses within the three communities in which it has offices (Jackson ,Pioneer , andIone ). The economy ofSonoma County is diversified with professional services, manufacturing, agriculture and real estate investment and construction, while the economy ofAmador County is reliant upon government, services, retail trade, manufacturing industries and Indian gaming. The Company has significant extensions of credit and commitments to extend credit that are secured by real estate. The ultimate repayment of these loans is generally dependent on personal or business cash flows or the sale or refinancing of the real estate. The Company monitors the effects of current and expected market conditions and other factors on the collectability of real estate loans. The more significant factors management considers involve the following: lease rates and terms, vacancy rates, absorption and sale rates and capitalization rates; real estate values, supply and demand factors, and rates of return; operating expenses; inflation and deflation; and sufficiency of repayment sources independent of the real estate including, in some instances, personal guarantees. In extending credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flows or from proceeds from the sale of selected assets of the borrowers. The Company's requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management's evaluation of the creditworthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. The Company secures its collateral by perfecting its security interest in business assets, obtaining deeds of trust, or outright possession among other means. In management's judgment, a concentration exists in real estate loans, which represented approximately 84% of the Company's loan portfolio atMarch 31, 2021 and 83% as ofDecember 31, 2020 . These figures exclude the PPP loans, which are 100% guaranteed by the SBA. Management believes that the residential land and construction portion of the Company's loan portfolio carries a reasonable level of credit risk. As ofMarch 31, 2021 , outstanding unimproved residential land and construction loans were$8,342,000 (or just 2.4% of the total real estate loans). Management currently believes that it maintains its allowance for loan losses at levels adequate to reflect the loss risk inherent in its total loan portfolio. A decline in the economy in general, or decline in real estate values in the Company's market areas, in particular, could have an adverse impact on the collectability of real estate loans and require an increase in the provision for loan losses. This could adversely affect the Company's future prospects, results of operations, profitability and stock price. See "Potential Impact of COVID-19." Management believes that its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no assurance that losses will not occur. The Company's loan practices and underwriting standards include, but are not limited to, the following principles: (1) maintaining a thorough understanding of the Company's market area and originating a significant majority of its loans within that area, (2) maintaining a thorough understanding of borrowers' knowledge, capacity, and market position in their field of expertise, (3) basing real estate loan approvals not only on market demand for the project, but also on the borrowers' capacity to support the project financially in the event it does not perform to expectations (whether sale or income performance), and (4) maintaining conforming and prudent loan-to-value and loan-to-cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Company's lending officers or contracted third-party professionals.
Nonperforming, Past Due and Restructured Loans
Management places loans on nonaccrual status when they become 90 days past due or if a loss is expected, unless the loan is well secured and in the process of collection. Loans are partially or fully charged off when, in the opinion of management, collection of such amount appears unlikely. The recorded investments in nonperforming loans, which includes nonaccrual loans and loans that were 90 days or more past due and on accrual, totaled zero at bothMarch 31, 2021 andDecember 31, 2020 , respectively. AtMarch 31, 2021 andDecember 31, 2020 there were no loans that were 30 days or more past due. 39 There were no loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as ofMarch 31, 2021 . Management is not aware of any potential problem loans, which were accruing and current atMarch 31, 2021 , where serious doubt exists as to the ability of the borrower to comply with the present repayment terms and that would result in a significant loss to the Company apart from those loans identified in the Bank's impairment analysis. Table Seven below sets forth nonaccrual loans and loans past due 90 days or more as ofMarch 31, 2021 andDecember 31, 2020 .
Table Seven: Nonperforming Loans
March 31, December 31,
(dollars in thousands) 2021 2020
Past due 90 days or more and still accruing:
Commercial $ - $ -
Real estate - -
Agriculture - -
Consumer - -
Nonaccrual:
Commercial - -
Real estate - -
Consumer - -
Total nonperforming loans $ - $ -
Impaired Loans
The Company considers a loan to be impaired when, based on current information
and events, it is probable that it will be unable to collect all amounts due
(principal and interest) according to the original contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present value
of the expected cash flows of the impaired loan discounted at the loan's
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The Company does not apply this definition to
smaller-balance loans that are collectively evaluated for credit risk. In
assessing whether a loan is impaired, the Company typically reviews loans graded
substandard or lower with outstanding principal balances in excess of $100,000 ,
as well as loans considered troubled debt restructures with outstanding
principal balances in excess of $25,000 . The Company identifies troubled debt
restructures by reviewing each renewal, modification, or extension of a loan
with a screening document. This document is designed to identify any
characteristics of such a loan that would qualify it as a troubled debt
restructure. If the characteristics are not present that would qualify a loan
as a troubled debt restructure, it is deemed to be a modification.
At March 31, 2021 , the recorded investment in loans that were considered to be
impaired totaled $6,989,000 , all of which are considered performing loans. Of
the total impaired loans of $6,989,000 , loans totaling $5,357,000 were deemed to
require no specific reserve and loans totaling $1,632,000 were deemed to require
a related valuation allowance of $109,000 . Of the $5,357,000 impaired loans that
did not carry a specific reserve there were $461,000 in loans that had previous
partial charge-offs and $4,896,000 in loans that were analyzed and determined
not to require a specific reserve or charge-off because the collateral value or
discounted cash flow value exceeded the loan balance. The recorded investment in
loans that were considered to be impaired totaled $7,050,000 at December 31,
2020 . Of the total impaired loans of $7,050,000 , loans totaling $5,387,000 were
deemed to require no specific reserve and loans totaling $1,663,000 were deemed
to require a related valuation allowance of $112,000 .
Prior to 2013, the Company had been operating in a market that had experienced
significant decreases in real estate values of commercial, residential, land,
and construction properties. As such, the Company is focused on monitoring
collateral values for those loans considered collateral dependent. For
collateral dependent loans the Company performs an internal evaluation or
obtains an updated appraisal, as necessary. In the first quarter of 2021, the
Company had net loan recoveries of $68,000 with zero provisions for loan losses.
The Company's ALLL to non-PPP loans (which are 100% SBA guaranteed) is 1.60% at
March 31, 2021 . The 1.60% ALLL to loans is higher than the Company's historical
average. Despite the Company's continued improvement in the credit quality of
the loan portfolio, due to the uncertain economic impact on the Company's
borrowers due to COVID-19, management believes that the 1.60% ALLL to non-PPP
loans is warranted. In the first quarter of 2020, the Company had net loan
recoveries of $4,000 with $475,000 in added provision.
During the periods ended March 31, 2021 and March 31, 2020 , there were no loans
that were modified as troubled debt restructurings. There were no payment
defaults during the three months ended March 31, 2021 or March 31, 2020 on
troubled debt restructurings made in the preceding twelve months. At March 31,
2021 and December 31, 2020 , there were no unfunded commitments on those loans
considered troubled debt restructures.
40
Working with Borrowers
The FDIC is encouraging financial institutions, like American River Bank , to
provide borrowers affected in a variety of ways by the COVID-19 outbreak with
payment accommodations that facilitate their ability to work through the
immediate impact of the virus. Such assistance provided in a prudent manner to
borrowers facing short-term setbacks could help the borrower and our community
to recover. The FDIC indicated that these loan accommodation programs should be
ultimately targeted toward loan repayment, but that if provided in a prudent
manner such programs can help borrowers and communities recover from short-term
setbacks.
TheFDIC encouraged financial institutions to consider ways to address any deferred or skipped payments such as extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan. The terms of the payment deferrals are generally 90 days and up to 180 days and borrowers may be eligible for multiple deferrals. Pursuant to the CARES Act, these loan modifications are not accounted for as troubled debt restructure. As ofJune 30, 2020 , the Company had made 107 such loan payment deferrals totaling$96,465,000 . During the third quarter 2020, two additional loans totaling$2,980,000 were extended loan payment deferrals and four loans that had previously been provided loan payment deferrals totaling$2,123,000 paid off in full. In addition, during the third quarter 69 loans that had previously been granted loan payment deferrals began making their loan payments and are no longer on a loan deferral program. As ofSeptember 30, 2020 , 39 loans totaling$39,576,000 were on a loan deferral program and of these loans, four loans totaling$4,074,000 were in their initial deferral period while 32 loans totaling$35,502,000 were provided an additional deferral period either after their initial deferral period ended or prior to the ending of their initial deferral period. As ofDecember 31, 2020 , there were two commercial real estate loans totaling$4,882,000 that had been granted loan payment deferrals. These two loans resumed their contractual payments during the first quarter of 2021. Also during the first quarter of 2021, one additional loan in the amount of$2,017,000 was granted a 90-day interest only payment deferral. This was the only loan on payment deferral atMarch 31, 2021 , however, this borrower resumed making the contractual payment during the second quarter of 2021. These loans are not considered past due until after the deferral period is over and scheduled payments have resumed and any subsequently scheduled payments are missed. The Company continues to accrue interest on all of the loan deferrals. The Company expects to continue to work with its borrowers and make prudent credit arrangements as needed, while intending to continue to act in a safe and sound manner. The Company has continued to keep in close contact with the borrowers that have been granted loan payment deferrals and continued to monitor those loans that have begun making their loan payments to track their payment history and evaluate whether it is appropriate to upgrade or downgrade the individual loan ratings. None of the borrowers that had been granted loan deferrals were more than 30 days past due immediately preceding the deferral date, and for those that have resumed making payments, none are more than 30 days past due atMarch 31, 2021 .
Allowance for Loan Losses Activity
The Company maintains an allowance for loan losses ("ALLL") to cover probable
losses inherent in the loan portfolio, which is based upon management's estimate
of those losses. The ALLL is established through a provision for loan losses and
is increased by provisions charged against current earnings and recoveries and
reduced by charge-offs. Actual losses for loans can vary significantly from this
estimate. The methodology and assumptions used to calculate the allowance are
continually reviewed as to their appropriateness given the most recent losses
realized and other factors that influence the estimation process. The model
assumptions and resulting allowance level are adjusted accordingly as these
factors change.
The adequacy of the ALLL and the level of the related provision for loan losses
is determined based on management's judgment after consideration of numerous
factors including, but not limited to: (i) local and regional economic
conditions, (ii) the financial condition of the borrowers, (iii) loan impairment
and the related level of expected charge-offs, (iv) evaluation of industry
trends, (v) industry and other concentrations, (vi) loans which are
contractually current as to payment terms but demonstrate a higher degree of
risk as identified by management, (vii) continuing evaluations of the performing
loan portfolio, (viii) ongoing review and evaluation of problem loans identified
as having loss potential, (ix) quarterly review by the Board of Directors, and
(x) assessments by banking regulators and other third parties. Management and
the Board of Directors evaluate the ALLL and determine its appropriate level
considering objective and subjective measures, such as knowledge of the
borrower's business, valuation of collateral, the determination of impaired
loans and exposure to potential losses.
41
The ALLL totaled $6,696,000 or 1.41% of total loans at March 31, 2021 compared
to $6,628,000 or 1.39% of total loans at December 31, 2020 . Excluding the 100%
SBA guaranteed PPP loans, which do not carry the same risk as the rest of the
loan portfolio, the ALLL to total loans was 1.60% at March 31, 2021 and 1.56% at
December 31, 2020 . The allowance for loans as a percentage of impaired loans was
95.8% at March 31, 2021 and 94.0% at December 31, 2020 . The Company establishes
general and specific reserves in accordance with accounting principles generally
accepted in the United States of America . The ALLL is composed of categories of
the loan portfolio based on loan type and loan rating; however, the entire
allowance is available to cover actual loan losses. While management uses
available information to recognize possible losses on loans, future additions to
the allowance may be necessary, based on changes in economic conditions and
other matters. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's ALLL. Such agencies
may require the Company to provide additions to the allowance based on their
judgment of information available to them at the time of their examination.
The Company's policy with regard to loan charge-offs continues to be that a loan
is charged off against the ALLL when management believes that the collectability
of the principal is unlikely. As previously discussed in the "Impaired Loans"
section, certain loans are evaluated for impairment. Generally, if a loan is
collateralized by real estate or other collateral, and considered collateral
dependent, the impaired portion will be charged off to the allowance for loan
losses unless it is in the process of collection, in which case a specific
reserve may be warranted. Table Eight below summarizes, for the periods
indicated, the activity in the ALLL.
Table Eight: Allowance for Loan Losses
(dollars in thousands) Three Months
Ended March 31,
2021 2020
Average loans outstanding $ 481,211 $ 396,322
Allowance for loan losses at beginning of period $ 6,628 $ 5,138
Loans charged off:
Consumer 9 -
Total 9 -
Recoveries of loans previously charged off:
Commercial 76 1
Real estate 1 3
Total 77 4
Net loans recovered 68 4
Additions to allowance charged to operating
expenses - 495
Allowance for loan losses at end of period$ 6,696 $
5,637
Ratio of net recoveries to average loans outstanding (annualized) -0.06 % 0.00 % Provision of allowance for loan losses to average loans outstanding (annualized) 0.00 %
0.50 % Allowance for loan losses to loans net of deferred fees at end of period
1.41 % 1.43 %
Allowance for loan losses to non PPP loans net of
deferred fees at end of period 1.60 % 1.43 % 42
It is the policy of management to maintain the allowance for loan losses at a level believed to be adequate for known and inherent risks in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan losses that management believes is appropriate at each reporting date. Formula allocations are calculated by applying historical loss factors to outstanding loans with similar characteristics. Historical loss factors are based upon the Company's loss experience. These historical loss factors are adjusted for changes in the business cycle and for significant factors that, in management's judgment, affect the collectability of the loan portfolio as of the evaluation date. The discretionary allocation is based upon management's evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions. Based on information currently available, management believes that the allowance for loan losses is prudent and adequate. However, no prediction of the ultimate level of loans charged off in future periods can be made with any certainty.
Other Real Estate Owned
AtMarch 31, 2021 andDecember 31, 2020 , the Company had one other real estate owned ("OREO") property totaling$800,000 . During the first quarter of 2021, the Company did not acquire or sell any OREO properties nor were there any impairment charges to this property. There was no valuation allowance atMarch 31, 2021 nor at year-end 2020. The Company believes that the OREO property owned atMarch 31, 2021 was carried approximately at fair value.
Deposits
AtMarch 31, 2021 , total deposits were$788,569,000 representing a$44,392,000 (6.0%) increase from theDecember 31, 2020 balance of$744,177,000 . The Company's deposit growth plan for 2021 is to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing money market and NOW accounts, and savings accounts while continuing to focus on maintaining an overall lower cost of funds than our peer group, while at the same time retaining our high-valued deposit relationships. During the first quarter of 2021, the Company experienced increases in noninterest-bearing checking ($9,619,000 or 2.9%), interest-bearing checking ($12,081,000 or 14.7%), money market savings ($10,545,000 or 6.0%), savings ($6,307,000 or 7.2%), and time deposits ($5,840,000 or 8.4%). Some of the deposit increase can be attributed to our business accounts depositing the funds received from their PPP loans into their accounts held atAmerican River Bank , as well as, balance increases due to the deferral payroll tax payments and other government programs.
Other Borrowed Funds
Other borrowings outstanding as ofMarch 31, 2021 andDecember 31, 2020 , consist of advances (both short-term and long-term) from theFederal Home Loan Bank of San Francisco ("FHLB"). Table Nine below summarizes these borrowings. Table Nine: Other Borrowed Funds (dollars in thousands) March 31, 2021 December 31, 2020 Amount Rate Amount Rate Short-term borrowings: FHLB advances$ 7,000 0.54 %$ 7,000 0.54 % Long-term borrowings: FHLB advances$ 13,787 1.13 %$ 13,787 1.13 % The maximum amount of short-term borrowings at any month-end during the first three months of 2021 and 2020 was$7,000,000 and$12,000,000 , respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of rates and maturities on FHLB advances (dollars in thousands) as ofMarch 31, 2021 : 43 Short-term Long-term Amount$ 7,000 $ 13,787 Maturity 2021 2022 to 2025 Weighted average rates 0.54 % 1.13 % Capital Resources The Company andAmerican River Bank are subject to certain regulatory capital requirements administered by theBoard of Governors of theFederal Reserve System and theFederal Deposit Insurance Corporation (the "FDIC"). Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's andAmerican River Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. AtMarch 31, 2021 , shareholders' equity was$92,891,000 , representing a decrease of$204,000 (0.2%) from$93,095,000 atDecember 31, 2020 . The decrease results from net income for the period ($2,647,000 ), stock based compensation and stock options exercised ($105,000 ), being less than decrease from other comprehensive income ($2,540,000 ) and the payment of cash dividends ($416,000 ). Table Ten below lists the Company's andAmerican River Bank's capital ratios atMarch 31, 2021 andDecember 31, 2020 , as well as the minimum capital ratios for capital adequacy and the minimum requirement for a well-capitalized institution. While the Company has elected to adopt the community bank leverage ratio framework in which it is no longer required to report the risk-based capital ratios, we believe reporting them to our shareholders allows them to compare the ratios of companies of similar size and, therefore, are presented below.
Table Ten: Capital Ratios
Minimum Regulatory Capital RequirementsMarch 31 ,December 31 ,
Capital to Risk-Adjusted Assets 2021 2020
2021 2020
American River Bankshares
Leverage Ratio 8.5 % 8.3 % N/A N/A
Tier 1 Risk-Based Capital 15.5 % 15.0 % N/A N/A
Total Risk-Based Capital 16.7 % 16.2 % N/A N/A
American River Bank
Leverage Ratio 8.5 % 8.4 % 6.5 % 6.5 %
Common Equity Tier 1 Risk-Based Capital 15.6 % 15.1 % 7.0 % 7.0 %
Tier 1 Risk-Based Capital 15.6 % 15.1 % 8.5 % 8.5 %
Total Risk-Based Capital 16.9 % 16.4 % 10.5 % 10.5 %
On February 17, 2021 , the Company paid a $0.07 per common share cash dividend to
shareholders of record on February 3, 2021 . This 2021 quarterly dividend follows
four quarterly cash dividends, totaling $0.28 per share, paid in 2020. Capital
ratios are reviewed on a regular basis to ensure that capital exceeds the
prescribed regulatory requirements and is adequate to meet future needs.
Accordingly, we cannot provide any assurance that we will continue to pay cash
dividends at the same historical rates, or at all. Management believes that both
the Company and American River Bank met all of their capital adequacy
requirements as of March 31, 2021 and December 31, 2020 .
The Bank's capital requirements consist of the following: (i) a common equity
Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1
capital to total risk weighted assets ratio of 6%; (iii) a total capital to
total risk weighted assets ratio of 8%; and (iv) a Tier 1 capital to adjusted
average total assets ("leverage") ratio of 4%.
44
In addition, a "capital conservation buffer," was established which requires
maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk
weighted assets in excess of the regulatory minimum capital ratio requirements
described above. The 2.5% buffer increases the minimum capital ratios to (i) a
common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%,
and (iii) a total capital ratio of 10.5%. The buffer requirement became fully
phased in on January 1, 2019 . If the capital ratio levels of a banking
organization fall below the capital conservation buffer amount, the organization
will be subject to limitations on (i) the payment of dividends; (ii)
discretionary bonus payments; (iii) discretionary payments under Tier 1
instruments; and (iv) engaging in share repurchases.
Inflation
The impact of inflation on a financial institution differs significantly from that exerted on manufacturing or other commercial concerns primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company and its subsidiaries through its effect on market rates of interest, which affects the Company's ability to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand and potentially adversely affects capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which may be generated in the future. In addition to its effects on interest rates, inflation increases overall operating expenses. Inflation has not had a significant effect upon the results of operations of the Company and its subsidiaries during the periods endedMarch 31, 2021 and 2020. Liquidity
Liquidity management refers to the Company's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit atMarch 31, 2021 were approximately$43,649,000 and$60,000 , respectively. Such loan commitments relate primarily to revolving lines of credit and other commercial loans and to real estate construction loans. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company's sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale and/or pledged for secured borrowings. AtMarch 31, 2021 , consolidated liquid assets totaled$220.1 million or 24.0% of total assets compared to$191.2 million or 22.0% of total assets onDecember 31, 2020 . In addition to liquid assets, the Company maintains two short-term unsecured lines of credit in the amount of$17,000,000 with two of its correspondent banks. AtMarch 31, 2021 , the Company had$17,000,000 available under these credit lines. Additionally, the Bank is a member of the FHLB. AtMarch 31, 2021 , the Bank could have arranged for up to$172,836,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. AtMarch 31, 2021 , the Company had advances, borrowings and commitments (including letters of credit) outstanding of$20,787,000 , leaving$152,049,000 available under these FHLB secured borrowing arrangements.American River Bank also has a secured borrowing arrangement with theFederal Reserve Bank of San Francisco . The borrowing can be secured by pledging selected loans and investment securities. AtMarch 31, 2021 , the Company's borrowing capacity at theFederal Reserve Bank was$6,062,000 . The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets and borrowing capacity to offset the potential runoff of these volatile and/or cyclical deposits. Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The Company can sell any of its unpledged securities held in the available-for-sale category to meet liquidity needs. Furthermore, the Bank can pledge additional unencumbered securities to borrow from theFederal Reserve Bank of San Francisco and the FHLB. 45 Off-Balance Sheet Items
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company applies the same credit policies to commitments and letters of credit as it does for loans included on the consolidated balance sheet. As ofMarch 31, 2021 andDecember 31, 2020 , commitments to extend credit and standby letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and standby letters of credit were$43,709,000 and$32,851,000 atMarch 31, 2021 andDecember 31, 2020 , respectively. As a percentage of net loans these off-balance sheet items represent 9.3% and 7.0%, respectively.
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