AMERICAN RIVER BANKSHARES - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - AMERICAN RIVER BANKSHARES	ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN RIVER BANKSHARES	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN RIVER BANKSHARES	ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

March 31, 2017

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number: 0-31525

AMERICAN RIVER BANKSHARES
(Exact name of registrant as specified in its charter)

California		68-0352144
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3100 Zinfandel Drive, Suite 450, Rancho Cordova, California		95670
(Address of principal executive offices)		(Zip Code)

(916) 851-0123

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer x (Do not check if a smaller reporting company)
	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

No par value Common Stock – 6,482,759 shares outstanding at May 4, 2017.

AMERICAN RIVER BANKSHARES

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2017

Part I.			Page
Item 1.	Financial Statements		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 4.	Controls and Procedures		44

Part II.

Item 1.	Legal Proceedings		45
Item 1A.	Risk Factors		45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3.	Defaults Upon Senior Securities		46
Item 4.	Mine Safety Disclosures		46
Item 5.	Other Information		46
Item 6.	Exhibits		46

Signatures			51

Exhibit Index			52
31.1		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	53
31.2		Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	54
32.1		Certification of American River Bankshares by its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	55

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Label
101.PRE	XBRL Taxonomy Extension Presentation

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICAN RIVER BANKSHARES

CONSOLIDATED BALANCE SHEET

(Unaudited)

(dollars in thousands)	March 31, 2017		December 31, 2016
ASSETS
Cash and due from banks	$	35,915	$	27,589
Interest-bearing deposits in banks		1,248		999
Investment securities:
Available-for-sale, at fair value		263,106		254,020
Held-to-maturity, at amortized cost fair value of $491 in 2017 and $521 in 2016		456		483
Loans and leases, less allowance for loan and lease losses of $4,833 at March 31, 2017 and $4,822 at December 31, 2016		313,969		324,086
Premises and equipment, net		1,342		1,362
Federal Home Loan Bank stock		3,779		3,779
Goodwill		16,321		16,321
Other real estate owned		1,348		1,348
Bank owned life insurance		14,883		14,805
Accrued interest receivable and other assets		6,884		6,658
	$	659,251	$	651,450

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Noninterest bearing	$	200,417	$	201,113
Interest-bearing		350,545		343,693
Total deposits		550,962		544,806

Short-term borrowings		3,500		3,500
Long-term borrowings		12,000		12,000
Accrued interest payable and other liabilities		9,681		7,294

Total liabilities		576,143		567,600

Commitments and contingencies

Shareholders’ equity:
Preferred stock, no par value; 20,000,000 shares authorized; none outstanding
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding – 6,545,959 shares at March 31, 2017 and 6,661,726 shares at December 31, 2016		40,641		42,484
Retained earnings		41,674		40,822
Accumulated other comprehensive income, net of taxes		793		544

Total shareholders’ equity		83,108		83,850
	$	659,251	$	651,450

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

(dollars in thousands, except per share data)
For the three months ended March 31,
	2017		2016
Interest income:
Interest and fees on loans and leases:
Taxable	$	3,430	$	3,362
Exempt from Federal income taxes		133		172
Interest on deposits in banks		2		1
Interest and dividends on investment securities:
Taxable		1,323		1,552
Exempt from Federal income taxes		157		184
Dividends		8		5
Total interest income		5,053		5,276
Interest expense:
Interest on deposits		194		184
Interest on borrowings		48		50
Total interest expense		242		234

Net interest income		4,811		5,042

Provision for loan and lease losses		—		—

Net interest income after provision for loan and lease losses		4,811		5,042

Noninterest income:
Service charges on deposit accounts		117		129
Gain on sale of securities		56		282
Rental income from OREO properties		—		106
Other noninterest income		246		237
Total noninterest income		419		754

Noninterest expense:
Salaries and employee benefits		2,170		2,160
Occupancy		269		298
Furniture and equipment		151		165
Federal Deposit Insurance Corporation assessments		53		80
Expenses related to other real estate owned		20		340
Other expense		767		748
Total noninterest expense		3,430		3,791

Income before provision for income taxes		1,800		2,005

Provision for income taxes		616		633

Net income	$	1,184	$	1,372

Basic earnings per share	$	0.18	$	0.19
Diluted earnings per share	$	0.18	$	0.19

Cash dividends per share	$	0.05	$	0.00

See notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands)
For the three months ended March 31,
	2017			2016
Net income	$	1,184		$	1,372
Other comprehensive income:
Increase in net unrealized gains on investment securities		461			2,902
Deferred tax expense		(179	)		(1,162	)
Increase in net unrealized gains on investment securities, net of tax		282			1,740

Reclassification adjustment for realized gains included in net income		(56	)		(282	)
Tax effect		23			113
Realized gains, net of tax		(33	)		(169	)
Total other comprehensive income		249			1,571
Comprehensive income	$	1,433		$	2,943

See notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

										Accumulated
(dollars in thousands)	Common Stock									Other		Total
							Retained			Comprehensive		Shareholders’
	Shares			Amount			Earnings			Income		Equity
Balance, January 1, 2016		7,343,649			49,554			34,418			2,103		86,075
Net income								1,372					1,372
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities											1,571		1,571

Net restricted stock award activity and related compensation expense		17,833			72								72
Stock option compensation expense		—			10								10
Retirement of common stock		(367,182	)		(3,798	)							(3,798	)

Balance, March 31, 2016		6,994,300		$	45,838		$	35,790		$	3,674	$	85,302

Balance, January 1, 2017		6,661,726		$	42,484		$	40,822		$	544	$	83,850
Net income								1,184					1,184
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities											249		249

Cash dividends ($0.05 per share)								(332	)				(332	)
Net restricted stock award activity and related compensation expense		12,083			91								91
Stock options exercised		3,150			27								27
Stock option compensation expense		—			10								10
Retirement of common stock		(131,000	)		(1,971	)							(1,971	)

Balance, March 31, 2017		6,545,959		$	40,641		$	41,674		$	793	$	83,108

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

(dollars in thousands)
For the three months ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	1,184		$	1,372
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in deferred loan origination fees, net		27			29
Depreciation and amortization		88			110
Gain on sale of investment securities		(56	)		(282	)
Amortization of investment security premiums and discounts, net		816			702
Increase in cash surrender values of life insurance policies		(78	)		(78	)
Stock based compensation expense		101			82
Gain/loss on sale/write-down of other real estate owned		—			259
(Increase) decrease in accrued interest receivable and other assets		(382	)		769
Increase (decrease) in accrued interest payable and other liabilities		387			(856	)

Net cash provided by operating activities		2,087			2,107

Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment securities		8,472			8,287
Proceeds from called available-for-sale investment securities		145			—
Purchases of available-for-sale investment securities		(26,827	)		(3,130	)
Proceeds from principal repayments for available-for-sale investment securities		10,769			10,042
Proceeds from principal repayments for held-to-maturity investment securities		27			50
Net increase in interest-bearing deposits in banks		(249	)		(249	)
Net decrease (increase) in loans		10,090			(1,467	)
Proceeds from sale of other real estate		—			710
Purchases of equipment		(68	)		(151	)

Net cash provided by investing activities		2,359			14,092

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)

(dollars in thousands)
For the three months ended March 31,
	2017			2016
Cash flows from financing activities:
Net increase (decrease) in demand, interest-bearing and savings deposits	$	6,989		$	(5,823	)
Net decrease in time deposits		(833	)		(1,048	)
Proceeds from exercised options		27			—
Cash dividends paid		(332	)		—
Cash paid to repurchase common stock		(1,971	)		(3,798	)

Net cash provided by (used in) financing activities	$	3,880		$	(10,669	)

Increase in cash and cash equivalents		8,326			5,530

Cash and cash equivalents at beginning of year		27,589			23,727

Cash and cash equivalents at end of period	$	35,915		$	29,257

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

1. CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of American River Bankshares (the “Company”) at March 31, 2017 and December 31, 2016, the results of its operations and statement of comprehensive income for the three month periods ended March 31, 2017 and 2016, its cash flows for the three-month periods ended March 31, 2017 and 2016 and its statement of changes in shareholders’ equity for the three months ended March 31, 2017 and 2016 in conformity with accounting principles generally accepted in the United States of America.

Certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. The results of operations for the three-month period ended March 31, 2017 may not necessarily be indicative of the operating results for the full year.

In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan and lease losses, the provision for taxes, the valuation of goodwill and the estimated fair value of investment securities, impaired loans and other real estate owned.

Management has determined that since all of the banking products and services offered by the Company are available in each branch office of American River Bank, all branch offices are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate all of the branch offices and report them as a single operating segment. No client accounts for more than ten percent (10%) of revenues for the Company or American River Bank.

2. STOCK-BASED COMPENSATION

Equity Plans

On March 17, 2010, the Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan was approved by the Company’s shareholders on May 20, 2010. In 2000, the Board of Directors adopted and the Company’s shareholders approved a stock option plan (the “2000 Plan”), under which 109,562 stock options remain outstanding at March 31, 2017. At March 31, 2017, there were 76,461 stock options and 83,907 shares of restricted stock outstanding and the total number of authorized shares that remain available for issuance under the 2010 Plan was 1,367,819. The 2010 Plan provides for the following types of stock-based awards: incentive stock options; nonqualified stock options; stock appreciation rights; restricted stock; restricted performance stock; unrestricted Company stock; and performance units. Awards under the 2000 Plan were either incentive stock options or nonqualified stock options. Under the 2010 Plan, the awards may be granted to employees and directors under incentive and nonqualified option agreements, restricted stock agreements, and other awards agreements. The unvested shares of restricted stock awarded under the 2010 Plan have dividend and voting rights. The 2010 Plan and the 2000 Plan (collectively the “Plans”) require that the option price may not be less than the fair market value of the stock at the date the option is awarded. The option awards under the Plans expire on dates determined by the Board of Directors, but not later than ten years from the date of award. The vesting period is generally five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding option awards under the Plans are exercisable until their expiration, however, no new options will be awarded under the 2000 Plan. New shares are issued upon exercise of an option.

The award date fair value of awards is determined by the market price of the Company’s common stock on the date of award and is recognized ratably as compensation expense or director expense over the vesting periods. The shares of common stock awarded pursuant to such agreements vest in increments over one to five years from the date of award. The shares awarded to employees and directors under the restricted stock agreements vest on the applicable vesting dates only to the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated.

Equity Compensation

For the three-month periods ended March 31, 2017 and 2016, the compensation cost recognized for equity compensation was $101,000 and $82,000, respectively. The recognized tax benefit for equity compensation expense was $37,000 and $29,000, for the three-month periods ended March 31, 2017 and 2016, respectively.

At March 31, 2017, the total compensation cost related to nonvested stock option awards not yet recorded is $89,000. This amount will be recognized over the next 3.25 years and the weighted average period of recognizing these costs is expected to be 1.3 years. At March 31, 2017, the total compensation cost related to restricted stock awards not yet recorded is $532,000. This amount will be recognized over the next 4.75 years and the weighted average period of recognizing these costs is expected to be 1.4 years.

Equity Plans Activity

Stock Options

There were no stock options awarded during the three-month periods ended March 31, 2017 and 2016. A summary of option activity under the Plans as of March 31, 2017 and changes during the period then ended is presented below:

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2017		186,023		$	12.92		3.7 years	$	741
Granted		—			—		—		—
Exercised		(3,150	)		8.50		—		—
Expired, forfeited or cancelled		(32,763	)		23.40		—		—
Outstanding at March 31, 2017		150,110		$	10.72		4.2 years	$	687
Vested at March 31, 2017		105,867		$	11.42		2.9 years	$	432
Non-vested at March 31, 2017		44,243		$	9.05		7.5 years	$	255

Restricted Stock

There were 17,833 shares of restricted stock awarded during the three-month period ended March 31, 2016 and 15,033 shares of restricted stock awarded during the three-month period ended March 31, 2017. There were no restricted stock awards that were fully vested during the three-month periods ended March 31, 2017 and 2016, respectively. The intrinsic value of nonvested restricted stock at March 31, 2017 was $1,243,000.

Restricted Stock	Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2017		71,824		$	9.69
Awarded		15,033			15.19
Less: Vested		—			—
Less: Expired, forfeited or cancelled		(2,950	)		10.01
Nonvested at March 31, 2017		83,907		$	10.66

Other Equity Awards

There were no stock appreciation rights; restricted performance stock; unrestricted Company stock; or performance units awarded during the three-month periods ended March 31, 2017 or 2016 or outstanding at March 31, 2017 or December 31, 2016.

The intrinsic value used for stock options and restricted stock was derived from the market price of the Company’s common stock of $14.82 as of March 31, 2017.

3. COMMITMENTS AND CONTINGENCIES

In the normal course of business there are outstanding various commitments to extend credit which are not reflected in the financial statements, including loan commitments of approximately $18,029,000 and standby letters of credit of approximately $191,000 at March 31, 2017 and loan commitments of approximately $19,728,000 and standby letters of credit of approximately $238,000 at December 31, 2016. Such commitments relate primarily to real estate construction loans, revolving lines of credit and other commercial loans. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company during 2017 as some of these are expected to expire without being fully drawn upon.

Standby letters of credit are commitments issued to guarantee the performance or financial obligation of a client to a third party. These guarantees are issued primarily relating to purchases of inventory, insurance programs, performance obligations to government agencies, or as security for real estate rents by commercial clients and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to clients and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The majority of all such commitments are collateralized. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at March 31, 2017 or December 31, 2016.

4. EARNINGS PER SHARE COMPUTATION

Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period (6,564,281 shares and 7,095,785 shares for the three-month periods ended March 31, 2017 and 2016, respectively). Diluted earnings per share reflect 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. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of stock based awards (76,311 shares for the three-month period ended March 31, 2017 and 34,659 shares for the three-month period ended March 31, 2016). For the three-month periods ended March 31, 2017 and 2016, there were 38,018 and 142,600 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. Earnings per share is retroactively adjusted for stock dividends and stock splits, if applicable, for all periods presented.

5. INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities at March 31, 2017 and December 31, 2016 consisted of the following (dollars in thousands):

Available-for-Sale

	March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
US Government Agencies and Sponsored Agencies	$	233,702	$	2,098	$	(1,213	)	$	234,587
Obligations of states and political subdivisions		22,532		580		(290	)		22,822
Corporate bonds		5,500		96		—			5,596
Equity securities:
Corporate stock		51		50		—			101
	$	261,785	$	2,824	$	(1,503	)	$	263,106

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
US Government Agencies and Sponsored Agencies	$	229,118	$	2,150	$	(1,483	)	$	229,785
Obligations of states and political subdivisions		22,436		559		(383	)		22,612
Corporate bonds		1,501		18		—			1,519
Equity securities:
Corporate stock		49		55		—			104
	$	253,104	$	2,782	$	(1,866	)	$	254,020

Net unrealized gains on available-for-sale investment securities totaling $1,321,000 were recorded, net of $528,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at March 31, 2017. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended March 31, 2017 totaled $8,472,000 and $56,000, respectively. There were no transfers of available-for-sale investment securities for the three-month period ended March 31, 2017.

Net unrealized gains on available-for-sale investment securities totaling $6,124,000 were recorded, net of $2,450,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at March 31, 2016. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended March 31, 2016 totaled $8,287,000 and $282,000, respectively. There were no transfers of available-for-sale investment securities for the three-month period ended March 31, 2016.

Held-to-Maturity

March 31, 2017

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

US Government Agencies and Sponsored Agencies

456

—

491

December 31, 2016

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

US Government Agencies and Sponsored Agencies

483

—

521

There were no sales or transfers of held-to-maturity investment securities for the periods ended March 31, 2017 and March 31, 2016. Investment securities with unrealized losses at March 31, 2017 and December 31, 2016 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):

March 31, 2017	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale

Debt securities:
US Government Agencies and Sponsored Agencies	$	102,794	$	(1,178	)		3,455		(35	)	$	106,249	$	(1,213	)
Obligations of states and political subdivisions		6,430		(290	)		—		—			6,430		(290	)
	$	109,224	$	(1,468	)	$	3,455	$	(35	)	$	112,679	$	(1,503	)

December 31, 2016	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale

Debt securities:
US Government Agencies and Sponsored Agencies	$	111,870	$	(1,415	)	$	5,010	$	(68	)	$	116,880	$	(1,483	)
Obligations of states and political subdivisions		8,319		(383	)		—		—			8,319		(383	)
	$	120,189	$	(1,798	)	$	5,010	$	(68	)	$	125,199	$	(1,866	)

There were no held-to-maturity investment securities with unrealized losses as of March 31, 2017 or December 31, 2016.

At March 31, 2017, the Company held 227 securities of which 63 were in a loss position for less than twelve months and two were in a loss position for twelve months or more. Of the two securities in a loss position for greater than twelve months at March 31, 2017, both were US Government Agencies and Sponsored Agencies securities. At December 31, 2015, the Company held 219 securities of which 70 were in a loss position for less than twelve months and three were in a loss position for twelve months or more. Of the three securities that were in a loss position for greater than twelve months, all were US Government Agencies and Sponsored Agencies.

The unrealized loss on the Company’s investment 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 until maturity, management does not consider these investments to be other-than-temporarily impaired.

The amortized cost and estimated fair values of investment securities at March 31, 2017 by contractual maturity are shown below (dollars in thousands).

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	1,931	$	1,937
After one year through five years		2,486		2,562
After five years through ten years		16,312		16,700
After ten years		7,303		7,219
		28,032		28,418
Investment securities not due at a single maturity date:
US Government Agencies and Sponsored Agencies		233,702		234,587	$	456	$	491
Corporate stock		51		101		—		—
	$	261,785	$	263,106	$	456	$	491

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.

6. IMPAIRED AND NONPERFORMING LOANS AND LEASES AND OTHER REAL ESTATE OWNED

At March 31, 2017 and December 31, 2016, the recorded investment in nonperforming loans and leases was approximately $17,000 and $19,000, respectively. Nonperforming loans and leases include all such loans and leases that are either placed on nonaccrual status or are 90 days past due as to principal or interest but still accrue interest because such loans are well-secured and in the process of collection. 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 contractual terms of the original loan agreement. At March 31, 2017, the recorded investment in loans and leases that were considered to be impaired totaled $17,161,000. Of the total impaired loans of $17,161,000, loans totaling $9,130,000 were deemed to require no specific reserve and loans totaling $8,031,000 were deemed to require a related valuation allowance of $533,000. At December 31, 2016, the recorded investment in loans and leases that were considered to be impaired totaled $17,297,000 and had a related valuation allowance of $421,000.

At March 31, 2017 and December 31, 2016, the recorded investment in other real estate owned (“OREO”) was $1,348,000. During the first quarter of 2017, the Company did not add any new or sell or impair any of the OREO properties. The March 31, 2017 OREO balance of $1,348,000 consists of two properties one of which is commercial real estate in the amount of $386,000 and the other is commercial land in the amount of $962,000.

Nonperforming loans and leases and other assets and OREO at March 31, 2017 and December 31, 2016 are summarized as follows (in thousands):

	March 31, 2017			December 31, 2016
Nonaccrual loans and leases that are current to terms (less than 30 days past due)	$	—		$	19
Nonaccrual loans and leases that are past due		17			—
Loans and leases past due 90 days and accruing interest		—			—
Other real estate owned		1,348			1,348
Total nonperforming assets	$	1,365		$	1,367

Nonperforming loans and leases to total loans and leases		0.01	%		0.01	%
Total nonperforming assets to total assets		0.21	%		0.21	%

Impaired loans and leases as of and for the periods ended March 31, 2017 and December 31, 2016 are summarized as follows:

(in thousands)	As of March 31, 2017						As of December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Real estate-commercial	$	8,797	$	9,420	$	—	$	10,910	$	11,540	$	—
Real estate-residential		333		420		—		334		421		—
Subtotal	$	9,130	$	9,840	$	—	$	11,244	$	11,961	$	—

With an allowance recorded:
Commercial	$	29	$	29	$	3	$	157	$	157	$	11
Real estate-commercial		5,392		5,482		361		3,244		3,336		246
Real estate-multi-family		480		480		20		482		482		2
Real estate-residential		1,776		1,776		120		1,813		1,813		133
Agriculture		354		354		29		357		357		29
Subtotal	$	8,031	$	8,121	$	533	$	6,053	$	6,145	$	421

Total:
Commercial	$	29	$	29	$	3	$	157	$	157	$	11
Real estate-commercial		14,189		14,902		361		14,154		14,876		246
Real estate-multi-family		480		480		20		482		482		2
Real estate-residential		2,109		2,196		120		2,147		2,234		133
Agriculture		354		354		29		357		357		29
	$	17,161	$	17,961	$	533	$	17,297	$	18,106	$	421

The following table presents the average balance related to impaired loans and leases for the periods indicated (in thousands):

	Average Recorded Investments for the three months ended
	March 31, 2017		March 31, 2016
Commercial	$	32	$	60
Real estate-commercial		14,402		16,734
Real estate-multi-family		484		487
Real estate-residential		2,155		2,195
Agriculture		362		369
Consumer		—		75
Total	$	17,435	$	19,920

The following table presents the interest income recognized on impaired loans and leases for the periods indicated (in thousands):

	Interest Income Recognized for the three months ended
	March 31, 2017		March 31, 2016
Commercial	$	1	$	1
Real estate-commercial		177		185
Real estate-multi-family		8		8
Real estate-residential		26		21
Agriculture		5		5
Consumer		—		—
Total	$	217	$	220

7. TROUBLED DEBT RESTRUCTURINGS

During the periods ended March 31, 2017 and 2016, there were no loans that were modified as troubled debt restructurings.

There were no payment defaults during the three months ended March 31, 2017 or March 31, 2016 on troubled debt restructurings made in the preceding twelve months. At March 31, 2017 and December 31, 2016, there were no unfunded commitments on those loans considered troubled debt restructures. See also “Impaired Loans and Leases” in Item 2.

8. LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company’s loan and lease portfolio allocated by management’s internal risk ratings as of March 31, 2017 and December 31, 2016 are summarized below:

March 31, 2017	Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)			Real Estate
	Commercial		Commercial		Multi-family		Construction		Residential
Grade:
Pass	$	26,313	$	161,863	$	68,782	$	7,740	$	12,222
Watch		60		22,053		480		2,381		1,470
Special mention		714		2,993		3,963		—		740
Substandard		2,741		—		—		—		459
Doubtful or loss		—		—		—		—		—
Total	$	29,828	$	186,909	$	73,225	$	10,121	$	14,891

	Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
	Leases		Agriculture		Consumer				Total
Grade:
Pass	$	349	$	1,897	$	1,082			$	280,248
Watch		—		353		244				27,041
Special mention		—		—		133				8,543
Substandard		—		—		19				3,219
Doubtful or loss		—		—		—				—
Total	$	349	$	2,250	$	1,478			$	319,051

December 31, 2016	Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)			Real Estate
	Commercial		Commercial		Multi-family		Construction		Residential
Grade:
Pass	$	31,733	$	166,769	$	68,615	$	6,770	$	12,773
Watch		157		21,328		4,758		2,410		1,773
Special mention		721		3,032		—		—		710
Substandard		2,763		—		—		—		462
Doubtful or loss		—		—		—		—		—
Total	$	35,374	$	191,129	$	73,373	$	9,180	$	15,718

	Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
	Leases		Agriculture		Consumer				Total
Grade:
Pass	$	404	$	1,945	$	1,093			$	290,102
Watch		—		357		316				31,099
Special mention		—		—		219				4,682
Substandard		—		—		22				3,247
Doubtful or loss		—		—		—				—
Total	$	404	$	2,302	$	1,650			$	329,130

The allocation of the Company’s allowance for loan and lease losses and by portfolio segment and by impairment methodology are summarized below:

March 31, 2017
(dollars in thousands)				Real Estate											Other
	Commercial				Commercial		Multi-Family			Construction		Residential			Leases		Agriculture			Consumer			Unallocated			Total
Allowance for Loan and Lease Losses

Beginning balance, January 1, 2017	$	855			$	2,050	$	851		$	446	$	253		$	1	$	64		$	24		$	278		$	4,822
Provision for loan losses		(20	)			48		(15	)		33		(21	)		—		(2	)		(4	)		(19	)		—
Loans charged-off		—				—		—			—		—			—		—			—			—			—
Recoveries		1				9		—			—		—			—		—			1			—			11

Ending balance, March 31, 2017	$	836			$	2,107	$	836		$	479	$	232		$	1	$	62		$	21		$	259		$	4,833

Ending balance:
Individually evaluated for impairment	$	3			$	361	$	20		$	—	$	120		$	—	$	29		$	—		$	—		$	533

Ending balance:
Collectively evaluated for impairment	$	833			$	1,746	$	816		$	479	$	112		$	1	$	33		$	21		$	259		$	4,300

Loans

Ending balance	$	29,828			$	186,909	$	73,225		$	10,121	$	14,891		$	349	$	2,250		$	1,478		$	—		$	319,051

Ending balance:
Individually evaluated for impairment	$	29			$	14,189	$	480		$	—	$	2,109		$	—	$	354		$	—		$	—		$	17,161

Ending balance:
Collectively evaluated for impairment	$	29,799			$	172,720	$	72,745		$	10,121	$	12,782		$	349	$	1,896		$	1,478		$	—		$	301,890

December 31, 2016
(dollars in thousands)					Real Estate										Other
	Commercial				Commercial		Multi-Family		Construction			Residential			Leases		Agriculture		Consumer			Unallocated		Total
Ending balance:
Individually evaluated for impairment	$	11			$	246	$	2	$	—		$	133		$	—	$	29	$	—		$	—	$	421

Ending balance:
Collectively evaluated for impairment	$	844			$	1,804	$	849	$	446		$	120		$	1	$	35	$	24		$	278	$	4,401

Loans

Ending balance	$	35,374			$	191,129	$	73,373	$	9,180		$	15,718		$	404	$	2,302	$	1,650		$	—	$	329,130

Ending balance:
Individually evaluated for impairment	$	157			$	14,154	$	482	$	—		$	2,147		$	—	$	357	$	—		$	—	$	17,297

Ending balance:
Collectively evaluated for impairment	$	35,217			$	176,975	$	72,891	$	9,180		$	13,571		$	404	$	1,945	$	1,650		$	—	$	311,833

March 31, 2016
(dollars in thousands)				Real Estate											Other
	Commercial				Commercial		Multi-Family		Construction			Residential			Leases		Agriculture		Consumer			Unallocated		Total
Allowance for Loan and Lease Losses

Beginning balance, January 1, 2016	$	860			$	2,369	$	228	$	813		$	319		$	1	$	77	$	78		$	230	$	4,975
Provision for loan losses		(81	)			143		42		(188	)		(21	)		1		—		(85	)		189		—
Loans charged-off		—				—		—		—			—			—		—		—			—		—
Recoveries		34				1		—		—			—			—		—		72			—		107

Ending balance, March 31, 2016	$	813			$	2,513	$	270	$	625		$	298		$	2	$	77	$	65		$	419	$	5,082

The Company’s aging analysis of the loan and lease portfolio at March 31, 2017 and December 31, 2016 are summarized below:

March 31, 2017 (dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Past Due Greater Than 90 Days		Total Past Due		Current		Total Loans		Past Due Greater Than 90 Days and Accruing		Nonaccrual
Commercial:
Commercial	$	—	$	—	$	—	$	—	$	29,828	$	29,828		—	$	—
Real estate:
Commercial		—		—		—		—		186,909		186,909		—		—
Multi-family		—		—		—		—		73,225		73,225		—		—
Construction		—		—		—		—		10,121		10,121		—		—
Residential		—		—		—		—		14,891		14,891		—		—
Other:
Leases		—		—		—		—		349		349		—		—
Agriculture		—		—		—		—		2,250		2,250		—		—
Consumer		80		—		—		80		1,398		1,478		—		17
Total	$	80	$	—	$	—	$	80	$	318,971	$	319,051	$	—	$	17

December 31, 2016 (dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		Past Due Greater Than 90 Days		Total Past Due		Current		Total Loans		Past Due Greater Than 90 Days and Accruing		Nonaccrual
Commercial:
Commercial	$	—	$	—	$	—	$	—	$	35,374	$	35,374	$	—	$	—
Real estate:
Commercial		—		—		—		—		191,129		191,129		—		—
Multi-family		—		—		—		—		73,373		73,373		—		—
Construction		—		—		—		—		9,180		9,180		—		—
Residential		—		—		—		—		15,718		15,718		—		—

Other:
Leases		—		—		—		—		404		404		—		—
Agriculture		—		—		—		—		2,302		2,302		—		—
Consumer		—		—		—		—		1,650		1,650		—		19
Total	$	—	$	—	$	—	$	—	$	329,130	$	329,130	$	—	$	19

9. BORROWING ARRANGEMENTS

At March 31, 2017, the Company had $17,000,000 of unsecured short-term borrowing arrangements with two of its correspondent banks. There were no advances under the borrowing arrangements as of March 31, 2017 or December 31, 2016.

The Company has a line of credit available with the Federal Home Loan Bank of San Francisco (the “FHLB”) which is secured by pledged mortgage loans and investment securities. Borrowings may include overnight advances as well as loans with terms of up to thirty years. Advances (both short-term and long-term) totaling $15,500,000 were outstanding from the FHLB at March 31, 2017, bearing interest rates ranging from 1.01% to 1.52% and maturing between May 22, 2017 and July 13, 2020. Advances totaling $15,500,000 were outstanding from the FHLB at December 31, 2016, bearing interest rates ranging from 1.01% to 1.52% and maturing between May 22, 2017 and July 13, 2020. Remaining amounts available under the borrowing arrangement with the FHLB at March 31, 2017 and December 31, 2016 totaled $114,806,000 and $100,187,000, respectively. In addition, the Company has a secured borrowing agreement with the Federal Reserve Bank of San Francisco. The borrowing can be secured by pledging selected loans and investment securities. Borrowings generally are short-term including overnight advances as well as loans with terms up to ninety days. Amounts available under this borrowing arrangement at March 31, 2017 and December 31, 2016 were $8,559,000 and $11,068,000, respectively. There were no advances outstanding under this borrowing arrangement as of March 31, 2017 and December 31, 2016.

10. 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 respective tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above, if applicable, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties related to unrecognized tax benefits, if applicable, as a component of interest expense in the consolidated statement of income. There have been no unrecognized tax benefits or accrued interest and penalties for the three-month periods ended March 31, 2017 and 2016.

Federal and state income taxes for the quarter ended March 31, 2017 decreased $17,000 (2.7%) from $633,000 in the first quarter of 2016 to $616,000 in the first quarter of 2017. The effective tax rate for the quarter ended March 31, 2017 was 34.2% compared to 31.6% for the first quarter of 2016. The lower tax expense in 2017 resulted from a lower amount of taxable income. Taxable income decreased $205,000 (10.2%) from $2,005,000 in the first quarter of 2016 to $1,800,000 in the first quarter of 2017. The higher effective tax rate in 2017 results from a decrease in tax benefits related to tax exempt loan interest. Interest on tax exempt loans decreased from $172,000 in 2016 to $133,000 in 2017.

11. 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 March 31, 2017 and December 31, 2016. They indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

	Carrying		Fair Value Measurements Using:
March 31, 2017	Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	35,915	$	35,915	$	—	$	—	$	35,915
Interest-bearing deposits in banks		1,248		—		1,250		—		1,250
Available-for-sale securities		263,106		55		263,051		—		263,106
Held-to-maturity securities		456		—		491		—		491
FHLB stock		3,799		N/A		N/A		N/A		N/A
Net loans and leases:		313,969		—		—		320,191		320,191
Accrued interest receivable		1,812		—		880		932		1,812
Financial liabilities:
Deposits:
Noninterest-bearing	$	200,417	$	200,417	$	—	$	—	$	200,417
Savings		66,646		66,646		—		—		66,646
Money market		138,460		138,460		—		—		138,460
NOW accounts		63,314		63,314		—		—		63,314
Time Deposits		82,125		—		82,372		—		82,372
Short-term borrowings		3,500		3,500		—		—		3,500
Long-term borrowings		12,000		—		11,975		—		11,975
Accrued interest payable		44		—		44		—		44

	Carrying		Fair Value Measurements Using:
December 31, 2016	Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	27,589	$	27,589	$	—	$	—	$	28,589
Interest-bearing deposits in banks		999		—		999		—		999
Available-for-sale securities		254,020		60		253,960		—		254,020
Held-to-maturity securities		483		—		521		—		521
FHLB stock		3,779		N/A		N/A		N/A		N/A
Net loans and leases:		324,086		—		—		329,110		329,110
Accrued interest receivable		1,824		—		937		887		1,824
Financial liabilities:
Deposits:
Noninterest-bearing	$	201,113	$	201,113	$	—	$	—	$	201,113
Savings		64,740		64,740		—		—		64,740
Money market		131,342		131,342		—		—		131,342
NOW accounts		64,652		64,652		—		—		64,652
Time Deposits		82,959		—		83,720		—		85,165
Short-term borrowings		3,500		3,500		—		—		3,500
Long-term borrowings		12,000		—		12,110		—		7,502
Accrued interest payable		62		—		62		—		60

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.

The following methods and assumptions were used by the Company to estimate the fair values of its financial instruments at March 31, 2017 and December 31, 2016:

Cash and due from banks: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Interest-bearing deposits in banks: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions and are classified as Level 2.

Investment securities: For investment securities, fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers and are classified as Level 2.

FHLB stock: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans and leases: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality also resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. For time deposits, the fair values for fixed rate certificates of deposit are estimated using a discounted cash flow methodology that applies market interest rates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term and long-term borrowings: The fair value of short-term borrowings is estimated to be the carrying amount and is classified as Level 1. The fair value of long-term borrowings is estimated using a discounted cash flow analysis using interest rates currently available for similar debt instruments and are classified as Level 2.

Accrued interest receivable and payable: The carrying amount of accrued interest receivable approximates fair value resulting in a Level 3 classification and the carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments was not material at March 31, 2017 and December 31, 2016.

Assets and liabilities measured at fair value on a recurring and non-recurring basis are presented in the following table:

Description	Fair Value Measurements Using								Total Gains
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3		(Losses)
March 31, 2017

Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
US Government Agencies and Sponsored Agencies	$	234,587	$	—	$	234,587	$	—	$	—
Obligations of states and political subdivisions		22,822		—		22,822		—		—
Corporate bonds		5,596		—		5,596		—		—
Corporate stock		101		55		46		—		—
Total recurring	$	263,106	$	55	$	263,051	$	—	$	—

Assets and liabilities measured on a nonrecurring basis:
Impaired loans:
Real estate:
Commercial	$	3,517	$	—	$	—	$	3,517	$	—
Residential		333		—		—		333		—

Other real estate owned
Commercial		386		—		—		386		—
Land		962		—		—		962		—
Total nonrecurring	$	5,198	$	—	$	—	$	5,198	$	—

Description	Fair Value Measurements Using								Total Gains
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3		(Losses)
December 31, 2016

Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
US Government Agencies and Sponsored Agencies	$	229,785	$	—	$	229,785	$	—	$	—
Corporate Debt securities		1,519		—		1,519
Obligations of states and political subdivisions		22,612		—		22,612		—		—
Corporate stock		104		60		44		—		—
Total recurring	$	254,020	$	60	$	253,960	$	—	$	—

Assets and liabilities measured on a nonrecurring basis:
Impaired loans:
Real estate:
Commercial	$	3,535	$	—	$	—	$	3,535	$	—
Residential		334		—		—		334		—

Other real estate owned
Commercial		386		—		—		386		(25	)
Land		961		—		—		961		173
Total nonrecurring	$	5,216	$	—	$	—	$	5,216	$	148

There were no transfers between Levels 1 and 2 during the three-month period ended March 31, 2017 or the twelve months ended December 31, 2016.

The following methods were used to estimate the fair value of each class of financial instrument above:

Available-for-sale securities – Fair values for investment securities are based on quoted market prices, if available, and are considered Level 1, or evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and are considered Level 2. Pricing applications apply available information, as applicable, through processes such as benchmark curves, benchmarking to like securities, sector groupings and matrix pricing.

Impaired loans – The fair value of collateral dependent impaired loans adjusted for specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring impaired loans is the sales comparison approach less a reserve for past due taxes and selling costs ranging from 8% to 10%.

Other real estate owned – Certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may use a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring OREO is the sales comparison approach less selling costs ranging from 8% to 10%.

12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows, however, the Company will continue to closely monitor developments and additional guidance.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company is currently evaluating the provisions of ASU No. 2016-02. The Company has determined that the provisions of ASU No. 2016-02 may result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities, however, the Company does not expect this to have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminated the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance also requires an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 was effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption was permitted, but all of the guidance must be adopted in the same period. The Company adopted the provisions of ASU No. 2016-09 in the first quarter of 2017 and the adoption did not, and is not expected to, have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems.

In March of 2017, the FASB issued ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This guidance shortens the amortization period for premiums on certain callable debt securities to the earliest call date (with an explicit, noncontingent call feature that is callable at a fixed price and on a preset dates), rather than contractual maturity date as currently required under GAAP. ASU 2017-08 does not impact instruments without preset call dates such as mortgage-backed securities. For instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of ASU 2017-08. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted. Accordingly, effective January of 2017, the Company early adopted ASU 2017-08 and the adoption was immaterial to the Company’s financial position, results of operations or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is management’s discussion and analysis of the significant changes in American River Bankshares’ (the “Company”) balance sheet accounts between December 31, 2016 and March 31, 2017 and its income and expense accounts for the three-month periods ended March 31, 2017 and 2016. The discussion is designed to provide a better understanding of significant trends related to the Company’s financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. This discussion and supporting tables and the consolidated financial statements and related notes appearing elsewhere in this report are unaudited. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within management’s discussion and analysis. Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q including, but not limited to, matters described in “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as amended, and subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,” “should,” “could,” “would,” and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ significantly from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following:

the legislation promulgated by the United States Congress and actions taken by governmental agencies that may impact the U.S. 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 and lease losses;

potential expenses associated with resolving non-performing assets as well as regulatory changes;

changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds;

competitive effects;

potential declines in fee and other noninterest income earned associated with economic factors, as well as regulatory changes;

general economic conditions nationally, regionally, and within our operating markets could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets;

changes in the regulatory environment including increased capital and regulatory compliance requirements and government intervention in the U.S. financial system;

changes in business conditions and inflation;

changes in securities markets, public debt markets, and other capital markets;

potential data processing, 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 the United States and its allies, negative financial and economic conditions, natural disasters, and disruption of power supplies and communications;

changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations;

projected business increases following any future strategic expansion could be lower than expected;

the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings;

the reputation of the financial services industry could experience further deterioration, which could adversely affect our ability to access markets for funding and to acquire and retain customers; 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 ended December 31, 2016, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should be carefully considered and understood as being applicable to all related forward-looking statements contained in this Quarterly Report on Form 10-Q, when evaluating the business prospects of the Company and its subsidiaries.

Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission (the “SEC”) on Forms 10-K, 10-Q and 8-K.

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 tangible book value and taxable equivalent basis. 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.

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 34% 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.

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.

Critical Accounting Policies

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is an estimate of the probable incurred credit loss risk inherent in our loan and lease portfolio as of the balance sheet date. The allowance is based on two basic principles of accounting: (1) “Accounting for Contingencies,” which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) the “Receivables” topic, which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan or lease balance.

The allowance for loan and lease losses is determined based upon estimates that can and do change when the actual risk, loss events, or changes in other factors, occur. The analysis of the allowance uses an historical loss view as an indicator of future losses and as a result could differ from the actual losses incurred in the future. If the allowance for loan and lease losses falls below that deemed adequate (by reason of loan and lease growth, actual losses, the effect of changes in risk factors, or some combination of these), the Company has a strategy for supplementing the allowance for loan and lease losses, over the short-term. For further information regarding our allowance for loan and lease losses, see “Allowance for Loan and Lease Losses Activity” discussion later in this Item 2.

Stock-Based Compensation

The Company recognizes compensation expense over the vesting period in an amount equal to the fair value of all share-based payments which consist of stock options and restricted stock awarded to directors and employees. The fair value of each stock option award is estimated on the date of the award and amortized over the service period using a Black-Scholes-Merton based option valuation model that requires the use of assumptions. Critical assumptions that affect the estimated fair value of each award include expected stock price volatility, dividend yields, option life and the risk-free interest rate.

Goodwill

Business combinations involving the Company’s acquisition of equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisition and is not deductible for tax purposes. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment on an annual basis. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The most recent annual assessment was performed as of December 31, 2016, 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.

Income Taxes

The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for (benefit from) income taxes. The Company accounts for income taxes using the balance sheet method, under which deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is, if applicable, reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties related to unrecognized tax benefits, if applicable, as a component of interest expense in the consolidated statement of income. There were no unrecognized tax benefits or accrued interest and penalties at March 31, 2017 or 2016 or for the three-month periods then ended.

General Development of Business

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California in 1995. 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. Its principal office is located at 3100 Zinfandel Drive, Suite 450, Rancho Cordova, California 95670 and its telephone number is (916) 854-0123. The Company employed an equivalent of 93 full-time employees as of March 31, 2017.

The Company owns 100% of the issued and outstanding common shares of its banking subsidiary, American River Bank (the “Bank”), and American River Financial, a California corporation which has been inactive since its incorporation in 2003.

American River Bank was incorporated and commenced business in Fair Oaks, California, in 1983 and thereafter moved its headquarters to Sacramento, California in 1985. American River Bank operates five full service offices in Sacramento and Placer Counties including the main office located at 1545 River Park Drive, Suite 107, Sacramento and branch offices in Sacramento, Gold River, and Roseville; two full service offices in Sonoma County in Healdsburg and Santa Rosa; and three full service offices in Amador County in Jackson, Pioneer, and Ione.

In 2000, the Company acquired North Coast Bank as a separate bank subsidiary. North Coast Bank was incorporated and commenced business in 1990 as Windsor Oaks National Bank in Windsor, California. In 1997, the name was changed to North Coast Bank. Effective December 31, 2003, North Coast Bank was merged with and into American River Bank. On December 3, 2004, the Company acquired Bank of Amador located in Jackson, California. Bank of Amador was merged with and into American River Bank.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). On November 9, 2010, the FDIC implemented a final rule to permanently increase the maximum insurance limit to $250,000 per depositor under the Dodd-Frank Act.

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 also conducts lease financing for certain types of business equipment. American River Bank owns 100% of two inactive companies, ARBCO and American River Mortgage. ARBCO was formed in 1984 to conduct real estate development and has been inactive since 1995. American River Mortgage has been inactive since its formation in 1994. During 2017 and 2016, the Company conducted no significant activities other than holding the shares of its subsidiaries. However, it is authorized, with the prior approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Company’s principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking. The common stock of the Company is registered under the Securities Exchange Act of 1934, as amended, and is listed and traded on the Nasdaq Global Select Market under the symbol “AMRB.”

Overview

The Company recorded net income of $1,184,000 for the quarter ended March 31, 2017, which was a decrease of $188,000 (13.7%) compared to $1,372,000 reported for the same period of 2016. Diluted earnings per share for the first quarter of 2017 was $0.18, a decrease of 5.3% compared to the $0.19 per share reported in the first quarter of 2016. The return on average equity (“ROAE”) and the return on average assets (“ROAA”) for the first quarter of 2017 were 5.74% and 0.74%, respectively, as compared to 6.44% and 0.87%, respectively, for the same period in 2016.

Total assets of the Company increased by $7,801,000 (1.2%) from $651,450,000 at December 31, 2016 to $659,251,000 at March 31, 2017. Net loans totaled $313,969,000 at March 31, 2017, a decrease of $10,117,000 (3.1%) from $324,086,000 at December 31, 2016. Deposit balances at March 31, 2017 totaled $550,962,000, an increase of $6,156,000 (1.1%) from $544,806,000 at December 31, 2016.

The Company ended the first quarter of 2017 with a leverage capital ratio of 10.4%, a Tier 1 capital ratio of 18.9%, and a total risk-based capital ratio of 20.2% compared to 10.5%, 19.0%, and 20.3%, respectively, at December 31, 2016. 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,
	2017			2016
Interest income*	$	5,151		$	5,397
Interest expense		(242	)		(234	)
Net interest income*		4,909			5,163
Provision for loan and lease losses		—			—
Noninterest income		419			754
Noninterest expense		(3,430	)		(3,791	)
Provision for income taxes		(616	)		(633	)
Tax equivalent adjustment		(98	)		(121	)
Net income	$	1,184		$	1,372

Average total assets	$	652,765		$	635,076
Net income (annualized) as a percentage of average total assets		0.74	%		0.87	%

* Fully taxable equivalent basis (FTE)

Results of Operations

Net Interest Income and Net Interest Margin

Net interest income represents the excess of interest and fees earned on interest earning assets (loans and leases, securities, Federal funds sold and investments in time deposits) over the interest paid on interest-bearing deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. The Company’s net interest margin was 3.44% for the three months ended March 31, 2017 and 3.63% for the three months ended March 31, 2016.

The fully taxable equivalent interest income component for the first quarter of 2017 decreased $246,000 (4.6%) to $5,151,000 compared to $5,397,000 for the three months ended March 31, 2016. The decrease in the fully taxable equivalent interest income for the first quarter of 2017 compared to the same period in 2016 is broken down by rate (down $425,000) and volume (up $179,000). The yield on earning assets decreased from 3.80% during the first quarter of 2016 to 3.61% during the first quarter of 2017. The primary driver in this rate decrease was a decrease in the yield on loans which saw a decrease from 4.90% in the first quarter of 2016 to 4.57% in the first quarter of 2017 and a decrease in the yield on investments, which saw a decrease from 2.64% in the first quarter of 2016 to 2.39% in the first quarter of 2017. While average loans increased $25,007,000 (8.5%) from $295,106,000 during the first quarter of 2016 to $320,113,000 during the first quarter of 2017, due to the overall lower interest rate environment, the new loans added were at lower yields than the existing loans. The decrease in the yield on the investment portfolio is also due primarily to the lower rate environment as principal paydowns were reinvested at lower rates. The volume increase of $179,000 was primarily from an increase in average loans ($295,000) partially offset by a decrease in investments ($116,000). The average balance of earning assets increased $7,893,000 (1.4%) from $571,339,000 in the first quarter of 2016 to $579,232,000 in the first quarter of 2017.

Interest expense was $242,000 or $8,000 (3.4%) higher in the first quarter of 2017 versus $234,000 in the first quarter of 2016. The net $8,000 increase in interest expense during the first quarter of 2017 compared to the first quarter of 2016 was due to higher rates (up $26,000) and lower volume (down $18,000). While average deposits increased by $27,399,000 (up 5.3%), from $518,512,000 during the first quarter of 2016 to $545,911,000 during the first quarter of 2017, interest bearing balances (which includes other borrowings) only increased by $1,519,000 (up 0.4%), from $355,945,000 during the first quarter of 2016 to $357,464,000 during the first quarter of 2017. The increase in deposit expense can be attributed to an increase in rates paid on time deposit balances. 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 $16,000 (up 11.5%) from $139,000 in the first quarter of 2016 to $155,000 in the first quarter of 2017 while the time deposit balances actually decreased by $1,509,000 (down 1.8%) from $83,811,000 in the first quarter of 2016 to $82,302,000 in the first quarter of 2017. Further adding to the decrease in volume was a decrease in other borrowings of $8,868,000 (down 36.4%) from $24,368,000 in the first quarter of 2016 to $15,500,000 in the first quarter of 2017.

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,	2017								2016
(Taxable Equivalent Basis) (dollars in thousands)	Avg Balance			Interest		Avg Yield (4)			Avg Balance			Interest		Avg Yield (4)
Assets
Earning assets:
Taxable loans and leases (1)	$	305,625		$	3,430		4.55	%	$	278,734		$	3,362		4.85	%
Tax-exempt loans and leases (2)		14,488			176		4.93	%		16,372			230		5.65	%
Taxable investment
Securities		235,213			1,323		2.28	%		249,622			1,552		2.50	%
Tax-exempt investment
securities (2)		22,725			210		3.75	%		25,557			246		3.87	%
Corporate stock (2)		63			10		64.37	%		69			6		34.97	%
Federal funds sold		—			—		—			—			—		—
Investments in time deposits		1,118			2		0.73	%		985			1		0.41	%
Total earning assets		579,232			5,151		3.61	%		571,339			5,397		3.80	%
Cash & due from banks		39,314								28,145
Other assets		39,047								40,595
Allowance for loan & lease losses		(4,828	)							(5,003	)
	$	652,765							$	635,076

Liabilities & Shareholders’ Equity
Interest bearing liabilities:
Interest checking and money market	$	196,397			34		0.07	%	$	188,560			40		0.09	%
Savings		63,265			5		0.03	%		59,206			5		0.03	%
Time deposits		82,302			155		0.76	%		83,811			139		0.67	%
Other borrowings		15,500			48		1.26	%		24,368			50		0.83	%
Total interest bearing liabilities		357,464			242		0.27	%		355,945			234		0.26	%
Noninterest bearing demand deposits		203,947								186,935
Other liabilities		7,719								6,467
Total liabilities		569,130								549,347
Shareholders’ equity		83,635								85,729
	$	652,765							$	635,076
Net interest income & margin (3)				$	4,909		3.44	%				$	5,163		3.63	%

(1)

Loan interest includes loan fees of $66,000 and $40,000, respectively, during the three months ended March 31, 2017 and March 31, 2016. Average 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 34% for 2017 and 2016.

(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 2017 and 91 days for 2016) and annualized to actual days in the year (365 days in 2017 and 366 days in 2016).

Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
Three Months Ended March 31, 2017 over 2016 (dollars in thousands)
Increase (decrease) due to change in:
	Volume			Rate (4)			Net Change
Interest-earning assets:
Taxable net loans and leases (1)(2)	$	322		$	(254	)	$	68
Tax-exempt net loans and leases (3)		(26	)		(28	)		(54	)
Taxable investment securities		(89	)		(140	)		(229	)
Tax exempt investment securities (3)		(27	)		(9	)		(36	)
Corporate stock		(1	)		5			4
Federal funds sold		—			—			—
Interest-bearing deposits in banks		—			1			1
Total		179			(425	)		(246	)
Interest-bearing liabilities:
Interest checking and money market		2			(8	)		(6	)
Savings deposits		—			—			—
Time deposits		(2	)		18			16
Other borrowings		(18	)		16			(2	)
Total		(18	)		26			8
Interest differential	$	197		$	(451	)	$	(254	)

(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 $66,000 and $40,000, respectively, during the three months ended March 31, 2017 and March 31, 2016 which have been included in the interest income computation.

(3)

(4)

The rate/volume variance has been included in the rate variance.

Provision for Loan and Lease Losses

The Company did not provide any provision for loan and lease losses for the first quarter of 2017 or 2016. The Company experienced net loan and lease recoveries of $11,000 or (0.01%) (on an annualized basis) of average loans and leases for the three months ended March 31, 2017 compared to net loan and lease recoveries of $107,000 or (0.15%) (on an annualized basis) of average loans and leases for the three months ended March 31, 2016. The Company continued to experience an overall improvement in the credit quality of the loan and lease portfolio and a reduction of credit losses. For additional information see the “Allowance for Loan and Lease Losses Activity.”

Noninterest Income

Table Four below provides a summary of the components of noninterest income for the periods indicated (dollars in thousands):

Table Four: Components of Noninterest Income
	Three Months Ended March 31,
	2017		2016
Service charges on deposit accounts	$	117	$	129
Gain on sale/call of securities		56		282
Merchant fee income		92		86
Bank owned life insurance		78		78
Income from OREO properties		—		106
Other		76		73
Total noninterest income	$	419	$	754

Noninterest income decreased $335,000 (44.4%) to 419,000 for the three months ended March 31, 2017 compared to $754,000 for the three months ended March 31, 2016. The decrease in noninterest income was primarily related to lower gains from sales of securities, which decreased from $282,000 in 2016 to $56,000 in 2017 and lower rental income on OREO properties which decreased from $106,000 in 2016 to zero in 2017. The lower rental income from OREO properties is due to the sale of the income producing property in the first quarter of 2016.

Noninterest Expense

Noninterest expense decreased $361,000 (9.5%) to a total of $3,430,000 in the first quarter of 2017 compared to $3,791,000 in the first quarter of 2016. Salary and employee benefits expense increased $10,000 (0.5%) from $2,160,000 during the first quarter of 2016 to $2,170,000 during the first quarter of 2017. On a quarter-over-quarter basis, occupancy expense decreased $29,000 (9.7%) and furniture and equipment expense decreased $14,000 (8.5%). FDIC assessments decreased $27,000 (33.8%) from $80,000 during the first quarter of 2016 to $53,000 in the first quarter of 2017. The decrease in the FDIC assessments relates to a lower assessment rate as a result of the Deposit Insurance Fund reaching the FDIC’s target level of 1.15% during 2016, which resulted in lower assessments for community banks such as American River Bank. OREO related expenses decreased $320,000 during the first quarter of 2017 from $340,000 in the first quarter of 2016 to $20,000 in the first quarter of 2017. The decrease in OREO expenses is related to an adjustment to the book value of one property that resulted in a $376,000 charge to expense partially offset by an $117,000 gain on sale of another property, both of which occurred during the first quarter of 2016. In addition, the Company sold three OREO properties in 2016, including an income producing property which had higher operating costs than the properties currently held by the Company. Other expense increased $19,000 (2.5%) to $767,000 in the first quarter of 2017 compared to $748,000 in the first quarter of 2016. The fully taxable equivalent efficiency ratio increased from 64.1% for the first quarter of 2016 to 64.4% for the first quarter of 2017. This increase in the efficiency ratio is primarily related to the decrease in net interest income.

Provision for Income Taxes

Balance Sheet Analysis

The Company’s total assets were $659,251,000 at March 31, 2017 as compared to $651,450,000 at December 31, 2016, representing an increase of $7,801,000 (1.2%). The average assets for the three months ended March 31, 2017 were $652,765,000, which represents an increase of $17,689,000 or 2.8% over the balance of $635,076,000 during the three-month period ended March 31, 2016.

Investment Securities

The Company classifies its investment securities as available-for-sale or held-to-maturity. The Company’s intent is to hold all securities classified as held-to-maturity until maturity and management believes that it has the ability to do so. Securities available-for-sale may be sold to implement asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Table Five below summarizes the values of the Company’s investment securities held on March 31, 2017 and December 31, 2016.

Table Five: Investment Securities Composition
(dollars in thousands)
Available-for-sale (at fair value)	March 31, 2017		December 31, 2016
Debt securities:
US Government Agencies and Sponsored Agencies	$	234,587	$	229,785
Obligations of states and political subdivisions		22,822		22,612
Corporate bonds		5,596		1,519
Corporate stock		101		104
Total available-for-sale investment securities	$	263,106	$	254,020
Held-to-maturity (at amortized cost)
Debt securities:
US Government Agencies and Sponsored Agencies	$	456	$	483
Total held-to-maturity investment securities	$	456	$	483

Net unrealized gains on available-for-sale investment securities totaling $1,321,000 were recorded, net of $528,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at March 31, 2017 and net unrealized gains on available-for-sale investment securities totaling $916,000 were recorded, net of $372,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2016.

Management periodically evaluates each investment security in a loss position for other than temporary impairment relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Management has the ability and intent to hold securities with established maturity dates until recovery of fair value, which may be until maturity, and believes it will be able to collect all amounts due according to the contractual terms for all of the underlying investment securities; therefore, management does not consider these investments to be other-than-temporarily impaired.

Loans and Leases

The Company’s historical lending activities have been in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) lease financing receivable; (7) agriculture; and (8) consumer loans. The Company’s continuing focus in our market area, new borrowers developed through the Company’s marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company originating $4.6 million in new loans during the first three months of 2017. This production was offset by higher than anticipated pay downs and payoffs, and resulted in an overall net decrease in net loans and leases of $10,117,000 (3.1%) from $324,086,000 at December 31, 2016 to $313,969,000 at March 31, 2017. Despite the decrease in net loans in 2017, the market in which the Company operates has begun to show demand for credit products as the continued low rate environment and expectations for economic expansion have increased refinancing as well as new loan activity.

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, boats, recreational vehicles, mobile homes and various other consumer items. Construction loans are generally comprised of commitments to customers within the Company’s service area for construction of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans consist primarily of loans secured by first trust deeds on commercial, multi-family, and residential properties typically with maturities from 3 to 10 years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily of vineyard loans. In general, except in the case of loans under SBA programs or Farm Services Agency guarantees, the Company does not make long-term mortgage loans. Table Six below summarizes the composition of the loan portfolio as of March 31, 2017 and December 31, 2016.

Table Six: Loan and Lease Portfolio Composition
(dollars in thousands)	March 31, 2017						December 31, 2016						Change			Percentage
	$			%			$			%			in dollars			change
Commercial	$	29,828			9	%	$	35,374			11	%	$	(5,546	)		(15.7	%)
Real estate
Commercial		186,909			59	%		191,129			58	%		(4,220	)		(2.2	%)
Multi-family		73,225			23	%		73,373			22	%		(148	)		(0.2	%)
Construction		10,121			3	%		9,180			3	%		941			10.3	%
Residential		14,891			5	%		15,718			5	%		(827	)		(5.3	%)
Lease financing receivable		349			—	%		404			—	%		(55	)		(13.6	%)
Agriculture		2,250			1	%		2,302			1	%		(52	)		(2.3	%)
Consumer		1,478			—	%		1,650			—	%		(172	)		(10.4	%)
Total loans and leases		319,051			100	%		329,130			100	%		(10,079	)		(3.1	%)
Deferred loan and lease fees, net		(249	)					(222	)					(27	)
Allowance for loan and lease losses		(4,833	)					(4,822	)					(11	)
Total net loans and leases	$	313,969					$	324,086					$	(10,117	)		(3.1	%)

“Subprime” real estate loans generally refer to residential mortgages made to higher-risk borrowers with lower credit and/or income histories. Within the banking industry, many of these loans are originated with adjustable interest rates that reset upward after an introductory period. These “subprime” loans coupled with declines in housing prices led to an increase in default rates during the last recession, resulting in many instances of increased foreclosure rates as the adjustable interest rates reset to higher levels. The Company did not have any such “subprime” loans at March 31, 2017 and December 31, 2016.

Risk Elements

The Company assesses and manages credit risk on an ongoing basis through a total credit culture that emphasizes excellent credit quality, extensive internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant to periodically review the existing loan and lease portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company’s loan and lease portfolio is critical for profitability and growth. Management strives to continue its emphasis on credit quality in the loan and lease approval process, through active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan and lease review and grading system that functions to continually assess the credit risk inherent in the loan and lease portfolio.

Ultimately, underlying trends in economic and business cycles influence credit quality. American River Bank’s business is concentrated in the Sacramento Metropolitan Statistical Area, which is a diversified economy, but with a large State of California government presence and employment base; in Sonoma County, which is focused on businesses within the two communities in which the Bank has offices (Santa Rosa and Healdsburg); and in Amador County, in which the Bank is primarily focused on businesses within the three communities in which it has offices (Jackson, Pioneer, and Ione). The economy of Sonoma County is diversified with professional services, manufacturing, agriculture and real estate investment and construction, while the economy of Amador County is reliant upon government, services, retail trade, manufacturing industries and Indian gaming. The Company previously had a presence in the Santa Clara, Contra Costa, and Alameda County markets and serviced these markets through a loan production office. In the fourth quarter of 2016, the Company discontinued operating the loan production office in the Bay Area market. The economies of Santa Clara, Contra Costa and Alameda Counties are diversified with professional services, manufacturing, technology related companies, real estate investment and construction.

The Company has significant extensions of credit and commitments to extend credit that are secured by real estate. The ultimate repayment of these loans is generally dependent on personal or business cash flows or the sale or refinancing of the real estate. The Company monitors the effects of current and expected market conditions and other factors on the collectability of real estate loans. The more significant factors management considers involve the following: lease rates and terms, vacancy rates, absorption and sale rates and capitalization rates; real estate values, supply and demand factors, and rates of return; operating expenses; inflation and deflation; and sufficiency of repayment sources independent of the real estate including, in some instances, personal guarantees.

In extending credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash 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 90% of the Company’s loan and lease portfolio at March 31, 2017 and 88% as of December 31, 2016. Management believes that the residential land portion of the Company’s loan portfolio carries more than the normal credit risk, due primarily to curtailed demand for new and resale residential property relative to pre-2006/2007 recession levels, a supply imbalance, and observed reductions in values throughout the Company’s market area. Management has responded by evaluating loans that it considers to carry any significant risk above the normal risk of collectability by taking actions where possible to reduce credit risk exposure by methods that include, but are not limited to, seeking liquidation of the loan by the borrower, seeking additional tangible collateral or other repayment support, converting the property through judicial or non-judicial foreclosure proceedings, and other collection techniques. Management currently believes that it maintains its allowance for loan and lease losses at levels adequate to reflect the loss risk inherent in its total loan portfolio.

A decline in the economy in general, or decline in real estate values in the Company’s primary market areas, in particular, could have an adverse impact on the collectability of real estate loans and require an increase in the provision for loan and lease losses. This could adversely affect the Company’s future prospects, results of operations, profitability and stock price. Management believes that its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no assurance that losses will not occur. The Company’s loan practices and underwriting standards include, but are not limited to, the following: (1) maintaining a thorough understanding of the Company’s service area and originating a significant majority of its loans within that area, (2) maintaining a thorough understanding of borrowers’ knowledge, capacity, and market position in their field of expertise, (3) basing real estate loan approvals not only on market demand for the project, but also on the borrowers’ capacity to support the project financially in the event it does not perform to expectations (whether sale or income performance), and (4) maintaining conforming and prudent loan-to-value and loan-to-cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Company’s lending officers or contracted third-party professionals.

Nonperforming, Past Due and Restructured Loans and Leases

At March 31, 2017, nonperforming loans and leases (those loans and leases on nonaccrual status and those loans and leases still accruing and past due 90 days or more) were $17,000 or 0.01% of total loans and leases. The $17,000 in nonperforming loans and leases consisted of one consumer loan. The overall level of nonperforming loans decreased $2,000 (10.5%) from $19,000 or 0.01% of total loans and leases at December 31, 2016 which consisted of two consumer loans.

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 March 31, 2017. Management is not aware of any potential problem loans, which were accruing and current at March 31, 2017, 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 of March 31, 2017 and December 31, 2016.

Table Seven: Nonperforming Loans and Leases
(dollars in thousands)	March 31,		December 31,
	2017		2016
Past due 90 days or more and still accruing:
Commercial	$	—	$	—
Real estate		—		—
Lease financing receivable		—		—
Agriculture		—		—
Consumer		—		—
Nonaccrual:
Commercial		—		—
Real estate		—		—
Lease financing receivable		—		—
Consumer		17		19
Total nonperforming loans	$	17	$	19

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.

At March 31, 2017, the recorded investment in loans and leases that were considered to be impaired totaled $17,161,000, all of which are considered performing loans and leases. Of the total impaired loans of $17,161,000, loans totaling $9,130,000 were deemed to require no specific reserve and loans totaling $8,031,000 were deemed to require a related valuation allowance of $533,000. Of the $9,130,000 impaired loans that did not carry a specific reserve there were $3,850,000 in loans or leases that had previous partial charge-offs and $5,280,000 in loans or leases that were analyzed and determined not to require a specific reserve or charge-off because the collateral value or discounted cash flow value exceeded the loan or lease balance. The recorded investment in loans and leases that were considered to be impaired totaled $17,297,000 at December 31, 2016. Of the total impaired loans of $17,297,000, loans totaling $11,244,000 were deemed to require no specific reserve and loans totaling $6,053,000 were deemed to require a related valuation allowance of $421,000.

The Company has been operating in a market that has recently experienced sporadic improvement 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 in excess of $250,000, the Company performs an internal evaluation or obtains an updated appraisal, as necessary, which is generally once every twelve months. In the first quarter of 2017, the Company had net loan recoveries of $11,000 with no added provision. In the first quarter of 2016, the Company had net loan recoveries of $107,000 with no added provision.

During the periods ended March 31, 2017 and March 31, 2016, there were no loans that were modified as troubled debt restructurings. There were no payment defaults during the three months ended March 31, 2017 or March 31, 2016 on troubled debt restructurings made in the preceding twelve months. At March 31, 2017 and December 31, 2016, there were no unfunded commitments on those loans considered troubled debt restructures.

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 $4,833,000 or 1.52% of total loans and leases at March 31, 2017 compared to $4,822,000 or 1.47% of total loans and leases at December 31, 2016. 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 28.2% at March 31, 2017 and 27.9% at December 31, 2016. Of the total non-performing and impaired loans and leases outstanding as of March 31, 2017, there were $4,222,000 in loans or leases that had been reduced by partial charge-offs of $800,000. As these loan or lease balances are charged off, the remaining balances, following analysis, normally do not initially require specific reserves and are not eligible for general reserves. The impact of this on credit ratios is such that the Company’s ALLL as a percentage may be lower, because the partial charge-offs have reduced the potential future losses related to those credits.

The Company’s policy with regard to loan or lease charge-offs continues to be that a loan or lease is charged off against the ALLL when management believes that the collectability of the principal is unlikely. 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. Based on information currently available to analyze inherent credit risk, including economic factors, overall credit quality, historical delinquencies and a history of actual charge-offs, management believes that the provision for loan and lease losses and the allowance for loan and lease losses are prudent and adequate. Adjustments may be made based on differences from estimated loan and lease growth, the types of loans constituting this growth, changes in risk ratings within the portfolio, and general economic conditions. However, no prediction of the ultimate level of loans and leases charged off in future periods can be made with any certainty.

Table Eight below summarizes, for the periods indicated, the activity in the ALLL.

Table Eight: Allowance for Loan and Lease Losses
(dollars in thousands)	Three Months Ended March 31,
	2017			2016

Average loans and leases outstanding	$	295,106		$	295,106

Allowance for loan and lease losses at beginning of period	$	4,822		$	4,975
Loans and leases charged off:
Consumer		—			—
Total		—			—
Recoveries of loans and leases previously charged off:
Commercial		1			34
Real estate		9			1
Consumer		1			72
Total		11			107
Net loans and leases recovered		11			107
Additions to allowance charged to operating expenses		—			—
Allowance for loan and lease losses at end of period	$	4,833		$	5,082
Ratio of net recoveries to average loans and leases outstanding (annualized)		(0.01	%)		(0.15	%)
Provision of allowance for loan and lease losses to average loans and leases outstanding (annualized)		—			—
Allowance for loan and lease losses to loans and leases net of deferred fees at end of period		1.52	%		1.71	%

Other Real Estate Owned

At March 31, 2017, the Company had two other real estate owned (“OREO”) properties totaling $1,348,000, unchanged from the balance reported as of December 31, 2016. During the first quarter of 2017, the Company did not acquire or sell any OREO properties nor were there any impairment charges to either of these two properties. There was no valuation allowance at March 31, 2017 nor at year end 2016. The Company believes that both of the OREO properties owned at March 31, 2017 are carried approximately at fair value.

Deposits

At March 31, 2017, total deposits were $550,962,000 representing a $6,156,000 (1.1%) increase from the December 31, 2016 balance of $544,806,000. The Company’s deposit growth plan for 2017 is to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing money market and NOW accounts, and savings accounts while allowing higher cost time deposits to mature and close or renew at lower rates. The Company experienced increases in interest-bearing checking ($1,994,000 or 3.1%) and money market accounts ($7,118,000 or 5.4%) and decreases in noninterest-bearing ($696,000 or 0.4%), savings ($1,426,000 or 2.2%), and time deposits ($834,000 or 1.0%) accounts.

Other Borrowed Funds

Other borrowings outstanding as of March 31, 2017 and December 31, 2016, consisted of advances (both short-term and long-term) from the Federal Home Loan Bank of San Francisco (“FHLB”). Table Nine below summarizes these borrowings.

Table Nine: Other Borrowed Funds
(dollars in thousands)
	March 31, 2017					December 31, 2016
	Amount		Rate			Amount		Rate
Short-term borrowings:
FHLB advances	$	3,500		1.01	%	$	3,500		1.01	%
Long-term borrowings:
FHLB advances	$	12,000		1.32	%	$	12,000		1.32	%

The maximum amount of short-term borrowings at any month-end during the first three months of 2017 and 2016 was $3,500,000 and $28,500,000, 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):

	Short-term			Long-term
Amount	$	3,500		$	12,000
Maturity		2017			2018 to 2020
Weighted average rates		1.01	%		1.32	%

Capital Resources

The Company and American River Bank are subject to certain regulatory capital requirements administered by the Federal Reserve Board and the Federal Deposit Insurance Corporation (the “FDIC”). Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under current capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and American River Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The ratio of total risk-based capital to risk adjusted assets was 20.2% at March 31, 2017 and 20.3% at December 31, 2016. Tier 1 risk-based capital to risk-adjusted assets was 18.9% at March 31, 2017 and 19.0% at December 31, 2016. The leverage ratio was 10.4% at March 31, 2017 and 10.5% at December 31, 2016. Table Ten below lists the Company’s and American River Bank’s capital ratios at March 31, 2017 and December 31, 2016, as well as the minimum capital ratios for capital adequacy and the minimum requirement for a well-capitalized institution.

Table Ten: Capital Ratios
Capital to Risk-Adjusted Assets	March 31, 2017			December 31, 2016			Minimum Regulatory Capital Requirements			Well-Capitalized Minimum Requirements
American River Bankshares
Leverage Ratio		10.4	%		10.5	%		4.0	%		N/A
Tier 1 Risk-Based Capital		18.9	%		19.0	%		6.0	%		N/A
Total Risk-Based Capital		20.2	%		20.3	%		8.0	%		N/A
American River Bank
Leverage Ratio		10.4	%		10.6	%		4.0	%		5.0	%
Common Equity Tier 1 Risk-Based Capital		18.8	%		18.9	%		4.5	%		6.5	%
Tier 1 Risk-Based Capital		18.8	%		18.9	%		6.0	%		8.0	%
Total Risk-Based Capital		20.0	%		20.2	%		8.0	%		10.0	%

Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory requirements and is adequate to meet future needs. Management believes that both the Company and American River Bank met all of their capital adequacy requirements as of March 31, 2017 and December 31, 2016.

In July 2013, the federal bank regulatory agencies issued interim final rules that revised the risk-based capital requirements in order to implement the “Basel III” regulatory capital reforms released by the Basel Committee on Banking Supervision and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Basel III reforms reflected in the final rules include an increase in the risk-based capital requirements and certain changes to capital components and the calculation of risk-weighted assets.

Effective January 1, 2015, banking organizations like 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% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.

In addition, a “capital conservation buffer,” is established which when fully phased-in will require maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer will increase the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new buffer requirement will be phased-in between January 1, 2016 and January 1, 2019. The buffer requirement for 2017 is 1.25% and will increase gradually to 2.50% by January 1, 2019. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases.

The federal bank regulatory agencies also implemented changes to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital ratios begin to show signs of weakness. These changes became effective January 1, 2015 and require insured depository institutions to meet the following increased capital ratio requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

At March 31, 2017, shareholders’ equity was $83,108,000, representing a decrease of $742,000 (0.9%) from $83,850,000 at December 31, 2016. The decrease results from repurchases of common stock ($1,971,000) and the payment of cash dividends ($332,000) exceeding the additions from other comprehensive income ($249,000), net income for the period ($1,184,000), and the stock based compensation ($128,000). During the first quarter of 2017, the Company repurchased 131,000 shares of its common stock at an average price of $15.01 per share under the 2017 Stock Repurchase Program.

On January 25, 2017, the Company approved and authorized a 5% stock repurchase program for 2017 (the “2017 Program”). See Part II, Item 2, for additional disclosure regarding the 2017 Program. In addition, on January 25, 2017, the Company announced that it was reinstituting a quarterly cash dividend program and on February 22, 2017, the Company paid a $0.05 per common share cash dividend to shareholders of record on February 8, 2017.

Inflation

The impact of inflation on a financial institution differs significantly from that exerted on manufacturing or other commercial concerns primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company and it subsidiaries through its effect on market rates of interest, which affects the Company’s ability to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand and potentially adversely affects capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which may be generated in the future. In addition to its effects on interest rates, inflation increases overall operating expenses. Inflation has not had a significant effect upon the results of operations of the Company and its subsidiaries during the periods ended March 31, 2017 and 2016.

Liquidity

Liquidity management refers to the Company’s ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company’s liquidity position. Federal funds lines, short-term investments and securities, and loan and lease repayments contribute to liquidity, along with deposit increases, while loan and lease funding and deposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit at March 31, 2017 were approximately $18,029,000 and $191,000, respectively. Such loan commitments relate primarily to revolving lines of credit and other commercial loans and to real estate construction loans. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company’s sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale and/or pledged for secured borrowings. At March 31, 2017, consolidated liquid assets totaled $230.6 million or 35.0% of total assets compared to $224.2 million or 34.4% of total assets on December 31, 2016. 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. At March 31, 2017, the Company had $17,000,000 available under these credit lines. Additionally, the Bank is a member of the FHLB. At March 31, 2017, the Bank could have arranged for up to $130,306,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At March 31, 2017, the Company had advances, borrowings and commitments (including letters of credit) outstanding of $15,500,000, leaving $114,806,000 available under these FHLB secured borrowing arrangements. American River Bank also has a secured borrowing arrangement with the Federal Reserve Bank of San Francisco. The borrowing can be secured by pledging selected loans and investment securities. At March 31, 2017, the Company’s borrowing capacity at the Federal Reserve Bank was $8,559,000. The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets and borrowing capacity to offset the potential runoff of these volatile and/or cyclical deposits.

Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The Company can sell any of its unpledged securities held in the available-for-sale category to meet liquidity needs. The Bank has established a master repurchase agreement with a correspondent bank to enable such transactions. Furthermore, the Bank can pledge additional unencumbered securities to borrow from the Federal Reserve Bank of San Francisco and the FHLB.

Off-Balance Sheet Items

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company applies the same credit policies to commitments and letters of credit as it does for loans included on the consolidated balance sheet. As of March 31, 2017 and December 31, 2016, 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 $18,220,000 and $19,966,000 at March 31, 2017 and December 31, 2016, respectively. As a percentage of net loans and leases these off-balance sheet items represent 6.2% and 5.8%, respectively.

The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results.

Website Access

The Company maintains a website where certain information about the Company is posted. Through the website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments thereto, as well as Section 16 Reports and amendments thereto, are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. These reports are free of charge and can be accessed through the address www.americanriverbank.com by accessing the Investor Relations link, then the Company News link, then the SEC Filings link located at that address. Once you have selected the SEC Filings link you will have the option to access the Section 16 Reports or the reports filed on Forms 10-K, 10-Q and 8-K by the Company by selecting the appropriate link.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Overview. Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its loan, investment and deposit functions. The goal for managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk. The Board of Directors has overall responsibility for the interest rate risk management policies. The Company has an Enterprise Risk Management Committee, made up of Company management that establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates.

Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits and investing in securities. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments. The Company uses simulation models to forecast earnings, net interest margin and market value of equity.

Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer-modeling techniques, with specialized software built for this specific purpose for financial institutions, the Company is able to estimate the potential impact of changing interest rates on earnings, net interest margin and market value of equity. A balance sheet is prepared using detailed inputs of actual loans, securities and interest-bearing liabilities (i.e. deposits/borrowings). The balance sheet is processed using multiple interest rate scenarios. The scenarios include a rising rate forecast, a flat rate forecast and a falling rate forecast which take place within a one-year time frame. The net interest income is measured over one 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.

After a review of the model results as of March 31, 2017, the Company does not consider the fluctuations from the base case to have a material impact on the Company’s projected results and the fluctuations 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.

Item 4. Controls and Procedures.

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2017. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

During the quarter ended March 31, 2017, there have been no changes in the Company’s internal control over financial reporting that have significantly affected, or are reasonably likely to materially affect, these controls.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, the Company and/or its subsidiaries is a party to claims and legal proceedings arising in the ordinary course of business. The Company’s management is not aware of any significant pending legal proceedings to which either it or its subsidiaries may be a party or has recently been a party, which will have a significant adverse effect on the financial condition or results of operations of the Company or its subsidiaries, taken as a whole.

Item 1A. Risk Factors.

There have been no significant changes in the risk factors previously disclosed in the Company’s Form 10-K for the period ended December 31, 2016, filed with the Securities and Exchange Commission on February 24, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On January 20, 2016, the Company approved and authorized a stock repurchase program for 2016 (the “2016 Program”). The 2016 Program authorized the repurchase during 2016 of up to 5% of the outstanding shares of the Company’s common stock. In addition, on April 20, 2016, the Company approved and authorized an additional amount of 5% to be purchased under the 2016 Program. During 2016, the Company repurchased 716,897 shares of its common stock at an average price of $10.34 per share. Repurchases under the 2016 Program were made from time to time by the Company in the open market. All such transactions were structured to comply with Securities and Exchange Commission Rule 10b-18 and all shares repurchased under the 2016 Program were retired.

On January 25, 2017, the Company approved and authorized a stock repurchase program for 2017 (the “2017 Program”). The 2017 Program authorized the repurchase during 2017 of up to 5% of the outstanding shares of the Company’s common stock, or approximately 333,086 shares based on the 6,661,726 shares outstanding as of December 31, 2016. Any repurchases under the 2017 Program will be made from time to time by the Company in the open market as conditions allow. All such transactions will be structured to comply with SEC Rule 10b-18 and all shares repurchased under the 2017 Program will be retired. The number, price and timing of the repurchases will be at the Company’s sole discretion and the 2017 Program may be re-evaluated depending on market conditions, capital and liquidity needs or other factors. Based on such re-evaluation, the Board of Directors may suspend, terminate, modify or cancel the 2017 Program at any time without notice. The following table lists shares repurchased during the quarter ended March 31, 2017 and the maximum amount available to repurchase under the repurchase plan.

Period	(a)	(b)	(c)	(d)
	Total Number of Shares (or Units) Purchased	Average Price Paid Per Share (or Unit)	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
Month #1 January 1 through January 31, 2017	—	—	—	333,086
Month #2 February 1 through February 28, 2017	-0-	—	-0-	333,086
Month #3 March 1 through March 31, 2017	131,000	$ 15.01	131,000	202,086
Total	131,000	$ 15.01	131,000	N/A

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

	Exhibit Number		Document Description

	(2.1)		Agreement and Plan of Reorganization and Merger by and among the Registrant, ARH Interim National Bank and North Coast Bank, N.A., dated as of March 1, 2000 (included as Annex A). **

	(2.2)		Agreement and Plan of Reorganization and Merger by and among the Registrant, American River Bank and Bank of Amador, dated as of July 8, 2004 (included as Annex A). ***

	(3.1)		Articles of Incorporation, as amended, incorporated by reference from Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2011, filed with the Commission on May 10, 2011.

	(3.2)		Bylaws, as amended, incorporated by reference from Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2013, filed with the Commission on May 9, 2013.

	(4.1)		Specimen of the Registrant’s common stock certificate, incorporated by reference from Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed with the Commission on August 11, 2004.

	(10.1)		Lease agreement between American River Bank and Spieker Properties, L.P., a California limited partnership, dated April 1, 2000, related to 1545 River Park Drive, Suite 107, Sacramento, California (**) and the Second Amendment thereto dated August 27, 2010, with HINES VAF II SACRAMENTO PROPERTIES, L.P., a Delaware limited partnership, the successor to Spieker Properties, L.P., incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on August 30, 2010.

	(10.2)		Lease agreement between American River Bank and Bradshaw Plaza Associates, Inc. dated November 27, 2006, related to 9750 Business Park Drive, Sacramento, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on November 28, 2006 and the First Amendment thereto dated July 1, 2016, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 6, 2016.

	*(10.3)		Registrant’s Deferred Compensation Plan, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 3, 2012 and first amendment thereto dated January 21, 2015, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 23, 2015.

	*(10.4)		Registrant’s Deferred Fee Plan, incorporated by reference from Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 3, 2012.

	*(10.5)		Employment Agreement between Registrant and David T. Taber dated June 2, 2006, incorporated by reference from Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 30, 2006.


	*(10.6)		Salary Continuation Agreement, as amended on December 31, 2012, between American River Bank and Mitchell A. Derenzo, incorporated by reference from Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 2, 2013.

	*(10.7)		Salary Continuation Agreement, as amended on December 31, 2012, between the Registrant and David T. Taber, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 2, 2013.

	*(10.8)		Salary Continuation Agreement, as amended on February 21, 2008, between American River Bank and Douglas E. Tow, incorporated by reference from Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008.

	*(10.9)		Registrant’s 2000 Stock Option Plan with forms of Nonqualified Stock Option Agreement and Incentive Stock Option Agreement. **

	*(10.10)		Registrant’s 401(k) Plan dated December 23, 2008, incorporated by reference from Exhibit 99.1 to the Current Report on Form 8-K, filed with the Commission on December 24, 2008.

	(10.11)		Lease agreement between Bank of Amador, a division of American River Bank, and the United States Postal Service, dated August 16, 2016, related to 424 Sutter Street, Jackson, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on August 16, 2016.

	*(10.12)		Salary Continuation Agreement, as amended on February 21, 2008, between Bank of Amador, a division of American River Bank, and Larry D. Standing and related Endorsement Split Dollar Agreement, incorporated by reference from Exhibit 99.4 to the Registrant’s Report on Form 8-K, filed with the Commission on February 22, 2008.

	*(10.13)		Director Retirement Agreement, as amended on February 21, 2008, between Bank of Amador, a division of American River Bank, and Larry D. Standing, incorporated by reference from Exhibit 99.5 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008.

	(10.14)		Item Processing Agreement between American River Bank and Fidelity Information Services, Inc., dated April 30, 2012, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 4, 2012.

	(10.15)		Lease agreement between Registrant and MSCP Capital Investors, LLC (successor to PGOCC, LLC and One Capital Center), a Delaware limited partnership, dated May 17, 2005, related to 3100 Zinfandel Drive, Rancho Cordova, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 18, 2005 and the First Amendment thereto dated April 23, 2010, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on April 23, 2010, and the Second Amendment thereto dated June 28, 2016, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 1, 2016.

	(10.16)		Managed Services Agreement between American River Bankshares and Fidelity Information Services, LLC successor to ProNet Solutions, Inc., dated June 25, 2012, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on June 27, 2012 and the First Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 14, 2015.


	*(10.17)		American River Bankshares 2005 Executive Incentive Plan, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on October 27, 2005; the First Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 17, 2006; the Second Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 23, 2007; the Third Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008; the Fourth Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 20, 2009; the Fifth Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 18, 2010; the Sixth Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 17, 2011; the Seventh Amendment thereto, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 17, 2012; the Eighth Amendment thereto, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on January 31, 2013; the Ninth Amendment thereto, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on January 16, 2014; the Tenth Amendment thereto, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on January 27, 2015; the Eleventh Amendment thereto, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on January 22, 2016; and the Twelfth Amendment thereto, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on December 22, 2016.

	*(10.18)		American River Bankshares Director Emeritus Program, incorporated by reference from Exhibit 10.33 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2006, filed with the Commission on August 8, 2006.

	*(10.19)		Employment Agreement dated September 20, 2006, between American River Bankshares and Mitchell A. Derenzo, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on September 20, 2006.

	*(10.20)		Employment Agreement dated September 20, 2006, between American River Bankshares and Kevin B. Bender, incorporated by reference from Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on September 20, 2006.

	*(10.21)		Salary Continuation Agreement, as amended on December 31, 2012, between American River Bank and Kevin B. Bender, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 2, 2013.

	*(10.22)		Salary Continuation Agreement, as amended on February 21, 2008, between American River Bank and Raymond F. Byrne, incorporated by reference from Exhibit 99.7 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 22, 2008.

	(10.23)		Lease agreement dated May 23, 2007 between Bank of Amador, a division of American River Bank, and Joseph Bellamy, Trustee of the Joseph T. Bellamy 2005 Trust, related to 26395 Buckhorn Ridge Road, Pioneer, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on May 24, 2007 and the First Amendment thereto, dated October 15, 2007, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on October 16, 2007.

	(10.24)		Lease agreement dated December 23, 2008, between North Coast Bank, a division of American River Bank, and 90 E Street LLC, related to 90 E Street, Santa Rosa, California, incorporated by reference from Exhibit 99.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on December 24, 2008.


	(10.25)		Customer Service Agreement dated January 4, 2010, between American River Bankshares and TriNet HR Corporation, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 5, 2010.

	*(10.26)		Form of Indemnification Agreement entered into on January 20, 2010, between American River Bankshares and its Directors and certain named executive officers, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 22, 2010.

	*(10.27)		Form of Indemnification Agreement entered into on January 20, 2010, between American River Bank and its Directors and certain named executive officers, incorporated by reference from Exhibit 99.2 to the Registrant’s Current Report on Form 8-K, filed with the Commission on January 22, 2010.

	*(10.28)		Registrant’s 2010 Equity Incentive Plan, incorporated by reference from the Registrant’s Definitive Proxy Statement for its 2010 Annual Meeting of Shareholders, filed with the Commission on April 9, 2010 and form of restricted stock award agreement incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 20, 2015.

	(10.29)		Subscription and Services Agreement between American River Bank and Postilion, Inc., dated June 19, 2012, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on June 21, 2012, and the amended agreement dated March 6, 2015 with ACI Worldwide Corp., successor to Postilion, Inc., incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on March 12, 2015.

	*(10.30)		Salary Continuation Agreement between American River Bank and Robert H. Muttera, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 4, 2013.

	(10.31)		Lease agreement dated February 6, 2014, between American River Bank and Gold River Village Associates, a California Limited Partnership, related to 11220 Gold River Express Drive, Gold River, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 10, 2014.

	(10.32)		Lease agreement dated February 12, 2014, between American River Bank and 520 Capitol Mall Inc., a Delaware corporation, related to 520 Capitol Mall, Suite 200, Sacramento, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on February 18, 2014.

	*(10.33)		Employment Agreement dated June 2, 2014, between American River Bank and Loren E. Hunter, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on June 2, 2014.

	*(10.34)		Salary Continuation Agreement between American River Bank and Loren E. Hunter, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 11, 2014.

	*(10.35)		Registrant’s Performance Based Restricted Stock Awards Program, incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Commission on March 20, 2015.

	(10.36)		Lease agreement dated July 11, 2016, between American River Bank and DDS Properties, a California General Partnership, related to 2510 Douglas Blvd., Roseville, California, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 12, 2016.

	(14.1)		Registrant’s Code of Ethics, incorporated by reference from Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2003, filed with the Commission on March 19, 2004.


	(21.1)		The Registrant’s only subsidiaries are American River Bank, a California banking corporation, and American River Financial, a California corporation.

	(31.1)		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	(31.2)		Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	(32.1)		Certification of American River Bankshares by its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	101.INS		XBRL Instance Document****
	101.SCH		XBRL Taxonomy Extension Schema****
	101.CAL		XBRL Taxonomy Extension Calculation****
	101.DEF		XBRL Taxonomy Extension Definition****
	101.LAB		XBRL Taxonomy Extension Label****
	101.PRE		XBRL Taxonomy Extension Presentation****

			*Denotes management contracts, compensatory plans or arrangements.

			**Incorporated by reference to Registrant’s Registration Statement on Form S-4 (No. 333-36326) filed with the Commission on May 5, 2000.

			***Incorporated by reference to Registrant’s Registration Statement on Form S-4 (No. 333-119085) filed with the Commission on September 17, 2004.

			****These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	AMERICAN RIVER BANKSHARES

May 4, 2017	By:	/s/ DAVID T. TABER

	David T. Taber
	President and
	Chief Executive Officer

	AMERICAN RIVER BANKSHARES

May 4, 2017	By:	/s/ MITCHELL A. DERENZO

	Mitchell A. Derenzo
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit Number	Description	Page

31.1	Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	53

31.2	Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	54

32.1	Certification of American River Bankshares by its Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	55

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