Form 10-Q AMERICAN RIVER BANKSHARE For: Sep 30

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November 3, 2016 3:16 PM EDT

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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

September 30, 2016

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

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 - 6,656,594 shares outstanding at November 2, 2016.

AMERICAN RIVER BANKSHARES

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2016

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		47
Item 4.	Controls and Procedures		48

Part II.

Item 1.	Legal Proceedings		48
Item 1A.	Risk Factors		48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3.	Defaults Upon Senior Securities		49
Item 4.	Mine Safety Disclosures		49
Item 5.	Other Information		49
Item 6.	Exhibits		49

Signatures			54

Exhibit Index			55
31.1		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	56
31.2		Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	57
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	58

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)	September 30, 2016		December 31, 2015
ASSETS
Cash and due from banks	$	43,094	$	23,727
Interest-bearing deposits in banks		999		750
Investment securities:
Available-for-sale, at fair value		253,502		273,819
Held-to-maturity, at amortized cost		508		623
Loans and leases, less allowance for loan and lease losses of $4,983 at September 30, 2016 and $4,975 at December 31, 2015		313,302		289,102
Premises and equipment, net		1,259		1,407
Federal Home Loan Bank stock		3,779		3,779
Goodwill and other intangible assets		16,321		16,321
Other real estate owned		653		3,551
Bank owned life insurance		14,722		14,483
Accrued interest receivable and other assets		5,707		7,078
	$	653,846	$	634,640

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Noninterest bearing	$	209,586	$	190,548
Interest-bearing		336,579		340,142
Total deposits		546,165		530,690

Short-term borrowings		5,000		3,500
Long-term borrowings		9,000		7,500
Accrued interest payable and other liabilities		9,015		6,875

Total liabilities		569,180		548,565

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 – 6,656,594 shares at September 30, 2016 and 7,343,649 shares at December 31, 2015		42,402		49,554
Retained earnings		38,907		34,418
Accumulated other comprehensive income, net of taxes		3,357		2,103

Total shareholders’ equity		84,666		86,075
	$	653,846	$	634,640

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

(dollars in thousands, except per share data)
For the periods ended September 30,	Three months					Nine months
	2016			2015		2016			2015
Interest income:
Interest and fees on loans:
Taxable	$	3,617		$	3,541	$	10,424		$	10,140
Exempt from Federal income taxes		189			92		534			222
Interest on deposits in banks		2			2		5			4
Interest and dividends on investment securities:
Taxable		1,340			1,633		4,333			4,706
Exempt from Federal income taxes		156			190		502			571
Dividends		—			—		11			10
Total interest income		5,304			5,458		15,809			15,643
Interest expense:
Interest on deposits		179			202		545			624
Interest on borrowings		44			38		133			108
Total interest expense		223			240		678			732

Net interest income		5,081			5,218		15,131			14,911
Provision for loan and lease losses		(668	)		—		(668	)		—

Net interest income after provision for loan and lease losses		5,749			5,218		15,799			14,911
Noninterest income:
Service charges on deposit accounts		124			132		381			376
Gain on sale, call, or impairment of securities		33			33		314			251
Rental income from other real estate owned		—			87		106			248
Other noninterest income		242			238		715			707
Total noninterest income		399			490		1,516			1,582

Noninterest expense:
Salaries and employee benefits		2,073			2,185		6,334			6,500
Occupancy		295			294		885			888
Furniture and equipment		165			171		493			527
Federal Deposit Insurance Corporation assessments		77			83		233			239
Expenses related to other real estate owned		(30	)		58		330			260
Other expense		766			641		2,277			2,246
Total noninterest expense		3,346			3,432		10,552			10,660

Income before provision for income taxes		2,802			2,276		6,763			5,833

Provision for income taxes		989			807		2,274			2,022

Net income	$	1,813		$	1,469	$	4,489		$	3,811

Basic earnings per share	$	0.28		$	0.20	$	0.66		$	0.50
Diluted earnings per share	$	0.27		$	0.20	$	0.66		$	0.50

Cash dividends per share	$	0.00		$	0.00	$	0.00		$	0.00

See notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands, except per share data)
For the periods ended September 30,	Three months						Nine months
	2016			2015			2016			2015
Net income	$	1,813		$	1,469		$	4,489		$	3,811
Other comprehensive income (loss):
(Decrease) increase in net unrealized gains on investment securities		(1,306	)		769			2,406			1,023
Deferred tax benefit (expense)		522			(308	)		(963	)		(409	)
(Decrease) increase in net unrealized gains on investment securities, net of tax		(784	)		461			1,443			614

Reclassification adjustment for realized gains included in net income		(33	)		(33	)		(314	)		(251	)
Tax effect		13			13			125			100
Realized gains, net of tax		(20	)		(20	)		(189	)		(151	)
Total other comprehensive (loss) income		(804	)		441			1,254			463
Comprehensive income	$	1,009		$	1,910		$	5,743		$	4,274

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, 2015		8,089,615		$	57,126		$	29,150	$	3,371	$	89,647
Net income								3,811				3,811
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities										463		463

Net restricted stock award activity and related compensation expense		45,023			175							175
Stock option compensation expense					25							25
Retirement of common stock		(790,989	)		(7,843	)						(7,843	)

Balance, September 30, 2015		7,343,649		$	49,483		$	32,961	$	3,834	$	86,278

Balance, January 1, 2016		7,343,649		$	49,554		$	34,418	$	2,103	$	86,075
Net income								4,489				4,489
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities										1,254		1,254

Net restricted stock award activity and related compensation expense		28,342			219							219
Stocks option exercised and compensation expense		1,500			43							43
Retirement of common stock		(716,897	)		(7,414	)						(7,414	)

Balance, September 30, 2016		6,656,594		$	42,402		$	38,907	$	3,357	$	84,666

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

(dollars in thousands)
For the nine months ended September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	4,489		$	3,811
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		(668	)		—
Increase (decrease) in deferred loan origination fees, net		27			(48	)
Depreciation and amortization		326			324
Gain on sale, call, and impairment of investment securities, net		(314	)		(251	)
Amortization of investment security premiums and discounts, net		2,159			2,470
Increase in cash surrender values of life insurance policies		(239	)		(239	)
Stock based compensation expense		249			200
Loss/gain on sale/write-down of other real estate owned		207			68
Decrease in accrued interest receivable and other assets		535			27
(Decrease) increase in accrued interest payable and other liabilities		(322	)		133

Net cash provided by operating activities		6,449			6,495

Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment securities		12,656			23,764
Proceeds from matured available-for-sale investment securities		600			175
Proceeds from called available-for-sale investment securities		1,165			—
Purchases of available-for-sale investment securities		(25,146	)		(41,254	)
Proceeds from principal repayments for available-for-sale investment securities		33,749			38,193
Proceeds from principal repayments for held-to-maturity investment securities		115			188
Net increase in interest-bearing deposits in banks		(249	)		—
Net increase in loans		(21,873	)		(31,669	)
Proceeds from sale of other real estate		1,005			924
Capitalized additions to other real estate		—			(126	)
Net increase in FHLB stock		—			(93	)
Purchases of equipment		(178	)		(241	)

Net cash provided by (used in) investing activities		1,844			(10,139	)

Cash flows from financing activities:
Net increase in demand, interest-bearing and savings deposits	$	17,125		$	12,200
Net decrease in time deposits		(1,650	)		(1,524	)
Net increase in short-term borrowings		1,500			—
Net increase in long-term borrowings		1,500			—
Proceeds from stock option exercise		13			—
Cash paid to repurchase common stock		(7,414	)		(7,843	)

Net cash provided by financing activities	$	11,074		$	2,833

Increase (decrease) in cash and cash equivalents		19,367			(811	)

Cash and cash equivalents at beginning of year		23,727			22,449

Cash and cash equivalents at end of period	$	43,094		$	21,638

See Notes to Unaudited Consolidated Financial Statements

AMERICAN RIVER BANKSHARES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

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 September 30, 2016 and December 31, 2015, the results of its operations and statement of comprehensive income for the three-month and nine-month periods ended September 30, 2016 and 2015, its cash flows for the nine-month periods ended September 30, 2016 and 2015 and its statement of changes in shareholders’ equity for the nine months ended September 30, 2016 and 2015 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, 2015. The results of operations for the three-month and nine-month periods ended September 30, 2016 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 110,587 options remain outstanding at September 30, 2016. At September 30, 2016, under the 2010 Plan, there were 76,461 stock options and 66,692 restricted shares outstanding and the total number of authorized shares that remain available for issuance was 1,376,819. 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 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 September 30, 2016 and 2015, the compensation cost recognized for equity compensation was $83,000 and $73,000, respectively. The recognized tax benefit for equity compensation expense was $29,000 and $25,000, respectively, for the three-month periods ended September 30, 2016 and 2015. For the nine-month periods ended September 30, 2016 and 2015, the compensation cost recognized for equity compensation was $249,000 and $200,000, respectively. The recognized tax benefit for equity compensation expense was $88,000 and $70,000, respectively, for the nine-month periods ended September 30, 2016 and 2015.

At September 30, 2016, the total compensation cost related to nonvested stock option awards not yet recorded was $109,000. This amount will be recognized over the next 3.75 years and the weighted average period of recognizing these costs is expected to be 1.8 years. At September 30, 2016, the total compensation cost related to restricted stock awards not yet recorded was $441,000. This amount will be recognized over the next 4.8 years and the weighted average period of recognizing these costs is expected to be 1.6 years.

Equity Plans Activity

Stock Options

There were no stock options awarded during the three-month and nine-month periods ended September 30, 2016 or the three-month period ended September 30, 2015. There were 26,427 stock options awarded during the nine-month period ended September 30, 2015 at a weighted average exercise price of $9.56. A summary of option activity under the Plans as of September 30, 2016 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, 2016		248,411	$	15.19		3.7 years	$	232
Awarded		—		—		—		—
Exercised		1,500		8.50		—		—
Expired, forfeited or cancelled		59,863		22.45		—		—
Outstanding at September 30, 2016		187,048	$	12.91		3.9 years	$	252
Vested at September 30, 2016		142,805	$	14.11		2.7 years	$	173
Non-vested at September 30, 2016		44,243	$	9.05		8.0 years	$	79

Restricted Stock

There were no shares of restricted stock awarded during the three-month periods ended September 30, 2016 and 2015. There were 29,756 and 45,023 shares of restricted stock awarded during the nine-month periods ended September 30, 2016 and 2015, respectively. Of the 29,756 restricted shares awarded in 2016, 10,094 restricted shares will vest one year from the date of the award, 1,829 vest over five years at 20% per year from the date of the award, and 17,833 are performance based awards that must meet minimum performance criteria before they begin to vest. If the performance metrics are not met, up to 100% of the award may be forfeited and if the performance metrics are exceeded, the awards may be increased by up to 150% of the original award. Of the 45,023 restricted shares awarded in 2015, 12,552 restricted shares vested one year from the date of the award, 11,939 vest over five years at 20% per year from the date of the award, and 20,532 are performance based awards that must meet minimum performance criteria before they begin to vest. If the performance metrics are not met, up to 100% of the award may be forfeited and if the performance metrics are exceeded, the awards may be increased by up to 150% of the original award. Award date fair value is determined by the market price of the Company’s common stock on the date of award ($10.17 on February 17, 2016, $10.40 on May 19, 2016, $9.41 on March 18, 2015, and $9.56 on May 22, 2015).

There were 947 restricted share awards that were fully vested during the three-month period ended September 30, 2016 and 19,166 restricted share awards that were fully vested during the nine-month period ended September 30, 2016. There were 3,274 restricted share awards that were fully vested during the three-month period ended September 30, 2015 and 20,345 restricted share awards that were fully vested during the nine-month period ended September 30, 2015. There were 386 and 1,414 restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2016, respectively, and no restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2015. The intrinsic value of nonvested restricted shares at September 30, 2016 was $723,000.

Restricted Stock	Shares		Weighted Average Award Date Fair Value
Nonvested at January 1, 2016		57,516	$	9.21
Awarded		29,756		10.26
Less: Vested		19,166		9.10
Less: Expired, forfeited or cancelled		1,414		9.32
Nonvested at September 30, 2016		66,692	$	9.71

Other Equity Awards

There were no stock appreciation rights; restricted performance stock; unrestricted Company stock; or performance units awarded during the three-month or nine-month month periods ended September 30, 2016 or 2015 or outstanding at September 30, 2016 or December 31, 2015.

The intrinsic value used for stock options and restricted stock awards was derived from the market price of the Company’s common stock of $10.84 as of September 30, 2016.

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 $23,697,000 and standby letters of credit of approximately $238,000 at September 30, 2016 and loan commitments of approximately $26,730,000 and standby letters of credit of approximately $238,000 at December 31, 2015. 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 2016 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 September 30, 2016 or December 31, 2015.

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 (6,589,125 and 6,800,016 shares for the three-month and nine-month periods ended September 30, 2016, and (7,481,529 and 7,653,109 shares for the three-month and nine-month periods ended September 30, 2015). 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. There were 32,515 and 28,108, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2016 and 19,930 and 14,878, respectively, dilutive shares for the three-month and nine-month periods ended September 30, 2015. For the three-month periods ended September 30, 2016 and 2015, there were 99,308 and 192,106 stock options, respectively, that were excluded from the calculation as they were considered antidilutive. For the nine-month periods ended September 30, 2016 and 2015, there were 99,308 and 192,106 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 Available-for-Sale and Held-to-Maturity investment securities at September 30, 2016 and December 31, 2015 consisted of the following (dollars in thousands):

Available-for-Sale

	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government Agencies and Sponsored Agencies	$	224,159	$	4,739	$	(165	)	$	228,733
Obligations of states and political subdivisions		22,197		1,017		(41	)		23,173
Corporate bonds		1,501		28		—			1,529
Equity securities:
Corporate stock		49		18		—			67
	$	247,906	$	5,802	$	(206	)	$	253,502

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government Agencies and Sponsored Agencies	$	244,056	$	3,059	$	(930	)	$	246,185
Obligations of states and political subdivisions		24,706		1,307		—			26,013
Corporate bonds		1,502		49		—			1,551
Equity securities:
Corporate stock		51		19		—			70
	$	270,315	$	4,434	$	(930	)	$	273,819

Net unrealized gains on available-for-sale investment securities totaling $5,596,000 were recorded, net of $2,239,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at September 30, 2016. Proceeds and gross realized gains from the sale, call, and impairment of available-for-sale investment securities totaled $5,534,000 and $33,000, respectively, for the three-month period ended September 30, 2016 and for the nine-month period ended September 30, 2016, proceeds and gross realized gains from the sale, call, and impairment of available-for-sale investment securities totaled $13,821,000 and $314,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2016.

Net unrealized gains on available-for-sale investment securities totaling $3,504,000 were recorded, net of $1,401,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2015. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended September 30, 2015 totaled $8,381,000 and $33,000, respectively, and for the nine-month period ended September 30, 2015 totaled $23,764,000 and $251,000, respectively. There were no transfers of available-for-sale investment securities for the three-month and nine-month periods ended September 30, 2015.

Held-to-Maturity

September 30, 2016

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

U.S. Government Agencies and Sponsored Agencies

508

—

551

December 31, 2015

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

U.S. Government Agencies and Sponsored Agencies

623

—

669

There were no sales or transfers of held-to-maturity investment securities for the periods ended September 30, 2016 and September 30, 2015. Investment securities with unrealized losses at September 30, 2016 and December 31, 2015 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):

September 30, 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:
U.S. Government Agencies and Sponsored Agencies	$	18,319	$	(81	)		5,475		(84	)	$	23,794	$	(165	)
Obligations of states and political subdivisions		3,564		(41	)		—		—			3,564		(41	)
	$	21,883	$	(122	)	$	5,475	$	(84	)	$	27,358	$	(206	)

December 31, 2015	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	$	93,265	$	(813	)	$	5,251	$	(117	)	$	98,516	$	(930	)
Obligations of states and political subdivisions		—		—			—		—			—		—
	$	93,265	$	(813	)	$	5,251	$	(117	)	$	98,516	$	(930	)

There were no held-to-maturity investment securities with unrealized losses as of September 30, 2016 or December 31, 2015. At September 30, 2016, the Company held 215 securities of which twelve were in a loss position for less than twelve months and three were in a loss position for twelve months or more. Of the twelve securities in a loss position for less than twelve months, nine were U.S. Government Agencies and Sponsored Agencies securities and three were obligations of states or political subdivisions and of the three securities that were in a loss position for greater than twelve months, all three were U.S. Government Agencies and Sponsored Agencies securities.

At December 31, 2015, the Company held 223 securities of which 45 were in a loss position for less than twelve months and three were in a loss position for twelve months or more. Of the 45 securities in a loss position for less than twelve months, all were US Government Agencies and Sponsored Agencies securities and 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 September 30, 2016 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	$	2,577	$	2,615
After one year through five years		2,656		2,768
After five years through ten years		12,953		13,758
After ten years		5,512		5,561
		23,698		24,702
Investment securities not due at a single maturity date:
US Government Agencies and Sponsored Agencies		224,159		228,733	$	508	$	551
Corporate stock		49		67		—		—
	$	247,906	$	253,502	$	508	$	551

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 September 30, 2016 and December 31, 2015, the recorded investment in nonperforming loans and leases was approximately $778,000 and $1,643,000, 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 September 30, 2016, the recorded investment in loans and leases that were considered to be impaired totaled $18,357,000, which includes $753,000 in nonaccrual loans and leases and $17,604,000 in performing loans and leases. Of the total impaired loans of $18,357,000, loans totaling $11,569,000 were deemed to require no specific reserve and loans totaling $6,788,000 were deemed to require a related valuation allowance of $564,000. At December 31, 2015, the recorded investment in loans and leases that were considered to be impaired totaled $21,365,000 and had a related valuation allowance of $899,000.

At September 30, 2016 and December 31, 2015, the balance in other real estate owned (“OREO”) was $653,000 and $3,551,000, respectively. At September 30, 2016, the Company did not own any residential OREO properties nor were there any residential properties in the process of foreclosure. During the first quarter of 2016, the Company sold a single commercial property in El Dorado County for a gain of $126,000. Also, during the first quarter the Company obtained an updated appraisal on existing commercial land in Sacramento County, which resulted in a charge to expense of $376,000. The Company did not add any properties to OREO during the first quarter of 2016. During the second quarter of 2016, the Company did not add any properties to OREO or sell any OREO property. During the third quarter of 2016, the Company did not add any properties to OREO and sold one single commercial property in Amador County for a gain of $43,000. The September 30, 2016 OREO balance of $653,000 consisted of one parcel of land zoned for commercial use. Nonperforming assets at September 30, 2016 and December 31, 2015 are summarized as follows:

(dollars in thousands)	September 30, 2016			December 31, 2015

Nonaccrual loans and leases that are current to terms (less than 30 days past due)	$	297		$	379
Nonaccrual loans and leases that are past due		481			1,264
Loans and leases past due 90 days and accruing interest		—			—
Other assets		878			878
Other real estate owned		653			3,551
Total nonperforming assets	$	2,309		$	6,072

Nonperforming loans and leases to total loans and leases		0.24	%		0.56	%
Total nonperforming assets to total assets		0.35	%		0.96	%

Impaired loans and leases as of and for the periods ended September 30, 2016 and December 31, 2015 are summarized as follows:

(dollars in thousands)	As of September 30, 2016						As of December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:

Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Real estate-commercial		11,233		11,931		—		12,269		12,902		—
Real estate-residential		336		423		—		338		338		—
Subtotal	$	11,569	$	12,354	$	—	$	12,607	$	13,240	$	—

With an allowance recorded:

Commercial	$	31	$	31	$	3	$	121	$	121	$	25
Real estate-commercial		4,053		4,148		366		5,597		5,693		598
Real estate-multi-family		483		483		3		488		488		5
Real estate-residential		1,827		1,827		139		2,114		2,201		204
Agriculture		360		360		30		370		370		38
Consumer		34		34		23		68		68		29
Subtotal	$	6,788	$	6,883	$	564	$	8,758	$	8,941	$	899

Total:

Commercial	$	31	$	31	$	3	$	121	$	121	$	25
Real estate-commercial		15,286		16,079		366		17,866		18,595		598
Real estate-multi-family		483		483		3		488		488		5
Real estate-residential		2,163		2,250		139		2,452		2,539		204
Agriculture		360		360		30		370		370		38
Consumer		34		34		23		68		68		29
	$	18,357	$	19,237	$	564	$	21,365	$	22,181	$	899

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

	Average Recorded Investments for the three months ended				Average Recorded Investments for the nine months ended
	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015

Commercial	$	32	$	125	$	33	$	145
Real estate-commercial		15,369		19,335		15,202		19,749
Real estate-multi-family		484		491		486		493
Real estate-residential		2,169		2,473		2,182		2,511
Agriculture		362		375		365		377
Consumer		35		91		36		77
Total	$	18,451	$	22,890	$	18,304	$	23,352

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

	Interest Income Recognized for the three months ended				Interest Income Recognized for the nine months ended
	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015

Commercial	$	—	$	2	$	2	$	7
Real estate-commercial		123		259		567		728
Real estate-multi-family		15		8		25		21
Real estate-residential		24		14		76		69
Agriculture		6		5		16		13
Consumer		—		—		—		—
Total	$	168	$	288	$	686	$	838

7. TROUBLED DEBT RESTRUCTURINGS

During the three and nine-month periods ended September 30, 2016, there were no loans that were modified as troubled debt restructurings. There were no loans modified as troubled debt restructurings during the three months ended September 30, 2015.

The following table presents loans by class modified as troubled debt restructurings during the nine months ended September 30, 2015 (dollars in thousands):

			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number		Recorded		Recorded
	of Loans		Investment		Investment
Troubled debt restructurings:
Commercial		1	$	47	$	47
Real estate - commercial		2		1,645		1,645
Real estate - residential		2		416		416
Consumer		1		23		23
Total		6	$	2,131	$	2,131

The troubled debt restructurings described above increased the allowance for loan and lease losses by $151,000 and resulted in no charge-offs during the nine months ended September 30, 2015.

There were no payment defaults on troubled debt restructurings within 12 months following the modification for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015.

8. ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company’s loan and lease portfolio allocated by management’s internal risk ratings as of September 30, 2016 and December 31, 2015 are summarized below:

September 30, 2016	Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)			Real Estate
	Commercial		Commercial		Multi-family		Construction		Residential
Grade:
Pass	$	30,334	$	169,327	$	50,442	$	6,684	$	13,014
Watch		1,416		21,371		485		10,181		1,797
Special mention		637		3,392		—		—		717
Substandard		2,785		719		—		—		465
Doubtful		—		—		—		—		—
Total	$	35,172	$	194,809	$	50,927	$	16,865	$	15,993

	Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
	Leases		Agriculture		Consumer				Total
Grade:
Pass	$	462	$	1,875	$	1,382			$	273,520
Watch		—		360		405				36,015
Special mention		—		—		221				4,967
Substandard		—		—		62				4,031
Doubtful		—		—		—				—
Total	$	462	$	2,235	$	2,070			$	318,533


December 31, 2015	Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)			Real Estate
	Commercial		Commercial		Multi-family		Construction		Residential
Grade:
Pass	$	32,216	$	172,755	$	23,001	$	6,371	$	10,593
Watch		1,073		17,318		493		8,162		2,099
Special mention		—		8,363		—		—		697
Substandard		2,906		1,155		—		—		811
Doubtful or loss		—		—		—		—		—
Total	$	36,195	$	199,591	$	23,494	$	14,533	$	14,200

	Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
	Leases		Agriculture		Consumer				Total
Grade:
Pass	$	732	$	2,061	$	2,136			$	249,865
Watch		—		370		378				29,893
Special mention		—		—		433				9,493
Substandard		—		—		175				5,047
Doubtful or loss		—		—		—				—
Total	$	732	$	2,431	$	3,122			$	294,298

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


September 30, 2016				Real Estate										Other
(dollars in thousands)	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		(769	)		(64	)		250		39		(53	)		—		(13	)		(97	)		39		(668	)
Loans charged-off		—			(68	)		—		—		—			—		—			—			—		(68	)
Recoveries		658			14			—		—		—			—		—			72			—		744

Ending balance, September 30, 2016	$	749		$	2,251		$	478	$	852	$	266		$	1	$	64		$	53		$	269	$	4,983

Ending balance:
Individually evaluated for impairment	$	3		$	365		$	3	$	—	$	140		$	—	$	30		$	23		$	—	$	564

Ending balance:
Collectively evaluated for impairment	$	746		$	1,886		$	475	$	852	$	126		$	1	$	34		$	30		$	269	$	4,419

Loans

Ending balance	$	35,172		$	194,809		$	50,927	$	16,865	$	15,993		$	462	$	2,235		$	2,070		$	—	$	318,533

Ending balance:
Individually evaluated for impairment	$	31		$	15,286		$	483	$	—	$	2,163		$	—	$	360		$	34		$	—	$	18,357

Ending balance:
Collectively evaluated for impairment	$	35,141		$	179,523		$	50,444	$	16,865	$	13,830		$	462	$	1,875		$	2,036		$	—	$	300,176

Allowance for Loan and Lease Losses

Beginning balance, June 30, 2016	$	808		$	2,647		$	329	$	725	$	283		$	1	$	73		$	60		$	206	$	5,132
Provision for loan losses		(644	)		(330	)		149		127		(17	)		—		(9	)		(7	)		63		(668	)
Loans charged off		—			(68	)		—		—		—			—		—			—			—		(68	)
Recoveries		585			2			—		—		—			—		—			—			—		587

Ending balance, September 30, 2016	$	749		$	2,251		$	478	$	852	$	266		$	1	$	64		$	53		$	269	$	4,983

December 31, 2015				Real Estate											Other
(dollars in thousands)	Commercial			Commercial			Multi-Family		Construction			Residential			Leases			Agriculture		Consumer			Unallocated			Total
Ending balance:
Individually evaluated for impairment	$	25		$	598		$	5	$	—		$	204		$	—		$	38	$	29		$	—		$	899

Ending balance:
Collectively evaluated for impairment	$	835		$	1,771		$	223	$	813		$	115		$	1		$	39	$	49		$	230		$	4,076

Loans

Ending balance	$	36,195		$	199,591		$	23,494	$	14,533		$	14,200		$	732		$	2,431	$	3,122		$	—		$	294,298

Ending balance:
Individually evaluated for impairment	$	121		$	17,866		$	488	$	—		$	2,452		$	—		$	370	$	68		$	—		$	21,365

Ending balance:
Collectively evaluated for impairment	$	36,074		$	181,725		$	23,006	$	14,533		$	11,748		$	732		$	2,061	$	3,054		$	—		$	272,933

September 30, 2015				Real Estate											Other
(dollars in thousands)	Commercial			Commercial			Multi-Family		Construction			Residential			Leases			Agriculture		Consumer			Unallocated			Total

Allowance for Loan and Lease Losses

Beginning balance, January 1, 2015	$	1,430		$	2,317		$	130	$	583		$	399		$	2		$	62	$	124		$	254		$	5,301
Provision for loan losses		38			(58	)		27		160			(133	)		—			14		(24	)		(24	)		—
Loans charged off		(609	)		—			—		—			—			(1	)		—		(6	)		—			(616	)
Recoveries		88			41			—		—			113			—			—		2			—			244

Ending balance, September 30, 2015	$	947		$	2,300		$	157	$	743		$	379		$	1		$	76	$	96		$	230		$	4,929

Allowance for Loan and Lease Losses

Beginning balance, June 30, 2015	$	1,652		$	1,968		$	107	$	807		$	385		$	1		$	50	$	122		$	267		$	5,359
Provision for loan losses		(161	)		331			50		(64	)		(119	)		—			26		(26	)		(37	)		—
Loans charged off		(609	)		—			—		—			—			—			—		—			—			(609	)
Recoveries		65			1			—		—			113			—			—		—			—			179

Ending balance, September 30, 2015	$	947		$	2,300		$	157	$	743		$	379		$	1		$	76	$	96		$	230		$	4,929

The Company’s aging analysis of the loan and lease portfolio at September 30, 2016 and December 31, 2015 are summarized below:

September 30, 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	$	—	$	—	$	—	$	—	$	35,172	$	35,172		—	$	—
Real estate:
Commercial		—		—		446		446		194,363		194,809		—		719
Multi-family		—		—		—		—		50,927		50,927		—		—
Construction		—		—		—		—		16,865		16,865		—		—
Residential		—		—		—		—		15,993		15,993		—		—
Other:
Leases		—		—		—		—		462		462		—		—
Agriculture		—		—		—		—		2,235		2,235		—		—
Consumer		36		35		—		71		1,999		2,070		—		59
Total	$	36	$	35	$	446	$	517	$	318,016	$	318,533	$	—	$	778

December 31, 2015 (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	$	—	$	—	$	30	$	30	$	36,165	$	36,195	$	—	$	30
Real estate:
Commercial		—		359		499		858		198,733		199,591		—		1,155
Multi-family		—		—		—		—		23,494		23,494		—		—
Construction		—		—		—		—		14,533		14,533		—		—
Residential		—		—		338		338		13,862		14,200		—		338
Other:
Leases		—		—		—		—		732		732		—		—
Agriculture		—		—		—		—		2,431		2,431		—		—
Consumer		367		—		—		367		2,755		3,122		—		120

Total	$	367	$	359	$	867	$	1,593	$	292,705	$	294,298	$	—	$	1,643

9. BORROWING ARRANGEMENTS

At September 30, 2016, 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 September 30, 2016 or December 31, 2015.

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 $14,000,000 were outstanding from the FHLB at September 30, 2016, bearing interest rates ranging from 0.75% to 1.52% and maturing between October 31, 2016 and July 13, 2020. Advances totaling $11,000,000 were outstanding from the FHLB at December 31, 2015, bearing interest rates ranging from 0.45% to 1.91% and maturing between January 19, 2016 and July 12, 2019. Remaining amounts available under the borrowing arrangement with the FHLB at September 30, 2016 and December 31, 2015 totaled $87,263,000 and $78,326,000, 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 September 30, 2016 and December 31, 2015 were $11,698,000 and $11,371,000, respectively. There were no advances outstanding under this borrowing arrangement as of September 30, 2016 and December 31, 2015.

10. 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 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 and nine-month periods ended September 30, 2016 and 2015.

Federal and state income taxes for the quarter ended September 30, 2016 increased $182,000 (22.6%) from $807,000 in the third quarter of 2015 to $989,000 in the third quarter of 2016 and increased $252,000 (12.5%) from $2,022,000 in the nine months ended September 30, 2015 to $2,274,000 for the nine months ended September 30, 2016. The combined federal and state effective tax rate for the quarter ended September 30, 2016 was 35.3%, compared to 35.5% for the third quarter of 2015. For the nine months ended September 30, 2016, the combined federal and state effective tax rate was 33.6% compared to 34.7% for the nine months ended September 30, 2015. The lower effective tax rate for both periods in 2016 compared to 2015 resulted from an increase in tax exempt loan interest. Tax exempt loan interest was $189,000 in the third quarter of 2016 compared to $99,000 in the third quarter of 2015 and tax exempt loan interest was $534,000 in the first nine months of 2016 compared to $222,000 in the first nine months of 2015. The benefit from tax exempt loan interest was partially offset by higher taxable income in both periods as well. Taxable income was $2,802,000 in the third quarter of 2016 compared to $2,276,000 in the third quarter of 2015 and taxable income was $6,763,000 in the first nine months of 2016 compared to $5,833,000 in the first nine months of 2015.

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 September 30, 2016 and December 31, 2015. 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:
September 30, 2016	Amount		Level 1		Level 2		Level 3		Total

Financial assets:
Cash and due from banks	$	43,094	$	43,094	$	—	$	—	$	43,094
Interest-bearing deposits in banks		999		—		999		—		999
Available-for-sale securities		253,502		23		253,479		—		253,502
Held-to-maturity securities		508		—		551		—		551
FHLB stock		3,779		N/A		N/A		N/A		N/A
Net loans and leases:		313,302		—		—		316,221		316,221
Accrued interest receivable		1,792		—		866		926		1,792

Financial liabilities:
Deposits:
Noninterest-bearing	$	209,586	$	209,586	$	—	$	—	$	209,586
Savings		60,605		60,605		—		—		60,605
Money market		131,655		131,655		—		—		131,655
NOW accounts		61,398		61,398		—		—		61,398
Time Deposits		82,921		—		83,429		—		83,429
Short-term borrowings		5,000		5,000		—		—		5,000
Long-term borrowings		9,000		—		9,080		—		9,080
Accrued interest payable		40		—		40		—		40

	Carrying		Fair Value Measurements Using:
December 31, 2015	Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	23,727	$	23,727	$	—	$	—	$	23,727
Interest-bearing deposits in banks		750		—		752		—		752
Available-for-sale securities		273,819		24		273,795		—		273,819
Held-to-maturity securities		623		—		669		—		669
FHLB stock		3,779		N/A		N/A		N/A		N/A
Net loans and leases:		289,102		—		—		292,444		292,444
Accrued interest receivable		1,885		—		1,077		808		1,885

Financial liabilities:
Deposits:
Noninterest-bearing	$	190,548	$	190,548	$	—	$	—	$	190,548
Savings		59,061		59,061		—		—		59,061
Money market		135,186		135,186		—		—		135,186
NOW accounts		61,324		61,324		—		—		61,324
Time Deposits		84,571		—		85,165		—		85,165
Short-term borrowings		3,500		3,500		—		—		3,500
Long-term borrowings		7,500		—		7,502		—		7,502
Accrued interest payable		60		—		60		—		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 September 30, 2016 and December 31, 2015:

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 September 30, 2016 and December 31, 2015.

Assets and liabilities measured at fair value on a recurring and non-recurring basis along with any related gain or loss recognized in the income statement due to fair value changes 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)

September 30, 2016
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
US Government Agencies and Sponsored Agencies	$	228,733	$	—	$	228,733	$	—	$	—
Obligations of states and political subdivisions		23,173		—		23,173		—		—
Corporate bonds		1,529		—		1,529		—		—
Corporate stock		67		23		44		—		—
Total recurring	$	253,502	$	23	$	253,479	$	—	$	—

Assets and liabilities measured on a nonrecurring basis:
Impaired loans:
Real estate:
Commercial	$	4,271	$	—	$	—	$	4,271	$	—
Residential		336		—		—		336		(68	)
Other real estate owned Land		653		—		—		653		(376	)
Total nonrecurring	$	5,260	$	—	$	—	$	5,260	$	(444	)

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

December 31, 2015
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
US Government Agencies and Sponsored Agencies	$	246,185	$	—	$	246,185	$	—	$	—
Corporate Debt securities		1,551		—		1,551
Obligations of states and political subdivisions		26,013		—		26,013		—		—
Corporate stock		70		24		46		—		—
Total recurring	$	273,819	$	24	$	273,795	$	—	$	—

Assets and liabilities measured on a nonrecurring basis:
Impaired loans:
Real estate:
Commercial	$	3,900	$	—	$	—	$	3,900	$	(334	)

Other real estate owned
Commercial		2,522		—		—		2,522		—
Land		1,029		—		—		1,029		—
Total nonrecurring	$	7,451	$	—	$	—	$	7,451	$	(334	)

There were no significant transfers between Levels 1 and 2 during the three-month and nine-month periods ended September 30, 2016 or the twelve months ended December 31, 2015.

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.

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 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

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 eliminates 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 will also require 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 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

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). 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.

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, 2015 and September 30, 2016 and its income and expense accounts for the three-month and nine-month periods ended September 30, 2016 and 2015. 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, including the United States Department of the Treasury, to deal with challenges to 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 nonperforming 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 further 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, 2015, 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.

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 items), 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, 2015, 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 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 September 30, 2016 or 2015 or for the three-month and nine-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 99 full-time employees as of September 30, 2016.

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 addition, American River Bank operates a loan production office in Santa Clara County, in the city of San Jose.

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”). The Dodd-Frank Act includes a permanent increase to $250,000 as the maximum FDIC insurance limit per depositor retroactive to January 1, 2008 and the extension of unlimited FDIC insurance for noninterest-bearing transaction accounts effective December 31, 2010 through December 31, 2012. On November 9, 2010, the FDIC implemented a final rule to permanently increase the maximum insurance limit to $250,000 under the Dodd-Frank Act. The unlimited insurance coverage for noninterest bearing transaction accounts was not extended and terminated on December 31, 2012. The $250,000 maximum deposit insurance amount per depositor remains in effect.

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 2015 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 $1,813,000 for the quarter ended September 30, 2016, which was an increase of $344,000 compared to $1,469,000 reported for the same period of 2015. Diluted earnings per share for the third quarter of 2016 were $0.27 compared to $0.20 recorded in the third quarter of 2015. The return on average equity (“ROAE”) and the return on average assets (“ROAA”) for the third quarter of 2016 were 8.62% and 1.13%, respectively, as compared to 6.71% and 0.92%, respectively, for the same period in 2015.

Net income for the nine months ended September 30, 2016 and 2015 was $4,489,000 and $3,811,000, respectively, with diluted earnings per share of $0.66 in 2016 and $0.50 in 2015. For the first nine months of 2016, ROAE was 7.12% and ROAA was 0.95% compared to 5.81% and 0.82%, respectively, for the same period in 2015.

Total assets of the Company increased by $19,206,000 (3.0%) from $634,460,000 at December 31, 2015 to $653,846,000 at September 30, 2016. Net loans totaled $313,302,000 at September 30, 2016, an increase of $24,200,000 (8.4%) from $289,102,000 at December 31, 2015. Deposit balances at September 30, 2016 totaled $546,165,000, an increase of $15,475,000 (2.9%) from the $530,690,000 at December 31, 2015.

The Company ended the third quarter of 2016 with a leverage capital ratio of 10.6%, a Tier 1 capital ratio of 18.4%, and a total risk-based capital ratio of 19.7% compared to 11.0%, 19.3%, and 20.6%, respectively, at December 31, 2015. 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 September 30,						For the nine months ended September 30,
	2016			2015			2016			2015
Interest income*	$	5,412		$	5,553		$	16,152		$	15,912
Interest expense		(223	)		(240	)		(678	)		(732	)
Net interest income*		5,189			5,313			15,474			15,180
Provision for loan and lease losses		668			—			668			—
Noninterest income		399			490			1,516			1,582
Noninterest expense		(3,346	)		(3,432	)		(10,552	)		(10,660	)
Provision for income taxes		(989	)		(807	)		(2,274	)		(2,022	)
Tax equivalent adjustment		(108	)		(95	)		(343	)		(269	)
Net income	$	1,813		$	1,469		$	4,489		$	3,811

Average total assets	$	635,561		$	630,704		$	632,120		$	618,551
Net income (annualized) as a percentage of average total assets		1.13	%		0.92	%		0.95	%		0.82	%

* 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 3.65% for the three months ended September 30, 2016, 3.72% for the three months ended September 30, 2015, 3.64% for the nine months ended September 30, 2016 and 3.62% for the nine months ended September 30, 2015.

The fully taxable equivalent interest income component for the third quarter of 2016 decreased $141,000 (2.5%) to $5,412,000 compared to $5,553,000 for the three months ended September 30, 2015. The decrease in the fully taxable equivalent interest income for the third quarter of 2016 compared to the same period in 2015 is broken down by rate (down $244,000) and volume (up $103,000). The yield on earning assets decreased from 3.89% during the third quarter of 2015 to 3.81% during the third quarter of 2016. The primary driver in this rate decrease was a decrease in the yield on loans which saw a decrease from 5.07% in the third quarter of 2015 to 5.01% in the third quarter of 2016 and a decrease in the yield on investments, which saw a decrease from 2.69% in the third quarter of 2015 to 2.38% in the third quarter of 2016. While average loans increased $20,410,000 (7.1%) from $286,914,000 during the third quarter of 2015 to $307,324,000 during the third quarter of 2016, 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 $103,000 was primarily from loans ($252,000) partially offset by a decrease in investment balances ($149,000). The average balance of earning assets decreased $1,652,000 (0.3%) from $566,722,000 in the third quarter of 2015 to $565,070,000 in the third quarter of 2016. When compared to the third quarter of 2015, average investment securities decreased $22,061,000 (7.9%) from $278,808,000 for the third quarter of 2015 compared to $256,747,000 for the third quarter of 2016.

Total fully taxable equivalent interest income for the nine months ended September 30, 2016 increased $240,000 (1.5%) to $16,152,000 compared to $15,912,000 for the nine months ended September 30, 2015. The breakdown of the fully taxable equivalent interest income for the nine months ended September 30, 2016 over the same period in 2015 resulted from a decrease in rate (down $380,000) and an increase in volume (up $620,000). Average earning assets increased $8,139,000 (1.5%) from $559,936,000 during the first nine months of 2015 to $568,075,000 for the same period in 2016. During the nine month periods, the Company also experienced a decrease in interest income due to the rates earned on loans (down $258,000) and investments (down $123,000). The yield on loans decreased from 5.06% in 2015 to 4.93% in 2016 and the yield on investments decreased from 2.59% in 2015 to 2.52% in 2016. Part of this decrease in the yield on investments was related to an increase in the mortgage refinance market and the related faster amortization of the premiums paid on the mortgage related bonds, as well as, a special one-time cash dividend in 2015 from the Federal Home Loan Bank of San Francisco (the “FHLB”) in the amount of $136,000. Average loan balances increased by $26,079,000 (9.5%) from $275,566,000 during 2015 to $301,645,000 during 2016. The volume increase of $620,000 is primarily related to the above mentioned increase in loan balances from 2015 to 2016, which accounted for a $971,000 increase in interest income, which was partially offset by a decrease in average investment balances. Average investment securities decreased $17,941,000 (6.3%) from $283,377,000 for the first nine months of 2015 compared to $265,436,000 for the first nine months of 2016.

Interest expense was $17,000 (7.1%) lower in the third quarter of 2016 versus the prior year period, decreasing from $240,000 to $223,000. The average balances on interest bearing liabilities were $347,173,000 or $12,713,000 (3.5%) lower in the third quarter of 2016 compared to $359,886,000 for the same quarter in 2015. The decrease in balances caused a $15,000 reduction on the overall interest expense while the decrease in rates caused a $2,000 reduction. Rates paid on interest bearing liabilities did not change during the periods as the Company’s cost of funds was 0.26% for both quarters.

Interest expense was $54,000 (7.4%) lower in the nine-month period ended September 30, 2016 decreasing from $732,000 in 2015 to $678,000 in 2016. The decrease is related to rates (down $53,000) and volume (down $1,000). The average balances on interest-bearing liabilities were $349,503,000 (down $6,625,000 or 1.9% lower) in the nine-month period ended September 30, 2016 compared $356,128,000 in the same period in 2015. Although the average balances were lower, the decreased balances did not result in a significant decrease in interest expense as the decrease in interest bearing deposit balances (down $26,000) was offset by an increase in other borrowings which increased by $25,000. Average other borrowings increased $3,330,000 (22.8%) from $14,606,000 in the first nine months of 2015 to $17,936,000 in the first nine months of 2016. The primary decrease in interest expense relates to lower rates (down $53,000). Rates paid on interest bearing liabilities decreased 1 basis point from 0.27% to 0.26% for 2015 compared to 2016.

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 September 30,	2016								2015
(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)	$	289,795		$	3,617		4.97	%	$	275,313		$	3,534		5.09	%
Tax-exempt loans and leases (2)		17,529			254		5.76	%		11,601			130		4.45	%
Taxable investment securities		232,858			1,340		2.29	%		252,760			1,633		2.56	%
Tax-exempt investment securities (2)		23,811			199		3.32	%		25,965			254		3.88	%
Corporate stock (2)		78			—		—			83			—		—
Federal funds sold		—			—		—			—			—		—
Investments in time deposits		999			2		0.80	%		1,000			2		0.79	%
Total earning assets		565,070			5,412		3.81	%		566,722			5,553		3.89	%
Cash & due from banks		37,343								29,465
Other assets		38,618								40,010
Allowance for loan & lease losses		(5,470	)							(5,493	)
	$	635,561							$	630,704

Liabilities & Shareholders’ Equity
Interest bearing liabilities:
Interest checking and money market	$	188,292			35		0.07	%	$	196,395			61		0.12	%
Savings		60,925			4		0.03	%		58,579			6		0.04	%
Time deposits		82,771			140		0.67	%		86,684			135		0.62	%
Other borrowings		15,185			44		1.15	%		18,228			38		0.83	%
Total interest bearing liabilities		347,173			223		0.26	%		359,886			240		0.26	%
Noninterest bearing demand deposits		198,655								177,737
Other liabilities		6,031								6,253
Total liabilities		551,859								543,876
Shareholders’ equity		83,702								86,828
	$	635,561							$	630,704
Net interest income & margin (3)				$	5,189		3.65	%				$	5,313		3.72	%

(1)

Loan interest includes loan fees of $102,000 and $157,000, respectively, during the three months ended September 30, 2016 and September 30, 2015. Average loan balances include nonperforming loans.

(2)

Includes taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% for 2016 and 2015.

(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 (92 days) and annualized to actual days in the year (366 days in 2016 and 365 days in 2015).

Nine Months Ended September 30,	2016								2015
(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)	$	284,782		$	10,424		4.89	%	$	267,256		$	10,130		5.07	%
Tax-exempt loans and leases (2)		16,863			716		5.67	%		8,310			297		4.78	%
Taxable investment securities		241,129			4,333		2.40	%		257,103			4,706		2.45	%
Tax-exempt investment securities (2)		24,233			660		3.64	%		26,196			763		3.89	%
Corporate stock (2)		74			14		25.27	%		78			12		20.57	%
Federal funds sold		—			—		—			—			—		—
Interest-bearing deposits in banks		994			5		0.67	%		993			4		0.54	%
Total earning assets		568,075			16,152		3.80	%		559,936			15,912		3.80	%
Cash & due from banks		31,209								24,347
Other assets		38,027								39,650
Allowance for loan & lease losses		(5,191	)							(5,382	)
	$	632,120							$	618,551

Liabilities & Shareholders’ Equity
Interest-bearing liabilities:
Interest checking and money market	$	188,405			110		0.08	%	$	195,563			192		0.13	%
Savings		59,940			14		0.03	%		58,464			23		0.05	%
Time deposits		83,222			421		0.68	%		87,495			409		0.62	%
Other borrowings		17,936			133		0.99	%		14,606			108		0.99	%
Total interest-bearing liabilities		349,503			678		0.26	%		356,128			732		0.27	%
Noninterest-bearing demand deposits		192,103								168,546
Other liabilities		6,262								6,157
Total liabilities		547,868								550,831
Shareholders’ equity		84,252								87,720
	$	632,120							$	618,551
Net interest income & margin (3)				$	15,474		3.64	%				$	15,180		3.62	%

(1)

Loan interest includes loan fees of $197,000 and $250,000, respectively, during the nine months ended September 30, 2016 and September 30, 2015. Average loan balances include nonperforming loans.

(2)

(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 (274 days for 2016 and 273 days for 2015) and annualized to actual days in the year (366 days for 2016 and 365 days for 2015).

Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
Three Months Ended September 30, 2016 over 2015 (dollars in thousands)
Increase (decrease) due to change in:
	Volume			Rate (4)			Net Change
Interest-earning assets:
Taxable loans and leases (1)	$	186		$	(103	)	$	83
Tax-exempt loans and leases (2)		66			58			124
Taxable investment securities		(128	)		(165	)		(293	)
Tax exempt investment securities (3)		(21	)		(34	)		(55	)
Corporate stock		—			—			—
Interest-bearing deposits in banks		—			—			—
Total		103			(244	)		(141	)
Interest-bearing liabilities:
Interest checking and money market		(3	)		(23	)		(26	)
Savings deposits		—			(2	)		(2	)
Time deposits		(6	)		11			5
Other borrowings		(6	)		12			6
Total		(15	)		(2	)		(17	)
Interest differential	$	118		$	(242	)	$	(124	)

Nine Months Ended September 30, 2016 over 2015 (dollars in thousands)
Increase (decrease) due to change in:
	Volume			Rate (4)			Net Change
Interest-earning assets:
Taxable loans and leases (1)	$	665		$	(371	)	$	294
Tax-exempt loans and leases (2)		306			113			419
Taxable investment securities		(293	)		(80	)		(373	)
Tax exempt investment securities (3)		(57	)		(46	)		(103	)
Corporate stock		(1	)		3			2
Interest-bearing deposits in banks		—			1			1
Total		620			(380	)		240
Interest-bearing liabilities:
Interest checking and money market		(7	)		(75	)		(82	)
Savings deposits		1			(10	)		(9	)
Time deposits		(20	)		32			12
Other borrowings		25			—			25
Total		(1	)		(53	)		(54	)
Interest differential	$	621		$	(327	)	$	294

(1)

The average balance of non-accruing loans is immaterial as a percentage of total loans and, as such, has been included in net loans.

(2)

Loan fees of $102,000 and $157,000, respectively, during the three months ended September 30, 2016 and September 30, 2015, and loan fees of $197,000 and $250,000, respectively, during the nine months ended September 30, 2016 and September 30, 2015, 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 experienced net loan and lease recoveries of $519,000 or 0.67% (on an annualized basis) of average loans and leases for the three months ended September 30, 2016 compared to net loan and lease losses of $430,000 or 0.59% (on an annualized basis) of average loans and leases for the three months ended September 30, 2015. As a result of the loan recoveries experienced in 2016, the Company reversed $668,000 from the allowance for loan and lease losses during the third quarter. The Company did not provide any provision for loan and lease losses for the third quarter of 2015. For the first nine months of 2016, the Company reversed $668,000 from the loan and lease loss allowance and net loan and lease recoveries were $676,000 or 0.30% (on an annualized basis) of average loans and leases outstanding in 2016 compared to net loan and lease losses of $372,000 or 0.18% (on an annualized basis) of average loans and leases outstanding in the first nine months of 2015. 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 September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Service charges on deposit accounts	$	124	$	132	$	381	$	376
Gain on sale/call/impairment of securities		33		33		314		251
Merchant fee income		98		98		277		285
Bank owned life insurance		80		80		239		239
Income from OREO properties		—		87		106		248
Other		64		60		199		183
Total noninterest income	$	399	$	490	$	1,516	$	1,582

Noninterest income decreased $91,000 (18.6%) to $399,000 for the three months ended September 30, 2016 compared to $490,000 for the three months ended September 30, 2015. The decrease from the third quarter of 2015 to the third quarter of 2016 was primarily related to a decrease in rental income from OREO properties which decreased $87,000 (100.0%) from $87,000 in 2015 to zero in 2016. The decrease in OREO income resulted from the sale of the Bank’s only remaining income producing OREO property in the first quarter of 2016.

For the nine months ended September 30, 2016, noninterest income decreased $66,000 (4.2%) from $1,582,000 to $1,516,000. The decrease from the first nine months of 2015 compared to the same period in 2016 was primarily related to the decrease in rental income from OREO properties which declined $142,000 (57.3%) from $248,000 in 2015 to $106,000 in 2016.

Noninterest Expense

Noninterest expense decreased $86,000 (2.5%) from $3,432,000 in the third quarter of 2015 to $3,346,000 in the third quarter of 2015. Salary and employee benefits expense decreased $112,000 (5.1%) from $2,185,000 during the third quarter of 2015 to $2,073,000 during the third quarter of 2016. The decrease in salaries and benefits resulted from a lower number of full time equivalent employees and the associated benefit and taxes. Average full-time equivalent employees decreased from 100 in the third quarter of 2015 to 98 in the third quarter of 2016. Occupancy expense increased $1,000 (0.3%) and furniture and equipment expense decreased $6,000 (3.5%) from the third quarter of 2015 to the third quarter of 2016. FDIC assessments decreased $6,000 (7.2%) from the third quarter of 2015 to the third quarter of 2016. OREO related expenses decreased $88,000 during the third quarter of 2016 from $58,000 in the third quarter of 2015 to a credit of $30,000 in the third quarter of 2016. The primary reason for the decrease in OREO related expenses was the reduction in OREO properties reducing carrying costs as well as a gain on sale of $43,000 recorded in the third quarter of 2016. The gain on sale was greater than the operating costs for the quarter resulting in the credit balance. Other expenses increased $125,000 (19.5%) to $766,000 in the third quarter of 2016 compared to $641,000 in the third quarter of 2015. Much of the increase is related to higher legal fees and network administration fees. Legal fees increased from $17,000 to $43,000 and is related to the resolution of a former loan relationship. The increased network administration fees increased from $69,000 to $114,000 and is related to additional work performed by the network vendor, including full hosting of the Company’s computer network. The fully taxable equivalent efficiency ratio for the third quarter of 2016 increased to 59.9% from 59.1% for the third quarter of 2015.

Noninterest expense for the nine-month period ended September 30, 2016 was $10,552,000 compared to $10,660,000 for the same period in 2015 for a decrease of $108,000 (1.0%). Salaries and employee benefits expense decreased $166,000 (2.6%) from $6,500,000 for the nine months ended September 30, 2015 to $6,334,000 for the same period in 2016. The decrease in salaries and benefit expense is related to lower incentive accruals, which decreased $81,000 (18.0%) from $450,000 in 2015 to $369,000 in 2016, as not all of the incentive targets have been met as of September 30, 2016. In addition, fees paid to employment agencies for placement fees decreased $50,000 (69.4%) from $72,000 in the first nine months of 2015 to $22,000 in the first nine months of 2016. Occupancy expense decreased $3,000 (0.3%) and furniture and equipment expense decreased $34,000 (6.5%). FDIC assessments decreased $6,000 (2.5%). OREO related expenses increased $70,000 (26.9%) during 2016 to $330,000, from $260,000 in 2015. The increase in OREO expenses is directly related to a $376,000 property write-down partially offset by the $169,000 gain on sale from two properties sold during 2016. Other expenses increased $31,000 (1.4%) from $2,246,000 for the nine months ended September 30, 2015 to $2,277,000 for the same period in 2016. The increase in other expenses resulted from higher legal fees and network administration fees. Legal fees increased from $102,000 to $126,000 and network administration fees increased from $210,000 to $322,000. The overhead efficiency ratio (fully taxable equivalent) for the first nine months of 2016 was 62.1% as compared to 63.6% in the same period of 2015.

Provision for Income Taxes

Federal and state income taxes for the quarter ended September 30, 2016 increased $182,000 (22.6%) from $807,000 in the third quarter of 2015 to $989,000 in the third quarter of 2016 and increased $252,000 (12.5%) from $2,022,000 in the nine months ended September 30, 2015 to $2,274,000 for the nine months ended September 30, 2016. The combined federal and state effective tax rate for the quarter ended September 30, 2016 was 35.3%, compared to 35.5% for the third quarter of 2015. For the nine months ended September 30, 2016, the combined federal and state effective tax rate was 33.6% compared to 34.7% for the nine months ended September 30, 2015. The lower effective tax rate for 2016 compared to 2015 resulted from an increase in tax exempt loan interest. Tax exempt loan interest was $534,000 in the first nine months of 2016 compared to $222,000 in the first nine months of 2015. The higher provision for taxes in 2016 resulted from a higher level of taxable income. Taxable income increased $930,000 (15.9%) from $5,833,000 in 2015 to $6,763,000 in 2016.

Balance Sheet Analysis

The Company’s total assets were $653,846,000 at September 30, 2016 compared to $634,460,000 at December 31, 2015, representing an increase of $19,386,000 (3.1%). The average assets for the three months ended September 30, 2016 were $635,561,000, which represents an increase of $4,857,000 (0.8%) from the balance of $630,704,000 during the three-month period ended September 30, 2015. The average assets for the nine months ended September 30, 2016 were $632,120,000, which represents an increase of $13,569,000 (2.2%) from the average balance of $618,551,000 during the nine-month period ended September 30, 2015.

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 September 30, 2016 and December 31, 2015.

Table Five: Investment Securities Composition

(dollars in thousands)

Available-for-sale (at fair value)	September 30, 2016		December 31, 2015
Debt securities:
U.S. Government Agencies and Sponsored Agencies	$	228,733	$	246,185
Obligations of states and political subdivisions		23,173		26,013
Corporate bonds		1,529		1,551
Corporate stock		67		70
Total available-for-sale investment securities	$	253,502	$	273,819

Held-to-maturity (at amortized cost)
Debt securities:
U.S. Government Agencies and Sponsored Agencies	$	508	$	623
Total held-to-maturity investment securities	$	508	$	623

Net unrealized gains on available-for-sale investment securities totaling $5,596,000 were recorded, net of $2,239,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at September 30, 2016 and net unrealized gains on available-for-sale investment securities totaling $3,504,000 were recorded, net of $1,401,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2015.

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 adding $66 million in new loans during the first nine months of 2016. This production was partially offset by normal pay downs and payoffs, but still resulted in an overall net increase in net loans and leases of $24.2 million (8.4%) from December 31, 2015. Included in the $66 million in new loans in 2016 was a $13.2 million pool of performing multi-family loans purchased from another financial institution. These purchased loans consisted of seven loans primarily in the Company’s lending footprint and two loans in San Diego County. 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. Table Six below summarizes the composition of the loan portfolio as of September 30, 2016 and December 31, 2015.

Table Six: Loan and Lease Portfolio Composition

(dollars in thousands)	September 30, 2016						December 31, 2015						Change in			Percentage
	$			%			$			%			dollars			change
Commercial	$	35,172			11	%	$	36,195			12	%	$	(1,023	)		(2.8	%)
Real estate
Commercial		194,809			61	%		199,591			68	%		(4,782	)		(2.4	%)
Multi-family		50,927			16	%		23,494			8	%		27,433			116.8	%
Construction		16,865			5	%		14,533			5	%		2,332			16.0	%
Residential		15,993			5	%		14,200			5	%		1,793			12.6	%
Lease financing receivable		462			0	%		732			0	%		(270	)		(36.9	%)
Agriculture		2,235			1	%		2,431			1	%		(196	)		(8.1	%)
Consumer		2,070			1	%		3,122			1	%		(1,052	)		(33.7	%)
Total loans and leases		318,533			100	%		294,298			100	%		24,235			8.2	%
Deferred loan and lease fees, net		(248	)					(221	)					(27	)
Allowance for loan and lease losses		(4,983	)					(4,975	)					(8	)
Total net loans and leases	$	313,302					$	289,102					$	24,200			8.4	%

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.

“Subprime” real estate loans generally refer to residential mortgages made to higher-risk borrowers with lower credit and/or income histories. Within the banking industry, many of these loans were originated with adjustable interest rates that reset upward after an introductory period. These “subprime” loans coupled with declines in housing prices led to an increase in default rates resulting in many instances of increased foreclosure rates as the adjustable interest rates reset to higher levels. The Company did not have any such “subprime” loans at September 30, 2016 and December 31, 2015.

Risk Elements

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

Ultimately, underlying trends in economic and business cycles influence credit quality. American River Bank’s business is concentrated in the Sacramento Metropolitan Statistical Area, which is a diversified economy, but with a large State of California government presence and employment base; in Sonoma County, which is focused on businesses within the two communities in which the Bank has offices (Santa Rosa and Healdsburg); and in Amador County, in which the Bank is primarily focused on businesses within the three communities in which it has offices (Jackson, Pioneer, and Ione). The economy of Sonoma County is diversified with professional services, manufacturing, agriculture and real estate investment and construction, while the economy of Amador County is reliant upon government, services, retail trade, manufacturing industries and Indian gaming. The Company has a presence in the Santa Clara, Contra Costa, and Alameda County markets and services these markets through a loan production office in San Jose. In October 2016, the sole business development employee located at this office terminated employment and the Company is currently looking for a replacement. 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 87% of the Company’s loan and lease portfolio at September 30, 2016 and 86% as of December 31, 2015. Management believes that the residential land portion of the Company’s loan portfolio carries more than the normal credit risk, due primarily to curtailed demand for new and resale residential property, relative to pre-recession, 2006/2007 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 September 30, 2016, 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 $778,000 or 0.24% of total loans and leases. The $778,000 in nonperforming loans and leases was made up of five loans. Three of those loans totaling $297,000 were current (less than 30 days past due pursuant to their original or modified terms). Nonperforming loans and leases were $1,643,000 or 0.56% of total loans and leases at December 31, 2015. Specific reserves of $83,000 were held on the nonperforming loans at September 30, 2016 and specific reserves of $28,000 were held on the nonperforming loans at December 31, 2015.

The overall level of nonperforming loans decreased $66,000 (4.0%) to $1,577,000 during the first quarter of 2016 from $1,643,000 at December 31, 2015, and decreased further by $522,000 (33.1%) during the second quarter of 2016 and by $277,000 (26.3%) during the third quarter of 2016. At December 31, 2015, the Company’s nonperforming loans included four real estate loans totaling $1,493,000; four consumer loans totaling $120,000 and a single commercial loan totaling $30,000. At September 30, 2016, the Company’s nonperforming loans included two real estate loans totaling $719,000 and three consumer loans totaling $59,000.

Table Seven below sets forth nonaccrual loans and loans past due 90 days or more as of September 30, 2016 and December 31, 2015.

Table Seven: Nonperforming Loans and Leases
(dollars in thousands)	September 30,		December 31,
	2016		2015
Past due 90 days or more and still accruing:
Commercial	$	—	$	—
Real estate		—		—
Lease financing receivable		—		—
Agriculture		—		—
Consumer		—		—
Nonaccrual:
Commercial		—		30
Real estate		719		1,493
Lease financing receivable		—		—
Agriculture		—		—
Consumer		59		120
Total nonperforming loans	$	778	$	1,643

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 September 30, 2016. Management is not aware of any potential problem loans, which were accruing and current at September 30, 2016, 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.

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 September 30, 2016, the recorded investment in loans and leases that were considered to be impaired totaled $18,357,000, which includes $17,604,000 in performing loans and leases. Of the total impaired loans of $18,357,000, loans totaling $11,569,000 were deemed to require no specific reserve and loans totaling $6,788,000 were deemed to require a related valuation allowance of $564,000. Of the $11,569,000 impaired loans that did not carry a specific reserve there were $4,160,000 in loans or leases that had previous partial charge-offs and $7,409,000 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 $21,365,000 at December 31, 2015. Of the total impaired loans of $21,365,000, loans totaling $12,607,000 were deemed to require no specific reserve and loans totaling $8,758,000 were deemed to require a related valuation allowance of $899,000.

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 third quarter of 2016, the Company had net recoveries of $519,000 and a negative provision of $668,000 (or a reduction of $668,000 in the allowance for loan and lease losses). In the third quarter of 2015, the Company had net loan and lease losses of $430,000 with no provision.

During the quarters ended September 30, 2016 and 2015, there were no loans that were modified as troubled debt restructurings. There were no payment defaults during the three months ended September 30, 2016 or September 30, 2015 on troubled debt restructurings made in the preceding twelve months. At September 30, 2016 and December 31, 2015 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. 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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015

Average loans and leases outstanding	$	307,324		$	286,914		$	301,645		$	275,566

Allowance for loan and lease losses at beginning of period	$	5,132		$	5,359		$	4,975		$	5,301

Loans and leases charged off:
Commercial		—			(609	)		—			(609	)
Real estate		(68	)		—			(68	)		—
Lease financing receivable		—			—			—			(1	)
Agriculture		—			—			—			—
Consumer		—			—			—			(6	)
Total		(68	)		(609	)		(68	)		(616	)
Recoveries of loans and leases previously charged off:
Commercial		585			65			658			88
Real estate		2			114			14			154
Lease financing receivable		—			—			—			—
Agriculture		—			—			—			—
Consumer		—			—			72			2
Total		587			179			744			244
Net loans and leases (recovered) charged off		(519	)		430			(676	)		372
Reductions to allowance charged credited to operating expenses		(668	)		—			(668	)		—
Allowance for loan and lease losses at end of period	$	4,983		$	4,929		$	4,983		$	4,929
Ratio of net charge-offs to average loans and leases outstanding (annualized)		-0.67	%		0.59	%		-0.30	%		0.18	%
Provision of allowance for loan and lease losses to average loans and leases outstanding (annualized)		-0.86	%		0.00	%		-0.30	%		0.00	%
Allowance for loan and lease losses to loans and leases net of deferred fees at end of period		1.57	%		1.67	%		1.57	%		1.67	%

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 $4,983,000 or 1.57% of total loans and leases at September 30, 2016 compared to $4,975,000 or 1.69% of total loans and leases at December 31, 2015. 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 ALLL as a percentage of nonperforming loans and leases was 640.5% at September 30, 2016 and 302.8% at December 31, 2015. The ALLL as a percentage of impaired loans and leases was 27.1% at September 30, 2016 and 23.3% at December 31, 2015. Of the total nonperforming and impaired loans and leases outstanding as of September 30, 2016, there were $4,160,000 in loans or leases that had been reduced by partial charge-offs of $720,000. 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.

Other Real Estate Owned

At September 30, 2016, the Company had one other real estate owned (“OREO”) property totaling $653,000. This is a reduction of $2,898,000 (81.6%) from the $3,551,000 reported as of December 31, 2015. At September 30, 2015, the Company had four properties totaling $3,781,000. During the third quarter of 2016, the Company did not foreclose on any property and sold one OREO property that had a book value of $243,000 and recorded a $43,000 gain on sale. There were no valuation adjustments to the book value of the existing OREO properties during the third quarter of 2016. The Company believes that the OREO property owned at September 30, 2016 is carried approximately at fair value.

Deposits

At September 30, 2016, total deposits were $546,165,000 representing a $15,475,000 (2.9%) increase from the December 31, 2015 balance of $530,690,000. The Company’s deposit growth plan for 2016 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. During the first nine months of 2016, the Company experienced deposit account increases in noninterest-bearing accounts ($19,038,000 or 10.0%), interest-bearing checking ($74,000 or 0.1%), and savings ($1,544,000 or 2.6%) and decreases in money market accounts ($3,531,000 or 2.6%), and time deposits ($1,650,000 or 2.0%). The decrease in money market accounts during the period is partially related to the Company’s decision to allow some higher rate promotional accounts to exit the Bank.

Other Borrowed Funds

Other borrowings outstanding as of September 30, 2016 and December 31, 2015, consist of advances (both long-term and short-term) from the FHLB. Table Nine below summarizes these borrowings.

Table Nine: Other Borrowed Funds

(dollars in thousands)
	September 30, 2016					December 31, 2015
	Amount		Rate			Amount		Rate
Short-term borrowings:
FHLB advances	$	5,000		0.93	%	$	3,500		1.28	%
Long-term borrowings:
FHLB advances	$	9,000		1.37	%	$	7,500		1.24	%

The maximum amount of short-term borrowings at any month-end during the first nine months of 2016 and 2015 was $25,500,000 and $3,500,000, respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of rates and maturities on FHLB advances (dollars in thousands):

	Short-term			Long-term
Amount	$	5,000		$	9,000
Maturity		2016-2017			2017 to 2020
Weighted average rates		0.93	%		1.37	%

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.

At September 30, 2016, shareholders’ equity was $84,666,000, representing a decrease of $1,409,000 (1.6%) from $86,075,000 at December 31, 2015. The decrease resulted from repurchases of common stock exceeding the additions from other comprehensive income, net income for the period, and the stock based compensation. The Company’s ratio of Total Risk-Based Capital to risk adjusted assets was 19.7% at September 30, 2016 and 20.3% at December 31, 2015. Its Tier 1 Risk-Based Capital to risk-adjusted assets was 18.4% at September 30, 2016 and 19.3% at December 31, 2015. Its Leverage Ratio was 10.6% at September 30, 2016 and 11.0% at December 31, 2015. Table Ten below lists the Company’s and American River Bank’s capital ratios at September 30, 2016 and December 31, 2015 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	September 30, 2016			December 31, 2015			Minimum Regulatory Capital Requirements			Well-Capitalized Minimum Requirements
American River Bankshares

Leverage Ratio		10.6	%		11.0	%		4.0	%		N/A
Tier 1 Risk-Based Capital		18.4	%		19.3	%		6.0	%		N/A
Total Risk-Based Capital		19.7	%		20.3	%		8.0	%		N/A


American River Bank

Leverage Ratio		10.6	%		11.0	%		4.0	%		5.0	%
Common Equity Tier 1 Risk-Based Capital		18.1	%		19.1	%		4.5	%		6.5	%
Tier 1 Risk-Based Capital		18.1	%		19.1	%		6.0	%		8.0	%
Total Risk-Based Capital		19.4	%		20.3	%		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 September 30, 2016 and December 31, 2015.

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 2016 is 0.625% 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%).

On January 20, 2016, the Company approved and authorized a stock repurchase program for 2016 (the “2016 Program”). The repurchase target of 5% of the outstanding common shares was reached in the first quarter of 2016 and on April 20, 2016, the Company approved and authorized an increase to this stock repurchase program. The repurchase target was also 5% of the outstanding common shares and was reached in the second quarter of 2016. See Part II, Item 2, for additional disclosure regarding the 2016 Program.

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 September 30, 2016 and 2015.

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 September 30, 2016 were approximately $23,697,000 and $238,000, respectively. Such loan commitments relate primarily to revolving lines of credit and other commercial loans and to real estate construction loans. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company’s sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale and/or pledged for secured borrowings. At September 30, 2016, consolidated liquid assets totaled $228.1 million or 34.9% of total assets compared to $229.7 million or 36.2% of total assets on December 31, 2015. 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 September 30, 2016, the Company had $17,000,000 available under these credit lines. Additionally, the Bank is a member of the FHLB. At September 30, 2016, the Bank could have arranged for up to $101,263,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At September 30, 2016, the Bank had advances, borrowings and commitments (including letters of credit) outstanding of $14,000,000, leaving $87,263,000 available under these FHLB secured borrowing arrangements. The 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 September 30, 2016, the Bank’s borrowing capacity at the Federal Reserve Bank was $11,698,000. 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 September 30, 2016 and December 31, 2015, 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 $23,935,000 and $26,968,000 at September 30, 2016 and December 31, 2015, respectively. As a percentage of net loans and leases these off-balance sheet items represent 7.6% and 9.3%, respectively.

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

Website Access

American River Bankshares 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 Securities and Exchange Commission (the “SEC”). These reports are free of charge and can be accessed through the address www.americanriverbank.com by clicking on the Investor Relations/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 other above-referenced reports filed 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 September 30, 2016, the Company does not consider the fluctuations from the base case, to have a material impact on the Company’s projected results and are within the tolerance levels outlined in the Company’s interest rate risk polices. The simulations of earnings do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as reasonable estimates of interest rate risk.

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 September 30, 2016. 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 September 30, 2016, there have been no changes in the Company’s internal control over financial reporting that have materially 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, 2015, filed with the Securities and Exchange Commission on February 26, 2016.

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

On January 21, 2015, the Company approved and authorized a stock repurchase program for 2015 (the “2015 Program”). The 2015 Program authorized the repurchase during 2015 of up to 5% of the outstanding shares of the Company’s common stock, or approximately 404,481 shares based on the 8,089,615 shares outstanding as of December 31, 2014. During the first quarter of 2015, the Company repurchased the targeted amount of 404,481 shares of its common stock at an average price of $9.70 per share. On July 17, 2015, the Company approved and authorized an increase in the 2015 Program. The increase authorized the repurchase during the remainder of 2015 of up to 5% of the outstanding shares of the Company’s common stock, or approximately 386,508 shares based on the 7,730,157 shares outstanding as of June 30, 2015. During the third quarter of 2015, the Company repurchased the targeted amount of 386,508 shares of its common stock at an average price of $10.03 per share.

On January 20, 2016, the Company approved and authorized a stock repurchase program for 2016 (the “2016 Program”). The 2016 Program authorized the repurchase during 2016 of up to 5% of the outstanding shares of the Company’s common stock, or approximately 367,182 shares based on the 7,343,649 shares outstanding as of December 31, 2015. During the first quarter of 2016, the Company repurchased the targeted amount of 367,182 shares of its common stock at an average price of $10.29 per share. On April 20, 2016, the Company approved and authorized an increase in the 2016 Program. The increase authorized the repurchase during the remainder of 2016 of up to 5% of the outstanding shares of the Company’s common stock, or approximately an additional 349,715 shares based on the 6,994,300 shares outstanding as of March 31, 2016. During the second quarter of 2016, the Company repurchased the targeted amount of 349,715 shares of its common stock at an average price of $10.29 per share. Repurchases under the 2016 Program were made from time to time by the Company in the open market as conditions allowed. All such transactions were structured to comply with SEC Rule 10b-18 and all shares repurchased under the 2016 Program have been retired. The following table lists shares repurchased during the quarter ended September 30, 2016 and the maximum amount available to repurchase under the repurchase plan. As a result of the completion of the 2016 Program, there is no data to report in the table below.

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 July 1 through July 31, 2016	—	—	—	—
Month #2 August 1 through August 31, 2016	—	—	—	—
Month #3 September 1 through September 30, 2016	—	—	—	—
Total	—	—	—	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)

Lease agreement between American River Bank and LUM YIP KEE, Limited (formerly Sandalwood Land Company) dated August 28, 1996, related to 2240 Douglas Boulevard, Suite 100, Roseville, California (**) and Amendment No. 1 thereto dated July 28, 2006, incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 31, 2006.

*(10.4)

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.

*(10.5)

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.

*(10.6)

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.

*(10.7)

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.

*(10.8)

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.

*(10.9)

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.

*(10.10)

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

*(10.11)

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.

(10.12)

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.

*(10.13)

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.

*(10.14)

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.

(10.15)

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.

(10.16)

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.

(10.17)

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.

*(10.18)

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; and 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.

*(10.19)

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.

*(10.20)

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.

*(10.21)

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.

*(10.22)

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.

*(10.23)

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.

(10.24)

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.

	(10.25)		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.

(10.26)

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.

*(10.27)

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.

*(10.28)

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.

*(10.29)

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.

(10.30)

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.

*(10.31)

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.

(10.32)

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.

(10.33)

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.

*(10.34)

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.

*(10.35)

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.

*(10.36)

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.

(10.37)

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

November 3, 2016	By:	/s/ DAVID T. TABER
	David T. Taber
	President and
	Chief Executive Officer

	AMERICAN RIVER BANKSHARES

November 3, 2016	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.	56

31.2	Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	57

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.	58

EXHIBIT 31.1

Certifications under Section 302 of the Sarbanes-Oxley Act of 2002

I, David T. Taber, certify that:

I have reviewed this quarterly report on Form 10-Q of American River Bankshares;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	Date: November 3, 2016
	By: /s/ DAVID T. TABER
	President and Chief Executive Officer

EXHIBIT 31.2

Certifications under Section 302 of the Sarbanes-Oxley Act of 2002

I, Mitchell A. Derenzo, certify that:

I have reviewed this quarterly report on Form 10-Q of American River Bankshares;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	Date: November 3, 2016
	By: /s/ MITCHELL A. DERENZO
	Executive Vice President and Chief Financial Officer

EXHIBIT 32.1

Certification of

American River Bankshares

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

regarding Quarterly Report on Form 10-Q for the quarter ended September 30, 2016

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of American River Bankshares, a California corporation (the “Company”), does hereby certify that:

The Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

Information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 3, 2016	By: /s/ DAVID T. TABER
	David T. Taber
	President and Chief Executive Officer

Dated: November 3, 2016	By: /s/ MITCHELL A. DERENZO
	Mitchell A. Derenzo
	Executive Vice President and
	Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to American River Bankshares and will be retained by American River Bankshares and furnished to the Securities and Exchange Commission or its staff upon request.

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Form 10-Q AMERICAN RIVER BANKSHARE For: Sep 30

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