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, 2020~~March 31, 2021

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)~~report.)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, no par value	AMRB	Nasdaq Global Select Market

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 such files).

Yes x No o

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

	Large ~~Accelerated Filer~~accelerated filer o	Accelerated ~~Filer~~filer ox
	Non-accelerated ~~filer~~Filer ox	Smaller ~~Reporting Company~~reporting company x
		Emerging ~~Growth Company~~growth company o

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

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

Yes o No x

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

No par value Common Stock – ~~5,937,529~~5,968,994shares outstanding at ~~November 5, 2020~~May 6, 2021

AMERICAN RIVER BANKSHARES

INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED ~~SEPTEMBER 30, 2020~~MARCH 31, 2021

Part I. Page

Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 50
Item 4. Controls and Procedures 51

Part II.

Item 1. Legal Proceedings 52
Item 1A. Risk Factors 52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
Item 3. Defaults Upon Senior Securities 52
Item 4. Mine Safety Disclosures 52
Item 5. Other Information 52
Item 6. Exhibits 53

Signatures 54

Exhibits

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

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.		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	46
Item 4.	Controls and Procedures	47

Part II.

Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	51

Signatures		51

Exhibits

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

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

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICAN RIVER BANKSHARES

CONSOLIDATED BALANCE SHEET

(Unaudited)

(dollars in thousands)	September 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
ASSETS

Cash and due from banks	$	16,559	$	15,258	$	18,927	$	14,030
Interest-bearing deposits in banks		56,469		2,552		78,871		28,479
Total cash and cash equivalents		73,028		17,810		97,798		42,509
Investment securities:
Available-for-sale, at fair value		266,917		261,965		301,628		306,966
Held-to-maturity, at amortized cost; fair value of $16 at September 30, 2020 and $266 at December 31, 2019		15		248
Loans, less allowance for loan losses of $6,616 at September 30, 2020 and $5,138 at December 31, 2019		471,647		393,802
Held-to-maturity, at amortized cost fair value of $11 in 2021 and $13 in 2020						10		12
Loans, less allowance for loan losses of $6,696 at March 31, 2021 and $6,628 at December 31, 2020						468,718		471,853
Premises and equipment, net		948		1,191		956		1,002
Federal Home Loan Bank stock		4,212		4,259		4,212		4,212
Goodwill and other intangible assets		16,321		16,321
Goodwill						16,321		16,321
Other real estate owned		846		846		800		800
Bank owned life insurance		16,021		15,763		16,162		16,101
Accrued interest receivable and other assets		7,979		8,148		9,458		9,215
Total assets	$	857,934	$	720,353	$	916,063	$	868,991

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
Noninterest bearing	$	295,862	$	227,055	$	339,714	$	330,095
Interest-bearing		432,969		377,782		448,855		414,082
Total deposits		728,831		604,837		788,569		744,177

Short-term borrowings		12,000		9,000		7,000		7,000
Long-term borrowings		15,460		10,500		13,787		13,787
Accrued interest payable and other liabilities		9,959		13,107		13,816		10,932

Total liabilities		766,250		637,444		823,172		775,896


Shareholders’ equity:
Shareholders' equity:
Preferred stock, 0 par value; 10,000,000 shares authorized; NaN outstanding		—		—
Common stock, 0 par value; 20,000,000 shares authorized; issued and outstanding – 5,938,009 shares at September 30, 2020 and 5,898,878 shares at December 31, 2019		30,855		30,536
Common stock, 0 par value; 20,000,000 shares authorized; issued and outstanding – 5,962,466 shares at March 31, 2021 and 5,937,529 shares at December 31, 2020						31,066		30,961
Retained earnings		54,290		50,581		58,209		55,978
Accumulated other comprehensive income, net of taxes		6,539		1,792		3,616		6,156

Total shareholders’ equity		91,684		82,909
Total liabilities and shareholders’ equity	$	857,934	$	720,353
Total shareholders' equity						92,891		93,095
Total liabilities and shareholders' equity					$	916,063	$	868,991

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
2020 2019 2020 2019
Interest income:
Interest and fees on loans:
Taxable $ 5,275 $ 4,397 $ 15,034 $ 12,329
Exempt from Federal income taxes 202 186 635 501
Interest on Federal funds sold — — — 5
Interest on deposits in banks 19 71 73 151
Interest and dividends on investment securities:
Taxable 1,523 1,846 4,894 5,756
Exempt from Federal income taxes 36 55 109 221
Total interest income 7,055 6,555 20,745 18,963
Interest expense:
Interest on deposits 261 545 1,074 1,558
Interest on borrowings 74 82 243 300
Total interest expense 335 627 1,317 1,858

Net interest income 6,720 5,928 19,428 17,105

Provision for loan losses 445 120 1,485 480

Net interest income after provision for loan losses 6,275 5,808 17,943 16,625

Noninterest income:
Service charges on deposit accounts 115 149 381 409
Gain on sale or call of securities — 9 38 74
Other noninterest income 259 259 743 766
Total noninterest income 374 417 1,162 1,249

Noninterest expense:
Salaries and employee benefits 2,889 2,898 8,265 8,423
Occupancy 258 256 773 768
Furniture and equipment 140 120 422 400
Federal Deposit Insurance Corporation assessments 62 (47 ) 138 48
Expenses related to other real estate owned 4 7 27 15
Other expense 870 859 2,730 2,847
Total noninterest expense 4,223 4,093 12,355 12,501

Income before provision for income taxes 2,426 2,132 6,750 5,373

Provision for income taxes 647 561 1,798 1,380

Net income $ 1,779 $ 1,571 $ 4,952 $ 3,993

Basic earnings per share $ 0.30 $ 0.27 $ 0.84 $ 0.68
Diluted earnings per share $ 0.30 $ 0.27 $ 0.84 $ 0.68

(dollars in thousands, except per share data)
For the three months ended March 31,
2021 2020
Interest income:
Interest and fees on loans:
Taxable $ 5,604 $ 4,675
Exempt from Federal income taxes 193 230
Interest on deposits in banks 8 34
Interest and dividends on investment securities:
Taxable 1,515 1,739
Exempt from Federal income taxes 34 37
Total interest income 7,354 6,715
Interest expense:
Interest on deposits 160 440
Interest on borrowings 62 87
Total interest expense 222 527

Net interest income 7,132 6,188

Provision for loan losses — 495

Net interest income after provision for loan losses 7,132 5,693

Noninterest income:
Service charges on deposit accounts 164 155
Gain on sale of securities 172 38
Other noninterest income 255 259
Total noninterest income 591 452

Noninterest expense:
Salaries and employee benefits 2,762 2,865
Occupancy 259 256
Furniture and equipment 134 143
Federal Deposit Insurance Corporation assessments 54 27
Expenses related to other real estate owned 4 5
Other expense 850 920
Total noninterest expense 4,063 4,216

Income before provision for income taxes 3,660 1,929

Provision for income taxes 1,013 497

Net income $ 2,647 $ 1,432

Basic earnings per share $ 0.45 $ 0.24
Diluted earnings per share $ 0.45 $ 0.24

See notes to Unaudited Consolidated Financial Statements
4

AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)

(dollars in thousands)
For the periods ended September 30, Three months Nine months
For the three months ended March 31,
2020 2019 2020 2019 2021 2020
Net income $ 1,779 $ 1,571 $ 4,952 $ 3,993 $ 2,647 $ 1,432
Other comprehensive (loss) income:
(Decrease) increase in net unrealized gains on investment
securities (83 ) 972 6,777 6,849 (3,434 ) 4,053
Deferred tax benefit (expense) 24 (287 ) (2,003 ) (2,025 ) 1,016 (1,198 )
(Decrease) increase in net unrealized gains on investment securities, net of tax (59 ) 685 4,774 4,824 (2,418 ) 2,855

Reclassification adjustment for realized gains included in net income — (9 ) (38 ) (74 ) (172 ) (38 )
Tax effect — 3 11 22 50 11
Realized gains, net of tax — (6 ) (27 ) (52 ) (122 ) (27 )

Total other comprehensive (loss) income (59 ) 679 4,747 4,772 (2,540 ) 2,828

Comprehensive income $ 1,720 $ 2,250 $ 9,699 $ 8,765 $ 107 $ 4,260

See ~~Notes~~notes to Unaudited Consolidated Financial Statements
5

AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CHANGES IN ~~SHAREHOLDERS’~~SHAREHOLDERS' EQUITY
(Unaudited)

Accumulated
(dollars in thousands, except per share data) Other Total
Common Stock Retained Comprehensive Shareholders’
Shares Amount Earnings Income (Loss) Equity
Balance, January 1, 2019 5,858,428 $ 30,103 $ 46,494 $ (1,876 ) $ 74,721

Net income 3,993 3,993
Other comprehensive income, net of tax: 4,772 4,772
Cash dividends ($0.17 per share) (1,000 ) (1,000 )
Net restricted stock award activity and related compensation expense 33,660 257 257
Stock options exercised 11,140 95 95
Stock option compensation expense 11 11

Balance, September 30, 2019 5,903,228 $ 30,466 $ 49,487 $ 2,896 $ 82,849

Balance, January 1, 2020 5,898,878 $ 30,536 $ 50,581 $ 1,792 $ 82,909

Net income 4,952 4,952
Other comprehensive income, net of tax: 4,747 4,747
Cash dividends ($0.21 per share) (1,243 ) (1,243 )
Net restricted stock award activity and related compensation expense 39,131 315 315
Stock option compensation expense 4 4

Balance, September 30, 2020 5,938,009 $ 30,855 $ 54,290 $ 6,539 $ 91,684
Accumulated
(dollars in thousands) Other Total
Common Stock Retained Comprehensive Shareholders'
Shares Amount Earnings Income (Loss) Equity
Balance, January 1, 2020 5,898,878 $ 30,536 $ 50,581 $ 1,792 $ 82,909
Net income 1,432 1,432
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities 2,828 2,828

Cash dividends ($0.07 per share) (413 ) (413 )
Net restricted stock award activity and related compensation expense 19,497 96 96
Stock option compensation expense 2 2

Balance, March 31, 2020 5,918,375 $ 30,634 $ 51,600 $ 4,620 $ 86,854

Balance, January 1, 2021 5,937,529 $ 30,961 $ 55,978 $ 6,156 $ 93,095
Net income 2,647 2,647
Other comprehensive loss, net of tax:
Net change in unrealized gains on available-for-sale investment securities (2,540 ) (2,540 )

Cash dividends ($0.07 per share) (416 ) (416 )
Net restricted stock award activity and related compensation expense 22,761 90 90
Stock options exercised 2,176 15 15

Balance, March 31, 2021 5,962,466 $ 31,066 $ 58,209 $ 3,616 $ 92,891

See Notes to Unaudited Consolidated Financial Statements
6

AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF ~~CHANGES IN SHAREHOLDERS’ EQUITY~~
~~(Unaudited)~~
Accumulated
(dollars in thousands, except per share data) Other Total
Common Stock Retained Comprehensive Shareholders’
Shares Amount Earnings Income (Loss) Equity
Balance, July 1, 2019 5,903,228 $ 30,373 $ 48,329 $ 2,217 $ 80,919

Net income 1,571 1,571
Other comprehensive income, net of tax 679 679
Cash dividends ($0.07 per share) (413 ) (413 )
Net restricted stock award activity and related compensation expense 90 90
Stock option compensation expense 3 3

Balance, September 30, 2019 5,903,228 $ 30,466 $ 49,487 $ 2,896 $ 82,849

Balance, July 1, 2020 5,938,009 $ 30,745 $ 52,927 $ 6,598 $ 90,270

Net income 1,779 1,779
Other comprehensive loss, net of tax (59 ) (59 )
Cash dividends ($0.07 per share) (416 ) (416 )
Net restricted stock award activity and related compensation expense 110 110

Balance, September 30, 2020 5,938,009 $ 30,855 $ 54,290 $ 6,539 $ 91,684
~~See Notes to Unaudited Consolidated Financial Statements~~
7
~~AMERICAN RIVER BANKSHARES~~
~~CONSOLIDATED STATEMENT OF~~ CASH FLOWS
(Unaudited)

(dollars in thousands)
For the nine months ended September 30, 2020 2019
Cash flows from operating activities:
Net income $ 4,952 $ 3,993
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,485 480
Increase (decrease) in deferred loan origination fees and costs, net 1,562 (454 )
Depreciation and amortization 331 170
Gain on sale of investment securities, net (38 ) (74 )
Amortization of investment security premiums and discounts, net 985 1,117
Increase in cash surrender values of life insurance policies (258 ) (247 )
Stock based compensation expense 319 268
(Increase) decrease in accrued interest receivable and other assets (2,327 ) 479
(Decrease) increase in accrued interest payable and other liabilities (2,645 ) 39

Net cash provided by operating activities 4,366 5,771

Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment securities 4,229 43,213
Proceeds from matured available-for-sale investment securities — 5,000
Purchases of available-for-sale investment securities (36,479 ) (56,978 )
Proceeds from principal repayments for available-for-sale investment securities 33,091 33,375
Proceeds from principal repayments for held-to-maturity investment securities 233 36
Net increase in loans (72,463 ) (34,077 )
Purchases of loans (8,429 ) (17,373 )
Net decrease (increase) in FHLB stock 47 (327 )
Purchases of equipment (88 ) (316 )

Net cash used in investing activities (79,859 ) (27,447 )
(dollars in thousands)
For the three months ended March 31,
2021 2020
Cash flows from operating activities:
Net income $ 2,647 $ 1,432
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses — 495
Increase (decrease) in deferred loan origination fees and costs, net 305 (64 )
Depreciation and amortization 48 219
Gain on sale of investment securities (172 ) (38 )
Amortization of investment security premiums and discounts, net 764 304
Increase in cash surrender values of life insurance policies (61 ) (84 )
Stock based compensation expense 90 98
Decrease (increase) in accrued interest receivable and other assets 651 (407 )
Decrease in accrued interest payable and other liabilities (239 ) (2,380 )

Net cash provided by (used in) operating activities 4,033 (425 )

Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment securities 11,048 4,229
Proceeds from matured available-for-sale investment securities 734 —
Purchases of available-for-sale investment securities (22,793 ) (4,987 )
Proceeds from principal repayments for available-for-sale investment securities 15,446 10,848
Proceeds from principal repayments for held-to-maturity investment securities 2 8
Net decrease in loans 4,115 8,164
Purchases of loans (1,285 ) (2,837 )
Purchases of equipment (2 ) (24 )

Net cash provided by investing activities 7,265 15,401

(Continued)
87

AMERICAN RIVER BANKSHARES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
(dollars in thousands)
For the nine months ended September 30, 2020 2019
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings deposits $ 128,808 $ 24,081
Net decrease in time deposits (4,814 ) (1,851 )
Net increase in short-term borrowings 3,000 —
Net increase to long-term borrowings 4,960 —
Proceeds from stock options exercised — 95
Cash dividends paid (1,243 ) (1,000 )

Net cash provided by financing activities 130,711 21,325

Increase (decrease) in cash and cash equivalents 55,218 (351 )

Cash and cash equivalents at beginning of year 17,810 29,733

Cash and cash equivalents at end of period $ 73,028 $ 29,382

Supplemental noncash disclosures:
Right of use asset and obligation recorded upon adoption of ASU 2016-02 $ — $ 3,570

Lease liabilities arising from obtaining right of use assets $ 508 $ —

Cash paid during the year for:
Interest expense $ 1,386 $ 1,682
Income taxes $ 1,765 $ 1,218
(dollars in thousands)
For the three months ended March 31,
2021 2020
Cash flows from financing activities:

Net increase in demand, interest-bearing and savings deposits $ 38,552 $ 1,193
Net increase (decrease) in time deposits 5,840 (2,894 )
Increase in short term borrowing — (4,000 )
Proceeds from exercised options 15 —
Cash dividends paid (416 ) (413 )

Net cash provided by (used in) financing activities 43,991 (6,114 )

Increase in cash and cash equivalents 55,289 8,862

Cash and cash equivalents at beginning of year 42,509 17,810

Cash and cash equivalents at end of period $ 97,798 $ 26,672

Supplemental noncash disclosures:

Cash paid during the year for:
Interest expense $ 227 $ 533
Income taxes $ — $ —

See Notes to Unaudited Consolidated Financial Statements
98

AMERICAN RIVER BANKSHARES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
~~September 30, 2020~~March 31, 2021

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”~~"Company") at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the results of its operations and ~~statement of comprehensive income for the three-month and nine-month periods ended September 30, 2020 and 2019,~~ its cash flows for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019 and its statement of changes in shareholders’ equity for the nine-month periods ended September 30, 2020 and 2019~~ 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~~Company's annual report on Form 10-K for the year ended December 31, ~~2019.~~2020. The results of operations for the three-month ~~and nine-month periods~~period ended ~~September 30, 2020~~March 31, 2021 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.

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 18, 2020, the Board of Directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan was approved by the Company’s shareholders on May 21, 2020. At ~~September 30, 2020~~March 31, 2021 there were ~~19,634~~42,395 restricted shares outstanding, zero stock options outstanding, and the total number of authorized shares that remain available for issuance under the 2020 Plan, including the ~~19,634~~42,395 restricted shares that have not yet vested, was 250,000. The 2020 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. Under the 2020 Plan, the awards may be granted to employees and directors under incentive and nonqualified option agreements, restricted stock agreements, and other award agreements. The unvested restricted stock under the 2020 Plan have dividend and voting rights. The 2020 Plan requires 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 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 one to five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding option awards are exercisable until their expiration. New shares are issued upon exercise of an option.

On March 17, 2010, the Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan was approved by the Company’s shareholders on May 20, 2010. At ~~September 30, 2020~~March 31, 2021 there were ~~29,958~~27,782 stock options and ~~41,790~~23,364 restricted shares outstanding. The 2010 Plan expired by its term on March 17, 2020. Accordingly, outstanding awards under the 2010 Plan are exercisable and will continue to vest until their expiration, but no new awards may be granted under the 2010 Plan. The unvested restricted stock under the 2010 Plan have dividend and voting rights. The 2010 Plan required 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 expire on dates determined by the Board of Directors, but not later than ten years from the date of award. All of the stock options previously awarded under the 2010 Plan are fully vested. New shares are issued upon exercise of an option. The initial vesting period for restricted stock issued under the 2010 Plan was generally three to five years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors.
109

The award date fair value of awards is determined by the market price of the ~~Company’s~~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,~~March 31, 2021 and 2020, ~~and 2019,~~ the compensation cost recognized for equity compensation was $~~110,000~~90,000 and $~~93,000~~98,000, ~~respectively, and the~~respectively. The recognized tax benefit for equity compensation expense was $~~30,000~~27,000 and $~~25,000~~26,000, ~~respectively,~~ for the ~~same~~ three-month ~~periods. For the nine-month~~ periods ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, the compensation cost recognized for equity compensation was $319,000~~ ~~and $268,000, respectively, and the recognized tax benefit for equity compensation expense was $85,000~~ ~~and $69,000, respectively, for the nine-month periods ended September 30, 2020 and 2019.~~respectively.
At ~~September 30, 2020,~~March 31, 2021, there was no unrecognized pre-tax compensation cost related to nonvested stock option awards. At ~~September 30, 2020,~~March 31, 2021 the total compensation cost related to restricted stock awards not yet recorded ~~was~~is $~~573,000~~705,000. This amount will be recognized over the next ~~4.7~~4.25 years and the weighted average period of recognizing these costs is expected to be ~~1.2~~1.3 years.
Equity Plans Activity
Stock Options
There were no stock options awarded during the three-month ~~and nine-month~~ periods ended ~~September 30, 2020 or September 30, 2019.~~March 31, 2021 and 2020. A A summary of option activity under the Plans as of ~~September 30, 2020~~March 31, 2021 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, 2020 29,958 $ 8.79 4.4 years $ 182
Awarded — — — —
Exercised — — — —
Expired, forfeited or cancelled — — — —
Outstanding at September 30, 2020 29,958 $ 8.79 3.6 years $ 35

Vested at September 30, 2020 29,958 $ 8.79 3.6 years $ 35

Non-vested at September 30, 2020 — $ — — $ 0

Options Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term Aggregate
Intrinsic
Value ($000)
Outstanding at January 1, 2021 29,958 $ 8.79 3.4 years $ 131
Granted — — — —
Exercised (2,176 ) 7.07 — —
Expired, forfeited or cancelled — — — —
Outstanding at March 31, 2021 27,782 $ 8.93 3.3 years $ 205
Vested at March 31, 2021 27,782 $ 8.93 3.3 years $ 205
Non-vested at March 31, 2021 — $ — — $ 0
Restricted Stock

There were no22,761 shares of restricted stock awarded during the three-month ~~periods~~period ended ~~September 30, 2020~~March 31, 2021 and ~~2019. There were~~ ~~39,131~~ ~~and~~ ~~33,968~~19,497 shares of restricted stock awarded during the ~~nine-month periods~~three-month period ended ~~September 30, 2020 and 2019, respectively.~~
11
March 31, 2020. There were no15,501 and 9,000 restricted ~~share~~stock awards that were fully vested during the three-month periods ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019. There were~~ ~~21,678~~ ~~restricted share awards that were fully vested during the nine-month period ended September 30, 2020 and~~ ~~15,423~~ restricted share awards that were fully vested during the nine-month period ended September 30, 2019. There were zero restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2020, respectively. There were zero restricted share awards forfeited during the three-month and nine-month periods ended September 30, 2019, respectively. The intrinsic value of nonvested restricted ~~shares~~stock at ~~September 30, 2020~~March 31, 2021 was $~~612,000~~1,073,000.
10
Schedule of nonvested share activity

Restricted Stock
Shares        Weighted
Average Award
Date Fair Value
Nonvested at January 1, 2020 43,971 $ 13.95
Awarded 39,131 12.45
Less: Vested (21,678 ) 13.63
Less: Expired, forfeited or cancelled — 0
Nonvested at September 30, 2020 61,424 $ 13.11
Restricted Stock Shares Weighted
Average Grant
Date Fair Value
Nonvested at January 1, 2021 58,499 $ 13.03
Awarded 22,761 15.25
Less:  Vested 15,501 14.61
Less:  Expired, forfeited or cancelled — 0
Nonvested at March 31, 2021 65,759 $ 13.43
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,~~March 31, 2021 or 2020 ~~or 2019~~ or outstanding at ~~September 30, 2020~~March 31, 2021 or December 31, ~~2019.~~2020.

The intrinsic value used for stock options and restricted stock ~~awards~~ was derived from the market price of the Company’s common stock of $~~9.96~~16.31 as of ~~September 30, 2020.~~March 31, 2021.

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 $~~35,729,000~~ ~~and~~ 0 ~~standby letters of credit of at September 30, 2020 and loan commitments of approximately $40,324,000~~43,649,000 and standby letters of credit of approximately $~~300,000~~60,000 at March 31, 2021 and loan commitments of approximately $32,851,000 and standby letters of credit of zero at December 31, ~~2019.~~2020. 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 ~~2020~~2021 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, 2020~~March 31, 2021 or December 31, ~~2019.~~2020.
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 (~~5,876,585~~5,886,297 shares and ~~5,868,307~~5,858,919 shares for the three-month ~~and nine-month~~ periods ended ~~September 30,~~March 31, 2021 and 2020, ~~and~~ ~~5,852,463~~ ~~and~~ ~~5,845,242~~ ~~shares for the three-month and nine-month periods ended September 30, 2019)~~respectively). Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or restricted stock, result in the issuance of common stock. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of stock based ~~awards. There were~~ awards (~~9,719~~35,661 ~~and~~ ~~14,386, respectively, dilutive~~ shares for the three-month ~~and nine-month periods~~period ended ~~September 30, 2020~~March 31, 2021 and ~~18,453~~24,657 ~~and~~ ~~18,737, respectively, dilutive~~ shares for the three-month ~~and nine-month periods~~period ended ~~September 30, 2019.~~March 31, 2020). For the three-month ~~and nine-month~~ periods ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ there were ~~zero~~0 stock options 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.
1211

5. INVESTMENT SECURITIES
The amortized cost and estimated fair values of ~~Available-for-Sale and Held-to-Maturity~~ investment securities at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 consisted of the following (dollars in thousands):

Available-for-Sale
September 30, 2020 March 31, 2021
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value
Debt securities:
U.S. Government Agencies and Sponsored Entities $ 235,441 $ 8,991 $ (745 ) $ 243,687
U.S. Government Agencies and Sponsored Agencies $ 261,826 $ 6,326 $ (1,665 ) $ 266,487
Obligations of states and political subdivisions 15,445 917 — 16,362 16,257 495 (29 ) 16,723
U. S Treasury securities 11,663 — (99 ) 11,564
Corporate bonds 6,748 120 — 6,868 6,749 110 (5 ) 6,854
$ 257,634 $ 10,028 $ (745 ) $ 266,917 $ 296,495 $ 6,931 $ (1,798 ) $ 301,628

December 31, 2019 December 31, 2020
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value
Debt securities:
U.S. Government Agencies and Sponsored Entities $ 239,617 $ 3,371 $ (1,101 ) $ 241,887
U.S. Government Agencies and Sponsored Agencies $ 276,191 $ 8,474 $ (832 ) $ 283,833
Obligations of states and political subdivisions 13,308 212 (73 ) 13,447 15,288 1,013 — 16,301
Corporate bonds 6,496 135 — 6,631 6,748 85 (1 ) 6,832
$ 259,421 $ 3,718 $ (1,174 ) $ 261,965 $ 298,227 $ 9,572 $ (833 ) $ 306,966

Net unrealized gains on available-for-sale investment securities totaling ~~$9,283,000~~$5,133,000 were recorded, net of ~~$2,744,000~~$1,517,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at September 30, 2020. There were no sales or realized gains from the sale of available-for-sale investment securities for the three-month period ended September 30, 2020 and for the nine-month period ended September 30, 2020, proceedsMarch 31, 2021. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the three-month period ended March 31, 2021 totaled ~~$4,229,000~~$11,048,000 and ~~$38,000,~~$172,000, respectively. There were no transfers of available-for-sale investment securities for the three-month ~~and nine-month periods~~period ended ~~September 30, 2020.~~March 31, 2021.
Net unrealized gains on available-for-sale investment securities totaling ~~$2,544,000~~$8,739,000 were recorded, net of ~~$752,000~~$2,583,000 in tax liabilities, as accumulated other comprehensive loss within shareholders’ equity at December 31, ~~2019.~~2020. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities ~~totaled $13,538,000 and $9,000, respectively,~~ for the three-month period ended ~~September 30, 2019~~March 31, 2020 totaled $4,229,000 and ~~for the nine-month period ended September 30, 2019, proceeds and gross realized gains from the sale and call of available-for-sale investment securities totaled $43,213,000 and $74,000,~~$38,000, respectively. There were no transfers of available-for-sale investment securities for the three-month ~~and nine-month periods~~period ended ~~September 30, 2019.~~March 31, 2020.
Held-to-Maturity
March 31, 2021
Amortized
Cost         Gross
Unrealized
Gains        Gross
Unrealized
Losses        Estimated
Fair Value
Debt securities:
U.S. Government Agencies and Sponsored Agencies $ 10 $ 1 $ — $ 11

December 31, 2020
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value
Debt securities:
U.S. Government Agencies and Sponsored Agencies $ 12 $ 1 $ — $ 13
1312

~~Held-to-Maturity~~
September 30, 2020
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities:
U.S. Government Agencies and Sponsored Entities $ 15 $ 1 $ — $ 16

December 31, 2019
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities:
U.S. Government Agencies and Sponsored Entities $ 248 $ 18 $ — $ 266
There were no sales or transfers of held-to-maturity investment securities for the periods ended ~~September 30, 2020~~March 31, 2021 and ~~September 30, 2019.~~ March 31, 2020. Investment securities with unrealized losses at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 are summarized and classified according to the duration of the loss period as follows (dollars in thousands):

September 30, 2020 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 Entities $ 32,735 $ (255 ) $ 35,932 $ (490 ) $ 68,667 $ (745 )
$ 32,735 $ (255 ) $ 35,932 $ (490 ) $ 68,667 $ (745 )

December 31, 2019 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 Entities $ 65,082 $ (438 ) $ 38,380 $ (663 ) $ 103,462 $ (1,101 )
Obligations of states and political subdivisions 8,060 (73 ) — — 8,060 (73 )
$ 73,142 $ (511 ) $ 38,380 $ (663 ) $ 111,522 $ (1,174 )
Investment securities with unrealized losses
March 31, 2021 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 $ 81,619 $ (1,307 ) $ 21,350 $ (358 ) $ 102,969 $ (1,665 )
Obligations of states and political subdivisions 2,328 (29 ) — — 2,328 (29 )
U. S Treasury securities 11,564 (99 ) 11,564 (99 )
Corporate bonds 745 (5 ) — — 745 (5 )
$ 96,256 $ (1,440 ) $ 21,350 $ (358 ) $ 117,606 $ (1,798 )

December 31, 2020 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 $ 58,886 $ (403 ) $ 31,138 $ (429 ) $ 90,024 $ (832 )
Corporate bonds 749 (1 ) — — 749 (1 )
$ 59,635 $ (404 ) $ 31,138 $ (429 ) $ 90,773 $ (833 )
There were no held-to-maturity investment securities with unrealized losses as of ~~September 30, 2020~~March 31, 2021 or December 31, ~~2019.~~ 2020.
At ~~September 30, 2020,~~March 31, 2021, the Company held ~~205~~218 securities of which 1540 were in a loss position for less than twelve months and 2216 were in a loss position for twelve months or more. ~~Of the 15~~All 16 of these securities ~~in a loss position for less than twelve months, all~~ 15 ~~were U.S. Government Agencies and Sponsored Entities securities and~~consisted of ~~the 22 securities that were in a loss position for greater than twelve months, all~~ 22 ~~were U.S. Government Agencies and Sponsored Entities~~mortgage-backed securities.
At December 31, ~~2019,~~2020, the Company held ~~205~~204 securities of which 4129 were in a loss position for less than twelve months and 2921 were in a loss position for twelve months or more. These 2950 securities consisted of mortgage-backed and corporate ~~and municipal~~ securities.
The unrealized loss on the ~~Company’s~~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.
14
The amortized cost and estimated fair values of investment securities at ~~September 30, 2020~~March 31, 2021 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 $ 2,278 $ 2,309
After one year through five years 500 502
After five years through ten years 16,131 16,907
After ten years 3,284 3,512
22,193 23,230
Investment securities not due at a single maturity date:
U.S. Government Agencies and Sponsored Entities 235,441 243,687 $ 15 $ 16
$ 257,634 $ 266,917 $ 15 $ 16
13
The amortized cost and estimated fair value of investment securities
Available-for-Sale Held-to-Maturity
Amortized
Cost Estimated
Fair
Value Amortized
Cost Estimated
Fair
Value

Within one year $ 2,279 $ 2,292
After one year through five years 360 361
After five years through ten years 28,523 28,956
After ten years 3,507 3,532
34,669 35,141
Investment securities not due at a single maturity date:
U.S. Government Agencies and Sponsored Agencies 261,826 266,487 $ 10 $ 11
$ 296,495 $ 301,628 $ 10 $ 11
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 OTHER REAL ESTATE OWNED
At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020 the recorded investment in nonperforming loans was ~~zero.~~zero in both periods. Nonperforming loans include all such loans 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.
At March 31, 2021 and December 31, 2020, the recorded investment in other real estate owned (“OREO”) was $800,000. During the first quarter of 2021, the Company repossessed and sold two automobiles that had combined loan balances of $66,000 and took a combined charge to the Allowance for Loan Losses (“ALLL”) of $9,000. At March 31, 2021, the Company did not own any residential OREO properties nor were there any residential properties in the process of foreclosure. During 2021, the Company did not add any new or sell any of the OREO properties, nor did we decrease the book value on any of the properties. The March 31, 2021 OREO balance of $800,000 consisted of one parcel of land zoned for commercial use. Nonperforming loans and other assets and OREO at March 31, 2021 and December 31, 2020 are summarized as follows (in thousands):
Nonperforming assets
March 31,
2021 December 31,
2020
Nonaccrual loans that are current to terms (less than 30 days past due) $ — $ —
Nonaccrual loans that are past due — —
Loans past due 90 days and accruing interest — —
Other real estate owned 800 800
Other assets — —
Total nonperforming assets $ 800 $ 800

Nonperforming loans to total loans 0 0
Total nonperforming assets to total assets 0.09 % 0.09 %
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, 2020~~ Impaired loans as of and for the periods ended March 31, 2021 and December 31, ~~2019, the recorded investment in other real estate owned (“OREO”) was $846,000. At September 30,~~ 2020 the Company did not own any residential OREO properties nor were there any residential properties in the process of foreclosure. During the first nine months of 2020, the Company did not add any new or sell any of the OREO properties, nor did we decrease the book value on any of the properties. The September 30, 2020 OREO balance of $846,000 consisted of one parcel of land zoned for commercial use. Included in the other asset balance at June 30, 2020 was a repossessed automobile that was acquired in June 2020 with a book value of $19,000. The loan balance at the time of acquisition was $25,000 and was reduced by $6,000 though a charge to the allowance for loan losses. The asset was sold in early July 2020, for no further loss. Included in the other assets balance at December 30, 2019 is a repossessed automobile acquired in December 2019 with a book value of $517,000 that was sold in the first quarter of 2020 for no loss.
~~Nonperforming assets~~ ~~at September 30, 2020 and December 31, 2019~~ are summarized as follows:
(dollars in thousands) September 30,
2020 December 31,
2019
Nonaccrual loans that are current to terms (less than 30 days past due) $ — $ —
Nonaccrual loans that are past due — —
Loans past due 90 days and accruing interest — —
Other real estate owned 846 846
Other assets — 517
Total nonperforming assets $ 846 $ 1,363

Nonperforming loans to total loans 0.00 % 0.00 %
Total nonperforming assets to total assets 0.10 % 0.19 %
1514

Impaired loans as of and for the periods ended ~~September~~June 30, 2020 and December 31, 2019 are summarized as follows:
(dollars in thousands) As of September 30, 2020 As of December 31, 2019
(in thousands) As of March 31, 2021 As of December 31, 2020

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

With no related allowance recorded:
Real estate-commercial $ 5,102 $ 5,236 $ — $ 5,530 $ 5,664 $ — $ 5,046 $ 5,180 $ — $ 5,075 $ 5,209 $ —
Real estate-residential 313 400 — 318 405 — 311 398 — 312 399 —
Subtotal $ 5,415 $ 5,636 $ — $ 5,848 $ 6,069 $ — $ 5,357 $ 5,578 $ — $ 5,387 $ 5,608 $ —

With an allowance recorded:

Real estate-commercial $ 1,565 $ 1,625 $ 121 $ 1,622 $ 1,693 $ 133 $ 1,512 $ 1,572 $ 100 1,539 1,599 106
Real estate-residential 128 128 7 134 134 9 120 120 9 124 124 6
Subtotal $ 1,693 $ 1,753 $ 128 $ 1,756 $ 1,827 $ 142 $ 1,632 $ 1,692 $ 109 $ 1,663 $ 1,723 $ 112

Total:

Real estate-commercial $ 6,667 $ 6,861 $ 121 $ 7,152 $ 7,357 $ 133 $ 6,558 $ 6,752 $ 100 $ 6,614 $ 5,808 $ 106
Real estate-residential 441 528 7 452 539 9 431 518 9 436 523 6
$ 7,108 $ 7,389 $ 128 $ 7,604 $ 7,896 $ 142 $ 6,989 $ 7,270 $ 109 $ 7,050 $ 7,331 $ 112

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

Average Recorded Investments
for the three months ended Average Recorded Investments
for the nine months ended Average Recorded Investments
for the three months ended
September 30,
2020 September 30,
2019 September 30,
2020 September 30,
2019 March 31,
2021 March 31,
2020
Real estate-commercial $ 6,761 $ 7,231 $ 6,798 $ 7,347 $ 6,586 $ 7,125
Real estate-residential 451 460 447 465 433 449
Total $ 7,212 $ 7,691 $ 7,245 $ 7,812 $ 7,019 $ 7,574

The following table presents the interest income recognized on impaired loans for the periods indicated ~~(dollars in~~(in thousands):
Interest Income Recognized
for the three months ended Interest Income Recognized
for the nine months ended
September 30,
2020 September 30,
2019 September 30,
2020 September 30,
2019
Real estate-commercial $ 107 $ 110 $ 301 $ 329
Real estate-residential 5 7 19 19
Total $ 112 $ 117 $ 320 $ 348
Interest Income Recognized
for the three months ended
March 31,
2021 March 31,
2020
Real estate-commercial $ 99 $ 106
Real estate-residential 7 7
Total $ 106 $ 113

7. TROUBLED DEBT RESTRUCTURINGS
During the ~~three and nine-month~~ periods ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ there were no loans that were modified as troubled debt restructurings (“TDRs”).
There were no payment defaults during the three months ended March 31, 2021 or March 31, 2020 on ~~TDRs within 12 months following~~troubled debt restructurings made in the ~~modification for the three-month and nine-month periods ended September 30, 2020 and 2019.~~preceding twelve months. At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were no unfunded commitments on those loans considered troubled debt ~~restructured loans that had unfunded commitments.~~restructures. See also “Impaired Loans” in Item 2.
8. ALLOWANCE FOR LOAN LOSSES

The Company’s loan portfolio allocated by ~~management’s~~management's internal risk ratings as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 are summarized below (Commercial “Pass” loans includes ~~$75,804,000~~$57,486,000 and $55,546,000 in Paycheck Protection Program (“PPP”) loans at ~~September 30, 2020)~~March 31, 2021 and December 31, 2020, respectively):
1615

September 30, 2020 Credit Risk Profile by Internally Assigned Grade
(dollars in thousands) Real Estate
Commercial Commercial Multi-family Construction Residential
Grade:
Pass $ 115,561 $ 191,302 $ 42,739 $ 30,193 $ 22,958
Watch 195 32,501 — 311 4,762
Special mention 4,400 124 — — —
Substandard — 1,202 — — —
Doubtful — — — — —
Total $ 120,156 $ 225,129 $ 42,739 $ 30,504 $ 27,720

Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure
Agriculture Consumer Total
Grade:
Pass $ 6,138 $ 28,053 $ 436,944
Watch — 107 37,876
Special mention — — 4,524
Substandard — — 1,202
Doubtful — — —
Total $ 6,138 $ 28,160 $ 480,546

December 31, 2019 Credit Risk Profile by Internally Assigned Grade
March 31, 2021 Credit Risk Profile by Internally Assigned Grade
(dollars in thousands) Real Estate Real Estate
Commercial Commercial Multi-family Construction Residential Commercial Commercial Multi-family Construction Residential
Grade:
Pass $ 38,085 $ 208,140 $ 56,818 $ 23,169 $ 28,570 $ 87,216 $ 227,925 $ 45,254 $ 25,242 $ 31,234
Watch 4,915 6,329 — — 610 6,766 18,100 — — 515
Special mention 19 — — — — — 1,437 — — —
Substandard — 135 — — — — 1,198 — — —
Doubtful or loss — — — — — — — — — —
Total $ 43,019 $ 214,604 $ 56,818 $ 23,169 $ 29,180 $ 93,982 $ 248,660 $ 45,254 $ 25,242 $ 31,749

Credit Risk Profile by Internally Assigned Grade Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure
Other Credit Exposure Agriculture Consumer Total
Grade:
Pass $ 6,034 $ 26,462 $ 449,367
Watch — 133 25,514
Special mention — — 1,437
Substandard — — 1,198
Doubtful or loss — — —
Total $ 6,034 $ 26,595 $ 477,516

December 31, 2020 Credit Risk Profile by Internally Assigned Grade
(dollars in thousands) Real Estate
Agriculture Consumer Total Commercial Commercial Multi-family Construction Residential
Grade:
Pass $ 6,479 $ 26,317 $ 387,578 $ 90,021 $ 229,887 $ 48,760 $ 18,424 $ 31,760
Watch — 75 11,929 4,501 20,143 — — 569
Special mention — — 19 — 118 — — —
Substandard — — 135 — 1,200 — — —
Doubtful — — —
Doubtful or loss — — — — —
Total $ 6,479 $ 26,392 $ 399,661 $ 94,522 $ 251,348 $ 48,760 $ 18,424 $ 32,329

Credit Risk Profile by Internally Assigned Grade
Other Credit Exposure
Agriculture Consumer Total
Grade:
Pass $ 6,091 $ 28,668 $ 453,611
Watch — 136 25,349
Special mention — — 118
Substandard — — 1,200
Doubtful or loss — — —
Total $ 6,091 $ 28,804 $ 480,278
~~Tables above do not include loan fees of $2,283,000~~ ~~at September 30, 2020 and $721,000~~ ~~at December 31, 2019.~~
1716

The allocation of the Company’s allowance for loan losses and by portfolio segment and by impairment methodology are summarized below (Commercial loans includes ~~$75,804,000~~$57,486,000 and $55,546,000 in PPP loans at ~~September 30,~~March 31, 2021 and December 31, 2020, respectively, and do not carry any associated allowance for loan loss, as they are 100% guaranteed by the Small Business Administration (“SBA”)) )):
Schedule of Impaired Loans
September 30, 2020
March 31, 2021
(dollars in thousands) Real Estate Other Real Estate Other
Commercial Commercial Multi-family Construction Residential Agriculture Consumer Unallocated Total Commercial Commercial Multi-family Construction Residential Agriculture Consumer Unallocated Total
Allowance for Loan Losses

Beginning balance, January 1, 2020 $ 950 $ 1,906 $ 329 $ 986 $ 281 $ 107 $ 334 $ 245 $ 5,138
Beginning balance, January 1, 2021 $ 922 $ 3,466 $ 411 $ 687 $ 388 $ 85 $ 391 $ 278 $ 6,628
Provision for loan losses 62 1,136 12 189 44 (19 ) 59 2 1,485 (149 ) (61 ) (34 ) 236 (1 ) — (19 ) 28 —
Loans charged-off (27 ) — — — — — (6 ) — (33 ) — — — — — — (9 ) — (9 )
Recoveries 13 13 — — — — — — 26 76 1 — — — — — — 77

Ending balance, September 30, 2020 $ 998 $ 3,055 $ 341 $ 1,175 $ 325 $ 88 $ 387 $ 247 $ 6,616
Ending balance, March 31, 2021 $ 849 $ 3,406 $ 377 $ 923 $ 387 $ 85 $ 363 $ 306 $ 6,696

Ending balance:
Individually evaluated for impairment $ — $ 121 $ — $ — $ 7 $ — $ — $ — $ 128 $ — $ 100 $ — $ — $ 9 $ — $ — $ — $ 109

Ending balance:
Collectively evaluated for impairment $ 998 $ 2,934 $ 341 $ 1,175 $ 318 $ 88 $ 387 $ 247 $ 6,488 $ 849 $ 3,306 $ 377 $ 923 $ 378 $ 85 $ 363 $ 306 $ 6,587

Loans

Ending balance $ 120,156 $ 225,129 $ 42,739 $ 30,504 $ 27,720 $ 6,138 $ 28,160 $ — $ 480,546 $ 93,982 $ 248,660 $ 45,254 $ 25,242 $ 31,749 $ 6,034 $ 26,595 $ — $ 477,516

Ending balance:
Individually evaluated for impairment $ — $ 6,667 $ — $ — $ 441 $ — $ — $ — $ 7,108 $ — $ 6,558 $ — $ — $ 431 $ — $ — $ — $ 6,989

Ending balance:
Collectively evaluated for impairment $ 120,156 $ 218,462 $ 42,739 $ 30,504 $ 27,279 $ 6,138 $ 28,160 $ — $ 473,438 $ 93,982 $ 242,102 $ 45,254 $ 25,242 $ 31,318 $ 6,034 $ 26,595 $ — $ 470,527

Allowance for Loan Losses

Beginning balance, July 1, 2020 $ 927 $ 2,708 $ 364 $ 1,105 $ 359 $ 96 $ 392 $ 247 $ 6,198
Provision for loan losses 98 347 (23 ) 70 (34 ) (8 ) (5 ) — 445
Loans charged off (27 ) — — — — — — — (27 )
Recoveries — — — — — — — — —

Ending balance, September 30, 2020 $ 998 $ 3,055 $ 341 $ 1,175 $ 325 $ 88 $ 387 $ 247 $ 6,616
1817

December 31, 2020
(dollars in thousands) Real Estate Other
Commercial Commercial Multi-family Construction Residential Agriculture Consumer Unallocated Total
Allowance for Loan Losses

Ending balance $ 922 $ 3,466 $ 411 $ 687 $ 388 $ 85 $ 391 $ 278 $ 6,628

Ending balance:
Individually evaluated for impairment $ — $ 106 $ — $ — $ 6 $ — $ — $ — $ 112

Ending balance:
Collectively evaluated for impairment $ 922 $ 3,360 $ 411 $ 687 $ 382 $ 85 $ 391 $ 278 $ 6,516

Loans

Ending balance $ 94,522 $ 251,348 $ 48,760 $ 18,424 $ 32,329 $ 6,091 $ 28,804 $ — $ 480,278

Ending balance:
Individually evaluated for impairment $ — $ 6,614 $ — $ — $ 436 $ — $ — $ — $ 7,050

Ending balance:
Collectively evaluated for impairment $ 94,522 $ 244,734 $ 48,760 $ 18,424 $ 31,893 $ 6,091 $ 28,804 $ — $ 473,228

March 31, 2020
(dollars in thousands) Real Estate Other
Commercial Commercial Multi-family Construction Residential Agriculture Consumer Unallocated Total
Beginning balance, January 1, 2020 $ 950 $ 1,906 $ 329 $ 986 $ 281 $ 107 $ 334 $ 245 $ 5,138
Provision for loan losses 63 349 64 (98 ) 56 (4 ) 58 7 495
Loans charged-off — — — — — — — — —
Recoveries 1 3 — — — — — — 4

Ending balance, March 31, 2020 $ 1,014 $ 2,258 $ 393 $ 888 $ 337 $ 103 $ 392 $ 252 $ 5,637
December 31, 2019
(dollars in thousands) Real Estate Other
Commercial Commercial Multi-family Construction Residential Agriculture Consumer Unallocated Total
Allowance for Loan Losses

Ending balance $ 950 $ 1,906 $ 329 $ 986 $ 281 $ 107 $ 334 $ 245 $ 5,138

Ending balance:
Individually evaluated for impairment $ — $ 133 $ — $ — $ 9 $ — $ — $ — $ 142

Ending balance:
Collectively evaluated for impairment $ 950 $ 1,773 $ 329 $ 986 $ 272 $ 107 $ 334 $ 245 $ 4,996

Loans

Ending balance $ 43,019 $ 214,604 $ 56,818 $ 23,169 $ 29,180 $ 6,479 $ 26,392 $ — $ 399,661

Ending balance:
Individually evaluated for impairment $ — $ 7,152 $ — $ — $ 452 $ — $ — $ — $ 7,604

Ending balance:
Collectively evaluated for impairment $ 43,019 $ 207,452 $ 56,818 $ 23,169 $ 28,728 $ 6,479 $ 26,392 $ — $ 392,057

September 30, 2019
(dollars in thousands) Real Estate Other
Commercial Commercial Multi-family Construction Residential Agriculture Consumer Unallocated Total
Allowance for Loan Losses

Beginning balance, January 1, 2019 $ 668 $ 2,114 $ 564 $ 267 $ 220 $ 88 $ 192 $ 279 $ 4,392
Provision for loan losses 257 (184 ) (149 ) 339 105 29 92 (9 ) 480
Loans charged-off — — — — — — — — —
Recoveries 5 8 — — — — 68 — 81

Ending balance, September 30, 2019 $ 930 $ 1,938 $ 415 $ 606 $ 325 $ 117 $ 352 $ 270 $ 4,953

Allowance for Loan Losses

Beginning balance, July 1, 2019 $ 794 $ 2,085 $ 390 $ 454 $ 358 $ 131 $ 318 $ 231 $ 4,761
Provision for loan losses 134 (149 ) 25 152 (33 ) (14 ) (34 ) 39 120
Loans charged off — — — — — — — — —
Recoveries 2 2 — — — — 68 — 72

Ending balance, September 30, 2019 $ 930 $ 1,938 $ 415 $ 606 $ 325 $ 117 $ 352 $ 270 $ 4,953
1918

The Company’s aging analysis of the loan portfolio at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 are summarized ~~below:~~below (Commercial loans includes $57,486,000 and $55,546,000 in PPP loans at March 31, 2021 and December 31, 2020, respectively):
March 31, 2021
(dollars in thousands) 30-59 Days
Past Due 60-89 Days
Past Due Past Due
Greater Than
89 Days Total Past
Due Current Total Loans Past Due
Greater Than
89 Days and
Accruing Nonaccrual
Commercial:
Commercial $ — $ — $ — $ — $ 93,982 $ 93,982 $ — $ —
Real estate:
Commercial — — — — 248,660 248,660 — —
Multi-family — — — — 45,254 45,254 — —
Construction — — — — 25,242 25,242 — —
Residential — — — — 31,749 31,749 — —
Other:
Agriculture — — — — 6,034 6,034 — —
Consumer — — — — 26,595 26,595 — —

Total $ — $ — $ — $ — $ 477,516 $ 477,516 $ — $ —

December 31, 2020
(dollars in thousands) 30-59 Days
Past Due 60-89 Days
Past Due Past Due
Greater Than
89 Days Total Past
Due Current Total Loans Past Due
Greater Than
89 Days and
Accruing Nonaccrual
Commercial:
Commercial $ — $ — $ — $ — $ 94,522 $ 94,522 $ — $ —
Real estate:
Commercial — — — — 251,348 251,348 — —
Multi-family — — — — 48,760 48,760 — —
Construction — — — — 18,424 18,424 — —
Residential — — — — 32,329 32,329 — —
Other:
Agriculture — — — — 6,091 6,091 — —
Consumer — — — — 28,804 28,804 — —

Total $ — $ — $ — $ — $ 480,278 $ 480,278 $ — $ —
September 30, 2020
(dollars in thousands)
30-59 Days
Past Due 60-89 Days
Past Due Past Due
Greater Than
89 Days Total Past
Due Current Total Loans Past Due
Greater Than
89 Days and
Accruing Nonaccrual
Commercial:
Commercial $ — $ — $ — $ — $ 120,156 $ 120,156 $ — $ —

Real estate:
Commercial — — — — 225,129 225,129 — —
Multi-family — — — — 42,739 42,739 — —
Construction — — — — 30,504 30,504 — —
Residential — — — — 27,720 27,720 — —

Other:
Agriculture — — — — 6,138 6,138 — —
Consumer — — — — 28,160 28,160 — —

Total $ — $ — $ — $ — $ 480,546 $ 480,546 $ — $ —

December 31, 2019
(dollars in thousands)
30-59 Days
Past Due 60-89 Days
Past Due Past Due
Greater Than
89 Days Total Past
Due Current Total Loans Past Due
Greater Than
89 Days and
Accruing Nonaccrual
Commercial:
Commercial $ — $ — $ — $ — $ 43,019 $ 43,019 $ — $ —

Real estate:
Commercial — — — — 214,604 214,604 — —
Multi-family — — — — 56,818 56,818 — —
Construction — — — — 23,169 23,169 — —
Residential — — — — 29,180 29,180 — —

Other:
Agriculture — — — — 6,479 6,479 — —
Consumer 75 — — — 26,317 26,392 — —

Total $ 75 $ — $ — $ — $ 399,586 $ 399,661 $ — $ —
2019

The Federal Deposit Insurance Corporation (the “FDIC”) is encouraging financial institutions, like American River Bank, to provide borrowers affected in a variety of ways by the COVID-19 outbreak with payment accommodations that facilitate their ability to work through the immediate impact of the virus. Such assistance provided in a prudent manner to borrowers facing short-term setbacks could help the borrower and our community to recover. The FDIC indicated that these loan accommodation programs should be ultimately targeted toward loan repayment, but that if provided in a prudent manner such programs can help borrowers and communities recover from short-term setbacks.

The FDIC suggested that financial institutions should consider ways to address any deferred or skipped payments such as extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan. During ~~the second and third quarters of~~ 2020, the Company made arrangements with some of its borrowers to defer principal and interest payments from three to six months and extend the original maturities by a like term, defer principal and interest payments from three to six months, with the amount deferred due at maturity, and defer principle payments for six months, with the amount deferred due at maturity. These arrangements are not considered TDRs as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), provided relief from certain requirements under U.S. GAAP. Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for TDRs under Accounting Standards Codification (“ASC”) 310-40 in certain situations. All of these arrangements met such requirements. The Company continues to accrue interest on all of the loan deferrals. The amount of deferred loans at June 30, 2020 totaled $96,465,000. This balance has been reduced by paydowns, payoffs, or loans returning to normal payments, to ~~$39,576,000~~$4,882,000 as of ~~September 30,~~December 31, 2020. These loans are not considered past due until after the deferral period is over and scheduled payments have resumed. During the first quarter of 2021, both of the loan deferrals comprised of the $4,882,000 at December 31, 2020 began making their scheduled payments and one additional loan, in the amount of $2,017,000, was granted a three-month interest only arrangement and is scheduled to resume contractual payments in the second quarter of 2021.
9. LEASES
~~The Company adopted ASU 2016-02,~~ ~~Leases (Topic 842),~~ on January 1, 2019, using the alternative transition method whereby comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required. The Company also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things allowed the Company to carry forward the historical lease classifications. Additionally, the Company elected the hindsight practical expedient to determine the lease term for existing leases.

The Company leases nine locations for administrative offices and branch locations. All leases were classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. The Company elected to use the practical expedient to not recognize short-term leases on the consolidated balance sheet and instead account for them as executory contracts.
Certain leases include options to renew, with renewal terms that can extend the lease term, typically for five years. Lease assets and liabilities include related options that are reasonably certain of being exercised, however, in the case of those leases that have renewal options, the Company is not including those additional lease terms as the rates are undeterminable and it has been the Company’s historical practice to renegotiate lease terms upon expiration of the original lease terms. The depreciable life of leased assets is limited by the expected lease term.

~~Adoption of this standard resulted in the Company recognizing a right of use asset and a corresponding lease liability of $3,570,000 on January 1, 2019.~~
Supplemental lease information at or for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 is as follows:
2021 2020
Balance Sheet
Operating lease asset classified as other assets $ 2,551,000 $ 2,717,000
Operating lease liability classified as other liabilities 2,730,000 2,392,000

Income Statement
Operating lease cost classified as occupancy and equipment expense $ 194,000 $ 190,000
Weighted average lease term, in years 5.87 5.47
Weighted average discount rate (1) 2.98 % 2.98 %
Operating cash flows $ 190,000 $ 194,000

Balance Sheet

Operating lease asset classified as other assets $ 2,396,000
Operating lease liability classified as other liabilities 2,593,000

Income Statement

Operating lease cost classified as occupancy and equipment expense $ 576,000
Weighted average lease term, in years 5.18
Weighted average discount rate (1) 3.01%  
Operating cash flows $ 585,000
(1) The discount rate was developed by using the fixed rate credit advance borrowing rate at the Federal Home Loan Bank of San Francisco for a term correlating to the remaining life of each lease.
2120

A maturity analysis of the Company’s lease liabilities at ~~September 30, 2020~~March 31, 2021 was as follows:
Balance
October 1, 2020 to December 31, 2020 $ 194,000
January 1, 2021 to December 31, 2021 777,000
January 1, 2022 to December 31, 2022 753,000
January 1, 2023 to December 31, 2023 329,000
January 1, 2024 to December 31, 2024 322,000
Thereafter 985,000
Total lease payments 3,360,000
Less: Interest (767,000 )
Present value of lease liabilities $ 2,593,000
Balance
April 1, 2021 to December 31, 2021 $ 583,000
January 1, 2021 to December 31, 2022 753,000
January 1, 2022 to December 31, 2023 329,000
January 1, 2023 to December 31, 2024 322,000
January 1, 2024 to December 31, 2025 232,000
Thereafter 753,000
Total lease payments 2,972,000
Less:  Interest (242,000 )
Present value of lease liabilities $ 2,730,000
10. BORROWING ARRANGEMENTS

At ~~September 30,~~March 31, 2021 and December 31, 2020, 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, 2020~~March 31, 2021 or December 31, ~~2019.~~2020.

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 $~~25,500,000~~20,787,000 were outstanding from the FHLB at ~~September 30,~~March 31, 2021 and December 31, 2020, bearing interest rates ranging from 0.00% to ~~3.17%~~2.43% and maturing between ~~October 27,~~April 12, ~~2020~~2021 and ~~November 24,~~October 20, ~~2023. Advances totaling $19,500,000~~ ~~were outstanding from the FHLB at December 31, 2019, bearing interest rates ranging from~~ ~~1.31%~~ to ~~3.17%~~ ~~and maturing between January 1,~~ ~~2020~~ ~~and November 24,~~ ~~2023~~2025. Remaining amounts available under the borrowing arrangement with the FHLB at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 totaled $~~139,246,000~~152,049,000 and $~~143,406,000~~132,409,000, 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, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were $~~6,345,000~~6,021,000 and $~~8,642,000~~6,209,000, respectively. There were no advances outstanding under this borrowing arrangement as of ~~September 30, 2020~~March 31, 2021 and December 31, 2019. On April 9, 2020, the Federal Reserve Bank created the Paycheck Protection Program Lending Facility (“PPPLF”) to allow commercial lenders to pledge Paycheck Protection Program (“PPP”) loans as collateral to borrow against and help commercial lenders fund PPP loans. The term of these loans would be equal to the term of the PPP loans pledged and could be prepaid earlier with no prepayment penalty. At September 30, 2020, an advance totaling $~~1,960,000~~ was outstanding under the PPPLF. The Company has pledged $1,960,000 in PPP loans against this advance that matures on April 10, 2022 at a rate of 0.35%. The advance was paid off in full on October 13, 2020. The Company can pledge its remaining unpledged PPP loans as collateral for additional advances, if needed, until December 31, 2020.

11. 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~~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, 2020~~March 31, 2021 and ~~2019.~~2020.
2221

12. 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, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. They indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value measurement is the exchange price to sell the asset or transfer the liability (exit price) in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

· Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
· Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
· Level 3 Inputs – Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities classified as available-for-sale are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other items. The carrying amounts and estimated fair values of the ~~Company’s~~Company's financial instruments are as follows (dollars in thousands):
22
Schedule of Estimated Fair Value of Financial Instruments
Carrying Fair Value Measurements Using:
March 31, 2021 Amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and due from banks $ 18,927 $ 18,927 $ — $ — $ 18,927
Interest-bearing deposits in banks 78,871 78,871 — — 78,871
Available-for-sale Securities 301,628 — 301,628 — 301,628
Held-to-maturity securities 10 — 11 — 11
Net loans 468,718 — — 479,432 479,432
Accrued interest receivable 3,460 — 1,502 1,958 3,460

Financial liabilities:
Deposits:
Noninterest-bearing $ 339,714 $ 339,714 $ — $ — $ 339,714
Savings 93,622 93,622 — — 93,622
Money market 186,086 186,086 — — 186,086
Interest checking 94,126 94,126 — — 94,126
Time Deposits 75,021 — 75,347 — 75,347
Short-term borrowings 7,000 7,000 — — 7,000
Long-term borrowings 13,787 — 13,945 — 13,945
Accrued interest payable 37 9 28 — 37

Carrying Fair Value Measurements Using:
December 31, 2020 Amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and due from banks $ 14,030 $ 14,030 $ — $ — $ 14,030
Interest-bearing deposits in banks 28,479 26,733 1,746 — 28,479
Available-for-sale Securities 306,966 — 306,966 — 306,966
Held-to-maturity securities 12 — 13 — 13
Net loans: 471,853 — — 474,400 474,400
Accrued interest receivable 3,733 — 1,428 2,305 3,733
Financial liabilities:

Deposits:
Noninterest-bearing $ 330,095 $ 330,095 $ — $ — $ 330,095
Savings 87,315 87,315 — — 87,315
Money market 175,541 175,541 — — 175,541
Interest checking 82,045 82,045 — — 82,045
Time Deposits 69,181 — 69,511 — 69,511
Short-term borrowings 7,000 7,000 — — 7,000
Long-term borrowings 13,787 — 13,967 — 13,967
Accrued interest payable 42 3 39 — 42
23

Carrying Fair Value Measurements Using:
September 30, 2020 Amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and due from banks $ 16,559 $ 16,559 $ — $ — $ 16,559
Interest-bearing deposits in banks 56,469 54,723 1,746 — 56,469
Available-for-sale securities 266,917 — 266,917 — 266,917
Held-to-maturity securities 15 — 16 — 16
Net loans 471,647 — — 479,071 479,071
Accrued interest receivable 3,710 — 1,024 2,686 3,710

Financial liabilities:
Deposits:
Noninterest-bearing $ 295,862 $ 295,862 $ — $ — $ 295,862
Savings 85,937 85,937 — — 85,937
Money market 193,647 193,647 — — 193,647
Interest checking 84,390 84,390 — — 84,390
Time Deposits 68,995 — 69,382 — 69,382
Short-term borrowings 12,000 12,000 — — 12,000
Long-term borrowings 15,460 — 15,966 — 15,966
Accrued interest payable 51 — 51 — 51

Carrying Fair Value Measurements Using:
December 31, 2019 Amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and due from banks $ 15,258 $ 15,258 $ — $ — $ 15,258
Interest-bearing deposits in banks 2,552 806 1,746 — 2,552
Available-for-sale securities 261,965 — 261,965 — 261,965
Held-to-maturity securities 248 — 266 — 266
FHLB stock 4,259 — — — —
Net loans: 393,802 — — 396,089 396,089
Accrued interest receivable 1,929 — 780 1,149 1,929
Financial liabilities:

Deposits:
Noninterest-bearing $ 227,055 $ 227,055 $ — $ — $ 227,055
Savings 75,820 75,820 — — 75,820
Money market 158,319 158,319 — — 158,319
NOW accounts 69,834 69,834 — — 69,834
Time Deposits 73,809 — 73,924 — 73,924
Short-term borrowings 9,000 9,000 — — 9,000
Long-term borrowings 10,500 — 10,714 — 10,714
Accrued interest payable 120 — 120 — 120
Because no market exists for a significant portion of the ~~Company’s~~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. Assets and liabilities measured at fair value on a recurring and non-recurring basis are presented in the following table:
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:~~
24
Description Fair Value Measurements Using: Total Gains
(dollars in thousands) Fair Value Level 1 Level 2 Level 3 (Losses)
September 30, 2020
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. Government Agencies and Sponsored Agencies $ 243,680 $ — $ 243,680 $ — $ —
Obligations of states and political subdivisions 16,362 — 16,362 — —
Corporate bonds 6,868 — 6,868 — —
Total recurring $ 266,917 $ — $ 266,917 $ — $ —

Assets and liabilities measured on a nonrecurring basis:

Other real estate owned Land $ 846 $ — $ — $ 846 $ —
Total nonrecurring $ 846 $ — $ — $ 846 $ —
Description Fair Value Measurements Using Total Gains
(dollars in thousands) Fair Value Level 1 Level 2 Level 3 (Losses)
March 31, 2021

Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. Government Agencies and Sponsored Entities $ 266,487 $ — $ 266,487 $ — $ —
Obligations of states and political subdivisions 16,723 — 16,723 — —
U.S. Treasury securities 11,564 11,564 — — —
Corporate Debt securities 6,854 — 6,854 — —
Total recurring $ 301,628 $ 11,564 $ 290,064 $ — $ —

Assets and liabilities measured on a nonrecurring basis:

Other real estate owned Land $ 800 $ — $ — $ 800 $ —
Total nonrecurring $ 800 $ — $ — $ 800 $ —

Description Fair Value Measurements Using Total Gains
(dollars in thousands) Fair Value Level 1 Level 2 Level 3 (Losses)
December 31, 2020

Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. Government Agencies and Sponsored Agencies $ 283,833 $ — $ 283,833 $ — $ —
Corporate Debt securities 6,832 — 6,832
Obligations of states and political subdivisions 16,301 — 16,301 — —
Total recurring $ 306,966 $ — $ 306,966 $ — $ —

Assets and liabilities measured on a nonrecurring basis:

Other real estate owned Land $ 800 $ — $ — $ 800 $ (46 )
Total nonrecurring $ 800 $ — $ — $ 800 $ (46 )
~~At September 30, 2020, there were no impaired loans carried at fair value as the appraised value exceeded carrying value.~~
Description Fair Value Measurements Using: Total Gains
(dollars in thousands) Fair Value Level 1 Level 2 Level 3 (Losses)
December 31, 2019
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. Government Agencies and Sponsored Agencies $ 241,887 $ — $ 241,887 $ — $ —
Obligations of states and political subdivisions 13,447 — 13,447 — —
Corporate bonds 6,631 — 6,631 — —
Total recurring $ 261,965 $ — $ 261,965 $ — $ —

Assets and liabilities measured on a nonrecurring basis:
Other assets:
Repossessed asset $ 517 $ — $ — $ 517 $ —

Other real estate owned Land 846 — — 846 —
Total nonrecurring $ 1,363 $ — $ — $ 1,363 $ —
~~At December 31, 2019, there were no impaired loans carried at fair value as the appraised value exceeded carrying value.~~
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.
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~~Impaired loans~~ – The fair value of collateral dependent impaired loans adjusted for specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and/or evaluations. These appraisals and/or evaluations may utilize a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring impaired loans is the sales comparison approach less a reserve for past dues taxes and selling costs ranging from 8% to 10%.
Other assets and real estate owned – Other assets can contain non-real estate property obtained by repossession of collateral in the case of a loan default and are measured at fair value, less costs to sell. Certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on recent appraisals and/or evaluations. These appraisals and/or evaluations may use a single valuation approach or a combination of approaches including comparable sales, cost and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income and other available data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for all Level 3 nonrecurring other assets and OREO is the sales comparison approach less selling costs ranging from 8% to 10%.
13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board (the ~~“FASB”~~"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”~~"incurred loss" approach with an ~~“expected loss”~~"expected loss" model. The new model, referred to as the current expected credit loss ~~(“CECL”~~("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”~~("AFS") debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize changes to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for credit losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 was initially scheduled to become effective for the Company for interim and annual reporting periods beginning after December 15, 2019, however, on November 15, 2019 the FASB issued ASU 2019-10 delaying the effective date for smaller reporting companies, such as the Company, to interim and annual reporting periods beginning after December 15, 2022; early adoption is still permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). As discussed in Note 15 below, the Company has entered into an Agreement to Merge and Plan of Reorganization with Bank of Marin Bancorp. While the Company ~~is currently evaluating~~continues to evaluate the provisions of ASU No. 2016-13 to determine the potential impact of the ~~new~~ standard ~~will~~may have on the ~~Company’s~~Company's Consolidated Financial Statements, ~~including if~~ it may not remain an independent Company and, therefore, not be subject to adoption of ASU No. 2016-13. Instead, the Company would be merged into Bank of Marin Bancorp. The Company will ~~early adopt~~continue to take the ~~standard, it has taken~~ steps to prepare for the implementation ~~when it~~if the merger does not becomes effective, such as ~~forming an~~continue meetings of its internal task force, gathering pertinent data, consulting with outside professionals, evaluating its current IT systems, and ~~purchasing a~~maintaining its software solution. The Company has imported current and historical data into the new software and is currently validating the data and intends to begin processing information, if needed, on a test basis, with the new CECL specific software during 2021 and to disclose any material potential impact of this modeling, if necessary, once it becomes available.

~~In August 2018, the FASB issued ASU 2018-13,~~ ~~“Fair Value Measurement (Topic 820). – Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.”~~ ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 became effective for the Company on January 1, 2020. The effects of adopting ASU No. 2018-13 did not have a material impact on the Company’s financial position, results of operations or cash flows.
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14. NOVEL CORONAVIRUS PANDEMIC (“COVID-19”)

The COVID-19 pandemic has placed significant health, economic and other major pressures on the individuals and communities we serve, the state of California, the United States and the entire world. We have implemented a number of procedures in response to the pandemic to support the safety and wellbeing of our employees and clients, and the financial viability of our clients, that continue through the date of this report:
· We have addressed the safety of our ten branches and our corporate office, following the guidelines of the Centers for Disease Control.  While our branches generally remain open to clients, we have taken steps, and continue to evaluate those steps, to push as much traffic and transactions as possible to our digital and electronic channels and our night depositories, and many of our employees can and are working ~~remotely;~~remotely;
· We hold regular executive meetings to address issues that change rapidly;
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· Provided extensions and loan payment deferrals to our borrowers effected by COVID-19 provided such clients were not 30 days past due; and
· We have been participating in the Paycheck Protection Program (“PPP”) under CARES Act to help provide potentially forgivable loans to our business clients to provide them with additional working capital to enable them to retain their employees.  During the second quarter of 2020, we funded 477 PPP loans totaling $80,154,000.  ~~We did not fund any~~During the first quarter of 2021 we funded 201 PPP loans ~~during~~totaling $25,465,000.  During the ~~third~~fourth quarter of ~~2020. We believe these loans~~2020 and ~~our participation in~~continuing into the ~~program are good~~first quarter we began processing PPP forgiveness applications for our ~~clients and the communities we serve.~~PPP borrowers.  At March 31, 2021, 368 PPP loans totaling $57,486,000 were remaining.
We continue to closely monitor this pandemic and expect to make future changes to respond to the pandemic as this situation continues to evolve.

The potential financial impact is unknown at this time. However, if the economic downturn currently being experienced is sustained, it may adversely impact industries within our business footprint and impair the ability of the Company’s borrowers to fulfill their contractual obligations and reduce our opportunity to create new client relationships. This could cause the Company to experience a material adverse effect to its business operations, asset valuations, financial condition and results of operations. Material adverse effects may include losses in earnings, higher loan loss provisions, and valuation impairments on the Company’s loans, investments, goodwill, or deferred tax assets.
15. SUBSEQUENT EVENT
On April 16, 2021, the Company entered into a Merger Agreement that, upon the terms and subject to the conditions set forth therein, the Company will merge (the “Merger”) with and into Bank of Marin Bancorp (“Marin Bancorp”) with Marin Bancorp surviving, followed immediately thereafter by the merger (the “Bank Merger”) of American River Bank, with and into Bank of Marin, a California corporation and wholly-owned subsidiary of Marin Bancorp, with Bank of Marin surviving. The Merger Agreement was approved by the Board of Directors of each of the Company and Marin Bancorp.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each outstanding share of the Company’s common stock, excluding certain specified shares, will be converted into the right to receive 0.575 (the “Exchange Ratio”) of a share of Marin Bancorp common stock (the “Merger Consideration”). In addition, at the Effective Time, (i) each option to purchase shares of Company common stock, whether vested or unvested, that is outstanding immediately prior to the Effective Time will be canceled and exchanged for the right to receive an amount of cash equal to the product of (x) the total number of shares of Company common stock subject to such option and (y) the excess, if any, of (A) the product of (1) the volume weighted average price of Marin Bancorp common stock on each of the last fifteen trading days ending on the second trading day immediately prior to the Effective Time, and (2) the Exchange Ratio, over (B) the exercise price per share under such option, less applicable taxes required to be withheld with respect to such payment; and (ii) any vesting conditions applicable to each outstanding restricted stock award and each outstanding restricted stock unit will accelerate in full, and each such restricted stock award and restricted stock unit will be treated as any other outstanding share of Company common stock entitled to receive the Merger Consideration. See the Company’s Form 8-K filed with the SEC on April 19, 2021 for further information.
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Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following is ~~management’s~~management's discussion and analysis of the significant changes in American River Bankshares’ (the “Company”) balance sheet accounts between December 31, ~~2019~~2020 and ~~September 30, 2020~~March 31, 2021 and its income and expense accounts for the three-month ~~and nine-month~~ periods ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020. The discussion is designed to provide a better understanding of significant trends related to the Company’s financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. This discussion and supporting tables and the consolidated financial statements and related notes appearing elsewhere in this report are unaudited. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within ~~management’s~~management's discussion and analysis. Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q including, but not limited to, matters described in this “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as amended, and subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,” “should,” “could,” “would,” and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ significantly from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following:
· The adverse effects of the COVID-19 pandemic on the economy, our business, borrowers, customers and employees and the impact of local, state and federal governments in response to the pandemic, including various government stimulus packages;
· current and future legislation and regulation promulgated by the United States Congress and actions taken by governmental agencies that may impact the U.S. financial system;
· the risks presented by economic volatility and recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
· variances in the actual versus projected growth in assets and return on assets;
· potential loan losses;
· potential expenses associated with resolving nonperforming assets;
· changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds;
· competitive effects;
· the effects of strategic transactions we are a party to;
· inadequate internal controls over financial reporting or disclosure controls and procedures;
· changes in accounting policies and practices and the effects of adopting ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“CECL”);
· potential declines in fee and other noninterest income earned associated with economic factors;
· general economic conditions nationally, regionally, and within our operating markets could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets;
· changes in the regulatory environment including increased capital and regulatory compliance requirements and government intervention in the 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, natural disasters (including earthquakes and wildfires), pandemic disease and viruses, and disruption of power supplies and communications;
· changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations;
· projected business increases following any future strategic expansion could be lower than expected;
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· the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings;
· our ability to comply with any regulatory orders or requirements we may become subject to;
· the effects and costs of litigation, regulatory, and other legal developments;
· the reputation of the financial services industry could experience deterioration, which could adversely affect our ability to access markets for funding and to acquire and retain customers;
· the possibility that the announced merger with Bank of Marin Bancorp (“Marin Bancorp”) does not close when expected or at all because required regulatory, shareholder or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all;
· the businesses of the Company and Marin Bancorp may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected;
· changes in the Company’s or Marin Bancorp’s stock price before the effective time of the merger, including as a result of financial performance, or more generally due to broader stock market movements, and the performance of financial companies and peer group companies;
· the risk that the benefits from the transaction may not be fully realized or may take longer to realize than expected, or that expected revenue synergies and cost savings from the announced merger with Marin Bancorp may not be fully realized or realized within the expected time frame, including as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, the effect of pandemic disease (including Covid-19) and the degree of competition in the geographic and business areas in which the Company and Marin Bancorp operate;
· the ability to promptly and effectively integrate the businesses of the Company and Marin Bancorp;
· the reaction to the merger transaction of the companies’ clients, employees and counterparties;
· diversion of time of directors, management and other employees on merger-related issues; and
· the efficiencies we may expect to receive from any investments in personnel and infrastructure may not be realized.
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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, ~~2019,~~2020, and other cautionary statements and information set forth in this Quarterly Report on Form 10-Q should also be carefully considered and understood as being applicable to all related forward-looking statements contained in this Quarterly Report on Form 10-Q, when evaluating the business prospects of the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. The future results and shareholder values may differ significantly from those expressed in these forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of this report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission (the “SEC”) on Forms 10-K, 10-Q and 8-K.
Merger with Bank of Marin Bancorp
On April 16, 2021, the Company entered into a Merger Agreement that, upon the terms and subject to the conditions set forth therein, the Company will merge (the “Merger”) with and into Bank of Marin Bancorp (the Marin Bancorp”) with Marin Bancorp surviving, followed immediately thereafter by the merger (the “Bank Merger”) of American River Bank, with and into Bank of Marin, a California corporation and wholly-owned subsidiary of Marin Bancorp, with Bank of Marin surviving. The Merger Agreement was approved by the Board of Directors of each of the Company and Marin Bancorp.
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Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each outstanding share of the Company’s common stock, excluding certain specified shares, will be converted into the right to receive 0.575 (the “Exchange Ratio”) of a share of Marin Bancorp common stock (the “Merger Consideration”). In addition, at the Effective Time, (i) each option to purchase shares of Company common stock, whether vested or unvested, that is outstanding immediately prior to the Effective Time will be canceled and exchanged for the right to receive an amount of cash equal to the product of (x) the total number of shares of Company common stock subject to such option and (y) the excess, if any, of (A) the product of (1) the volume weighted average price of Marin Bancorp common stock on each of the last fifteen trading days ending on the second trading day immediately prior to the Effective Time, and (2) the Exchange Ratio, over (B) the exercise price per share under such option, less applicable taxes required to be withheld with respect to such payment; and (ii) any vesting conditions applicable to each outstanding restricted stock award and each outstanding restricted stock unit will accelerate in full, and each such restricted stock award and restricted stock unit will be treated as any other outstanding share of Company common stock entitled to receive the Merger Consideration. We cannot provide any assurance on whether or not the Merger will close in a timely fashion or at all.
Potential Impact of COVID-19
2020 began with optimism based off the progress made in 2019, but that was stalled when the novel coronavirus pandemic (“COVID-19”) arrived and created a global health crisis that has set off an economic crisis causing significant disruption in the local, national and global economies and financial markets. Continuation and further spread of COVID-19 could cause additional quarantines, shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The disruptions in the economy ~~will~~has impaired and may continue to impair the ability of some of our borrowers to make their loan payments, which could result in significant increases in delinquencies, defaults, foreclosures, declining collateral values, and credit losses on our loans. Similarly, because of changing economic and market conditions, we may be required to recognize credit losses on the investment securities we hold as well. COVID-19 may also continue to materially disrupt banking and other financial activity generally and may result in a decline in demand for our products and services, including loans and deposits which could negatively impact our liquidity position and our growth strategy. Any one or more of these developments could have a material adverse effect on our business, operations, consolidated financial condition, and consolidated results of operations.
In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the “FRB”) has taken a number of actions that have significantly affected the financial markets in the United States, including actions intended to result in substantial decreases in market interest rates, including reducing the target federal funds range by 150 basis points during the first quarter of 2020 to 0% and announcing further quantitative easing in response to the expected economic downturn caused by COVID-19. We expect that these reductions in interest rates, among other actions of the FRB and the Federal government generally, especially if prolonged, ~~could~~will adversely affect our net interest income, margins and profitability.

In addition to preparing the Company to handle the impact of the economic crisis, protecting the health and wellbeing of our employees and the financial viability of our clients, is now our highest priority. The Company quickly put its pandemic plan into action to adjust to the impact of the health issues from the COVID-19 pandemic on our employees and our clients. We have been working with our clients by assisting them with loan payment deferrals and maintaining service at all of our branch locations, subject to reduced operating hours. We are encouraging the use of our digital and electronic channels and our night depositories, all the while adhering to the ever-evolving State and Federal guidelines. We have been participating in the Small Business Administration’s (“~~SBA’s”~~SBA's”) Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act to help provide loans to our business clients to provide them with additional working capital to enable them to retain their employees.
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We believe the COVID-19 pandemic has already impacted our local economy when Federal, State and local shelter-in-place recommendations were enacted in our markets in March 2020 causing many businesses to close and workers to be furloughed or become unemployed. Essential purpose entities such as medical professionals, food and agricultural businesses, and transportation and logistical businesses were exempted from the closures; however, unemployment rates ~~are increasing~~increased in our local market area. Prior to the pandemic unemployment rates were at all-time lows. At the end of February 2020, the unemployment rate in Sacramento County was 3.7%, in Sonoma County it was 2.8%, and in Amador County it was 4.4%. By the end of May 2020, these numbers increased to 14.1% in Sacramento County, 12.7%, in Sonoma County, and 15.1% in Amador County. With some businesses allowed to reopen these rates have decreased ~~some~~ to ~~10.3%~~7.4% in Sacramento County, ~~7.7%~~6.0%, in Sonoma County, and ~~9.3%~~7.4% in Amador County as of ~~August~~March 31, ~~2020.~~2021. While shelter-in-place restrictions were eased in our markets during the second quarter of 2020, and just as many businesses were opening, new restrictions were put in place, essentially eliminating the progress that had been made until later in the third quarter when selected areas had the restrictions eased again. New restrictions went in place throughout the State later in 2020, which were then eased in January 2021. With the successful rollout of the pandemic vaccines, more business have been able to reopen in the first quarter of 2021.
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The Company has taken measures to protect the health and safety of its employees by implementing remote work arrangements to the full extent possible, and by adjusting banking offices hours and operational measures to promote social distancing. The Company will continue to analyze economic conditions in our geographic markets and perform stress testing of our investment and loan portfolios. The Company does not currently have a stock repurchase program in place. Our Board of Directors will evaluate whether or not to implement a program following such time that the economic impact of the COVID-19 has been assessed and minimized. On ~~October 22, 2020,~~April 21, 2021, the Company announced a $0.07 per share cash dividend payable on ~~November 18, 2020~~May 19, 2021 to shareholders of record on ~~November~~May 4, ~~2020.~~2021. Future cash dividend decisions will consider, among other business considerations, the impact of COVID-19 on the Company’s capital and liquidity levels. Based on the Company’s current capital levels, historical conservative underwriting policies, low loan-to-deposit ratio, concentration and geographical diversification of the loan portfolio, the Company currently expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic with sufficient liquidity and capital levels.
While the Company is not exposed to large oil and gas, airline, or the entertainment industries we have been evaluating the exposure to potentially increased loan losses related to the COVID-19 pandemic and have identified the following industry segments most impacted by the pandemic as of ~~September 30, 2020:~~March 31, 2021:
Industry Loan Balance Percentage of total
non PPP loans
outstanding (1) Loan Balance Percentage of total
non PPP loans
outstanding (1)
Hospitality — N/A $ 918,000 0.2 %
Churches $ 18,203,000 4.5 % $ 21,692,000 5.2 %
Restaurants $ 5,777,000 1.4 % $ 5,725,000 1.4 %
Eldercare $ 6,615,000 1.6 % $ 6,440,000 1.5 %
School/childcare $ 4,572,000 1.1 % $ 5,355,000 1.3 %
Recreation (golf/sportsclubs) $ 1,934,000 0.5 % $ 1,668,000 0.4 %
Oil/Gas $ 6,194,000 (2) 1.5 % $ 8,924,000 (2) 2.1 %

(1) The PPP loans are 100% guaranteed by the SBA. By removing them from the total loans outstanding in this calculation, we believe the table represents a more reflective picture of the risk in the loan portfolio. The percentage of loans outstanding is, therefore, calculated excluding the PPP loans from the total loans. PPP loans as of March 31, 2021 were $57,486,000, therefore, gross non-PPP loans were $420,030,000.
(2) ~~Of this~~This total ~~$1,920,000 is to three~~represents gas stations with convenience stores; ~~$3,318,000 is to a~~ gas station, convenience store and car ~~wash; $642,000 is to an~~washes; auto restoration ~~company;~~companies; gas station, car washes; and ~~$314,000 is to a~~ drive though oil change and car wash ~~facility.~~facilities.
The Company is closely monitoring the effects of the pandemic on our loan and deposit clients. We are focusing on assessing the risks in our loan portfolio and working with our borrowers to minimize potential loan losses. We have implemented loan programs to allow borrowers to defer loan principal and interest payments. See “Working with Borrowers” for more information on loan deferrals. ~~As of September 30,~~During 2020, the Company ~~had~~ funded 477 PPP loans totaling $80,154,000, ~~of which 473~~and in 2021, the Company funded 201 PPP loans totaling ~~$75,804,000 remained at September 30, 2020.~~$25,465,000. At March 31, 2021, there were 368 PPP loans totaling $57,486,000. The reduction in the March 31, 2021 balance represents loan forgiveness or loan paydowns.
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Use of Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q (“Form 10Q”) contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP. These measures include the taxable equivalent basis used in the computation of the net interest margin and efficiency ratio. Management has presented these non-GAAP financial measures in this Form 10Q because it believes that they provide useful and comparative information to assess trends in the Company’s financial position reflected in the current quarter and year-to-date results and facilitate comparison of our performance with the performance of our peers.
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Net Interest Margin and Efficiency Ratio (non-GAAP financial measures)

In accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation of net interest margin and the efficiency ratio. The Company believes the presentation of net interest margin on a taxable equivalent basis using a 21% effective tax rate allows comparability of net interest margin with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and tax-exempt loans and investments. The efficiency ratio is a measure of a banking company’s overhead as a percentage of its revenue. The Company derives this ratio by dividing total noninterest expense by the sum of the taxable equivalent net interest income and the total noninterest income.

Reconciliation of Annualized Net Interest Margin, Fully Tax Equivalent (non-GAAP)
(dollars in thousands) For the three months
ended September 30, For the nine months
ended September 30,
2020 2019 2020 2019
Net interest income (GAAP) $ 6,720 $ 5,928 $ 19,428 $ 17,105
Tax equivalent adjustment 49 49 154 148
Net interest income - tax equivalent adjusted (non-GAAP) $ 6,769 $ 5,977 $ 19,582 $ 17,253

Average earning assets $ 787,756 $ 655,937 $ 739,412 $ 642,605
Net interest margin (GAAP) 3.39 % 3.59 % 3.51 % 3.56 %
Net interest margin (non-GAAP) 3.42 % 3.62 % 3.54 % 3.59 %
(dollars in thousands)
For the three months
ended March 31,
2021 2020
Net interest income (GAAP) $ 7,132 $ 6,188
Tax equivalent adjustment 47 56
Net interest income - tax equivalent adjusted (non-GAAP) $ 7,179 $ 6,244

Average earning assets $ 814,280 $ 669,974
Net interest margin (GAAP) 3.55 % 3.71 %
Net interest margin (non-GAAP) 3.58 % 3.75 %

Reconciliation of Non-GAAP Measure – Efficiency Ratio

(dollars in thousands) For the three months
ended September 30, For the nine months
ended September 30,
For the three months
ended March 31,
2020 2019 2020 2019 2021 2020
Net interest income (GAAP) $ 6,720 $ 5,928 $ 19,428 $ 17,105 $ 7,132 $ 6,188
Tax equivalent adjustment 49 49 154 148 47 56
Net interest income – tax-equivalent adjusted (non-GAAP) $ 6,769 $ 5,977 $ 19,582 $ 17,253 $ 7,179 $ 6,244
Noninterest income 374 417 1,162 1,249 591 452
Total income 7,143 6,394 20,744 18,502 7,770 6,696
Total noninterest expense 4,223 4,093 12,355 12,501 4,063 4,216
Efficiency ratio, fully tax-equivalent (non-GAAP) 59.12 % 64.01 % 59.56 % 67.57 % 52.29 % 62.96 %

Critical Accounting Policies
General
The ~~Company’s~~Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. We use historical loss data and the economic environment as factors, among others, in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
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Allowance for Loan Losses
The allowance for loan losses is an estimate of probable credit losses inherent in the ~~Company’s~~Company's credit portfolio that have been incurred as of the balance-sheet date. The allowance is based on two basic principles of accounting: (1) “Accounting for Contingencies,” which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) the “Receivables” topic, which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
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The allowance for loan losses is determined based upon estimates that can and do change when the actual risk, loss events, or changes in other factors, occur. The analysis of the allowance uses a historical loss view as an indicator of future losses and as a result could differ from the actual losses incurred in the future. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. For further information regarding our allowance for loan losses, see “Allowance for Loan Losses Activity.”
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 ~~101~~95 full-time employees as of ~~September 30, 2020.~~March 31, 2021.
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.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. American River Bank does not offer trust services or international banking services and does not plan to do so in the near future. American River Bank’s primary business is serving the commercial banking needs of small to mid-sized businesses within those counties listed above. American River Bank accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services. American River Bank owns 100% of two inactive companies, ARBCO and 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 ~~2020~~2021 and ~~2019,~~2020, 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.”
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On April 16, 2021, the Company entered into a Merger Agreement that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Marin Bancorp as described above.
Overview
The Company recorded net income of ~~$1,779,000~~$2,647,000 for the quarter ended ~~September 30, 2020,~~March 31, 2021, which was an increase of ~~$208,000~~$1,215,000 (84.8%) compared to ~~$1,571,000~~$1,432,000 reported for the same period of ~~2019.~~2020. Diluted earnings per share for the ~~third~~first quarter of ~~2020 were $0.30~~2021 was $0.45, an increase of 87.5% compared to ~~$0.27 recorded~~the $0.24 per share reported in the ~~third~~first quarter of ~~2019.~~2020. The return on average equity (“ROAE”) and the return on average assets (“ROAA”) for the ~~third~~first quarter of ~~2020~~2021 were ~~7.79%~~11.54% and ~~0.82%~~1.21%, respectively, as compared to ~~7.65%~~6.77% and ~~0.88%~~0.80%, respectively, for the same period in ~~2019.~~2020.
Net income for the nine months ended September 30, 2020 and 2019 was $4,952,000 and $3,993,000, respectively, with diluted earnings per share of $0.84 in 2020 and $0.68 in 2019. For the first nine months of 2020, ROAE was 7.52% and ROAA was 0.82% compared to 6.81% and 0.77%, respectively, for the same period in 2019.
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Total assets of the Company increased by ~~$137,581,000, or 19.1%,~~$47,072,000 (5.4%) from ~~$720,353,000~~$868,991,000 at December 31, ~~2019~~2020 to ~~$857,934,000~~$916,063,000 at ~~September 30, 2020.~~March 31, 2021. Net loans totaled ~~$471,647,000~~$468,718,000 at ~~September 30, 2020,~~March 31, 2021, a decrease of $3,135,000 (0.7%) from $471,853,000 at December 31, 2020. Deposit balances at March 31, 2021 totaled $788,569,000, an increase of ~~$77,845,000 or (19.8%~~$44,392,000 (6.0%) from ~~$393,802,000~~$744,177,000 at December 31, ~~2019. Deposit balances at September 30, 2020 totaled $728,831,000, an increase of $123,994,000, or 20.5%, from the $604,837,000 at December 31, 2019.~~
2020. The Company ended the ~~third~~first quarter of ~~2020~~2021 with a leverage capital ratio of ~~8.2%~~8.5%, a Tier 1 capital ratio of ~~15.3%~~15.5%, and a total risk-based capital ratio of ~~16.5%~~16.7% compared to ~~9.2%~~8.3%, ~~14.8%~~15.0%, and ~~15.9%~~16.2%, respectively, at December 31, ~~2019.~~2020. Table One below provides a summary of the components of net income for the periods indicated (See the “Results of Operations” section that follows for an explanation of the fluctuations in the individual components).
Table One: Components of Net Income
(dollars in thousands) For the three months ended
September 30, For the nine months ended
September 30,
For the three months ended
March 31,
2020 2019 2020 2019 2021 2020
Interest income* $ 7,104 $ 6,604 $ 20,899 $ 19,111 $ 7,401 $ 6,771
Interest expense (335 ) (627 ) (1,317 ) (1,858 ) (222 ) (527 )
Net interest income* 6,769 5,977 19,582 17,253 7,179 6,244
Provision for loan losses (445 ) (120 ) (1,485 ) (480 ) — (495 )
Noninterest income 374 417 1,162 1,249 591 452
Noninterest expense (4,223 ) (4,093 ) (12,355 ) (12,501 ) (4,063 ) (4,216 )
Provision for income taxes (647 ) (561 ) (1,798 ) (1,380 ) (1,013 ) (497 )
Tax equivalent adjustment (49 ) (49 ) (154 ) (148 ) (47 ) (56 )
Net income $ 1,779 $ 1,571 $ 4,952 $ 3,993 $ 2,647 $ 1,432

Average total assets $ 861,843 $ 708,698 $ 802,388 $ 695,364 $ 884,565 $ 721,439
Net income (annualized) as a percentage of average total assets 0.82 % 0.88 % 0.82 % 0.77 % 1.21 % 0.80 %
* Fully taxable equivalent basis (FTE)

Results of Operations
Net Interest Income and Net Interest Margin
Net interest income represents the excess of interest and fees earned on interest earning assets (loans, securities, Federal funds sold and investments in time deposits) over the interest paid on interest-bearing deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. The Company’s net interest margin was ~~3.42%~~3.58% for the three months ended ~~September 30, 2020, 3.62%~~March 31, 2021 and 3.75% for the three months ended ~~September 30, 2019, 3.54% for the nine months ended September 30, 2020 and 3.59% for the nine months ended September 30, 2019.~~March 31, 2020.
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The fully taxable equivalent interest income component for the ~~third~~first quarter of ~~2020~~2021 increased ~~$500,000 (7.6%~~$630,000 (9.3%) to ~~$7,104,000~~$7,401,000 compared to ~~$6,604,000~~$6,771,000 for the three months ended ~~September 30, 2019.~~March 31, 2020. The increase in the fully taxable equivalent interest income for the ~~third~~first quarter of ~~2020~~2021 compared to the same period in ~~2019~~2020 is broken down by rate (down ~~$943,000)~~$762,000) and volume (up $1,443,000). The yield on earning assets decreased from 3.99% during the third quarter of 2019 to 3.59% during the third quarter of 2020. The lower interest rate environment led to decreases in yields on loans (which decreased from 4.98% in the third quarter of 2019 to 4.64% in the third quarter of 2020), investments (which decreased from 2.77% in the third quarter of 2019 to 2.37% in the third quarter of 2020), and interest-bearing balances in banks (which decreased from 2.06% in the third quarter of 2019 to 0.14% in the third quarter of 2020). The lower yield led to decreases in loan interest of $429,000, investment income of $262,000 and interest from deposit in banks of $252,000. The increase in interest income was driven by increased loan balances, which led to an additional $1,327,000 in interest income, as well as increased balances in interest-deposit in banks which led to an additional $200,000 in interest income. The increased income on loans resulted from a higher balance of loans. Loans increased $104,757,000 (28.5%) from $368,160,000 in the third quarter of 2019 to $472,917,000 in the third quarter of 2020. Of the $104,757,000 increase in loans, $75,804,000 was related to PPP. These PPP loans carried an interest rate of 1% and added just $194,000 in interest income for the quarter, however, the SBA also paid the Company a processing fee ranging between 1% and 5%, which is amortized (net of costs) over the two-year life of the loans. The net fees added during the third quarter related to these PPP loans was $441,000. Average interest-balances in banks increased $38,578,000, (or 282.4%), from $13,662,000 during the third quarter of 2019 to $52,240,000 during the third quarter of 2020.
Total fully taxable equivalent interest income for the nine months ended September 30, 2020 increased $1,788,000 (9.4%) to $20,899,000 compared to $19,111,000 for the nine months ended September 30, 2019. The breakdown of the increase in fully taxable equivalent interest income for the nine months ended September 30, 2020 over the same period in 2019 resulted from a decrease in rate (down $1,548,000) and an increase in volume (up $3,336,000)$1,392,000). The primary driver in this rate decrease was a decrease in the ~~yields~~yield on loans, which ~~decreased from 4.94%~~led to a decrease of $174,000, a decrease in ~~2019~~the yield on investments, which led to ~~4.80% in 2020, on the investment portfolio which decreased from 2.84% in 2019 to 2.56% in 2020,~~a decrease of $476,000, and a decrease in the ~~yields~~yield on interest-bearing ~~balances~~deposits in banks, which led to a decrease of $112,000. The yield on loans decreased from ~~2.22%~~5.03% in ~~2019~~the first three months of 2020 to ~~0.26% in 2020. The decreased~~a yield ~~in 2020 compared to 2019 was due to~~of 4.92% during the ~~overall lower interest rate environment. The decreased yield earned on loans, investments and interest-bearing balances in banks was the reason~~first three months of 2021; the yield on ~~earning assets~~investments decreased from ~~3.98%~~2.69% in ~~2019~~the first three months of 2020 to ~~3.78%~~a yield of 2.06% during the first three months of 2021 and the yield on interest-bearing deposits in ~~2020.~~banks decreased from 1.59% in the first quarter of 2020 to 0.11% in the first quarter of 2021. The volume increase of ~~$3,336,000~~$1,392,000 was primarily from an increase in loans ($~~3,333,000)~~1,059,000); an increase in investments ($248,000); and ~~interest-deposit~~an increase in interest-bearing deposits in banks ($~~483,000), partially offset by a decrease in investment balances ($475,000)~~86,000). Average loans balances increased ~~$89,577,000,~~$84,889,000, (or ~~25.6%~~21.4%), from ~~$349,718,000~~$396,322,000 during the first ~~nine months~~quarter of ~~2019~~2020 to ~~$439,295,000~~$481,211,000 during the first ~~nine months~~quarter of ~~2020;~~2021; average investment balances increased $37,401,000, (or 14.1%), from $265,037,000 during the first quarter of 2020 to $302,438,000 during the first quarter of 2021, and average ~~interest-deposit~~balances in interest-bearing deposits in banks increased ~~$29,040,000,~~$22,016,000, (or ~~319.3%~~255.6%), from ~~$9,096,000~~$8,615,000 during the first ~~nine months~~quarter of ~~2019~~2020 to ~~$38,136,000~~$30,631,000 during the first ~~nine months~~quarter of 2020; and average investment balances decreased $21,579,000, (or 7.6%), from $283,560,000 during the first nine months of 2019 to $261,981,000 during the first nine months of 2020. Of the $89,577,000 increase in loans, $38,958,000 was related to PPP. These PPP loans added $333,000 in interest income for the year and the net fees for the year related to these PPP loans was $748,000.2021.
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Interest expense was ~~$292,000 (or 46.6%~~$222,000 or $305,000 (57.9%) lower in the ~~third~~first quarter of ~~2020 versus~~2021 compared to $527,000 in the ~~prior year period, decreasing from $627,000 to $335,000.~~first quarter of 2020. The ~~$292,000~~net $305,000 decrease in interest expense during the ~~third~~first quarter of 2021 compared to the first quarter of 2020 ~~compared to the third quarter of 2019~~ was ~~due to lower rates (down $326,000) and higher~~predominantly rate related which reduced expense by $369,000. This decrease was partially offset by volume ~~(up $34,000). The decrease in interest~~which increased expense ~~can be attributed to a decrease in rates paid on deposit and borrowing balances during a lower interest rate environment.~~by $64,000. Rates paid on interest bearing liabilities decreased 2334 basis points from ~~0.64%~~0.54% to 0.29% for the third quarter of 2019 compared to the same period in 2020. The largest decrease due to rates occurred in the time deposits. Some of these time deposits are indexed to the three- or six-month treasury rates which have decreased over the past twelve months. Interest expense on time deposits decreased by $255,000, or 66.6%, from $383,000 in the third quarter of 2019 to $128,000 in the third quarter of 2020. Average time deposit balances decreased by $17,669,000, or (20.3%), from $86,938,000 in the third quarter of 2019 to $69,269,000 in the third quarter of 2020. Of the decrease in expense related to time deposits of $255,000, $177,000 was related to rate and $78,000 was related to volume. The volume increase of $34,000 was attributed to an increase in the lower cost interest checking and money market balances which increased $67,174,000 (31.7%) from $211,930,000 in third quarter of 2019 to $279,104,000 in the third quarter of 2020 and in other borrowings which increased $11,846,000 (75.9%) from $15,614,000 in third quarter of 2019 to $27,460,000 in the third quarter of 2020.
Interest expense was $541,000 (or 29.1%) lower in the nine-month period ended September 30, 2020 decreasing from $1,858,000 in 2019 to $1,317,000 in 2020. The decrease is related to rates (down $452,000) and volume (down $89,000). Rates paid on interest bearing liabilities decreased 23 basis points from 0.64% to 0.41%0.20% for the first ~~nine months~~quarter of ~~2019~~2020 compared to the first ~~nine months~~quarter of ~~2020.~~2021. Of the ~~$452,000~~$369,000 decrease in interest expense related to rates, ~~$386,000~~$175,000 is related to lower rates paid on interest checking and money market accounts and $147,000 was related to time deposit balances. ~~Some of these time deposits are indexed~~The overall lower interest rate environment in short term rates contributed to the three-or six-month treasury rates which have decreased over the past twelve months. Net interest expense on time deposits decreased by $620,000, or 53.1%, from $1,168,000 in 2019 to $548,000 in 2020 while the average time deposit balances decreased by $17,570,000, or 20.0%, from $87,655,000 in 2019 to $70,085,000 in 2020. Of thethis decrease in ~~expense from time deposits of $620,000, $386,000 was related to rate and $234,000 was related to volume.~~interest expense. Partially offsetting the decrease in ~~time deposit~~ expense due to rates ~~and volume~~ was an increase indue to volume as average interest ~~checking and money market~~bearing balances ~~which~~ increased ~~$49,890,000 (23.9%~~$60,515,000 (15.4%) from ~~$208,607,000~~$392,517,000 in ~~2019~~the first quarter of 2020 to ~~$258,497,000 in 2020 and in other borrowings which increased $3,535,000 (18.3%) from $19,341,000 in 2019 to $22,876,000 in 2020.~~$453,032,000 during the first quarter of 2021.
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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, 2020 2019
(Taxable Equivalent Basis)
(dollars in thousands)
Avg
Balance

Interest

Avg
Yield (4)

Avg
Balance

Interest

Avg
Yield (4)

Assets
Earning assets:
Taxable loans (1) $ 452,301 $ 5,275 4.64 % $ 346,598 $ 4,397 5.03 %
Tax-exempt loans (2) 20,616 244 4.71 % 21,562 224 4.12 %
Taxable investment securities 257,171 1,523 2.36 % 267,012 1,846 2.74 %
Tax-exempt investment securities (2) 5,428 43 3.15 % 7,103 66 3.69 %
Interest-bearing deposits in banks 52,240 19 0.14 % 13,662 71 2.06 %
Total earning assets 787,756 7,104 3.59 % 655,937 6,604 3.99 %
Cash & due from banks 39,524 17,215
Other assets 40,845 40,406
Allowance for loan losses (6,282 ) (4,860 )
Total average assets $ 861,843 $ 708,698
Liabilities & Shareholders’ Equity
Interest bearing liabilities:
Interest checking and money market $ 279,104 126 0.18 % $ 211,930 155 0.29 %
Savings 83,140 7 0.03 % 74,738 7 0.04 %
Time deposits 69,269 128 0.74 % 86,938 383 1.75 %
Other borrowings 27,460 74 1.07 % 15,614 82 2.08 %
Total interest bearing liabilities 458,973 335 0.29 % 389,220 627 0.64 %
Noninterest bearing demand deposits 301,505 227,644
Other liabilities 10,476 10,368
Total liabilities 770,954 627,232
Shareholders’ equity 90,889 81,466
Total average liabilities and shareholders’ equity $ 861,843 $ 708,698
Net interest income & margin (3) $ 6,769 3.42 % $ 5,977 3.62 %
Table Two: Analysis of Net Interest Margin on Earning Assets
Three Months Ended March 31, 2021 2020
(Taxable Equivalent Basis)
(dollars in thousands)
Avg
Balance

Interest

Avg
Yield (4)

Avg
Balance

Interest

Avg
Yield (4)

Assets
Earning assets:
Taxable loans (1) $ 462,037 $ 5,604 4.92 % $ 372,826 $ 4,675 5.04 %
Tax-exempt loans (2) 19,174 233 4.93 % 23,496 278 4.76 %
Taxable investment securities 297,320 1,515 2.07 % 259,592 1,739 2.69 %
Tax-exempt investment securities (2) 5,118 41 3.25 % 5,445 45 3.32 %
Federal funds sold — — — — — —
Interest-bearing deposits in banks 30,631 8 0.11 % 8,615 34 1.59 %
Total earning assets 814,280 7,401 3.69 % 669,974 6,771 4.06 %
Cash & due from banks 35,124 16,008
Other assets 41,906 40,675
Allowance for loan losses (6,745 ) (5,218 )
$ 884,565 $ 721,439

Liabilities & Shareholders’ Equity
Interest bearing liabilities:
Interest checking and money market $ 266,895 61 0.09 % $ 230,222 204 0.36 %
Savings 91,076 6 0.03 % 74,530 7 0.04 %
Time deposits 74,274 93 0.51 % 70,787 229 1.30 %
Other borrowings 20,787 62 1.21 % 16,978 87 2.06 %
Total interest bearing liabilities 453,032 222 0.20 % 392,517 527 0.54 %
Noninterest bearing demand deposits 326,179 232,562
Other liabilities 12,346 11,282
Total liabilities 791,557 636,361
Shareholders' equity 93,008 85,078
$ 884,565 $ 721,439
Net interest income & margin (3) $ 7,179 3.58 % $ 6,244 3.75 %

(1) Loan interest includes loan fees of ~~$446,000~~$642,000 and ~~$18,000,~~$171,000, respectively, during the three months ended ~~September 30, 2020~~March 31, 2021 and ~~September 30, 2019.~~March 31, 2020.  Includes ~~$441,000~~$656,000 in net fees from PPP loans during the ~~third~~first quarter of ~~2020.~~2021.  Average loan balances include ~~nonperforming~~non-performing loans.
(2) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes. The effective federal statutory tax rate was 21% for ~~2020~~2021 and ~~2019.~~2020.
(3) Net interest margin is computed by dividing net interest income by total average earning assets.
(4) Average yield is calculated based on actual days in the period ~~(92 days)~~(90 days for 2021 and 91 days for 2020) and annualized to actual days in the year ~~(366~~(365 days for ~~2020~~2021 and ~~365 days)~~366 days for 2020).
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Nine Months Ended September 30, 2020 2019
(Taxable Equivalent Basis)
(dollars in thousands)
Avg
Balance

Interest

Avg
Yield (4)

Avg
Balance

Interest

Avg
Yield (4)

Assets
Earning assets:
Taxable loans (1) $ 417,667 $ 15,034 4.81 % $ 330,312 $ 12,329 4.99 %
Tax-exempt loans (2) 21,628 767 4.74 % 19,406 604 4.16 %
Taxable investment securities 256,566 4,894 2.55 % 272,738 5,756 2.82 %
Tax-exempt investment securities (2) 5,415 131 3.23 % 10,822 266 3.29 %
Federal funds sold — — -% 231 5 2.89 %
Interest-bearing deposits in banks 38,136 73 0.26 % 9,096 151 2.22 %
Total earning assets 739,412 20,899 3.78 % 642,605 19,111 3.98 %
Cash & due from banks 28,212 16,356
Other assets 40,507 41,048
Allowance for loan losses (5,743 ) (4,645 )
Total average assets $ 802,388 $ 695,364

Liabilities & Shareholders’ Equity
Interest-bearing liabilities:
Interest checking and money market $ 258,497 505 0.26 % $ 208,607 369 0.24 %
Savings 78,869 21 0.04 % 73,596 21 0.04 %
Time deposits 70,085 548 1.04 % 87,655 1,168 1.78 %
Other borrowings 22,876 243 1.42 % 19,341 300 2.07 %
Total interest-bearing liabilities 430,327 1,317 0.41 % 389,199 1,858 0.64 %
Noninterest-bearing demand deposits 273,016 217,760
Other liabilities 11,140 10,019
Total liabilities 714,483 616,978
Shareholders’ equity 87,905 78,386
Total average liabilities and shareholders’ equity $ 802,388 $ 695,364
Net interest income & margin (3) $ 19,582 3.54 % $ 17,253 3.59 %
Table Three:  Analysis of Volume and Rate Changes on Net Interest Income and Expenses
Three Months Ended March 31, 2021 over 2020 (dollars in thousands)
Increase (decrease) due to change in:
Interest-earning assets: Volume Rate (4) Net Change
Taxable net loans (1)(2) $ 1,109 $ (180 ) $ 929
Tax-exempt net loans (3) (51 ) 6 (45 )
Taxable investment securities 251 (475 ) (224 )
Tax exempt investment securities (3) (3 ) (1 ) (4 )
Federal funds sold — — —
Interest-bearing deposits in banks 86 (112 ) (26 )
Total 1,392 (762 ) 630
Interest-bearing liabilities:
Interest checking and money market 32 (175 ) (143 )
Savings deposits 2 (3 ) (1 )
Time deposits 11 (147 ) (136 )
Other borrowings 19 (44 ) (25 )
Total 64 (369 ) (305 )
Interest differential $ 1,328 $ (393 ) $ 935

(1) The average balance of nonaccrual loans is immaterial as a percentage of total loans and has been included in net loans.
(2) Loan interest includes loan fees of ~~$990,000~~$642,000 and ~~$194,000,~~$171,000, respectively, during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019.~~which have been included in the interest income computation. Includes ~~$748,000~~$656,000 in net fees from PPP loans during ~~2020. Average loan balances include nonperforming loans.~~the first quarter of 2021
~~(2)~~(3) Includes taxable-equivalent adjustments that primarily relate to income on certain loans and securities that is exempt from federal income taxes.  The effective federal statutory tax rate was 21% for ~~2020~~2021 and ~~2021.~~
~~(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 2020 and 273 days for 2019) and annualized to actual days in the year (366 days for 2020 and 365 days for 2019).~~
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~~Table Three: Analysis of Volume and Rate Changes on Net Interest Income and Expenses~~
Three Months Ended September 30, 2020 over 2019 (dollars in thousands)
Increase (decrease) due to change in:

Interest-earning assets: Volume Rate (4) Net Change
Taxable loans (1) $ 1,337 $ (459 ) $ 878
Tax-exempt loans (2) (10 ) 30 20
Taxable investment securities (68 ) (255 ) (323 )
Tax exempt investment securities (3) (16 ) (7 ) (23 )
Interest-bearing deposits in banks 200 (252 ) (52 )
Total 1,443 (943 ) 500
Interest-bearing liabilities:
Interest checking and money market 49 (78 ) (29 )
Savings deposits 1 (1 ) —
Time deposits (78 ) (177 ) (255 )
Other borrowings 62 (70 ) (8 )
Total 34 (326 ) (292 )
Interest differential $ 1,409 $ (617 ) $ 792
Nine Months Ended September 30, 2020 over 2019 (dollars in thousands)
Increase (decrease) due to change in:

Interest-earning assets: Volume Rate (4) Net Change
Taxable loans (1) $ 3,264 $ (559 ) $ 2,705
Tax-exempt loans (2) 69 94 163
Taxable investment securities (342 ) (520 ) (862 )
Tax exempt investment securities (3) (133 ) (2 ) (135 )
Federal funds sold (5 ) — (5 )
Interest-bearing deposits in banks 483 (561 ) (78 )
Total 3,336 (1,548 ) 1,788
Interest-bearing liabilities:
Interest checking and money market 88 48 136
Savings deposits 2 (2 ) —
Time deposits (234 ) (386 ) (620 )
Other borrowings 55 (112 ) (57 )
Total (89 ) (452 ) (541 )
Interest differential $ 3,425 $ (1,096 ) $ 2,329

~~(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 $446,000 and $18,000, respectively, during the three months ended September 30, 2020 and September 30, 2019, and loan fees of $990,000 and $194,000, respectively, during the nine months ended September 30, 2020 and September 30, 2019, have been included in the interest income computation. The three and nine- month periods in 2020 include $414,000 and $748,000, respectively, in net fees from PPP loans.
~~(3)~~ 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 21% for 2020 and 2019.2020.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan Losses
The Company ~~added $445,000 to the~~did not provide a provision for loan losses ~~for~~in the ~~third~~first quarter of ~~2020~~2021 compared to ~~$120,000~~$495,000 in the ~~third~~first quarter of ~~2019.~~2020. The Company experienced net loan ~~losses~~recoveries of ~~$27,000~~$68,000 or ~~0.02%~~(0.06%) (on an annualized basis) of average loans for the three months ended ~~September 30, 2020~~March 31, 2021 compared to net loan recoveries of ~~($72,000)~~$4,000 or ~~0.08%~~(0.00%) (on an annualized basis) of average loans for the three months ended ~~September 30, 2019. The Company added $1,485,000 to the allowance for loan losses during the first nine months of~~March 31, 2020. This compares to additions of $480,000 to the allowance for loan losses during the first nine months of 2019. Net loan losses were $7,000 (0.00%) (on an annualized basis) of average loans outstanding in 2020 and net loan recoveries were ($81,000) or 0.03% (on an annualized basis) of average loans outstanding in 2019.
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The Company continues to experience an overall improvement in the credit quality of the loan portfolio and a reduction of credit losses, however, due to the uncertain economic impact on the Company’s borrowers due to COVID-19, the ~~$445,000~~$495,000 addition in 2020 to the provision for loan losses during the ~~third~~first quarter of ~~2020 and the $1,485,000 addition to the provision for loan losses during~~ 2020 was warranted. For additional information see the “Allowance for Loan Losses Activity” and “Potential Impact of COVID-19.” The net loan recoveries, reduction in loan balances in the first quarter of 2021, and the progress made in the circulation of the pandemic vaccine allowed the Company to forgo and additions to the provision for loan losses in the first quarter of 2021
Noninterest Income
Table Four below provides a summary of the components of noninterest income for the periods ~~indicated:~~indicated (dollars in thousands):
~~Table Four: Components of Noninterest Income~~
(dollars in thousands)
Three Months
Ended
September 30,

Nine Months
Ended
September 30,

2020 2019 2020 2019
Service charges on deposit accounts $ 115 $ 149 $ 381 $ 409
Gain on sale of securities — 9 38 74
Merchant fee income 98 105 274 294
Bank owned life insurance 89 83 258 248
Other 72 71 211 224
Total noninterest income $ 374 $ 417 $ 1,162 $ 1,249
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Table Four: Components of Noninterest Income
Three Months Ended
March 31,
2021 2020
Service charges on deposit accounts $ 164 $ 155
Gain on sale of securities 172 38
Merchant fee income 90 93
Bank owned life insurance 70 84
Other 95 82
Total noninterest income $ 591 $ 452

Noninterest income ~~decreased $43,000 (10.3%~~increased $139,000 (30.8%) to ~~$374,000~~$591,000 for the three months ended ~~September 30, 2020~~March 31, 2021 as compared to ~~$417,000 during~~$452,000 for the three months ended ~~September 30, 2019.~~March 31, 2020. The ~~decrease from the third quarter of 2019 to the third quarter of 2020~~increase in noninterest income was primarily related to ~~a decrease in service charges on deposit accounts which decreased $34,000 from $149,000 in 2019 to $115,000 in 2020.~~
Noninterest income decreased $87,000 (or 7.0%) from $1,249,000 during the first nine months of 2020 to $1,162,000 during the first nine months of 2019. The decrease from the first nine months of 2020 compared to the same period in 2019 was primarily related to a decrease inhigher gain on sale of securities, ~~(down $36,000 or 48.6%) resulting in income of $74,000 in the first nine months of 2019 compared to $38,000 for the first nine months of 2020 and a decrease in service charges on deposit accounts~~ which ~~decreased $28,000 (6.8%~~increased $134,000 (352.6%) from ~~$409,000~~$38,000 in ~~2019~~2020 to ~~$381,000~~$172,000 in ~~2020.~~2021.
Noninterest Expense
Noninterest expense ~~increased $130,000 (3.2%~~decreased $153,000 (3.6%) ~~from $4,093,000~~to a total of $4,063,000 in the ~~third~~first quarter of ~~2019~~2021 compared to ~~$4,223,000~~$4,216,000 in the ~~third~~first quarter of 2020. Salary and employee benefits expense decreased ~~$9,000 (0.3%~~$103,000 (3.6%) from ~~$2,898,000~~$2,865,000 during the ~~third~~first quarter of ~~2019~~2020 to ~~$2,889,000~~$2,762,000 during the ~~third~~first quarter of 2021. The decrease in salaries and benefits expense resulted from an increase in the deferral of direct loan origination costs, which reduced salary expense. Each PPP loan that was recorded had an associated loan origination cost. Total origination costs for the first quarter of 2021 were $212,000 compared to $82,000 for the first quarter of 2020. Of the $212,000 in deferred loan origination costs recorded in 2021, $140,700 was related to PPP loans. The benefit from the deferred loan origination costs was partially offset by normal cost of living increases and promotions. Average full-time equivalent employees was 95 during the first quarter of 2021 compared to 101 during the ~~third~~first quarter of ~~2020 and 2019. Occupancy~~2020.
On a quarter-over-quarter basis, occupancy expense increased ~~$2,000 (0.8%~~$3,000 (1.2%) and furniture and equipment expense decreased $9,000 (6.3%). FDIC assessments increased ~~$20,000 (16.6%~~$27,000 (100.0%) from the third quarter of 2019 to the third quarter of 2020. FDIC assessments increased $109,000 from the third quarter of 2019 to the third quarter of 2020. OREO related expenses decreased $3,000 (42.9%) during the thirdfirst quarter of 2020 ~~compared~~ to the ~~third~~first quarter of ~~2019. Other expenses increased $11,000 (1.3%) to $870,000 in the third quarter of 2020 compared to $859,000 in the third quarter of 2019.~~2021. The increased FDIC assessments result from ~~a credit received in 2019 as~~ the FDIC insurance fund reaching the target of 1.38% and the Company being able to use the Small Bank Assessment Credits, awarded to banks like American River Bank, which essentially gave banks a credit for the assessments paid ~~for~~in the ~~second quarter~~latter half of 2019 and ~~allowed them to forgo~~for a partial amount of the ~~assessment~~ expense for the ~~third~~first quarter of ~~2019. The fully taxable equivalent efficiency ratio for~~2020. There were no assessment credits received in the ~~third~~first quarter of 2021. OREO related expenses decreased $1,000 (20.0%) from $5,000 in the first quarter of 2020 ~~decreased~~ to ~~59.1% from 64.0% for~~$4,000 in the ~~third~~first quarter of ~~2019.~~
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Noninterest expense for the nine-month period ended September 30, 2020 was $12,355,000 compared to $12,501,000 for the same period in 2019 for a decrease of $146,000 (1.2%). Salaries and employee benefits2021. Other expense decreased ~~$158,000 (1.9%~~$70,000 (7.6%) from ~~$8,423,000 for the nine months ended September 30, 2019 to $8,265,000 for the same period in 2020. The decrease in salaries and benefits expense resulted from an increase~~$920,000 in the ~~deferral~~first quarter of direct loan origination costs, which reduced salary expense. Total origination costs for 2020 were $635,000 compared to $340,000 for 2019. Of the $635,000 in deferred loan origination costs recorded in 2020, $332,000 was related to PPP loans. The benefit from the deferred loan origination costs was partially offset by normal cost of living increases and promotions and higher allocations to the earned but unpaid personal time. Salary expense increased $49,000 (0.9%) from $5,707,000 in 2019 to $5,756,000 in 2020. Expenses related to accruals for paid time off increased $42,000 (22.5%) from $187,000 in 2019 to $229,000 in 2020. Average full-time equivalent employees was 102 in 2019 compared to 101 during 2020. Occupancy expense increased $5,000 (0.7%) and furniture and equipment expense increased $22,000 (5.5%). FDIC assessments increased $90,000 (187.5%). OREO related expenses increased $12,000 (80.0%) during 2020 to ~~$27,000, from $15,000~~$850,000 in ~~2019. Other expenses decreased $117,000 (4.1%) from $2,847,000 for~~ the ~~nine months ended September 30, 2019 to $2,730,000 for the same period in 2020. The increased FDIC assessments result from the Small Bank Assessment Credits received in 2019.~~first quarter of 2021. There were numerous line items that make up the ~~$117,000~~$70,000 decrease in other expenses including ~~advertising and business development. Advertising and~~a $21,000 (131.3%) decrease in business development, which decreased ~~$253,000 (58.7%~~from $37,000 in 2020 to $16,000 in 2021, and a $16,000 (40.0%) decrease in legal fees, which decreased from ~~$431,000~~$40,000 in ~~2019~~2020 to ~~$178,000~~$24,000 in ~~2020. Partially offsetting~~2021. The fully taxable equivalent efficiency ratio decreased from 63.0% for the ~~reduced advertising and business development costs was a $70,000 expense related to a retirement plan payment to the estate of a director who passed away during the second~~first quarter of 2020 ~~and internet processing which increased $74,000 (42.3%) from $175,000 in 2019~~ to ~~$249,000 in 2020.~~
~~The overhead efficiency ratio (fully taxable equivalent)~~52.3% for the first ~~nine months~~quarter of ~~2020 was 59.6% as compared to 67.6% in the same period of 2019.~~2021.
Provision for Income Taxes

Federal and state income taxes for the quarter ended ~~September 30, 2020~~March 31, 2021 increased ~~$86,000 (15.3%~~$516,000 (103.8%) from ~~$561,000~~$497,000 in the ~~third quarter of 2019 to $647,000 in the third~~first quarter of 2020 ~~and increased $418,000 (30.3%), from $1,380,000~~to $1,013,000 in the ~~nine months ended September 30, 2019 to $1,798,000 for the nine months ended September 30, 2020.~~first quarter of 2021. The ~~combined federal and state~~ effective tax rate for the quarter ended ~~September 30, 2020~~March 31, 2021 was ~~26.7%,~~27.7% compared to ~~26.3%~~25.8% for the ~~third~~first quarter of ~~2019 and for the nine months ended September 30, 2020, the effective tax rate was 26.7% compared to 25.7% for the nine months ended September 30, 2019.~~2020. The higher ~~taxes and~~tax expense was related to the higher level of taxable income ($1,731,000 or 89.7%), which increased from $1,929,000 in 2020 to $3,660,000 in 2021. The higher effective tax rate in ~~2020~~2021 compared to ~~2019~~2020 is also related to athe higher level of taxable income as well as a lower level of benefits from ~~tax exempt municipal bonds,~~tax-exempt loans and ~~the tax treatment of equity based compensation under Accounting Standards Update 2016-09 (“ASU 2016-09”)~~investments (including investments in bank owned life insurance).
~~Taxable income increased $294,000 (13.8%)~~ Tax-exempt benefits decreased from ~~$2,132,000~~$346,000 in ~~the third quarter of 2019~~2020 to ~~$2,426,000~~$296,000 in the third quarter of 2020, and increased $1,377,000 (25.6%) from $5,373,000 in the first nine months of 2019 to $6,750,000 in the first nine months of 2020. Under ASU 2016-09, if the market value of the Company’s stock price on the date restricted stock vests is higher than the Company’s stock price on the date the restricted stock was awarded the Company receives a tax credit for the difference in values and if the market price on the vesting date is lower than the stock price on the award date the Company recognizes additional tax expense.
In the third quarter of 2019 the Company recognized a $3,000 tax credit under ASU 2016-09 and in the third quarter of 2020 the Company recognized a $4,000 tax credit under ASU 2016-09. For the nine months ended September 30, 2019, the Company recognized a $32,000 tax credit under ASU 2016-09 and in the nine months ended September 30, 2020, the Company recognized a $34,000 tax expense under ASU 2016-09. The average balance of tax exempt municipal bonds decreased $1,675,000 (23.6%) from $7,103,000 in the third quarter of 2019 to $5,428,000 in the third quarter of 2020, and decreased $5,407,000 (50.0%) from $10,822,000 in the first nine months of 2019 to $5,415,000 in the first nine months of 2020.2021.
Balance Sheet Analysis
The Company’s total assets were ~~$857,934,000~~$916,063,000 at ~~September 30, 2020~~March 31, 2021 as compared to ~~$720,353,000~~$868,991,000 at December 31, ~~2019,~~2021, representing an increase of ~~$137,581,000 (19.1%~~$47,072,000 (5.4%). The average assets for the three months ended ~~September 30, 2020~~March 31, 2021 were ~~$861,843,000,~~$884,565,000, which represents an increase of ~~$153,145,000 (21.6%) from~~$163,126,000 or 22.6% over the ~~average~~ balance of ~~$708,698,000~~$721,439,000 during the three-month period ended September 30, 2019. The average assets for the nine months ended September 30, 2020 were $802,388,000, which represents an increase of $107,024,000 (15.4%) from the average balance of $695,364,000 during the nine-month period ended September 30, 2019.March 31, 2020.
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Cash and Cash Equivalents
The balance held in cash and cash equivalents at ~~September 30, 2020,~~March 31, 2021, was ~~$73,038,000~~$97,798,000 compared to ~~$17,810,000~~$42,509,000 at December 31, ~~2019~~2020 an increase of ~~$55,228,000 (310.1%~~$55,289,000 (130.1%). The primary reason for the increase in cash and cash equivalents since December 31, ~~2019~~2020 is directly related to the increase in deposit balances during the same period.
Investment Securities
Table Five below summarizes the values of the Company’s investment securities held on ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.
Table Five: Investment Securities Composition
(dollars in thousands)

Available-for-sale (at fair value)
September 30,
2020      December 31,
2019
Debt securities:
U.S. Government Agencies and Sponsored Entities $ 243,687 $ 241,887
Obligations of states and political subdivisions 16,362 13,447
Corporate bonds 6,868 6,631
Total available-for-sale investment securities $ 266,917 $ 261,965

Held-to-maturity (at amortized cost)
Debt securities:
U.S. Government Agencies and Sponsored Entities $ 15 $ 248
Total held-to-maturity investment securities $ 15 $ 248

(dollars in thousands)
Available-for-sale (at fair value) March 31,
2021 December 31,
2020
Debt securities:
US Government Agencies and Sponsored Agencies $ 266,487 $ 283,833
Obligations of states and political subdivisions 16,723 16,301
U. S Treasury securities 11,564 —
Corporate bonds 6,854 6,832
Total available-for-sale investment securities $ 301,628 $ 306,966
Held-to-maturity (at amortized cost)
Debt securities:
US Government Agencies and Sponsored Agencies $ 10 $ 12
Total held-to-maturity investment securities $ 10 $ 12
The Company classifies its investment securities as available-for-sale or held-to-maturity. The Company’s intent is to hold all securities classified as held-to-maturity until maturity and management believes that it has the ability to do so. Securities available-for-sale may be sold to implement asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors.
Net unrealized gains on available-for-sale investment securities totaling ~~$9,283,000~~$5,133,000 were recorded, net of ~~$2,744,000~~$1,517,000 in tax liabilities, as accumulated other comprehensive ~~income~~loss within shareholders’ equity at ~~September 30, 2020~~March 31, 2021 and net unrealized ~~losses~~gains on available-for-sale investment securities totaling ~~$2,544,000~~$8,739,000 were recorded, net of ~~$752,000~~$2,583,000 in tax ~~benefits,~~liabilities, as accumulated other comprehensive loss within shareholders’ equity at December 31, ~~2019.~~2020.

Management periodically evaluates each investment security in a loss position for other than temporary impairment relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Management has the ability and intent to hold securities with established maturity dates until recovery of fair value, which may be until maturity, and believes it will be able to collect all amounts due according to the contractual terms for all of the underlying investment securities; therefore, management does not consider these investments to be other-than-temporarily impaired.
Loans
The Company’s historical lending activities have been in the following principal areas: (1) commercial; (2) commercial real estate; (3) multi-family real estate; (4) real estate construction (both commercial and residential); (5) residential real estate; (6) agriculture; and (7) consumer loans. The Company’s continuing focus in our market area, new borrowers developed through the Company’s marketing efforts, and credit extensions expanded to existing borrowers resulted in the Company originating ~~$63.5~~$25.9 million in new loans during the first ~~nine months~~quarter of ~~2020.~~2021. In addition to the ~~$63.5~~$25.9 million in new production the Company also originated ~~477~~201 PPP loans totaling ~~$80.2 million.~~$25.5 million during the first quarter of 2021. This production was partially offset by pay downs and payoffs, and excluding the PPP loans resulted in an overall ~~increase~~decrease in net loans of ~~$3,636,000 (0.9%~~$4,702,000 (1.1%) from December 31, ~~2019.~~2020. At ~~September 30, 2020,~~March 31, 2021, gross PPP loans were ~~$75,804,000~~$57,486,000 and had related fees of ~~$1,595,000,~~$1,354,000, for a net balance of ~~$74,209,000.~~$56,132,000. These PPP loans were recorded as commercial loans. At ~~September 30, 2020,~~March 31, 2021, net loans excluding net PPP loans were ~~$397,438,000.~~$419,282,000 and total loans excluding total PPP loans were $420,030,000.
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A significant portion of the Company’s loans are direct loans made to individuals and local businesses. The Company relies substantially on networking, local promotional activity, and personal contacts by American River Bank officers, directors and employees to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment. Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products. Consumer loans include a range of traditional consumer loan products such as personal lines of credit and homeowner equity lines of credit and loans to finance purchases of autos (including classic and collectors autos), boats, recreational vehicles, mobile homes and various other consumer items. Construction loans are generally comprised of commitments to customers within the Company’s service area for construction of commercial properties, multi-family properties and custom and semi-custom single-family residences. Other real estate loans consist primarily of loans secured by first trust deeds on commercial, multi-family, and residential properties typically with maturities from three to ten years and original loan-to-value ratios generally from 65% to 75%. Agriculture loans consist primarily of first trust deed loans on properties that produce grapes, fruit, and nut loans. In general, except in the case of loans under SBA programs or Farm Services Agency guarantees, the Company does not make long-term residential mortgage loans.

Table Six below summarizes the composition of the loan portfolio ~~in dollars and as a percentage of total loans~~ as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2010.
Table Six: Loan Portfolio Composition
(dollars in thousands) March 31, 2021 December 31, 2020 Change in Percentage
$ % $ % dollars change
Commercial (1) $ 93,982 20 % $ 94,522 20 % $ (540 ) (0.6 %)
Real estate
Commercial 248,660 52 % 251,348 52 % (2,688 ) (1.1 %)
Multi-family 45,254 9 % 48,760 10 % (3,506 ) (7.2 %)
Construction 25,242 5 % 18,424 4 % 6,818 37.0 %
Residential 31,749 7 % 32,329 7 % (580 ) (1.8 %)
Agriculture 6,034 1 % 6,091 1 % (57 ) (0.9 %)
Consumer 26,595 6 % 28,804 6 % (2,209 ) (7.7 %)
Total loans 477,516 100 % 480,278 100 % (2,762 ) (0.6 %)
Deferred loan (fees) and costs, net (2,102 ) (1,797 ) (305 )
Allowance for loan losses (6,696 ) (6,628 ) (68 )
Total net loans $ 468,718 $ 471,853 $ (3,135 ) (0.7 %)
~~Table Six: Loan Portfolio Composition~~
(dollars in thousands) September 30, 2020 December 31, 2019 Change in Percentage
$ % $ % dollars change
Commercial (1) $ 120,156 25 % $ 43,019 11 % $ 77,137 179.3 %
Real estate
Commercial 225,129 47 % 214,604 54 % 10,525 4.9 %
Multi-family 42,739 9 % 56,818 14 % (14,079 ) (24.8 %)
Construction 30,504 6 % 23,169 6 % 7,335 31.6 %
Residential 27,720 6 % 29,180 7 % (1,460 ) (5.0 %)
Agriculture 6,138 1 % 6,479 2 % (341 ) (5.3 %)
Consumer 28,160 6 % 26,392 6 % 1,768 6.7 %
Total loans 480,546 100 % 399,661 100 % 80,885 20.2 %
Deferred loan fees and costs, net (2,283 ) (721 ) (1,562 )
Allowance for loan losses (6,616 ) (5,138 ) (1,478 )
Total net loans $ 471,647 $ 393,802 $ 77,845 19.8 %
(1) ~~The September 30, 2020 balance includes $75,804,000 in~~Incudes PPP ~~loans.~~loans of $57,486,000 at March 31, 2021 and $55,546,000 at December 31, 2020.
Risk Elements
The Company assesses and manages credit risk on an ongoing basis through a total credit culture that emphasizes excellent credit quality, extensive internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant to periodically review the existing loan portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company’s loan portfolio is critical for profitability and growth. Management strives to continue its emphasis on credit quality in the loan approval process, through active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio.
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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 significant extensions of credit and commitments to extend credit that are secured by real estate. The ultimate repayment of these loans is generally dependent on personal or business cash flows or the sale or refinancing of the real estate. The Company monitors the effects of current and expected market conditions and other factors on the collectability of real estate loans. The more significant factors management considers involve the following: lease rates and terms, vacancy rates, absorption and sale rates and capitalization rates; real estate values, supply and demand factors, and rates of return; operating expenses; inflation and deflation; and sufficiency of repayment sources independent of the real estate including, in some instances, personal guarantees.
In extending credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flows or from proceeds from the sale of selected assets of the borrowers. The Company’s requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management’s evaluation of the creditworthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. The Company secures its collateral by perfecting its security interest in business assets, obtaining deeds of trust, or outright possession among other means.

In management’s judgment, a concentration exists in real estate loans, which represented approximately ~~81%~~84% of the Company’s loan portfolio at ~~September 30, 2020~~March 31, 2021 and 83% as of December 31, ~~2019. The September 30, 2020 figure excludes~~2020. These figures exclude the PPP loans, which are 100% guaranteed by the SBA. Management believes that the residential land and construction portion of the Company’s loan portfolio carries a reasonable level of credit risk. As of ~~September 30, 2020,~~March 31, 2021, outstanding unimproved residential land and construction loans were ~~$7,744,000~~$8,342,000 (or just 2.4% of the total real estate loans). ~~Of the $7,744,000, $1,617,000 (20.9%) was represented by one amortizing loan, which was considered well-secured, with a favorable loan-to-value ratio.~~ Management currently believes that it maintains its allowance for loan 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~~Company's market areas, in particular, could have an adverse impact on the collectability of real estate loans and require an increase in the provision for loan losses. This could adversely affect the ~~Company’s~~Company's future prospects, results of operations, profitability and stock price. See “Potential Impact of COVID-19.” Management believes that its lending practices and underwriting standards are structured with the intent to minimize losses; however, there is no assurance that losses will not occur. The Company’s loan practices and underwriting standards include, but are not limited to, the ~~following:~~following principles: (1) maintaining a thorough understanding of the Company’s market area and originating a significant majority of its loans within that area, (2) maintaining a thorough understanding of ~~borrowers’~~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’~~borrowers' capacity to support the project financially in the event it does not perform to expectations (whether sale or income performance), and (4) maintaining conforming and prudent loan-to-value and loan-to-cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Company’s lending officers or contracted third-party professionals.
Nonperforming, Past Due and Restructured Loans
Management places loans on nonaccrual status when they become 90 days past due or if a loss is expected, unless the loan is well secured and in the process of collection. Loans are partially or fully charged off when, in the opinion of management, collection of such amount appears unlikely. The recorded investments in nonperforming loans, which includes nonaccrual loans and loans that were 90 days or more past due and on accrual, totaled zero at both ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. At March 31, 2021 and December 31, 2020 there were no loans that were 30 days or more past due.
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There were no loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as of ~~September 30, 2020.~~March 31, 2021. Management is not aware of any potential problem loans, which were accruing and current at ~~September 30, 2020,~~March 31, 2021, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms and that would result in a significant loss to the Company apart from those loans identified in the Bank’s impairment analysis.
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Table Seven below sets forth nonaccrual loans and loans past due 90 days or more as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.
Table Seven: Nonperforming Loans
(dollars in thousands)
September 30, December 31,
2020 2019
Past due 90 days or more and still accruing:
Commercial $ — $ —
Real estate — —
Agriculture — —
Consumer — —
Nonaccrual:
Commercial — —
Real estate — —
Agriculture — —
Consumer — —
Total nonperforming loans $ — $ —
~~There were no loans that were considered past due between 30 and 89 days at September 30, 2020 and $75,000 at December 31, 2019.~~
Table Seven:  Nonperforming Loans
(dollars in thousands) March 31,
2021 December 31,
2020
Past due 90 days or more and still accruing:
Commercial $ — $ —
Real estate — —
Agriculture — —
Consumer — —
Nonaccrual:
Commercial — —
Real estate — —
Consumer — —
Total nonperforming loans $ — $ —
Impaired Loans
The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (principal and interest) according to the original contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan discounted at the loan’s original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company does not apply this definition to smaller-balance loans that are collectively evaluated for credit risk. In assessing whether a loan is impaired, the Company typically reviews loans graded substandard or lower with outstanding principal balances in excess of $100,000, as well as loans considered troubled debt restructures with outstanding principal balances in excess of $25,000. The Company identifies troubled debt restructures by reviewing each renewal, modification, or extension of a loan with a screening document. This document is designed to identify any characteristics of such a loan that would qualify it as a troubled debt restructure. If the characteristics are not present that would qualify a loan as a troubled debt restructure, it is deemed to be a modification.
At ~~September 30, 2020,~~March 31, 2021, the recorded investment in loans that were considered to be impaired totaled ~~$7,108,000,~~$6,989,000, all of which are considered performing loans. Of the total impaired loans of ~~$7,108,000,~~$6,989,000, loans totaling ~~$5,415,000~~$5,357,000 were deemed to require no specific reserve and loans totaling ~~$1,693,000~~$1,632,000 were deemed to require a related valuation allowance of ~~$128,000.~~$109,000. Of the ~~$5,415,000~~$5,357,000 impaired loans that did not carry a specific reserve there were ~~$469,000~~$461,000 in loans that had previous partial charge-offs and ~~$4,946,000~~$4,896,000 in loans that were analyzed and determined not to require a specific reserve or charge-off because the collateral value or discounted cash flow value exceeded the loan balance. The recorded investment in loans that were considered to be impaired totaled ~~$7,604,000~~$7,050,000 at December 31, ~~2019.~~2020. Of the total impaired loans of ~~$7,604,000,~~$7,050,000, loans totaling ~~$5,848,000~~$5,387,000 were deemed to require no specific reserve and loans totaling ~~$1,756,000~~$1,663,000 were deemed to require a related valuation allowance of ~~$142,000.~~$112,000.

Prior to 2013, the Company had been operating in a market that had experienced significant decreases in real estate values of commercial, residential, land, and construction properties. As such, the Company is focused on monitoring collateral values for those loans considered collateral dependent. For collateral dependent loans the Company performs an internal evaluation or obtains an updated appraisal, as necessary. In the ~~third~~first quarter of ~~2020,~~2021, the Company had net loan ~~losses~~recoveries of ~~$27,000~~$68,000 with ~~$445,000 in~~zero provisions for loan losses. ~~For~~The Company’s ALLL to non-PPP loans (which are 100% SBA guaranteed) is 1.60% at March 31, 2021. The 1.60% ALLL to loans is higher than the ~~nine months ended September 30, 2020, the Company had net loan losses of $7,000 with $1,485,000 in provisions for loan losses.~~Company’s historical average. Despite the Company’s continued improvement in the credit quality of the loan portfolio, due to the uncertain economic impact on the Company’s borrowers due to COVID-19, management believes that the ~~$445,000 addition~~1.60% ALLL to non-PPP loans is warranted. In the ~~provision for loan losses during the third~~first quarter of 2020, ~~was warranted. In the third quarter of 2019,~~ the Company had net loan recoveries of ~~$72,000~~$4,000 with ~~$120,000~~$475,000 in ~~provisions for loan and lease losses and for the nine months ended September 30, 2019, the Company had net recoveries of $81,000 with $480,000 in provisions for loan losses.~~added provision.
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During the ~~quarters~~periods ended ~~September 30,~~March 31, 2021 and March 31, 2020, ~~and September 30, 2019,~~ there were no loans that were modified as troubled debt restructurings. There were no payment defaults during the three months ended March 31, 2021 or March 31, 2020 on troubled debt restructurings ~~within 12 months following~~made in the ~~modification for the three-month and nine-month periods ended September 30, 2020.~~
~~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, 2019.~~preceding twelve months. At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020, there were no unfunded commitments on those loans considered troubled debt restructures.
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Working with Borrowers

The FDIC is encouraging financial institutions, like American River Bank, to provide borrowers affected in a variety of ways by the COVID-19 outbreak with payment accommodations that facilitate their ability to work through the immediate impact of the virus. Such assistance provided in a prudent manner to borrowers facing short-term setbacks could help the borrower and our community to recover. The FDIC indicated that these loan accommodation programs should be ultimately targeted toward loan repayment, but that if provided in a prudent manner such programs can help borrowers and communities recover from short-term setbacks.

The FDIC ~~suggested that~~encouraged financial institutions ~~should~~to consider ways to address any deferred or skipped payments such as extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan. The terms of the payment deferrals are generally 90 days and up to 180 days and borrowers may be eligible for multiple deferrals. Pursuant to the CARES Act, these loan modifications are not accounted for as troubled debt restructure. As of June 30, 2020, the Company had made 107 such loan payment deferrals totaling $96,465,000. During the third quarter 2020, two additional loans totaling $2,980,000 were extended loan payment deferrals and four loans that had previously been provided loan payment deferrals totaling $2,123,000 paid off in full. In addition, during the third quarter 69 loans that had previously been granted loan payment deferrals began making their loan payments and are no longer on a loan deferral program. As of September 30, 2020, 39 loans totaling $39,576,000 were on a loan deferral program and of these loans, four loans totaling $4,074,000 were in their initial deferral period while 32 loans totaling $35,502,000 were provided an additional deferral period either after their initial deferral period ended or prior to the ending of their initial deferral period. ~~The following arrangements~~As of December 31, 2020, there were two commercial real estate loans totaling $4,882,000 that had been ~~made for borrowers requesting these~~granted loan ~~deferrals:~~
~~Three~~payment deferrals. These two loans ~~totaling $2,992,000 that had~~resumed their contractual payments ~~deferred for principal and interest for three months with~~during the ~~maturity extended three months;~~
~~One~~first quarter of 2021. Also during the first quarter of 2021, one additional loan ~~totaling $30,000 that had payments deferred payments for principal and interest for four months with~~in the ~~maturity extended four months;~~
~~Twenty-eight loans totaling $30,894,000 that had payments deferred for principal and interest for six months with the maturity extended six months;~~
~~One loan totaling $25,000 that had payments deferred for principal and interest for three months, due at maturity;~~
~~One loan totaling $3,723,000 that had payments deferred for principal and interest for four months, due at maturity;~~
~~Two loans totaling $1,912,000 that had principal payments deferred but were paying~~amount of $2,017,000 was granted a 90-day interest only ~~for six months, maturity~~payment deferral. This was the only loan on payment deferral at March 31, 2021, however, this borrower resumed making the contractual payment during the second quarter of 2021. These loans are not ~~extended.~~
considered past due until after the deferral period is over and scheduled payments have resumed and any subsequently scheduled payments are missed.
The Company continues to accrue interest on all of the loan deferrals. The Company expects to continue to work with its borrowers and make prudent credit arrangements as needed, while intending to continue to act in a safe and sound manner. The Company has continued to keep in close contact with the borrowers that have been granted ~~the remaining 39~~ loan payment deferrals and continued to monitor those loans that have begun making their loan payments to track their payment history and evaluate whether it is appropriate to upgrade or downgrade the individual loan ratings. None of the borrowers that had been granted loan deferrals were more than 30 days past due immediately preceding the deferral date, and for those that have resumed making payments, none are more than 30 days past due at ~~September 30, 2020.~~March 31, 2021.
Allowance for Loan Losses Activity
The Company maintains an allowance for loan losses (“ALLL”) to cover probable losses inherent in the loan portfolio, which is based upon management’s estimate of those losses. The ALLL is established through a provision for loan losses and is increased by provisions charged against current earnings and recoveries and reduced by charge-offs.
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Actual losses for loans can vary significantly from this estimate. The methodology and assumptions used to calculate the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change. ~~Table Eight below summarizes, for the periods indicated, the activity in the ALLL.~~
~~Table Eight: Allowance for Loan Losses~~
(dollars in thousands) Three Months
Ended September 30, Nine Months
Ended September 30,
2020 2019 2020 2019
Average loans outstanding $ 472,917 $ 368,160 $ 439,295 $ 349,718

Allowance for loan losses at beginning of period $ 6,198 $ 4,761 $ 5,138 $ 4,392
Loans charged off:
Commercial (27 ) — (27 ) —
Real estate — — — —
Agriculture — — — —
Consumer — — (6 ) —
Total (27 ) — (33 ) —
Recoveries of loans previously charged off:
Commercial — 2 13 5
Real estate — 2 13 8
Agriculture — — — —
Consumer — 68 — 68
Total — 72 26 81
Net loans (charged off) recovered (27 ) 72 (7 ) 81
Additions to allowance charged to operating expenses 445 120 1,485 480
Allowance for loan losses at end of period $ 6,616 $ 4,953 $ 6,616 $ 4,953
Ratio of net charge-offs (recoveries) to average loans
outstanding (annualized) 0.02 % -0.08 % 0.00 % -0.03 %
Provision of allowance for loan losses to average
loans outstanding (annualized) 0.37 % 0.13 % 0.45 % 0.18 %
Allowance for loan losses to loans net of deferred fees at end of period 1.38 % 1.32 % 1.38 % 1.32 %
Allowance for loan losses to non PPP loans net of deferred fees at end of period 1.64 % 1.32 % 1.64 % 1.32 %
The adequacy of the ALLL and the level of the related provision for loan losses is determined based on management’s judgment after consideration of numerous factors including, but not limited to: (i) local and regional economic conditions, (ii) the financial condition of the borrowers, (iii) loan impairment and the related level of expected charge-offs, (iv) evaluation of industry trends, (v) industry and other concentrations, (vi) loans which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management, (vii) continuing evaluations of the performing loan portfolio, (viii) ongoing review and evaluation of problem loans identified as having loss potential, (ix) quarterly review by the Board of Directors, and (x) assessments by banking regulators and other third parties. Management and the Board of Directors evaluate the ALLL and determine its appropriate level considering objective and subjective measures, such as knowledge of the borrower’s business, valuation of collateral, the determination of impaired loans and exposure to potential losses.
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The ALLL totaled ~~$6,616,000~~$6,696,000 or ~~1.38%~~1.41% of total loans at ~~September 30, 2020~~March 31, 2021 compared to ~~$5,138,000~~$6,628,000 or ~~1.29%~~1.39% of total loans at December 31, ~~2019.~~2020. Excluding the 100% SBA guaranteed PPP loans, which do not carry the same risk as the rest of the loan portfolio, the ALLL to total loans was ~~1.64%~~1.60% at ~~September 30,~~March 31, 2021 and 1.56% at December 31, 2020. The allowance for loans as a percentage of impaired loans was 95.8% at March 31, 2021 and 94.0% at December 31, 2020. The Company establishes general and specific reserves in accordance with accounting principles generally accepted in the United States of America. The ALLL is composed of categories of the loan portfolio based on loan type and loan rating; however, the entire allowance is available to cover actual loan losses. While management uses available information to recognize possible losses on loans, future additions to the allowance may be necessary, based on changes in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the ~~Company’s~~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.
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The ALLL as a percentage of impaired loans was 93.1% at September 30, 2020 and 67.6% at December 31, 2019. Of the total nonperforming and impaired loans outstanding as of September 30, 2020, there were $648,000 in loans that had been reduced by partial charge-offs of $281,000.
The Company’s policy with regard to loan charge-offs continues to be that a loan is charged off against the ALLL when management believes that the collectability of the principal is unlikely. As previously discussed in the “Impaired Loans” section, certain loans are evaluated for impairment. Generally, if a loan is collateralized by real estate or other collateral, and considered collateral dependent, the impaired portion will be charged off to the allowance for loan losses unless it is in the process of collection, in which case a specific reserve may be warranted. Table Eight below summarizes, for the periods indicated, the activity in the ALLL.
Table Eight: Allowance for Loan Losses
(dollars in thousands) Three Months
Ended March 31,
2021 2020
Average loans outstanding $ 481,211 $ 396,322

Allowance for loan losses at beginning of period $ 6,628 $ 5,138
Loans charged off:
Consumer 9 —
Total 9 —
Recoveries of loans previously charged off:
Commercial 76 1
Real estate 1 3
Total 77 4
Net loans recovered 68 4
Additions to allowance charged to operating expenses — 495
Allowance for loan losses at end of period $ 6,696 $ 5,637
Ratio of net recoveries to average loans outstanding (annualized) -0.06 % 0.00 %
Provision of allowance for loan losses to average loans outstanding (annualized) 0.00 % 0.50 %
Allowance for loan losses to loans net of deferred fees at end of period 1.41 % 1.43 %
Allowance for loan losses to non PPP loans net of deferred fees at end of period 1.60 % 1.43 %
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It is the policy of management to maintain the allowance for loan losses at a level believed to be adequate for known and inherent risks in the portfolio. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan losses that management believes is appropriate at each reporting date. Formula allocations are calculated by applying historical loss factors to outstanding loans with similar characteristics. Historical loss factors are based upon the Company’s loss experience. These historical loss factors are adjusted for changes in the business cycle and for significant factors that, in ~~management’s~~management's judgment, affect the collectability of the loan portfolio as of the evaluation date.  The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions. Based on information currently available, management believes that the allowance for loan losses is prudent and adequate. However, no prediction of the ultimate level of loans charged off in future periods can be made with any certainty.

Other Real Estate Owned
At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company had one other real estate owned (“OREO”) property totaling ~~$846,000.~~$800,000. During ~~2020,~~the first quarter of 2021, the Company did not acquire or sell any OREO properties nor were there any impairment charges to this property. There was no valuation allowance at ~~September 30, 2020~~March 31, 2021 nor at year-end ~~2019.~~2020. The Company believes that the OREO property owned at ~~September 30, 2020~~March 31, 2021 was carried approximately at fair value.
~~Other Assets~~
Other assets consists of bank owned life insurance, accrued interest receivable and other assets. There was no significant change in the balance in bank owned life insurance at September 30, 2020 ($16,021,000) compared to December 31, 2019 ($15,763,000). Accrued interest receivable and other assets decreased from $8,148,000 at December 31, 2019 to $7,979,000 at September 30, 2020, a decrease of $169,000 (2.1%). A portion of this decrease is related to a decrease in the lease right-of-use-asset related to the Company’s adoption of ASU 2016-02 during 2019 which decreased $479,000 (16.7%), from $2,875,000 at December 31, 2019 to $2,396,000 at September 30, 2020. There were no repossessed automobiles at September 30, 2020, compared to $517,000 at December 31, 2019.
Deposits
At ~~September 30, 2020,~~March 31, 2021, total deposits were ~~$728,831,000~~$788,569,000 representing a ~~$123,994,000 (20.5%~~$44,392,000 (6.0%) increase from the December 31, ~~2019~~2020 balance of ~~$604,837,000.~~$744,177,000. The Company’s deposit growth plan for ~~2020~~2021 is to concentrate its efforts on increasing noninterest-bearing demand, interest-bearing money market and NOW accounts, and savings accounts while continuing to focus on maintaining an overall lower cost of funds than our peer group, while at the same time retaining our high-valued deposit relationships. During the first ~~nine months~~quarter of ~~2020,~~2021, the ~~Company’s~~Company experienced increases in noninterest-bearing checking ($~~69,807,000~~9,619,000 or ~~30.3%~~2.9%), interest-bearing checking ($~~14,556,000~~12,081,000 or ~~20.8%~~14.7%), money market savings ($~~35,328,000~~10,545,000 or ~~22.3%~~6.0%) ~~and~~, savings ($~~10,117,000~~6,307,000 or ~~13.3%~~7.2%), and ~~a decrease in~~ time deposits ($~~4,814,000~~5,840,000 or ~~6.5%~~8.4%). Some of the deposit increase can be attributed to our business accounts depositing the funds received from their PPP loans into their accounts held at American River Bank, as well as, balance increases due to the deferral payroll tax payments and other government programs.
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Other Borrowed Funds
Other borrowings outstanding as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, consist of advances (both ~~long-term~~short-term and ~~short-term)~~long-term) from the ~~FHLB.~~Federal Home Loan Bank of San Francisco (“FHLB”). Table Nine below summarizes these borrowings.
Table Nine: Other Borrowed Funds ��
(dollars in thousands)
March 31, 2021 December 31, 2020
Amount Rate Amount Rate
Short-term borrowings:
FHLB advances $ 7,000 0.54 % $ 7,000 0.54 %
Long-term borrowings:
FHLB advances $ 13,787 1.13 % $ 13,787 1.13 %
~~Table Nine: Other Borrowed Funds~~
~~(dollars in thousands)~~
September 30, 2020 December 31, 2019
Amount Rate Amount Rate
Short-term borrowings:
FHLB advances $ 12,000 0.32 % $ 9,000 1.46 %
Long-term borrowings:
FRBSF advances $ 1,960 0.35 % — —
FHLB advances $ 13,500 1.81 % $ 10,500 2.48 %
The maximum amount of short-term borrowings at any month-end during the first ~~nine~~three months of 2021 and 2020 was $7,000,000 and ~~2019 was $17,000,000 and $25,000,000,~~$12,000,000, respectively. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The ~~FRBSP advances are collateralized by PPP loans pledged to the FRBSF under the Paycheck Protection Program Lending Facility. The~~ following is a breakdown of rates and maturities on FHLB ~~and FRBSF~~ advances (dollars in thousands): as of March 31, 2021:
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Short-term Long-term
Amount $ 7,000 $ 13,787
Maturity 2021 2022 to 2025
Weighted average rates 0.54 % 1.13 %
Short-term Long-term
Amount $ 12,000 $ 15,460
Maturity 2020 to 2021 2021 to 2023
Weighted average rates 0.32 % 1.62 %
Capital Resources
The Company and American River Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (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~~Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The ~~Company’s~~Company's and American River ~~Bank’s~~Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

At March 31, 2021, shareholders’ equity was $92,891,000, representing a decrease of $204,000 (0.2%) from $93,095,000 at December 31, 2020. The decrease results from net income for the period ($2,647,000), stock based compensation and stock options exercised ($105,000), being less than decrease from other comprehensive income ($2,540,000) and the payment of cash dividends ($416,000). Table Ten below lists the Company’s and American River Bank’s capital ratios at March 31, 2021 and December 31, 2020, as well as the minimum capital ratios for capital adequacy and the minimum requirement for a well-capitalized institution. While the Company has elected to adopt the community bank leverage ratio framework in which it is no longer required to report the risk-based capital ratios, we believe reporting them to our shareholders allows them to compare the ratios of companies of similar size and, therefore, are presented below. ~~Table Ten below lists~~
Table Ten: Capital Ratios
Minimum Regulatory Capital
Requirements
Capital to Risk-Adjusted Assets March 31,
2021 December 31,
2020 2021 2020
American River Bankshares
Leverage Ratio 8.5 % 8.3 % N/A N/A
Tier 1 Risk-Based Capital 15.5 % 15.0 % N/A N/A
Total Risk-Based Capital 16.7 % 16.2 % N/A N/A

American River Bank
Leverage Ratio 8.5 % 8.4 % 6.5 % 6.5 %
Common Equity Tier 1 Risk-Based Capital 15.6 % 15.1 % 7.0 % 7.0 %
Tier 1 Risk-Based Capital 15.6 % 15.1 % 8.5 % 8.5 %
Total Risk-Based Capital 16.9 % 16.4 % 10.5 % 10.5 %
On February 17, 2021, the ~~Company’s~~Company paid a $0.07 per common share cash dividend to shareholders of record on February 3, 2021. This 2021 quarterly dividend follows four quarterly cash dividends, totaling $0.28 per share, paid in 2020. Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory requirements and is adequate to meet future needs. Accordingly, we cannot provide any assurance that we will continue to pay cash dividends at the same historical rates, or at all. Management believes that both the Company and American River ~~Bank’s~~Bank met all of their capital ~~ratios at September 30, 2020~~adequacy requirements as of March 31, 2021 and December 31, ~~2019 as well as the minimum regulatory requirements.~~
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Table Ten: Capital Ratios
September 30, December 31, Minimum Regulatory
Capital Requirements
2020 2019 2020 2019
American River Bankshares
Leverage Ratio 8.2 % 9.2 % N/A N/A
Tier 1 Risk-Based Capital 15.3 % 14.8 % N/A N/A
Total Risk-Based Capital 16.5 % 15.9 % N/A N/A

American River Bank
Leverage Ratio 8.3 % 9.3 % 6.5 % 6.5 %
Common Equity Tier 1 Risk-Based Capital 15.4 % 14.9 % N/A 7.0 %
Tier 1 Risk-Based Capital 15.4 % 14.9 % N/A 8.5 %
Total Risk-Based Capital 16.7 % 16.1 % N/A 10.5 %
At September 30, 2020, shareholders’ equity was $91,684,000, representing an increase of $8,775,000 (10.6%) from $82,909,000 at December 31, 2019. The increase results from net income for the period ($4,952,000), stock based compensation ($319,000), and the increase from other comprehensive income ($4,747,000), exceeding the payment of cash dividends ($1,243,000).2020.

Effective January 1, 2015, bank holding companies with consolidated assets of $1 Billion or more ($3 Billion or more effective August 30, 2018) and banks like American River Bank must comply with minimum capital ratio requirements which have been fully phased in. The Bank’s capital requirements consist of the following: (i) a common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6%; (iii) a total capital to total risk weighted assets ratio of 8%; and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.
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In addition, a “capital conservation buffer,” was established which requires maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer increases the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The buffer requirement became fully phased in on January 1, 2019. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases.
On February 12, 2020, May 15, 2020, and August 12, 2020, the Company paid cash dividends of $0.07 per common share to shareholders of record on January 29, 2020, April 29, 2020, and July 29, 2020, respectively. These 2020 quarterly cash dividends follow four quarterly cash dividends, totaling $0.24 per share, paid in 2019. Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory requirements and is adequate to meet future needs. Accordingly, we cannot provide any assurance that we will continue to pay cash dividends at the same historical rates, or at all. Management believes that both the Company and American River Bank met all of their capital adequacy requirements as of September 30, 2020 and December 31, 2019.
Inflation
The impact of inflation on a financial institution differs significantly from that exerted on manufacturing or other commercial concerns primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company and its subsidiaries through its effect on market rates of interest, which affects the Company’s ability to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand and potentially adversely affects capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which may be generated in the future. In addition to its effects on interest rates, inflation increases overall operating expenses. Inflation has not had a significant effect upon the results of operations of the Company and its subsidiaries during the periods ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.
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Liquidity
Liquidity management refers to the Company’s ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company’s liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit at ~~September 30, 2020~~March 31, 2021 were approximately ~~$35,729,000~~$43,649,000 and ~~zero,~~$60,000, respectively. Such loan commitments relate primarily to revolving lines of credit and other commercial loans and to real estate construction loans. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Company’s sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale and/or pledged for secured borrowings. At ~~September 30, 2020,~~March 31, 2021, consolidated liquid assets totaled ~~$165.5~~$220.1 million or ~~19.3%~~24.0% of total assets compared to ~~$141.5~~$191.2 million or ~~19.6%~~22.0% of total assets on December 31, ~~2019.~~2020. In addition to liquid assets, the Company maintains two short-term unsecured lines of credit in the amount of $17,000,000 with two of its correspondent banks. At ~~September 30, 2020,~~March 31, 2021, the Company had $17,000,000 available under these credit lines. Additionally, the Bank is a member of the FHLB. At ~~September 30, 2020,~~March 31, 2021, the Bank could have arranged for up to ~~$164,746,000~~$172,836,000 in secured borrowings from the FHLB. These borrowings are secured by pledged mortgage loans and investment securities. At ~~September 30, 2020,~~March 31, 2021, the ~~Bank~~Company had advances, borrowings and commitments (including letters of credit) outstanding of ~~$25,500,000,~~$20,787,000, leaving ~~$139,246,000~~$152,049,000 available under these FHLB secured borrowing arrangements. ~~The~~American River Bank also has a secured borrowing arrangement with the Federal Reserve Bank of San Francisco. The borrowing can be secured by pledging selected loans and investment securities. At ~~September 30, 2020,~~March 31, 2021, the ~~Bank’s~~Company’s borrowing capacity at the Federal Reserve Bank was $6,345,000. In April 2020, the Company entered into a borrowing arrangement with the Federal Reserve Bank of San Francisco to participate in the Paycheck Protection Program Lending Facility (“PPPLF”). The PPPLF allows commercial lenders to pledge PPP loans as collateral for advances up to the term of the original PPP loans, through December 31, 2020. At September 30, 2020, the Company had $1,960,000 pledged and borrowed under the PPPLF, and $73,844,000 in remaining PPP loans that could be pledged as collateral for future advances under the PPPLF.$6,062,000. The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets and borrowing capacity to offset the potential runoff of these volatile and/or cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The Company can sell any of its unpledged securities held in the available-for-sale category to meet liquidity needs. Furthermore, the Bank can pledge additional unencumbered securities to borrow from the Federal Reserve Bank of San Francisco orand the FHLB.
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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~~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, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, commitments to extend credit and standby letters of credit were the only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments. Loan commitments and standby letters of credit were ~~$35,729,000~~$43,709,000 and ~~$40,624,000~~$32,851,000 at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. As a percentage of net loans these off-balance sheet items represent ~~6.9%~~9.3% and ~~10.3%~~7.0%, respectively. ~~See also, Note 3 “Commitments and Contingencies” to the unaudited consolidated financial statements included herein for additional information about the Company’s off-balance sheet items.~~
49
The Company has certain ongoing commitments under operating leases. These commitments do not significantly impact operating results. See also, Note 9 “Leases” to the unaudited consolidated financial statements included herein for additional information about the Company’s leases.
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-year and two-year periods assuming a gradual change in rates over the twelve-month horizon. The simulation modeling attempts to estimate changes in the ~~Company’s~~Company's net interest income utilizing a detailed current balance sheet. Table Eleven below summarizes the effect on net interest income (NII) of a ±100 and ±200 basis point change in interest rates as measured against a constant rate (no change) scenario.
Table Eleven: Interest Rate Risk Simulation of Net Interest as of March 31, 2021
(dollars in thousands) $ Change in NII
from Current
12 Month Horizon $ Change in NII
from Current
24 Month Horizon
Variation from a constant rate scenario
+100bp $ 597 $ 1,954
+200bp $ 1,174 $ 3,958
-100bp $ (621 ) $ (2,089 )
-200bp $ (1,351 ) $ (4,163 )
After a review of the model results as of March 31, 2021, 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.
46
Interest Rate Sensitivity Analysis
Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the current portfolio that are subject to repricing at various time horizons. The differences are known as interest sensitivity gaps. A positive cumulative gap may be equated to an asset sensitive position. An asset sensitive position in a rising interest rate environment will cause a bank’s interest rate margin to expand. This results as floating or variable rate loans reprice more rapidly than fixed rate certificates of deposit that reprice as they mature over time. Conversely, a declining interest rate environment will cause the opposite effect. A negative cumulative gap may be equated to a liability sensitive position. A liability sensitive position in a rising interest rate environment will cause a bank’s interest rate margin to contract, while a declining interest rate environment will have the opposite effect.

~~Table Eleven below summarizes the effect on net interest income (NII) of a ±100 and ±200 basis point change in interest rates as measured against a constant rate (no change) scenario.~~
50
~~Table Eleven: Interest Rate Risk Simulation of Net Interest as of September 30, 2020~~
(dollars in thousands)
$ Change in NII
from Current
12 Month Horizon

$ Change in NII
from Current
24 Month Horizon

Variation from a constant rate scenario
+100bp $ 589 $ 2,028
+200bp $ 1,143 $ 4,050
-100bp $ (301 ) $ (1,503 )
-200bp $ (715 ) $ (2,928 )
After a review of the model results as of September 30, 2020, 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, 2020.~~March 31, 2021. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures ~~were effective as of the end of the period covered by this report.~~are effective.

During the quarter ended ~~September 30, 2020,~~March 31, 2021, 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.
51
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~~Except as described below, 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, ~~2019,~~2020, filed with the Securities and Exchange Commission on ~~February 21, 2020, except~~March 18, 2021.
Because the market price of Marin Bancorp common stock will fluctuate, the Company's shareholders cannot be sure of the exact value of the consideration they will receive in the Merger.
Upon the effective time of the Merger described above, each share of Company common stock will be cancelled and converted into the right to receive the Merger Consideration, consisting of shares of Marin Bancorp common stock pursuant to the terms of the Merger Agreement. The value of the Merger Consideration to be received by Company shareholders will be based on an Exchange Ratio, which is fixed at 0.575 shares of Marin Bancorp common stock for each share of Company common stock. Because the price of Marin Bancorp common stock could fluctuate during the period of time between the date of this filing and the time the Company's shareholders actually receive their shares of Marin Bancorp common stock as ~~described below.~~merger consideration, the Company's shareholders will be subject to the risk of a decline in the price of Marin Bancorp common stock during this period. The Company does not have the right to terminate the Merger Agreement or to re-solicit the vote of its shareholders solely because of changes in the market prices of Marin Bancorp common stock. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the values and perceptions of financial services stocks generally and Marin Bancorp in particular, changes in Marin Bancorp's business, operations and prospects and regulatory considerations. Many of these factors are beyond Marin Bancorp's control. Accordingly, the Company's shareholders will not know or be able to calculate the exact value of the shares of Marin Bancorp common stock they will receive upon completion of the Merger until actual consummation of the Merger.
47
Directors and officers of the Company have some interests in the Merger that are in addition to or different than the interests of the Company's shareholders.
The Company's directors and officers have interests in the Merger as individuals that are in addition to, or different from, their interests as shareholders of the Company, which include:
The Company's directors and officers will have the vesting of their Company stock options and Company restricted stock accelerated and (i) the Company restricted stock shall be converted into the right to receive the Merger Consideration and (ii) holders of Company options will receive cash based on the difference between the value of Marin Bancorp common stock as of a set time prior to the Merger and the strike price of the options.
The agreement of Marin Bancorp to honor indemnification obligations of the Company for a period of six (6) years, as well as to purchase liability insurance for the Company's directors and officers for six (6) years following the merger, subject to the terms of the Merger Agreement;
Cash payments to certain officers of the Company in the aggregate amount of approximately $2.7 million, on a pre-tax basis, pursuant to the terms of their respective employment-related agreements with the Company and assumption of certain deferred compensation arrangements and other employee benefits the Company’s officers had previously entered into; and
The appointment of two directors of the Company to the Board of Directors of Marin Bancorp and Bank of Marin effective upon completion of the merger;
The termination fee and the restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire the Company.
Until the completion of the Merger, with some limited exceptions, the Company is prohibited from soliciting, initiating, encouraging or participating in any discussion of or otherwise considering any inquiries or proposals that may lead to an acquisition proposal, such as a merger or other business combination transaction, with any person other than Marin Bancorp. In addition, the Company has agreed to pay a termination fee to Marin Bancorp in specified circumstances. These provisions could discourage other companies from trying to acquire the Company even though those other companies might be willing to offer greater value to the Company's shareholders than Marin Bancorp has offered in the Merger.
Marin Bancorp may fail to realize the anticipated benefits of the Merger.
The success of the Merger will depend on, among other things, Marin Bancorp's ability to realize the anticipated revenue enhancements and efficiencies and to combine the businesses of Marin Bancorp and the Company in a manner that does not materially disrupt the existing customer relationships of the Company or result in decreased revenues resulting from any loss of customers and that permits growth opportunities to occur. If Marin Bancorp is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected.
Marin Bancorp and the Company have operated and, until the completion of the Merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company's ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect Marin Bancorp's ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the Merger. Integration efforts between the two companies could also divert management attention and resources. These integration matters could have an adverse effect on each of Marin Bancorp and the Company during the transition period and on the combined company following completion of the merger.
48
The merger may distract management of the Company and Marin Bancorp from their other responsibilities.
The merger could cause the management of the Company and Marin Bancorp to focus their time and energies on matters related to the Merger that otherwise would be directed to their respective businesses and operations. Anysuch distraction on the part of management, if significant, could affect the ability of Marin Bancorp and the Company to service existing business and develop new business and may adversely affect their businesses and earnings.

The market price of Marin Bancorp common stock after the Merger may be affected by factors different from those affecting the shares of the Company or Marin Bancorp currently.
Upon completion of the Merger, holders of Company common stock will become holders of Marin Bancorp common stock. Marin Bancorp's business differs from that of the Company, and, accordingly, the financial condition and results of operations of the combined company and the market price of Marin Bancorp common stock after the completion of the Merger may be affected by certain factors which are different from those currently affecting the financial condition and results of operations of the Company or Marin Bancorp on a standalone basis.
~~COVID~~-19 ~~pandemic has significantly impacted~~The Merger is subject to the ~~State~~receipt of ~~California and our business. We~~approvals or waivers from regulatory authorities that may impose conditions that could have ~~already experienced~~ an adverse ~~impact~~effect on ~~our business as result~~Marin Bancorp.
Before the Merger can be completed, various approvals or waivers must be obtained from bank regulatory authorities. Regulatory approval or waivers are not guaranteed and even if granted, the bank regulatory authorities may impose conditions on the completion of the ~~pandemic. The ultimate impact~~Merger or require changes to the terms of the ~~COVID-19 pandemic~~Merger Agreement. Although the Company does not currently expect that any such conditions or changes will be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the merger, imposing additional costs on, ~~our business and financial results will depend on future developments, which are highly uncertain and~~or limiting the revenues of Marin Bancorp following the Merger or causing the Merger Agreement to terminate.
The Merger cannot be ~~predicted, including~~completed unless the ~~scope~~Marin Bancorp shareholders approve the Merger Agreement and ~~duration~~the issuance of Marin Bancorp common stock in the merger and the Company's shareholders approve the Merger Agreement.
In order for the Merger to be completed, the Marin Bancorp shareholders must approve the Merger Agreement and the issuance of Marin Bancorp common stock in the Merger and the Company shareholders must approve the Merger Agreement and the other transactions contemplated by the Merger Agreement. If either or both of these required votes is not obtained from the shareholders of each of the ~~pandemic~~respective companies, the merger may not be consummated.
The Merger is subject to certain closing conditions that, if not satisfied or waived, will result in the Merger not being completed, which may cause the prices of Marin Bancorp common stock and ~~actions taken by governmental authorities~~the Company's common stock to decline.

Consummation of the Merger is subject to customary conditions to closing in ~~response~~addition to the ~~pandemic.~~

receipt of the required regulatory approvals and approval of the Company's shareholders of the Merger Agreement and the approval of Marin Bancorp's shareholders of the issuance of Marin Bancorp common stock in connection with the Merger. If any condition to the Merger is not satisfied or waived, to the extent permitted by law, the Merger will not be completed. In addition, Marin Bancorp and the Company may terminate the Merger Agreement under certain circumstances even if the Merger Agreement is approved by the Company's shareholders and the issuance of Marin Bancorp common stock in connection with the Merger is approved by Marin Bancorp's shareholders, including if the merger has not been completed on or before December 31, 2021. If the merger is not completed, the respective trading prices of Marin Bancorp common stock and Company common stock on the Nasdaq Stock Market may decline to the extent that the current prices reflect a market assumption that the Merger will be completed. In addition, neither company would realize any of the expected benefits of having completed the Merger.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. We, and manyshares of our clients, have been adversely affected by the COVID-19 pandemic. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering-in-place requirements in many states and communities. Our operations, like those of other financial institutions, are significantly influenced by economic conditions in California, including the strength of the real estate market and construction industry. As a result, the demand for our products and services has been, and may continueMarin Bancorp common stock to be ~~adversely impacted.~~

Furthermore, the pandemic could influence the recognition of credit losses in our loan portfolios and increase our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. For the nine months ending September 30, 2020, we increased our allowance for loan lossesreceived by ~~$1,485,000, primarily~~Company shareholders as a result of the ~~COVID-19 pandemic. Similarly, because~~Merger will have different rights than shares of the Company's common stock.

Upon completion of the Merger, the Company's shareholders will become Marin Bancorp shareholders and their rights as shareholders will be governed by the Marin Bancorp articles of incorporation and bylaws. The rights associated with Company common stock are different from the rights associated with Marin Bancorp common stock.

Holders of Company common stock will have a reduced ownership and voting interest after the Merger and will exercise less influence over management.

Holders of Company common stock currently have the right to vote in the election of the board of directors and on other matters affecting the Company. Upon the completion of the Merger, each Company shareholder who receives shares of Marin Bancorp common stock will become a shareholder of the Company with a percentage ownership of Marin Bancorp that is smaller than the shareholder’s percentage ownership of the Company. In the aggregate, the Company’s current shareholders are expected to own approximately 20.5% of the outstanding shares of Marin Bancorp common stock when the Merger is completed. Because of this, Company shareholders may have less influence on the management and policies of the combined company than they now have on the management and policies of the Company.

We will be subject to contractual restrictions and business uncertainties while the merger with Marin Bancorp is pending.

Although there is no assurance as to the exact timing, the merger currently is expected to close at the end of the third quarter of 2021 or early in the fourth quarter of 2021. The Merger Agreement requires us to operate in the ordinary course of business pending the Merger's completion, but restricts us from certain activities, including making acquisitions or opening of new branches, divestitures, issuance of securities and other customary restrictions without Marin Bancorp's consent. These restrictions may limit or prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger, and which we might pursue absent the Merger Agreement.

Uncertainty about the effects of the merger on our employees and customers may have an adverse effect on us. Certain employees may experience uncertainty about their future roles. These uncertainties may make it more difficult for us to attract, retain and motivate key personnel until the merger is completed, and could cause our customers and others that deal with us to consider changing existing business relationships with us. It is not unusual for competitors to use mergers as an opportunity to seek the merging parties' customers and to hire certain of their staffs. If key employees depart the Company or American River Bank in light of uncertainty over the merger or our integration efforts with Marin Bancorp, our business could be adversely affected.

The fairness opinion received by the Company’s board of directors has not been, and is not expected to be, updated to reflect any changes in circumstances that may have occurred since the date of the opinion.

The fairness opinions of Piper Sandler was delivered to the Company’s board of directors on April 16, 2021. Changes in the operations and prospects of Marin Bancorp or the Company, general market and economic conditions and ~~market conditions affecting issuers,~~other factors which may be beyond the control of Marin Bancorp and the Company may have altered the value of Marin Bancorp or the Company or the sale prices of shares of Marin Bancorp common stock and Company common stock as of the date hereof, or may alter such values and sale prices by the time the Merger is completed. The opinion from Piper Sandler, dated April 16, 2021, does not speak as of any date other than the date of that opinion.

Termination of the Merger Agreement could negatively affect us.

If, for any reason, the Merger Agreement is terminated, our business may be adversely affected as a result of not pursuing other beneficial opportunities prior to such termination and our management focus on completing the merger. If the Merger Agreement is terminated and our board of directors seeks another merger or business combination, we may not be ~~required~~able to ~~recognize other-than-temporary impairments in future periods on~~find a party willing to offer equivalent or more attractive consideration than the ~~securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable~~consideration Marin Bancorp has agreed to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, and we have already temporarily reduced hours at our branches and staff are working remotely. In response to the pandemic, we have implemented loan programs to allow borrowers to defer loan principal and interest payments and are participatingprovide in the ~~PPP under~~merger, especially if the CARES Act to help provide loans to our business clients to provide them with additional working capital to enable them to retain their employees. The extent to which the COVID-19 pandemic continues to negatively impact our business, results of operations, and financial condition,termination fee becomes payable as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.a result.

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

The Company did not repurchase any shares during ~~2019~~2020 or the first ~~nine~~three months of ~~2020~~2021 and does not currently have a stock repurchase program in place.

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

(10.1)		First amendment to the Employment Agreement, dated September 20, 2006, by and between American River Bankshares and Kevin B. Bender (incorporated by reference to Exhibit 10.1 filed with the Registrant’s Form 8-K on February 23, 2021).

(10.2)		~~Third Lease Amendment~~First amendment to ~~Lease~~the Employment Agreement, ~~between Point West Office Investors LLC, a Delaware limited liability company, Nelson Point West LLC, a Delaware limited liability company~~dated September 20, 2006, by and ~~Bridgewood Point West LP, a Delaware limited partnership and~~between American River Bankshares and Mitchell A. Derenzo (incorporated by reference to Exhibit 10.2 filed with the Registrant’s Form 8-K on February 23, 2021).

(10.3)		First amendment to the Employment Agreement, dated May 15, 2018, by and between American River Bank and Dan C. McGregor (incorporated by reference to Exhibit 10.3 filed with the Registrant’s Form 8-K on February 23, 2021).

(10.4)		Agreement to Merge and Plan of Reorganization between American River Bankshares and Bank of Marin Bancorp, a California corporation (incorporated by reference to Exhibit ~~99.1~~2.1 filed with the Registrant’s Form 8-K on ~~September 14, 2020)~~April 19, 2021).

(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*
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

		*Filed herewith
		** Furnished herewith

5351

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 5, 2020~~May 6, 2021	By:~~By:~~	/s/ DAVID E. RITCHIE, JR.
		David E. Ritchie, Jr.
		President and
		Chief Executive Officer

	AMERICAN RIVER BANKSHARES

~~November 5, 2020~~May 6, 2021	By:~~By:~~	/s/ MITCHELL A. DERENZO
		Mitchell A. Derenzo
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

5452

(dollars in thousands, except per share data)
For the periods ended September 30,	Three months					Nine months
	2020		2019			2020		2019
Interest income:
Interest and fees on loans:
Taxable	$	5,275	$	4,397		$	15,034	$	12,329
Exempt from Federal income taxes		202		186			635		501
Interest on Federal funds sold		—		—			—		5
Interest on deposits in banks		19		71			73		151
Interest and dividends on investment securities:
Taxable		1,523		1,846			4,894		5,756
Exempt from Federal income taxes		36		55			109		221
Total interest income		7,055		6,555			20,745		18,963
Interest expense:
Interest on deposits		261		545			1,074		1,558
Interest on borrowings		74		82			243		300
Total interest expense		335		627			1,317		1,858

Net interest income		6,720		5,928			19,428		17,105

Provision for loan losses		445		120			1,485		480

Net interest income after provision for loan losses		6,275		5,808			17,943		16,625

Noninterest income:
Service charges on deposit accounts		115		149			381		409
Gain on sale or call of securities		—		9			38		74
Other noninterest income		259		259			743		766
Total noninterest income		374		417			1,162		1,249

Noninterest expense:
Salaries and employee benefits		2,889		2,898			8,265		8,423
Occupancy		258		256			773		768
Furniture and equipment		140		120			422		400
Federal Deposit Insurance Corporation assessments		62		(47	)		138		48
Expenses related to other real estate owned		4		7			27		15
Other expense		870		859			2,730		2,847
Total noninterest expense		4,223		4,093			12,355		12,501

Income before provision for income taxes		2,426		2,132			6,750		5,373

Provision for income taxes		647		561			1,798		1,380

Net income	$	1,779	$	1,571		$	4,952	$	3,993

Basic earnings per share	$	0.30	$	0.27		$	0.84	$	0.68
Diluted earnings per share	$	0.30	$	0.27		$	0.84	$	0.68

(dollars in thousands, except per share data)
For the three months ended March 31,
	2021		2020
Interest income:
Interest and fees on loans:
Taxable	$	5,604	$	4,675
Exempt from Federal income taxes		193		230
Interest on deposits in banks		8		34
Interest and dividends on investment securities:
Taxable		1,515		1,739
Exempt from Federal income taxes		34		37
Total interest income		7,354		6,715
Interest expense:
Interest on deposits		160		440
Interest on borrowings		62		87
Total interest expense		222		527

Net interest income		7,132		6,188

Provision for loan losses		—		495

Net interest income after provision for loan losses		7,132		5,693

Noninterest income:
Service charges on deposit accounts		164		155
Gain on sale of securities		172		38
Other noninterest income		255		259
Total noninterest income		591		452

Noninterest expense:
Salaries and employee benefits		2,762		2,865
Occupancy		259		256
Furniture and equipment		134		143
Federal Deposit Insurance Corporation assessments		54		27
Expenses related to other real estate owned		4		5
Other expense		850		920
Total noninterest expense		4,063		4,216

Income before provision for income taxes		3,660		1,929

Provision for income taxes		1,013		497

Net income	$	2,647	$	1,432

Basic earnings per share	$	0.45	$	0.24
Diluted earnings per share	$	0.45	$	0.24

								Accumulated
(dollars in thousands, except per share data)								Other			Total
	Common Stock				Retained			Comprehensive			Shareholders’
	Shares		Amount		Earnings			Income (Loss)			Equity
Balance, January 1, 2019		5,858,428	$	30,103	$	46,494		$	(1,876	)	$	74,721

Net income						3,993						3,993
Other comprehensive income, net of tax:									4,772			4,772
Cash dividends ($0.17 per share)						(1,000	)					(1,000	)
Net restricted stock award activity and related compensation expense		33,660		257								257
Stock options exercised		11,140		95								95
Stock option compensation expense				11								11

Balance, September 30, 2019		5,903,228	$	30,466	$	49,487		$	2,896		$	82,849

Balance, January 1, 2020		5,898,878	$	30,536	$	50,581		$	1,792		$	82,909

Net income						4,952						4,952
Other comprehensive income, net of tax:									4,747			4,747
Cash dividends ($0.21 per share)						(1,243	)					(1,243	)
Net restricted stock award activity and related compensation expense		39,131		315								315
Stock option compensation expense				4								4

Balance, September 30, 2020		5,938,009	$	30,855	$	54,290		$	6,539		$	91,684

(dollars in thousands)
For the nine months ended September 30,	2020			2019
Cash flows from operating activities:
Net income	$	4,952		$	3,993
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,485			480
Increase (decrease) in deferred loan origination fees and costs, net		1,562			(454	)
Depreciation and amortization		331			170
Gain on sale of investment securities, net		(38	)		(74	)
Amortization of investment security premiums and discounts, net		985			1,117
Increase in cash surrender values of life insurance policies		(258	)		(247	)
Stock based compensation expense		319			268
(Increase) decrease in accrued interest receivable and other assets		(2,327	)		479
(Decrease) increase in accrued interest payable and other liabilities		(2,645	)		39

Net cash provided by operating activities		4,366			5,771

Cash flows from investing activities:
Proceeds from the sale of available-for-sale investment securities		4,229			43,213
Proceeds from matured available-for-sale investment securities		—			5,000
Purchases of available-for-sale investment securities		(36,479	)		(56,978	)
Proceeds from principal repayments for available-for-sale investment securities		33,091			33,375
Proceeds from principal repayments for held-to-maturity investment securities		233			36
Net increase in loans		(72,463	)		(34,077	)
Purchases of loans		(8,429	)		(17,373	)
Net decrease (increase) in FHLB stock		47			(327	)
Purchases of equipment		(88	)		(316	)

Net cash used in investing activities		(79,859	)		(27,447	)

Options	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2020		29,958	$	8.79		4.4 years	$	182
Awarded		—		—		—		—
Exercised		—		—		—		—
Expired, forfeited or cancelled		—		—		—		—
Outstanding at September 30, 2020		29,958	$	8.79		3.6 years	$	35

Vested at September 30, 2020		29,958	$	8.79		3.6 years	$	35

Non-vested at September 30, 2020		—	$	—		—	$	0

Restricted Stock	Shares			Weighted Average Award Date Fair Value
Nonvested at January 1, 2020		43,971		$	13.95
Awarded		39,131			12.45
Less: Vested		(21,678	)		13.63
Less: Expired, forfeited or cancelled		—			0
Nonvested at September 30, 2020		61,424		$	13.11

Restricted Stock	Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2021		58,499	$	13.03
Awarded		22,761		15.25
Less: Vested		15,501		14.61
Less: Expired, forfeited or cancelled		—		0
Nonvested at March 31, 2021		65,759	$	13.43


	September 30, 2020									March 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government Agencies and Sponsored Entities	$	235,441	$	8,991	$	(745	)	$	243,687
U.S. Government Agencies and Sponsored Agencies										$	261,826	$	6,326	$	(1,665	)	$	266,487
Obligations of states and political subdivisions		15,445		917		—			16,362		16,257		495		(29	)		16,723
U. S Treasury securities											11,663		—		(99	)		11,564
Corporate bonds		6,748		120		—			6,868		6,749		110		(5	)		6,854
	$	257,634	$	10,028	$	(745	)	$	266,917	$	296,495	$	6,931	$	(1,798	)	$	301,628

	December 31, 2019									December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government Agencies and Sponsored Entities	$	239,617	$	3,371	$	(1,101	)	$	241,887
U.S. Government Agencies and Sponsored Agencies										$	276,191	$	8,474	$	(832	)	$	283,833
Obligations of states and political subdivisions		13,308		212		(73	)		13,447		15,288		1,013		—			16,301
Corporate bonds		6,496		135		—			6,631		6,748		85		(1	)		6,832
	$	259,421	$	3,718	$	(1,174	)	$	261,965	$	298,227	$	9,572	$	(833	)	$	306,966


September 30, 2020	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 Entities	$	32,735		$	(255	)	$	35,932	$	(490	)	$	68,667	$	(745	)
	$	32,735		$	(255	)	$	35,932	$	(490	)	$	68,667	$	(745	)

December 31, 2019	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 Entities	$	65,082		$	(438	)	$	38,380	$	(663	)	$	103,462	$	(1,101	)
Obligations of states and political subdivisions		8,060			(73	)		—		—			8,060		(73	)
	$	73,142		$	(511	)	$	38,380	$	(663	)	$	111,522	$	(1,174	)

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	2,278	$	2,309
After one year through five years		500		502
After five years through ten years		16,131		16,907
After ten years		3,284		3,512
		22,193		23,230
Investment securities not due at a single maturity date:
U.S. Government Agencies and Sponsored Entities		235,441		243,687	$	15	$	16
	$	257,634	$	266,917	$	15	$	16

	March 31, 2021			December 31, 2020
Nonaccrual loans that are current to terms (less than 30 days past due)	$	—		$	—
Nonaccrual loans that are past due		—			—
Loans past due 90 days and accruing interest		—			—
Other real estate owned		800			800
Other assets		—			—
Total nonperforming assets	$	800		$	800

Nonperforming loans to total loans		0			0
Total nonperforming assets to total assets		0.09	%		0.09	%

(dollars in thousands)	As of September 30, 2020						As of December 31, 2019
(in thousands)													As of March 31, 2021						As of December 31, 2020
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Real estate-commercial	$	5,102	$	5,236	$	—	$	5,530	$	5,664	$	—	$	5,046	$	5,180	$	—	$	5,075	$	5,209	$	—
Real estate-residential		313		400		—		318		405		—		311		398		—		312		399		—
Subtotal	$	5,415	$	5,636	$	—	$	5,848	$	6,069	$	—	$	5,357	$	5,578	$	—	$	5,387	$	5,608	$	—

With an allowance recorded:

Real estate-commercial	$	1,565	$	1,625	$	121	$	1,622	$	1,693	$	133	$	1,512	$	1,572	$	100		1,539		1,599		106
Real estate-residential		128		128		7		134		134		9		120		120		9		124		124		6
Subtotal	$	1,693	$	1,753	$	128	$	1,756	$	1,827	$	142	$	1,632	$	1,692	$	109	$	1,663	$	1,723	$	112

Total:

Real estate-commercial	$	6,667	$	6,861	$	121	$	7,152	$	7,357	$	133	$	6,558	$	6,752	$	100	$	6,614	$	5,808	$	106
Real estate-residential		441		528		7		452		539		9		431		518		9		436		523		6
	$	7,108	$	7,389	$	128	$	7,604	$	7,896	$	142	$	6,989	$	7,270	$	109	$	7,050	$	7,331	$	112

	Average Recorded Investments for the three months ended				Average Recorded Investments for the nine months ended				Average Recorded Investments for the three months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019		March 31, 2021		March 31, 2020
Real estate-commercial	$	6,761	$	7,231	$	6,798	$	7,347	$	6,586	$	7,125
Real estate-residential		451		460		447		465		433		449
Total	$	7,212	$	7,691	$	7,245	$	7,812	$	7,019	$	7,574

	Interest Income Recognized for the three months ended				Interest Income Recognized for the nine months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Real estate-commercial	$	107	$	110	$	301	$	329
Real estate-residential		5		7		19		19
Total	$	112	$	117	$	320	$	348

September 30, 2020	Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)			Real Estate
	Commercial		Commercial		Multi-family		Construction		Residential
Grade:
Pass	$	115,561	$	191,302	$	42,739	$	30,193	$	22,958
Watch		195		32,501		—		311		4,762
Special mention		4,400		124		—		—		—
Substandard		—		1,202		—		—		—
Doubtful		—		—		—		—		—
Total	$	120,156	$	225,129	$	42,739	$	30,504	$	27,720

	Credit Risk Profile by Internally Assigned Grade
	Other Credit Exposure
	Agriculture		Consumer						Total
Grade:
Pass	$	6,138	$	28,053					$	436,944
Watch		—		107						37,876
Special mention		—		—						4,524
Substandard		—		—						1,202
Doubtful		—		—						—
Total	$	6,138	$	28,160					$	480,546

December 31, 2019	Credit Risk Profile by Internally Assigned Grade
March 31, 2021											Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)			Real Estate										Real Estate
	Commercial		Commercial		Multi-family		Construction		Residential		Commercial		Commercial		Multi-family		Construction		Residential
Grade:
Pass	$	38,085	$	208,140	$	56,818	$	23,169	$	28,570	$	87,216	$	227,925	$	45,254	$	25,242	$	31,234
Watch		4,915		6,329		—		—		610		6,766		18,100		—		—		515
Special mention		19		—		—		—		—		—		1,437		—		—		—
Substandard		—		135		—		—		—		—		1,198		—		—		—
Doubtful or loss		—		—		—		—		—		—		—		—		—		—
Total	$	43,019	$	214,604	$	56,818	$	23,169	$	29,180	$	93,982	$	248,660	$	45,254	$	25,242	$	31,749

	Credit Risk Profile by Internally Assigned Grade										Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
	Other Credit Exposure										Agriculture		Consumer						Total
Grade:
Pass											$	6,034	$	26,462					$	449,367
Watch												—		133						25,514
Special mention												—		—						1,437
Substandard												—		—						1,198
Doubtful or loss												—		—						—
Total											$	6,034	$	26,595					$	477,516

December 31, 2020											Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)													Real Estate
	Agriculture		Consumer						Total		Commercial		Commercial		Multi-family		Construction		Residential
Grade:
Pass	$	6,479	$	26,317					$	387,578	$	90,021	$	229,887	$	48,760	$	18,424	$	31,760
Watch		—		75						11,929		4,501		20,143		—		—		569
Special mention		—		—						19		—		118		—		—		—
Substandard		—		—						135		—		1,200		—		—		—
Doubtful		—		—						—
Doubtful or loss												—		—		—		—		—
Total	$	6,479	$	26,392					$	399,661	$	94,522	$	251,348	$	48,760	$	18,424	$	32,329

											Credit Risk Profile by Internally Assigned Grade Other Credit Exposure
											Agriculture		Consumer						Total
Grade:
Pass											$	6,091	$	28,668					$	453,611
Watch												—		136						25,349
Special mention												—		—						118
Substandard												—		—						1,200
Doubtful or loss												—		—						—
Total											$	6,091	$	28,804					$	480,278

March 31, 2021
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due Greater Than 89 Days		Total Past Due		Current		Total Loans		Past Due Greater Than 89 Days and Accruing		Nonaccrual
Commercial:
Commercial	$	—	$	—	$	—	$	—	$	93,982	$	93,982	$	—	$	—
Real estate:
Commercial		—		—		—		—		248,660		248,660		—		—
Multi-family		—		—		—		—		45,254		45,254		—		—
Construction		—		—		—		—		25,242		25,242		—		—
Residential		—		—		—		—		31,749		31,749		—		—
Other:
Agriculture		—		—		—		—		6,034		6,034		—		—
Consumer		—		—		—		—		26,595		26,595		—		—

Total	$	—	$	—	$	—	$	—	$	477,516	$	477,516	$	—	$	—

December 31, 2020
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due Greater Than 89 Days		Total Past Due		Current		Total Loans		Past Due Greater Than 89 Days and Accruing		Nonaccrual
Commercial:
Commercial	$	—	$	—	$	—	$	—	$	94,522	$	94,522	$	—	$	—
Real estate:
Commercial		—		—		—		—		251,348		251,348		—		—
Multi-family		—		—		—		—		48,760		48,760		—		—
Construction		—		—		—		—		18,424		18,424		—		—
Residential		—		—		—		—		32,329		32,329		—		—
Other:
Agriculture		—		—		—		—		6,091		6,091		—		—
Consumer		—		—		—		—		28,804		28,804		—		—

Total	$	—	$	—	$	—	$	—	$	480,278	$	480,278	$	—	$	—

	2021			2020
Balance Sheet
Operating lease asset classified as other assets	$	2,551,000		$	2,717,000
Operating lease liability classified as other liabilities		2,730,000			2,392,000

Income Statement
Operating lease cost classified as occupancy and equipment expense	$	194,000		$	190,000
Weighted average lease term, in years		5.87			5.47
Weighted average discount rate (1)		2.98	%		2.98	%
Operating cash flows	$	190,000		$	194,000

Balance Sheet

Operating lease asset classified as other assets	$	2,396,000
Operating lease liability classified as other liabilities		2,593,000

Income Statement

Operating lease cost classified as occupancy and equipment expense	$	576,000
Weighted average lease term, in years		5.18
Weighted average discount rate (1)		3.01%
Operating cash flows	$	585,000

	Balance
October 1, 2020 to December 31, 2020	$	194,000
January 1, 2021 to December 31, 2021		777,000
January 1, 2022 to December 31, 2022		753,000
January 1, 2023 to December 31, 2023		329,000
January 1, 2024 to December 31, 2024		322,000
Thereafter		985,000
Total lease payments		3,360,000
Less: Interest		(767,000	)
Present value of lease liabilities	$	2,593,000

	Balance
April 1, 2021 to December 31, 2021	$	583,000
January 1, 2021 to December 31, 2022		753,000
January 1, 2022 to December 31, 2023		329,000
January 1, 2023 to December 31, 2024		322,000
January 1, 2024 to December 31, 2025		232,000
Thereafter		753,000
Total lease payments		2,972,000
Less: Interest		(242,000	)
Present value of lease liabilities	$	2,730,000


	Carrying		Fair Value Measurements Using:
March 31, 2021	Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	18,927	$	18,927	$	—	$	—	$	18,927
Interest-bearing deposits in banks		78,871		78,871		—		—		78,871
Available-for-sale Securities		301,628		—		301,628		—		301,628
Held-to-maturity securities		10		—		11		—		11
Net loans		468,718		—		—		479,432		479,432
Accrued interest receivable		3,460		—		1,502		1,958		3,460

Financial liabilities:
Deposits:
Noninterest-bearing	$	339,714	$	339,714	$	—	$	—	$	339,714
Savings		93,622		93,622		—		—		93,622
Money market		186,086		186,086		—		—		186,086
Interest checking		94,126		94,126		—		—		94,126
Time Deposits		75,021		—		75,347		—		75,347
Short-term borrowings		7,000		7,000		—		—		7,000
Long-term borrowings		13,787		—		13,945		—		13,945
Accrued interest payable		37		9		28		—		37

	Carrying		Fair Value Measurements Using:
December 31, 2020	Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and due from banks	$	14,030	$	14,030	$	—	$	—	$	14,030
Interest-bearing deposits in banks		28,479		26,733		1,746		—		28,479
Available-for-sale Securities		306,966		—		306,966		—		306,966
Held-to-maturity securities		12		—		13		—		13
Net loans:		471,853		—		—		474,400		474,400
Accrued interest receivable		3,733		—		1,428		2,305		3,733
Financial liabilities:

Deposits:
Noninterest-bearing	$	330,095	$	330,095	$	—	$	—	$	330,095
Savings		87,315		87,315		—		—		87,315
Money market		175,541		175,541		—		—		175,541
Interest checking		82,045		82,045		—		—		82,045
Time Deposits		69,181		—		69,511		—		69,511
Short-term borrowings		7,000		7,000		—		—		7,000
Long-term borrowings		13,787		—		13,967		—		13,967
Accrued interest payable		42		3		39		—		42

Description			Fair Value Measurements Using:						Total Gains
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3		(Losses)
September 30, 2020
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. Government Agencies and Sponsored Agencies	$	243,680	$	—	$	243,680	$	—	$	—
Obligations of states and political subdivisions		16,362		—		16,362		—		—
Corporate bonds		6,868		—		6,868		—		—
Total recurring	$	266,917	$	—	$	266,917	$	—	$	—

Assets and liabilities measured on a nonrecurring basis:

Other real estate owned Land	$	846	$	—	$	—	$	846	$	—
Total nonrecurring	$	846	$	—	$	—	$	846	$	—

Description			Fair Value Measurements Using						Total Gains
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3		(Losses)
March 31, 2021
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. Government Agencies and Sponsored Entities	$	266,487	$	—	$	266,487	$	—	$	—
Obligations of states and political subdivisions		16,723		—		16,723		—		—
U.S. Treasury securities		11,564		11,564		—		—		—
Corporate Debt securities		6,854		—		6,854		—		—
Total recurring	$	301,628	$	11,564	$	290,064	$	—	$	—

Assets and liabilities measured on a nonrecurring basis:

Other real estate owned Land	$	800	$	—	$	—	$	800	$	—
Total nonrecurring	$	800	$	—	$	—	$	800	$	—

Description			Fair Value Measurements Using						Total Gains
(dollars in thousands)	Fair Value		Level 1		Level 2		Level 3		(Losses)
December 31, 2020
Assets and liabilities measured on a recurring basis:
Available-for-sale securities:
U.S. Government Agencies and Sponsored Agencies	$	283,833	$	—	$	283,833	$	—	$	—
Corporate Debt securities		6,832		—		6,832
Obligations of states and political subdivisions		16,301		—		16,301		—		—
Total recurring	$	306,966	$	—	$	306,966	$	—	$	—

Assets and liabilities measured on a nonrecurring basis:

Other real estate owned Land	$	800	$	—	$	—	$	800	$	(46	)
Total nonrecurring	$	800	$	—	$	—	$	800	$	(46	)

	·	Provided extensions and loan payment deferrals to our borrowers effected by COVID-19 provided such clients were not 30 days past due; and

	·	We have been participating in the Paycheck Protection Program (“PPP”) under CARES Act to help provide potentially forgivable loans to our business clients to provide them with additional working capital to enable them to retain their employees. During the second quarter of 2020, we funded 477 PPP loans totaling $80,154,000. ~~We did not fund any~~During the first quarter of 2021 we funded 201 PPP loans ~~during~~totaling $25,465,000. During the ~~third~~fourth quarter of ~~2020. We believe these loans~~2020 and ~~our participation in~~continuing into the ~~program are good~~first quarter we began processing PPP forgiveness applications for our ~~clients and the communities we serve.~~PPP borrowers. At March 31, 2021, 368 PPP loans totaling $57,486,000 were remaining.

Industry	Loan Balance			Percentage of total non PPP loans outstanding (1)			Loan Balance			Percentage of total non PPP loans outstanding (1)
Hospitality		—			N/A		$	918,000			0.2	%
Churches	$	18,203,000			4.5	%	$	21,692,000			5.2	%
Restaurants	$	5,777,000			1.4	%	$	5,725,000			1.4	%
Eldercare	$	6,615,000			1.6	%	$	6,440,000			1.5	%
School/childcare	$	4,572,000			1.1	%	$	5,355,000			1.3	%
Recreation (golf/sportsclubs)	$	1,934,000			0.5	%	$	1,668,000			0.4	%
Oil/Gas	$	6,194,000	(2)		1.5	%	$	8,924,000	(2)		2.1	%

(dollars in thousands)	For the three months ended September 30,						For the nine months ended September 30,
	2020			2019			2020			2019
Net interest income (GAAP)	$	6,720		$	5,928		$	19,428		$	17,105
Tax equivalent adjustment		49			49			154			148
Net interest income - tax equivalent adjusted (non-GAAP)	$	6,769		$	5,977		$	19,582		$	17,253

Average earning assets	$	787,756		$	655,937		$	739,412		$	642,605
Net interest margin (GAAP)		3.39	%		3.59	%		3.51	%		3.56	%
Net interest margin (non-GAAP)		3.42	%		3.62	%		3.54	%		3.59	%

(dollars in thousands)
	For the three months ended March 31,
	2021			2020
Net interest income (GAAP)	$	7,132		$	6,188
Tax equivalent adjustment		47			56
Net interest income - tax equivalent adjusted (non-GAAP)	$	7,179		$	6,244

Average earning assets	$	814,280		$	669,974
Net interest margin (GAAP)		3.55	%		3.71	%
Net interest margin (non-GAAP)		3.58	%		3.75	%

(dollars in thousands)	For the three months ended September 30,						For the nine months ended September 30,
													For the three months ended March 31,
	2020			2019			2020			2019			2021			2020
Interest income*	$	7,104		$	6,604		$	20,899		$	19,111		$	7,401		$	6,771
Interest expense		(335	)		(627	)		(1,317	)		(1,858	)		(222	)		(527	)
Net interest income*		6,769			5,977			19,582			17,253			7,179			6,244
Provision for loan losses		(445	)		(120	)		(1,485	)		(480	)		—			(495	)
Noninterest income		374			417			1,162			1,249			591			452
Noninterest expense		(4,223	)		(4,093	)		(12,355	)		(12,501	)		(4,063	)		(4,216	)
Provision for income taxes		(647	)		(561	)		(1,798	)		(1,380	)		(1,013	)		(497	)
Tax equivalent adjustment		(49	)		(49	)		(154	)		(148	)		(47	)		(56	)
Net income	$	1,779		$	1,571		$	4,952		$	3,993		$	2,647		$	1,432

Average total assets	$	861,843		$	708,698		$	802,388		$	695,364		$	884,565		$	721,439
Net income (annualized) as a percentage of average total assets		0.82	%		0.88	%		0.82	%		0.77	%		1.21	%		0.80	%

Three Months Ended September 30,	2020								2019
(Taxable Equivalent Basis) (dollars in thousands)	Avg Balance			Interest		Avg Yield (4)			Avg Balance			Interest		Avg Yield (4)
Assets
Earning assets:
Taxable loans (1)	$	452,301		$	5,275		4.64	%	$	346,598		$	4,397		5.03	%
Tax-exempt loans (2)		20,616			244		4.71	%		21,562			224		4.12	%
Taxable investment securities		257,171			1,523		2.36	%		267,012			1,846		2.74	%
Tax-exempt investment securities (2)		5,428			43		3.15	%		7,103			66		3.69	%
Interest-bearing deposits in banks		52,240			19		0.14	%		13,662			71		2.06	%
Total earning assets		787,756			7,104		3.59	%		655,937			6,604		3.99	%
Cash & due from banks		39,524								17,215
Other assets		40,845								40,406
Allowance for loan losses		(6,282	)							(4,860	)
Total average assets	$	861,843							$	708,698
Liabilities & Shareholders’ Equity
Interest bearing liabilities:
Interest checking and money market	$	279,104			126		0.18	%	$	211,930			155		0.29	%
Savings		83,140			7		0.03	%		74,738			7		0.04	%
Time deposits		69,269			128		0.74	%		86,938			383		1.75	%
Other borrowings		27,460			74		1.07	%		15,614			82		2.08	%
Total interest bearing liabilities		458,973			335		0.29	%		389,220			627		0.64	%
Noninterest bearing demand deposits		301,505								227,644
Other liabilities		10,476								10,368
Total liabilities		770,954								627,232
Shareholders’ equity		90,889								81,466
Total average liabilities and shareholders’ equity	$	861,843							$	708,698
Net interest income & margin (3)				$	6,769		3.42	%				$	5,977		3.62	%

Table Two: Analysis of Net Interest Margin on Earning Assets
Three Months Ended March 31,	2021								2020
(Taxable Equivalent Basis) (dollars in thousands)	Avg Balance			Interest		Avg Yield (4)			Avg Balance			Interest		Avg Yield (4)
Assets
Earning assets:
Taxable loans (1)	$	462,037		$	5,604		4.92	%	$	372,826		$	4,675		5.04	%
Tax-exempt loans (2)		19,174			233		4.93	%		23,496			278		4.76	%
Taxable investment securities		297,320			1,515		2.07	%		259,592			1,739		2.69	%
Tax-exempt investment securities (2)		5,118			41		3.25	%		5,445			45		3.32	%
Federal funds sold		—			—		—			—			—		—
Interest-bearing deposits in banks		30,631			8		0.11	%		8,615			34		1.59	%
Total earning assets		814,280			7,401		3.69	%		669,974			6,771		4.06	%
Cash & due from banks		35,124								16,008
Other assets		41,906								40,675
Allowance for loan losses		(6,745	)							(5,218	)
	$	884,565							$	721,439

Liabilities & Shareholders’ Equity
Interest bearing liabilities:
Interest checking and money market	$	266,895			61		0.09	%	$	230,222			204		0.36	%
Savings		91,076			6		0.03	%		74,530			7		0.04	%
Time deposits		74,274			93		0.51	%		70,787			229		1.30	%
Other borrowings		20,787			62		1.21	%		16,978			87		2.06	%
Total interest bearing liabilities		453,032			222		0.20	%		392,517			527		0.54	%
Noninterest bearing demand deposits		326,179								232,562
Other liabilities		12,346								11,282
Total liabilities		791,557								636,361
Shareholders' equity		93,008								85,078
	$	884,565							$	721,439
Net interest income & margin (3)				$	7,179		3.58	%				$	6,244		3.75	%