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American River Bankshares Reports Second Quarter 2018 Results

Sacramento, CA, July 19, 2018 – American River Bankshares (NASDAQ-GS: AMRB) today reported net income of $1.3 million, or $0.22 per diluted share for the second quarter of 2018 compared to $1.3 million, or $0.20 per diluted share for the second quarter of 2017.  For the six months ended June 30, 2018, net income was $2.6 million or $0.44 per diluted share, compared to $2.5 million or $0.38 per diluted share for the six months ended June 30, 2017.

“During the quarter we began to see the results of the hard work from our new lending team,” said David E. Ritchie, Jr., President and CEO of American River Bankshares.  “While we experienced a decrease in loans outstanding due to higher than usual loan payoffs, we did record $30 million in new loan commitments during the quarter and included in that total was $8 million in commercial loans.”  Ritchie continued, “Of the $30 million in commitments, $13 million funded in the second quarter and it is anticipated that many of these remaining commitments will begin funding in the third quarter of 2018.”

Financial Highlights 

•    Core deposits increased $47.0 million (10.3%) from June 30, 2017 to June 30, 2018.  Net loans decreased $25.6 million (8.1%) from June 30, 2017 to June 30, 2018.  During the first half of 2018, core deposits increased $27.7 million (5.8%) and net loans decreased $18.2 million (5.9%).  

•    The net interest margin for the second quarter of 2018 was 3.36%, compared to 3.29% for the first quarter of 2018 and 3.41% for the second quarter of 2017.  The net interest margin for the six months ended June 30, 2018 was 3.32%, compared to 3.43% for the six months ended June 30, 2017.  

•    Net interest income was $5.1 million in the second quarter of 2018, compared to $4.9 million in the second quarter of 2017.  For the six months ended June 30, 2018, net interest income was $9.9 million, compared to $9.7 million for the six months ended June 30, 2017.

•    The allowance for loan and lease losses was $4.5 million (1.52% of total loans and leases) at June 30, 2018, compared to $4.9 million (1.52% of total loans and leases) at June 30, 2017.  Nonperforming loans were $1.9 million at June 30, 2018, compared to $1.9 million at March 31, 2018 and $12,000 at June 30, 2017. 

•    Shareholders’ equity was $71.9 million at June 30, 2018, compared to $72.1 million at March 31, 2018 and $81.4 million at June 30, 2017.  Tangible book value per share was $9.48 at June 30, 2018, compared to $9.48 at March 31, 2018 and $10.23 at June 30, 2017.  Book value per share was $12.26 per share at June 30, 2018, compared to $12.26 per share at March 31, 2018 and $12.80 per share at June 30, 2017.

•    The 2018 Stock Repurchase Program resulted in the Company repurchasing 34,600 shares of its common stock at an average price of $16.00 per share during the second quarter of 2018, totaling a repurchase of 298,778 shares at an average price of $15.53 per share in the six months ended June 30, 2018.  The Company continued the quarterly cash dividend by paying a $0.05 per share cash dividend on May 16, 2018.

•    The Company continues to maintain strong capital ratios.  At June 30, 2018, the Leverage ratio was 8.8% compared to 8.7% at March 31, 2018 and 10.2% at June 30, 2017; the Tier 1 Risk-Based Capital ratio was 17.6% compared to 17.0% at March 31, 2018 and 18.4% at June 30, 2017, and the Total Risk-Based Capital ratio was 18.8% compared to 18.3% at March 31, 2018 and 19.7% at June 30, 2017.  

Northern California Economic Update, June 30, 2018

Each quarter, management at American River Bank prepares an economic report for internal use that analyzes the recent historical rolling quarters within the three primary markets in which the Company does business – Greater Sacramento Area and Sonoma and Amador Counties.  Sources of economic and industry information include: Colliers International, Keegan & Coppin Company, Inc., ycharts/housing, State of California Employment Development Department, US Census, CBRE, Integra Realty Resources, and Sacramento Association of Realtors and Trading Economics.  

Commercial real estate and employment data continued to be positive in the markets we serve.  
    
Commercial Real Estate.  In the Greater Sacramento Area, when comparing fourth quarter 2017 to fourth quarter 2016, commercial real estate vacancies improved in all segments.  Office vacancy decreased from 11.6% to 10.8%, retail vacancy decreased from 10.3% to 9.1%, and industrial vacancy decreased from 8.1% to 5.9%.  As of first quarter 2018, Sacramento’s office and industrial decreased further to 10.5% and 4.9% respectively, while retail vacancy increased slightly to 9.2%.     

In Sonoma County, when comparing fourth quarter 2017 to fourth quarter 2016, commercial real estate vacancies also continued to improve.  Office vacancy decreased from 14.7% to 12.5%, retail vacancy remained flat at 3.8%, and industrial vacancy decreased from 5.8% to 4.6%.   As of first quarter 2018, Sonoma County’s retail and industrial vacancies decreased further to 3.7% and 4.2% respectively, while office increased slightly to 12.6%.
    
In all segments (office, retail, and industrial), the Greater Sacramento Area reported positive absorption over the past three years, with the exception of first quarter 2016 (retail and office).  Sonoma County and the City of Santa Rosa has reported (when data is available) positive absorption over the past three years for the office and industrial segments (retail data is not available). 

In Greater Sacramento, commercial lease rates have been in a relatively narrow range over the past two years through the first quarter 2018 with lease rates ranging from the following: office: $1.71/SF to $1.85/SF; retail: $1.33/SF to $1.36/SF and industrial: $0.46/SF to $0.52/SF.  At June 30, 2018, lease rates per square foot were $1.85 for office, $1.34 for retail, and $0.52 for industrial.   

As a proxy for Sonoma County, the City of Santa Rosa’s gross office lease rates in fourth quarter 2015 averaged $1.75/SF and industrial rates averaged $0.80/SF.  The office lease rates as of year-end 2016 ranged from $1.75/SF to $2.25/SF depending on the quality of the property and industrial rents ranged from $0.85/SF to $0.95/SF with light industrial in certain cases ranging from $1.15/SF to $1.40/SF.   As of year-end 2017, office rental rates ranged from $1.75/SF to $2.35/SF and industrial rates ranged from $0.90/SF to $1.10/SF.   There was no retail rental rate data available for Santa Rosa for these time periods.  

The Amador region has the lowest level of commercial real estate concentration in the Bank.  There is limited supply for commercial real estate in this region and as a result, minimal information is available.

Multi-family.  The multi-family market in the Sacramento area has reflected high occupancy over the last two years.  The highest occupancy rate within this time range was in second quarter 2016 at 97.9%, and the lowest was first quarter 2018 at 96.3%.  Monthly lease rates during this period ranged from $1,157 in first quarter 2016 to $1,367 in first quarter 2018. 

The trailing 12-month cap rate during the past two years ranged with minor fluctuation from 5.58% in first quarter 2016 to 6.10% in third quarter 2017.   As of first quarter 2018, the rate was 5.60%.   The median sales price increased from $106,571 per unit in fourth quarter 2017 to $110,119 per unit in the first quarter 2018.   According to Colliers, it is expected that 1,440 units will be delivered during 2018, the highest in a single year since 2008.  Similar data for the Sonoma and Amador markets are currently unavailable.  

Employment.  National unemployment, which reached a high of 10.0% at October 31, 2009, has dropped steadily since and has stabilized.  Compared to December 2014, national unemployment decreased from 5.6% to 5.0% in December 2015, and to 4.7% as of December 2016.  As of December 2017, unemployment dropped further to 4.1% and as of May 2018 the rate was 3.8%.  

California unemployment was 6.9% at December 31 2014, 5.9% at December 31, 2015, and 5.3% at December 31, 2016.  As of December 2017, the rate decreased further to 4.5%, and as of May 2018, the rate was 4.2%.  The number of employed Californians continues to increase.  There were 17.5 million employed at the end of 2014, 17.9 million employed at the end of 2015, 18.2 million at the end of 2016, and 18.5 million at the end of 2017.  The State added another 16,000 jobs during the first five months in 2018.   

At December 31, 2015, all three of our markets reported lower unemployment rates than at year end 2014.   Unemployment rates at the time were 5.5% and 4.2% for the Sacramento MSA and Santa Rosa-Petaluma MSA, respectively.  When comparing December 31, 2016 to December 31 2017, unemployment rates decreased from 5.0% to 3.8% in the Sacramento MSA and 3.7% to 2.8% in the Santa Rosa-Petaluma MSA.  As of month-end May 2018, the rate for Sacramento and Santa Rosa-Petaluma MSAs decreased to 3.3% and 2.4% respectively. 

Over the same period, Amador County has been higher than the State level in nearly every quarter.  Amador County has shown improvement from 7.4% at December 31, 2014 to 6.2% at December 31, 2015, 5.9% at December 31, 2016 and 4.2% at December 31, 2017.  As of May 2018, the rate decreased further to 3.5% and is now below the State average.

Job growth was positive in all of our markets in the past two years.  Compared to December 2015, job growth was 1.81%, 1.38% and 4.87% for the Sacramento MSA, Santa Rosa-Petaluma MSA and Amador County, respectively as of December 2016.  Comparing December 2016 to December 2017, job growth was 2.66% for the Sacramento MSA, 2.41% in the Santa Rosa-Petaluma MSA and 2.80% in Amador County.  As of May 2018, job growth was negative 0.67% for Sacramento MSA, however Santa Rosa MSA and Amador County continued to see job growth at 2.4% and 1.36% respectively.  

Balance Sheet Review

American River Bankshares’ assets totaled $675.3 million at June 30, 2018, compared to $655.6 million at December 31, 2017, and $641.6 million at June 30, 2017. 
 
Net loans totaled $290.6 million at June 30, 2018, compared to $308.7 million at December 31, 2017, and $316.1 million at June 30, 2017.  

The loan portfolio at June 30, 2018 included: real estate loans of $266.9 million (90% of the portfolio), commercial loans of $25.0 million (9% of the portfolio) and other loans, which consist mainly of agriculture and consumer loans of $3.4 million (1% of the portfolio).  The real estate loan portfolio at June 30, 2018 includes: owner-occupied commercial real estate loans of $64.9 million (24% of the real estate portfolio), investor commercial real estate loans of $112.7 million (42% of the real estate portfolio), multi-family real estate loans of $66.1 million (25% of the real estate portfolio), construction and land development loans of $6.4 million (3% of the real estate portfolio) and residential real estate loans of $16.8 million (6% of the real estate loan portfolio).
 
Nonperforming assets (“NPAs”) include nonperforming loans, leases, and other assets and other real estate owned (“OREO”).  Nonperforming loans include all such loans and leases that are either placed on nonaccrual status or are 90 days past due as to principal or interest, but still accrue interest because such loans are well-secured and in the process of collection.  NPAs remained at $2.9 million at June 30, 2018 from December 31, 2017 and increased from $1.4 million at June 30, 2017.  The NPAs to total assets ratio decreased to 0.43% at the end of June 2018 from 0.44% at December 31, 2017 and increased from 0.21% one year ago.  

At June 30, 2018 and December 31, 2017, the Company had one OREO property totaling $961,000. This compares to two OREO properties totaling $1.3 million at June 30, 2017.  During the second quarter of 2018, the Company did not add, sell, or modify the value of any OREO properties.  At June 30, 2018, December 31, 2017, and June 30, 2017 there was not a valuation allowance for OREO properties.  

Loans measured individually for impairment were $12.0 million at the end of June 2018, a decrease from $13.8 million at December 31, 2017, and $17.0 million a year ago.  Specific reserves of $446,000 were held on the impaired loans at June 30, 2018, compared to $355,000 at December 31, 2017 and $505,000 at June 30, 2017.  There was no provision for loan and lease losses for the second quarters of 2018 and 2017.  The Company had net recoveries of $4,000 in the second quarter of 2018 compared to net recoveries of $48,000 in the second quarter of 2017.  For the first six months of 2018, the Company had net recoveries of $14,000 compared to net recoveries of $59,000 in the first six months of 2017.  During 2013, the Company participated in a shared national credit to a large retailer.  The Company’s initial loan balance of $3.0 million was paid down to $2.7 million, as agreed then during the third quarter of 2017 this retailer filed for bankruptcy reorganization and the loan was placed on nonaccrual status.  The Company has performed an impairment analysis, which resulted in reducing the loan balance to $1.6 million as of June 30, 2018, through charge offs in 2017, totaling $1.1 million to the allowance for loan and lease losses (“ALLL”).  The loan also carries a $200,000 specific reserve reducing the Company’s exposure to $1.4 million.  The Company continues to gather the latest information available to perform and update its impairment analysis.  As more information becomes available, the Company will update the impairment analysis, which could lead to further charges to the ALLL.  The Company maintains the allowance for loan and lease losses at a level believed to be adequate for known and inherent risks in the portfolio. The methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date.  
  
Investment securities, which excludes $3.9 million in stock of the Federal Home Loan Bank of San Francisco (“FHLB Stock”), totaled $282.0 million at June 30, 2018, up 7.3% from $262.7 million at December 31, 2017 and up 9.3% from $257.9 million at June 30, 2017.  At June 30, 2018, the investment portfolio was comprised of 91% U.S. Government agencies or U.S. Government-sponsored agencies (primarily mortgage-backed securities), 6% obligations of states and political subdivisions, 2% corporate bonds, and 1% U.S. Treasuries.
 
At June 30, 2018, total deposits were $581.3 million, compared to $556.1 million at December 31, 2017 and $537.9 million one year ago.  Core deposits increased 10.3% to $504.1 million at June 30, 2018 from $457.1 million at June 30, 2017 and increased 5.8% from $476.4 million at December 31, 2017.  The Company considers all deposits except time deposits as core deposits.
 
At June 30, 2018, noninterest-bearing demand deposits accounted for 38% of total deposits, interest-bearing demand accounts were 12%, savings deposits were 12%, money market balances accounted for 25% and time certificates were 13% of total deposits.  At June 30, 2017, noninterest-bearing demand deposits accounted for 36% of total deposits, interest-bearing demand accounts were 12%, savings deposits were 12%, money market balances accounted for 25% and time certificates were 15% of total deposits.

Shareholders’ equity decreased $5.0 million (6.5%) to $71.9 million at June 30, 2018 compared to $76.9 million at December 31, 2017 and $9.5 million (11.7%) from $81.4 million at June 30, 2017.  The decrease in equity from December 31, 2017 was due to a decrease in common stock of $4.4 million primarily related to repurchases made under the 2018 Stock Repurchase Program and a $2.7 million decrease in accumulated other comprehensive income related to a decrease in the unrealized gain on securities, partially offset by an increase in Retained Earnings of $2.0 million due to the net income for the year less cash dividends declared.  

Net Interest Income 
 
The net interest income during the second quarter of 2018 was $5.1 million compared to $4.9 million in the second quarter of 2017 and for the six months ended June 30, 2018, net interest income increased 1.8% to $9.9 million from $9.7 million for the six months ended June 30, 2017.  The net interest margin as a percentage of average earning assets was 3.36% in the second quarter of 2018, compared to 3.29% in the first quarter of 2018 and 3.41% in the second quarter of 2017. For the six months ended June 30, 2018, the net interest margin was 3.32% compared to 3.43% for the six months ended June 30, 2017.  Interest income for the second quarter of 2018 increased 7.4% to $5.5 million from $5.1 million for the second quarter of 2017 and for the six months ended June 30, 2018, interest income increased 3.8% to $10.6 million from $10.2 million for the six months ended June 30, 2017.  
 
The average tax equivalent yield on earning assets increased from 3.59% in the second quarter of 2017 to 3.60% for the second quarter of 2018 and for the six months ended June 30, 2018 decreased to 3.56% from 3.60% for the six months ended June 30, 2017.  Much of the decrease in yields from the six months ending June 30, 2017 to June 30, 2018 can be attributed to an increase in lower yielding Federal funds sold.  The average balance increased from zero in 2017 to $18.0 million in 2018.  The rate earned on the Federal funds sold in 2018 was 1.66%, therefore, reducing the average yield on earning assets.  
 
The average balance of earning assets increased $34.4 million (5.9%) from $583.8 million in the second quarter of 2017 to $618.2 million in the second quarter of 2018 and for the six months ended June 30, 2018, increased $23.5 million (4.0%) to $605.0 million from $581.5 million for the six months ended June 30, 2017. 
 
Interest expense for the second quarter of 2018 increased 50.0% to $378,000 from $252,000 for the second quarter of 2017 and for the six months ended June 30, 2018 increased 43.1% to $707,000 from $494,000 for the six months ended June 30, 2017.  The increase in interest expense is related to an overall higher interest rate environment.  The average cost of funds increased from 0.28% in the second quarter of 2017 to 0.39% in the second quarter of 2018 and from 0.28% in the first six months of 2017 to 0.37% in the first six months of 2018.  Average deposits increased $45.9 million (8.5%) from $542.8 million during the second quarter of 2017 to $588.7 million during the second quarter of 2018.  Average borrowings remained consistent at $15.5 million during the second quarter of 2017 compared to the second quarter of 2018.
 
Noninterest Income and Expense
 
Noninterest income for the second quarter of 2018 was $380,000, down from $439,000 in the second quarter of 2017 and decreased to $752,000 for the six months ended June 30, 2018 from $858,000 in the first six months of 2017.   For both periods, the decrease in noninterest income was predominately related to a decrease in gain on sale of securities from a gain of $86,000 in the second quarter of 2017 to a gain of $10,000 in the second quarter of 2018 and from $142,000 in the first half of 2017 to $11,000 for the first half of 2018.    
 
Noninterest expense increased to $3.8 million for the second quarters of 2018 from $3.4 million in the second quarter of 2017 and increased from $6.8 million for the six months ended June 30, 2017 to $7.2 million for the same period in 2018.  The predominant variance between the second quarters of 2017 and 2018 and the six months ended June 30 for each year was the increase in salaries and benefits of $453,000, quarter over quarter, and $489,000, year over year.  There has been one newly created Chief Lending Officer position and multiple vacant Relationship Manager positions have been filled in 2018.      

The fully taxable equivalent efficiency ratio for the second quarter of 2018 increased to 68.9% from 62.3% from the second quarter of 2017 and for the six months ended June 30, 2018, increased to 66.9% from 63.3% for the six months ended June 30, 2017.  
 
Provision for Income Taxes 
Federal and state income taxes for the quarter ended June 30, 2018 decreased by $240,000 from $643,000 in the second quarter of 2017 to $403,000 in the second quarter of 2018 and decreased $450,000 from $1.3 million in the first six months of 2017 to $809,000 in 2018.  The lower provision for taxes in 2018 compared to 2017 primarily resulted from the lower federal tax rate effective January 1, 2018 of 21% compared to 34% in prior year.  

Earnings Conference Call

The second quarter earnings conference call will be held Friday, July 20, 2018 at 10:30 a.m. Pacific Time (1:30 p.m. Eastern Time).  David E. Ritchie, Jr., President and Chief Executive Officer, and Mitchell A. Derenzo, Executive Vice President and Chief Financial Officer, both of American River Bankshares, will lead a live presentation and answer analysts’ questions.   Shareholders, analysts and other interested parties are invited to join the call by dialing (888) 517-2458 and entering the Conference ID 6590637#.  A recording of the call will be available approximately twenty-four hours after the call’s completion on AmericanRiverBank.com.

View Balance Sheet 
View Income Statement 
View Average Earning Assets 

About American River Bankshares

American River Bankshares [NASDAQ-GS: AMRB] is the parent company of American River Bank, a regional bank serving Northern California since 1983. We give business owners more REACH by offering financial expertise and exceptional service to complement a full suite of banking products and services. Our honest approach, commitment to community and focus on profitability is intended to lead our clients to greater success. For more information, call (800) 544-0545 or visit AmericanRiverBank.com.

Use of Non-GAAP Financial Measures

This news release contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP.  These measures include tangible book value and taxable equivalent basis.  Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company’s financial position reflected in the current quarter and year-to-date results and facilitate comparison of our performance with the performance of our peers.

Net Interest Margin and Efficiency Ratio (non-GAAP financial measures)

In accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation of net interest margin and the efficiency ratio.  The Company believes the presentation of net interest margin on a taxable equivalent basis using a 21% effective tax rate for 2018 and a 34% effective tax rate for 2017 allows for comparability of net interest margin with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and tax-exempt loans and investments.  The efficiency ratio is a measure of a banking company’s overhead as a percentage of its revenue.  The Company derives this ratio by dividing total noninterest expense by the sum of the taxable equivalent net interest income and the total noninterest income.       

Tangible Equity (non-GAAP financial measures)

Tangible common stockholders' equity (tangible book value) excludes goodwill and other intangible assets.  The Company believes the exclusion of goodwill and other intangible assets to create “tangible equity” facilitates the comparison of results for ongoing business operations.  The Company’s management internally assesses its performance based, in part, on these non-GAAP financial measures. 

Adjustments made to reflect certain expenses

During the fourth quarter of 2017, the Company recorded expenses related to a change in leadership as well as higher than historical income tax expense resulting from the Tax Cuts and Jobs Act that was signed into law on December 22, 2017.  Management believes that presenting the net income and earnings per share adjusted for these items provides investors with useful information in understanding the financial performance on a comparative basis.   

Forward-Looking Statements

Certain statements contained herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties.  Actual results may differ materially from the results in these forward-looking statements.  Factors that might cause such a difference include, among other matters, changes in interest rates, economic conditions, governmental regulation and legislation, credit quality, and competition affecting the Company’s businesses generally; the risk of natural disasters and future catastrophic events including terrorist related incidents; and other factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and in subsequent reports filed on Form 10-Q and Form 8-K.  The Company does not undertake any obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or otherwise, except as required by law. 
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