American River Bankshares Reports First Quarter 2020
Sacramento, CA, April 16, 2020 – American River Bankshares (NASDAQ-GS: AMRB) today reported net income of $1.4 million, or $0.24 per diluted share for the first quarter of 2020 compared to $1.1 million, or $0.20 per diluted share for the first quarter of 2019.
“While it is important to share our quarterly results with our shareholders, it is important to remember that the current global pandemic is impacting us all,” said David E. Ritchie, Jr., President and Chief Executive Officer. “We are carefully balancing our decisions to benefit our shareholders while protecting the health and wellbeing of our employees and financial viability of our clients, which would include providing access to the benefits under the CARES Act.”
- Net loans decreased $5.8 million (1.5%) and core deposits increased $1.2 million (0.2%) during the first quarter of 2020. Net loans increased $52.0 million (15.5%) from March 31, 2019 to March 31, 2020. Core deposits increased $47.5 million (9.8%) from March 31, 2019 to March 31, 2020.
- The first quarter 2020 net interest margin was 3.75%, compared to 3.63% for the fourth quarter of 2019 and 3.59% for the first quarter of 2019.
- Net interest income was $6.2 million in the first quarter of 2020, compared to $5.5 million in the first quarter of 2019
- Pretax, pre-provision income increased $724,000 (42.6%) to $2.4 million in the first quarter of 2020, compared to $1.7 million in the first quarter of 2019.
- The allowance for loan and lease losses was $5.6 million (1.43% of total loans and leases) at March 31, 2020, compared to $5.1 million (1.29% of total loans and leases) at December 31, 2019 and $4.6 million (1.34% of total loans and leases) at March 31, 2019. There were no nonperforming loans at March 31, 2020 and December 31, 2019 compared to $25,000 at March 31, 2019.
- Shareholders’ equity was $86.9 million at March 31, 2020 compared to $82.9 million at December 31, 2019. Tangible book value per share was $11.92 at March 31, 2020 compared to $11.29 at December 31, 2019. Book value per share was $14.68 per share at March 31, 2020 compared to $14.06 per share at December 31, 2019.
- The Company continued the quarterly cash dividend program by paying a $0.07 per share cash dividend on February 12, 2020.
- The Company continues to maintain strong capital ratios. At March 31, 2020 the Leverage ratio was 9.4% compared to 9.2% at December 31, 2019; the Tier 1 Risk-Based Capital ratio was 15.3% compared to 14.8% at December 31, 2019; and the Total Risk-Based Capital ratio was 16.6% compared to 15.9% at December 31, 2019.
Northern California Economic Update, March 31, 2020.
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, and the State of California Employment Development Department.
The commercial real estate and employment data below primarily covering years 2017 through 2019 reflects mostly positive trends in the markets we serve. 2019 commercial real estate results reflect some slight signs of slowing when compared to year-end 2018. Unemployment for the month of December 2019 decreased when compared to year-end 2018, however, as we move into 2020, unemployment has increased in all of the Bank’s markets.
Although more current data has not yet fully emerged, the Bank’s management is closely monitoring the ongoing economic effects of the COVID-19 pandemic, including temporary and permanent business closures, increased unemployment, and the disruption of supply chains for construction. It is anticipated that unemployment will continue to rise and the commercial real estate market will slow considerably in the coming months.
Commercial Real Estate. In the Greater Sacramento Area, when comparing fourth quarter 2018 to fourth quarter 2017, commercial real estate vacancies improved in all segments. Office vacancy decreased from 14.9% to 14.0%, retail vacancy decreased from 9.1% to 7.8%, and industrial vacancy decreased from 5.9% to 4.7%. As of the fourth quarter 2019, vacancies in office and industrial segments decreased slightly further to 13.8% and 4.6% respectively. Retail vacancy increased slightly over the year, topping at 8.3%, however, rested at 7.8% as of fourth quarter 2019.
In Sonoma County, vacancy rates fluctuated within a relatively narrow range during 2018. Comparing fourth quarter 2018 to fourth quarter 2017, commercial real estate office vacancy decreased slightly from 12.5% to 12.3%, retail vacancy increased from 3.8% to 4.5%, and industrial vacancy increased from 4.6% to 4.8%. As of fourth quarter 2019, Sonoma County’s retail and industrial vacancy rates decreased slightly further to 4.3% and 4.7% respectively. Office vacancy remained flat at 12.3%.
In all segments (office, retail, and industrial), the Greater Sacramento Area reported a positive absorption from December 31, 2017 through December 31, 2018. Some fluctuation has occurred in 2019 and as of December 31, 2019 absorption was a positive 129,414 square feet (SF) for office, 568,000 SF for retail, and 120,000 SF for industrial.
Sonoma County and the City of Santa Rosa reported positive absorption for the office segment from December 31, 2017 through the third quarter of 2018. Although absorption remained positive for the fourth quarter of 2018 and into 2019, it was trending downward, and at the end of the third quarter 2019 was negative 45,441 SF in Sonoma County and a positive 44,143 SF in Santa Rosa.
Industrial absorption in Sonoma County was also positive through third-quarter 2018, however, experienced an increasingly negative absorption since that time. During the third quarter 2019, some improvement was made, however, absorption was still a negative 71,923 SF. As of fourth quarter 2019, industrial absorption improved further to a positive 18,599 SF. In the City of Santa Rosa, industrial absorption was positive from December 31, 2017 through June 30, 2018, however began to decline as of September 30, 2018 at which time absorption was a negative 7,795 SF. As of September 30, 2019, absorption was a negative 6,876 SF, however improved as of December 31, 2019 to a positive 81,630 SF. Retail absorption data for Sonoma County and the City of Santa Rosa is not available for the time periods mentioned above.
In the Greater Sacramento area, commercial lease rates overall have increased from December 31, 2017 through December 31, 2018 with lease rates ranging from the following: office: $1.88/SF to $1.99/SF; retail: $1.34/SF to $1.38/SF and industrial: $0.50/SF to $0.57/SF. Fourth quarter 2018 lease rates represent the top of the range in two segments at $1.99/SF for office and $0.57/SF for industrial. Retail decreased slightly from $1.39/SF in third quarter 2018 to $1.38/SF in fourth quarter 2018. As of fourth quarter 2019, lease rates for office, industrial, and retail remained flat at $1.99/SF, $0.57/SF, and $1.41/SF respectively.
As a proxy for Sonoma County, the City of Santa Rosa’s gross office lease rates as of year-end 2017 ranged from $1.75/SF to $2.35/SF and industrial rates ranged from $0.90/SF to $1.10/SF. Year-end 2018 office rental rates ranged from $1.80/SF to $2.50/SF (depending on quality) and industrial rates ranged from $0.95/SF to $1.30/SF with cannabis use rents ranging from $1.50/SF to $3.00+ per SF gross. As of second quarter 2019, office rental rates ranged from $1.95 - $2.35/SF full service for Class A, and $1.75 - $1.90/SF full service for Class B. Industrial rental rates ranged from $0.95 - $1.25/SF gross (non-cannabis). Retail rental rates ranged from $2.00 - $4.50/SF NNN for shops in anchor centers and $1.25 - $1.50/SF NNN for anchor space in anchor centers. Subsequent data for Santa Rosa is not yet available. There is no retail rental rate data available for the City of Santa Rosa for the other time periods mentioned above.
Due to the rural nature of the Amador County region, it has the lowest level of commercial real estate concentration in the Bank’s footprint. There is limited supply for commercial real estate in this region and as a result, minimal information is available.
Multi-family. The Bank’s multi-family loan portfolio is widely spread geographically throughout California. Sacramento data is currently being used below as it is our largest concentration, however, as multi-family loans become more concentrated in other major areas they may be added in the future.
The multi-family market in the Sacramento area has reflected high occupancy from December 31, 2017 through December 31, 2018. The highest occupancy rate within this time range was in third quarter 2018 at 96.8%, and the lowest was first quarter 2018 at 96.3%. As of fourth quarter 2019, occupancy was at 96.5%. Monthly lease rates during this period ranged from $1,359 in fourth quarter 2017 to $1,405 in fourth quarter 2018. As of fourth quarter 2019, lease rates increased to $1,495.
The trailing 12-month cap rate from fourth quarter 2017 through fourth quarter 2018, ranged with some fluctuation from a high of 5.6% in fourth quarter 2017 to a low of 5.4% in the second quarter 2018. As of fourth quarter 2019, the 12-month cap rate was 5.8%.
Employment. National unemployment, which reached a high of 10.0% at October 31, 2009, had dropped steadily over the years and stabilized. However, the recent global COVID-19 pandemic facing our nation has had a sudden tremendous impact on unemployment. When compared to December 2016, national unemployment decreased from 4.7% to 4.1% in December 2017, 3.9% in December 2018, and 3.5% as of December 2019. As of March 31, 2020, the national unemployment rate was 4.4%, a sharp increase compared to February’s 3.5% unemployment rate.
California unemployment was 4.4% at December 31, 2017. As of December 2018 and December 2019, the rate decreased further to 4.3% and 3.9% respectively. The California preliminary unemployment rate remained flat at 3.9% as of February 2020. The number of employed Californians increased during years 2017 and 2018, and slowed at year-end 2019. There were 18.5 million employed at the end of 2017, and 18.7 million at the end of years 2018 and 2019. As of February 2020, the number of employed Californians increased since year-end 2019 by 28,000 jobs. The March 2020 data is not yet available for California, but as stated earlier based on the increased number of first time unemployment claims we expect the unemployment rate to increase.
All three of our markets have reported positive unemployment rate results from year-end 2017 to year-end 2019 with an increase in unemployment as we move into 2020. When comparing December 31, 2017 to December 31, 2018, unemployment rates increased slightly from 3.9% to 4.0% in the Sacramento MSA and decreased from 2.9% to 2.6% in the Santa Rosa-Petaluma MSA. As of December 31, 2019, the unemployment rate for Sacramento and Santa Rosa-Petaluma MSAs decreased to 3.2% and 2.4%, respectively. Over the same period, Amador County’s unemployment has improved decreasing to 4.3% at December 31, 2017, 4.0% at December 31, 2018, and 3.6% at December 31, 2019.
As of February 2020, unemployment rates increased slightly in all areas compared to year-end 2019 as follows: Sacramento MSA increased from 3.2% to 3.8%, Santa-Rosa-Petaluma MSA increased from 2.4% to 2.8%, and Amador County from 3.6% to 4.4%.
Job growth was positive in all of our markets from year-end 2017 to year-end 2018. Compared to December 2017, job growth was 3.7% for Sacramento MSA, 1.6% for Santa Rosa MSA and 1.2% for Amador County as of December 2018. As of December 2019, the number employed decreased slightly in the Sacramento MSA and Santa Rosa MSA, 0.19% and 0.39% respectively, while Amador County increased the number employed 2.08%. February 2020 results reflect a decrease in job growth for all three areas. The number employed in the Sacramento MSA decreased by 7,000 jobs or 0.65%, Santa Rosa MSA 2,000 jobs or 0.79%, and Amador County 60 jobs or 0.42%.
Balance Sheet Review
American River Bankshares’ assets totaled $716.1 million at March 31, 2020, compared to $720.4 million at December 31, 2019, and $689.4 million at March 31, 2019.
Net loans totaled $388.0 million at March 31, 2020, compared to $393.8 million at December 31, 2019, and $336.0 million at March 31, 2019.
The loan portfolio at March 31, 2020 included: real estate loans of $318.4 million (81% of the portfolio), commercial loans of $42.9 million (11% of the portfolio) and other loans, which consist mainly of agriculture and consumer loans of $33.0 million (8% of the portfolio). The real estate loan portfolio at March 31, 2020 includes: owner-occupied commercial real estate loans of $74.4 million (23% of the real estate portfolio), investor commercial real estate loans of $141.9 million (45% of the real estate portfolio), multi-family real estate loans of $52.1 million (16% of the real estate portfolio), construction and land development loans of $20.9 million (7% of the real estate portfolio) and residential real estate loans of $29.1 million (9% of the real estate loan portfolio).
Nonperforming assets (“NPAs”) include nonperforming loans and leases, 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. There were $846,000 in NPAs at March 31, 2020 compared to $1.4 million in NPAs at December 31, 2019 and $982,000 at March 31, 2019. The NPAs to total assets ratio decreased to 0.12% at March 31, 2020 from 0.19% at December 31, 2019 and from 0.14% at March 31, 2019.
At March 31, 2020 and December 31, 2019, the Company had one OREO property totaling $846,000 compared to a balance of $957,000 at March 31, 2019. During the fourth quarter of 2019, the book value of this OREO property was written down from $957,000 to $846,000 after receipt of an updated appraisal. Also during the fourth quarter of 2019, the Company took possession of an automobile which was held as collateral for a loan. The book value of this automobile at December 31, 2019 was $517,000 and was classified in other assets. During the first quarter of 2020, this automobile was sold with 100% of the principal collected upon sale. At March 31, 2020, December 31, 2019 and March 31, 2019 there was no valuation allowance for OREO properties.
Loans measured for impairment were $7.5 million at the end of March 2020, a decrease from $7.6 million at December 31, 2019, and from $8.6 million at the end of March 2019. Specific reserves of $134,000 were held on the impaired loans at March 31, 2020, compared to $142,000 at December 31, 2019 and $164,000 at March 31, 2019. There was $495,000 in provision for loan and lease losses in the first quarter of 2020 compared to $180,000 in provision for the fourth quarter of 2019 and $180,000 for the first quarter of 2019. The additions to the loan and lease loss allowance in 2020 were due to the anticipated economic impact of the COVID-19 pandemic and expected volatility in loan payments. The Company had net recoveries of $4,000 in the first quarter of 2020 compared to net recoveries of $4,000 in the fourth quarter of 2019 and net recoveries of $5,000 in the first quarter of 2019. The Company continues to gather the latest information available to perform and update its impairment analysis. As more information becomes available, including the economic impact of the COVID-19 pandemic, 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 $4.3 million in stock of the Federal Home Loan Bank of San Francisco (“FHLB Stock”), totaled $255.9 million at March 31, 2020, a decrease of 2.4% from $262.2 million at December 31, 2019 and of 10.8% from $286.9 million at March 31, 2019.
At March 31, 2020, the investment portfolio was comprised of 92% U.S. Government agencies or U.S. Government-sponsored agencies (primarily mortgage-backed securities), 5% obligations of states and political subdivisions, and 3% corporate bonds. The reduction in the investment portfolio during 2020 was to increase the Company’s cash position in light of potential liquidity needs due to the COVID-19 pandemic.
At March 31, 2020, total deposits were $603.1 million, compared to $604.8 million at December 31, 2019 and $572.4 million one year ago. Core deposits increased $1.2 million (0.2%) to $532.2 million at March 31, 2020 from $531.0 million at December 31, 2019 and increased $47.5 million (9.8%) from $484.7 million at March 31, 2019. The Company considers all deposits except time deposits as core deposits.
At March 31, 2020, noninterest-bearing demand deposits accounted for 38% of total deposits, interest-bearing demand accounts were 11%, savings deposits were 12%, money market balances accounted for 27% and time certificates were 12% of total deposits. At March 31, 2019, noninterest-bearing demand deposits accounted for 37% of total deposits, interest-bearing demand accounts were 12%, savings deposits were 13%, money market balances accounted for 23% and time certificates were 15% of total deposits.
Shareholders’ equity increased $3.9 million (4.8%) to $86.8 million at March 31, 2020 compared to $82.9 million at December 31, 2019. The increase in equity from December 31, 2019 was due to a $2.8 million increase in accumulated other comprehensive income related to an increase in the unrealized gain on securities, a $1.0 million increase in Retained Earnings due to the net income for the quarter less cash dividends declared, and a $98,000 increase in common stock from equity compensation.
Net Interest Income
The net interest income during the first quarter 2020 increased $639,000 (11.5%) to $6.2 million from $5.5 million in the first quarter of 2019 and the net interest margin as a percentage of average earning assets was 3.75% in the first quarter of 2020, compared to 3.63% in the fourth quarter of 2019 and 3.59% in the first quarter of 2019. Interest income for the first quarter of 2020 increased $583,000 (9.5%) to $6.7 million compared to $6.1 million in the first quarter of 2019.
The average tax equivalent yield on earning assets increased from 3.96% in the first quarter of 2019 to 4.06% for the first quarter of 2020. Much of the increase in yields from the first quarter of 2019 to the first quarter of 2020 can be attributed to an increase in loans and an increase in yield on loans due to the higher rate environment between these periods. When compared to the first quarter of 2019, average loan balances increased $67.8 million (20.6%) from $328.6 million to $396.3 million for the first quarter of 2020. The yield on loans increased from 4.93% in the first quarter of 2019 to 5.03% during the first quarter of 2020.
The average balance of earning assets increased $37.0 million (5.8%) from $633.0 million in the first quarter of 2019 to $670.0 million in the first quarter of 2020.
Interest expense for the first quarter of 2020 decreased $56,000 (9.6%) to $527,000 compared to $583,000 for the first quarter of 2019. The decrease in interest expense is related to a reduction in some higher rate time deposits. As these high rate time deposits matured they exited the Company and were replaced by lower cost checking and money market accounts. Average time deposits decreased $16.8 million (19.2%) from $87.6 million during the first quarter of 2019 to $70.8 million during the first quarter of 2020 and the cost of those funds decreased from 1.80% to 1.30% during that same time period. The average cost of funds decreased from 0.60% in the first quarter of 2019 to 0.54% in the first quarter of 2020. Average deposits increased $26.4 million (4.5%) from $581.7 million during the first quarter of 2019 to $608.1 million during the first quarter of 2020. Average borrowings decreased $2.5 million (12.8%) from $19.5 million during the first quarter of 2019 to $17.0 million during the first quarter of 2020.
Noninterest Income and Expense
Noninterest income for the first quarter of 2020 was $452,000, an increase of $41,000 (10.0%) from $411,000 in the first quarter of 2019. The increase in noninterest income was predominately related to an increase in income from service charges on deposits from $121,000 in 2019 to $155,000 in 2020.
Noninterest expense decreased $44,000 (1.0%) from $4.3 million for the first quarter of 2019 to $4.2 million in the first quarter of 2020. The decrease is primarily due to a decrease in other expenses of $108,000 which includes costs such as insurance, advertising, director expenses, technology and telephone expenses, and bank charges. The largest change within the other expenses category is in advertising and business development. Advertising and business development decreased $123,000 (63.4%) from $194,000 in the first quarter of 2019 to $71,000 in the first quarter of 2020. Much of this decrease is related to the shelter in place order within our markets reducing the number of business development opportunities and events. This was offset by an increase in salaries and benefits of $84,000 (3.0%) due to regular annual salary adjustments and promotions.
The fully taxable equivalent efficiency ratio for the first quarter of 2020 decreased to 63.0% from 70.9% for the first quarter of 2019.
Provision for Income Taxes
Federal and state income taxes for the quarter ended March 31, 2020 increased by $123,000 (32.9%) from $374,000 in the first quarter of 2019 to $497,000 in the first quarter of 2020. The higher provision for taxes in 2020 compared to 2019 primarily resulted from a lower level of tax benefits from tax-exempt investments and equity compensation and an increase in taxable income in 2020.
Earnings Conference Call
The first quarter earnings conference call will be held Thursday, April 16, 2020 at 1:30 p.m. Pacific 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) 517-2464 and entering the Conference ID 6805 366#. A recording of the call will be available approximately twenty-four hours after the call’s completion on AmericanRiverBank.com.
About American River Bankshares
American River Bankshares is the parent company of American River Bank, a regional bank serving Northern California since 1983. We provide financial expertise and exceptional service to complement a full suite of banking products and services to meet the needs of the communities we serve. For more information, call (800) 544-0545 or visit our website at 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 income before provisions for loan and lease losses and income taxes (referred to as “pretax, pre-provision income”), 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.
Income Before Provision for Loan and Lease Losses and Income Taxes (non-GAAP financial measures)
Income before provision for loan and lease losses and income taxes (pretax, pre-provision income) adds back both the provision for loan and lease losses and the provision for income taxes to net income. The Company believes the income before deducting the provisions for loan and lease losses and income taxes 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.
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 2019 and 2020 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.
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, 2019, 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.
Mitchell A. Derenzo
Executive Vice President and
Chief Financial Officer
American River Bankshares
Jennifer J. Held
Vice President, Marketing Director
American River Bankshares
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