American River Bankshares
Q2 2019 Earnings Call Transcript

Published: 19 Jul 2019

[Operator:]

Welcome to the second quarter 2019 earnings conference call. My name is Erin and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.I will now turn the call over to David Ritchie. David, you may begin.

[David Ritchie:]

Good afternoon. This is Dave Ritchie, President and CEO of American River Bankshares, the parent company for American River Bank, headquartered in Rancho Cordova, California. This is the second quarter update. Please be aware that two press releases went out at the market open today; our earnings release which details our quarterly results and a cash dividend that will be payable next month. As always, we did include some economic data in our press release. In general, positive trends continue in our markets, in California and the nation as a whole.Now, I'm going to turn it over to Mitch Derenzo, our Chief Financial Officer and he'll give you a in-depth financial report.

[Mitch Derenzo:]

Thanks, Dave. Thanks to all of you for listening in on the call today as well. Before we get started, as you know, I need to remind everyone of our safe harbor disclosures. Certain matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and may involve risks and uncertainties.Actual results may differ materially from the results in these forward-looking statements. Factors that might cause such a difference are discussed in the company's Annual Report on the Form 10-K for the year ended December 31, 2018, and in subsequent reports filed on Form 10-Q and 8-K.The company does not undertake any obligation to publicly update or revise any of these forward-looking statements, which would include information of future events, except as required by law. The links to our annual report and our 2018 Form 10-K are located in our website, americanriverbank.com.As with the prior conference calls, I'm going to highlight some of the key areas that were in our press release this morning. I'll try to provide some additional details and analysis and then will turn it back over to Dave for some comments and then we'll open up the lines for some questions.This morning American River Bankshares reported net income for the second quarter 2019 of $1.3 million, that's about $7,000 higher than the $1.3 million during the second quarter of 2018. Earnings per share were $0.22 in both the second quarter of this year and the second quarter of last year.ROA and ROE for the first quarter -- I'm sorry, for this prior quarter were 74 basis points and 6.53% respectively compared to 75 basis points and 7.09% respectively one year ago. From a results basis, the second quarter 2019 net income was $7,000 higher than the second quarter 2018. The pre-tax pre-provision was $229,000 higher in 2019 versus 2018. That's a 13.7% increase.As I discussed on the call last quarter, we didn't start adding the additional relationship managers and Chief Credit Officer until the second quarter 2019, so a better comparison would be to how we fared versus the two most recent quarters. Net income has increased from $1.125 million in the fourth quarter 2018 to $1.146 million in the first quarter of this year and now the $1.276 million. So the second quarter 2019, net income is up 11.3% over the first quarter of 2019's net income.Earnings per share has increased from $0.19 in the fourth quarter of last year to $0.20 in the first quarter of this year, to now the $0.22 per share in the second quarter of 2019. Those increases are not too worth to getting excited over; we do believe we're heading in the right direction.We continue to shift asset from investments in the higher-yielding loans and that has had a nice impact on our net interest income, which has increased from $5.1 million in the second quarter of last year to $5.6 million in the second quarter of this year. And then, year-to-date the net interest income has increased from $9.9 million in 2018 to $1.1 million in 2019. On the year-to-date pre-tax pre-provision, net income was up to $3.6 million this year versus $3.4 million last year. That's about a 5% increase.As I mentioned the shift from divestments to loan, loans were up $67.9 million or 23.4% from one year ago. And now they are up $39 million, actually almost $40 million from -- for the year about 12.5% growth rate. This has helped with the daily interest income which increased from $60,000 -- $60,130 in the fourth quarter of last year to $61,655 in the first quarter of this year to now $61,846 in the second quarter of this year. The loan growth -- because of the loan growth we've also been required to add net provision. We added $180,000 in each of the last two quarters compared to zero in the first two quarters of 2018.Some comment on the balance sheet. As I mentioned, the loans, we did increase $22.4 million in the second quarter and now they've increased $39.9 million from December 31, 2018 as the new fundings have exceeded the payoffs. Again that's a 12.5% growth in the first half of this year.In the second quarter of this year, we did fund $42.6 million in new loans. That's up from $30.5 million in the first quarter of this year. This marks the fifth consecutive quarter of $30 million-plus in loan fundings. The trailing over those five quarters totaled $177 million in new loan fundings.Total unused commitments at the end of the quarter were $33 million. About $11 million of those were commercials, so those have the ability to revolve and most of the rest of that $33 million is real estate related and should fund over the next year or so.Payoffs continue to be manageable with just under $13 million for the second quarter, up slightly from the $10 million that we had payoff in the first quarter of this year. The good news is we're retaining the loans. I guess the negative would be that the prepayment penalties are down. We collected just $35,000 in prepayment penalties in the second quarter of this year that compares to $232,000 from the second quarter of last year.On a year-to-date basis, we've collected $128,000 in prepayment penalties in 2019 that compares to $356,000 in 2018. I would say that our 2019 earnings were more indicative of the progress we're making when compared to 2018 as 2018 did include those non-core-type prepayment penalties.On credit quality really not much to discuss here. We did upgrade those two small non-accrual loans as they continued to make payments as we didn't have any non-accrual loans at June 30, 2019, nor did we have any loans past due greater than 30 days at the end of the quarter, some positive signs on the credit quality. We did add $180,000 in provisions for the -- during the quarter, actually due to the cumulative loan growth.The ALLL to loans was 1.31% at June 30. We had about $4,000 in loan recoveries for the quarter, no loan losses and then year-to-date we have about $9,000 in recoveries. We continue to have the one OREO property for $957,000. The loan growth during the quarter was pretty well diversified. The largest increase was in real estate with about $14 million in growth. That's 4.9%.Commercial loans were up $5.5 million or 18.5%. We did see some growth in consumer and that's going to show up in the other loan line item on the balance sheet. Growth in real estate was primarily in CRA -- CRE and was up $11.6 million or 5.9%. Construction was up $1.2 million or 13.2% and residential was up $3.4 million or 13.1%.On the construction, that growth was primarily in commercial. During the quarter, residential construction paid down about $1 million and commercial construction increased by $2.2 million. On the consumer, which is in the other loan category that I mentioned that grew by $4.6 million to $20.4 million. That consumer growth is in our specialty auto portfolio.During the quarter, we did 60 new loans averaging about $93,000. That compares to 70 of those loans during the first quarter of this year, about $84,000 average balance and then in the fourth quarter we booked 70 of those loans average balance was about $85,000.The average loan rate on the $42.6 million in the quarter was 5.19%. We also renewed $13.4 million of the existing loans during the second quarter and those rates averaged 5.91%. Classified equity ratio actually did decrease was 1.7% at the end of March. Now it's down to 1.6% with the classified assets being the $957,000 in OREO and then we have one $138,000 commercial real estate loan.In the investment portfolio, no changes there really. That continues to be comprised with a well structured cash flow and mortgage products and a few high credit quality municipal bonds. Relatively short again the average life of the entire portfolio was under 4% -- I'm sorry under four years. And the effective duration in the entire portfolio again that's under three years and our price change and rates up is under 10% -- rates up to 300 it's under 10%.On the liability side, deposits at the end of quarter at $581 million that's up about $8.7 million from the March 31st balance, and about the same as it was one year ago at $581 million. We are seeing some good increases in the non-interest-bearing. Those are still 37% of the outstanding deposits, but rate pressures are impacting the money market accounts. Well, I think those are holding up pretty well, because we actually did see an increase in our money markets about $3.3 million or 2.5% during the quarter.Non-interest balances -- those increased those were up $1 million for the quarter. Interest checking increased $4.6 million or 7% really not much change in savings and CD balances.I talked a little bit about rate pressure in our last quarterly call that continues. The impact I guess would be on the interest expense. So the second quarter, the average cost of funds was 67 basis points, compared to 60 basis points in the first quarter of this year and then it's up from 39 basis points in the second quarter of last year.Admittedly the reason for that is the more competitive rate environment. We've also got some usage of the higher cost FHLB borrowings on an overnight basis. The competitive reference really is focused on the money markets accounts that's how the costs increased from 18 basis points in the first quarter of this year to 24 basis points in the second quarter of this year.The rest of it really savings and CDs those were actually about the same. So the first quarter and the second quarter of those were four basis points for savings and 1.8% on the CDs.I mentioned the overnight borrowings. Those did increase $3.4 million during the quarter and the average paid -- rate paid on those was increased from 1.95% in the first quarter this year to 2.17% in the second quarter.Once those deposits did pick up back in the second quarter we're able to reduce the overnight borrowings down to zero, so that $15.5 million of borrowing on the balance sheet at quarter-end those were our term borrowings.Capital levels remained strong. Of course the earnings helped increase the leverage ratio that increased from 9.1% at the end of March to 9.3% at the end of June. Total risk-based capital though that actually decreased from 17% at March 31st, down to 16.7% at June 30th, really the switch there is from the -- as we move the assets from the lower risk-weighted investment securities to the higher risk-weighted loans that's going to decrease that ratio. You may have seen the press release that went out this morning Dave mentioned it as well on the increased cash dividend that will be paid out next month.On the income statement not much change here really. The non-interest income was pretty close. It was $421,000 this quarter versus $411,000 in the first quarter of this year and then $380,000 in the second quarter of last year. And that change really is the fluctuation in gain on sale of securities; $29,000 in second quarter of this year $36,000 in the first quarter of this year and then $10,000 in the second quarter of last year.I'm going to point out though that we did see a slight increase in the service charges and deposit accounts. Those were $116,000 in the second quarter of last year was increased slightly in the first quarter of this year to $121,000 and then up to $139,000 in the second quarter for this year.On the expense side, we saw a decrease overall. In the second quarter of this year, we're $4.148 million that's down from $4.260 million in the first quarter of this year and also down from $4.329 million in the fourth quarter of 2018, but obviously up from the second quarter last year as we -- I mentioned earlier much of the salary and benefits from the new loan production team as well as other new salary increases over the past 12 months have increased that dollar amount. But actually the salary and benefit expenses stabilized and have been consistent in the past two quarters.Our largest change in the -- from quarter-to-quarter, the second quarter of this year versus the first quarter of this year was in the other expenses. That includes quite a bit of line items, but it did decrease from $1.028 million in the first quarter of this year to $960,000 in the second quarter much of that decrease relates to lower business development of promotional costs. Those dropped $30,000 quarter-to-quarter.We remain out in the markets to strengthen our brand develop new relationships. We have a year behind our belt now and it allowed us to more precisely focus our spend on our target market.Couple of comments here on the taxes. The provision increased from $403,000 in the second quarter of last year to $445,000 in the second quarter of this year. Pre-tax income actually increased during that time from $1.672 million to $1.721 million, but the effective tax rate kind of jumps out every year. It was 25.9% in the second quarter of this year versus 24.1% in the second quarter last year.During that higher rate result from a lower-level of tax exempt municipal bonds and the timing of option exercises investing in restricted stock under accounting standards ASU 2016-09. I went over this last quarter, but we received tax credits when non-qualified stock options are exercised as well as when restricted stock bests when the market price is higher and when the restricted stock is awarded.Actually the reverse is true as well on the restricted stock if the market price is lower than the award date, we don't receive credit we actually get hit with a higher tax expense and that did happen in the second quarter of 2019 as we had a $14,000 expense compared to a $43,000 tax benefit in the second quarter last year, so call it a $57,000 swing. So, accounting rules are getting us.Thank you. Now, I'll turn it back over to Dave for some additional comments.

[David Ritchie:]

Thanks, Mitch. So, we continue -- I just will say, we're continuing to stay committed to our plan. Management is working really hard to execute with a mindset of growing the bank and delivering consistent results. I feel we are truly grown into the company that we wish to become.Just to reiterate a couple of things, for the second quarter, as Mitch said, we closed $42 million of new loan commitments. And we also renewed $13 million of existing loans for a total of $55 million. This marks the fifth quarter in a row that we've booked over $30 million in new loan commitments. Since the plan really got kicked off, which was this time last year, the total loans -- total new loans were $150 million in the last 12 months and $27 million worth of renewals.We give you some perspective 6/30/2018 our outstanding loan balances were $302 million, and we closed the books 6/30/19 at $363 million. Year-to-date with the renewals and new business we put on $89 million in new loan commitments and $268 million in new loan fees.It should be noted as well, I think this is a credit to the team that not only we've got 12 months under our belt and back in the loan business, we're starting to see some repeat business from existing clients, which is truly a credit to the process here. As far as the payoffs go, I think they're kind of normalized a bit. We've run -- our amortization is about $3 million a quarter. And so the difference between the $13 million this quarter is I think the loans should be expected to pay off. We still have some non-relationship purchase loans in the book, but it's relatively small in relation to the portfolio.Pre-tax, pre-provision, net interest income, efficiency ratio those all seem to be starting to go in the right direction. As Mitch said, the deposits are somewhat flat, but I think I just want to give you a perspective of that. That was based – it was down for a little while. It was one major account that decided to move on. But in the last six months, the banks opened up 602 new demand deposit accounts. The opening deposits on those accounts were a little over $17 million, and the close of the business 630 those same accounts had 20 – little over $28 million on those accounts. So, an increase of almost 64% in a six-month period of time. So we certainly are doing something right on tracking deposits.The retail team, this always is a really good retention option for us. We completed 700 financial reviews with our top clients. I mean, it's really important to the bank to stay ahead of the curve. It's very competitive out there. But this is a really great way for us to retain our top clients.I was going to let you know that, we are in the implementation phase of – with Q2, for our online banking platform. We do feel it's an excellent new platform for our existing – for all of our clients. We do expect that to go live in the fourth quarter. So, the takeaways for me this quarter, we remain committed to our plan that we started with.From our Chairman, our Board of Directors, and our Executive team we are all fully engaged. I feel we're starting to generate some core earnings. We're not generating the one – we still will generate some one-time charges or one-time fees from prepayments but in my opinion that was something of the past and that's not a sustainable growth campaign. The loan portfolio is at a level now where I think the payoffs will have less impact. And business development and pipeline remains strong, which is attributed to the entire American River Bank team.So, Erin now you can open up the lines for questions.

[Operator:]

[Operator Instructions] And your first question comes from Charles O'Brien. Your line is open.

[Tim O'Brien:]

Thank you. I'm serving in for Tim.

[Mitch Derenzo:]

Okay.

[Tim O'Brien:]

They ask for your full name on that -- in the prompt, so I figured you guys were tightening things up. So I gave him my full name. Now, you know something about me, you got me, but. Just a follow-up question $42.6 million was that new commitments or was that funded – new funded loans?

[Mitch Derenzo:]

New commitments.

[David Ritchie:]

New commitments.

[Tim O'Brien:]

And what was the actual dollar amount of new funded? How much of that was drawn I guess?

[Mitch Derenzo:]

Well, it -- I mean, we're adding new commitments on funded commission last quarter. So I think what you need to do is really look at the change in the quarter of – it was at...

[David Ritchie:]

$37 million.

[Mitch Derenzo:]

$37 million-or-so.

[Tim O'Brien:]

$37 million of that funded immediately at the time of the time –

[Mitch Derenzo:]

The commitments – the unfunded commitments were about the same as they were last. I think they increased by $1 million over last year. I think there was $33 million at the – I'm sorry there were $33 million at the end of this quarter versus $32 million at the end of the second quarter. So pretty close.

[Tim O'Brien:]

So new fund – new loans documents signed and approved and everything so the loan is made. Those total commitments were $42.6 million. How much of that received funding at the time that the close took place like $37 million?

[Mitch Derenzo:]

Yes.Q - Tim O'BrienOkay. Got it. And then you said renewals were $13 million and payoffs were – sorry, Mitch I was scribbling but how much –

[Mitch Derenzo:]

Payoffs were $13 million.

[David Ritchie:]

$13 million.

[Tim O'Brien:]

$13 million. Got it. So you guys are – obviously, this was a nice quarter for loan growth. Did – how – what's the pipeline? What kind of shape is the pipeline in after such a good quarter? How are we – how are you shaped up for second half of the year?

[Mitch Derenzo:]

The pipeline remains strong. I can tell you business development does not seem to be a problem for us. And some of it is as I said, there's a lot of repeat business we're getting ready, which is really a good sign for us. So -- yes, it remain strong. I mean, like I said, we're trying to stay consistent with what we've been showing in. That's kind of the -- that's kind of where we were at and we're trying to go forward on that basis and put on the right stuff.And there is a lot of granularity there too. I mean, we're not doing -- there's a lot of loans that are getting done, which is like what I really want. I mean, there's a lot of -- between $2 million and $5 million is kind of our number and there's not a lot of elephant -- we're not out on an elephant hunting. So I think there were a total of 16 new commercial banking loans that were booked. Is that right?

[David Ritchie:]

Of that $42 million, it was 90 -- some of those were in the auto I think 60 of those so 30. So you take off the auto, the new auto was $6 million. So you look at $37 million and there is 60 loans. I'm sorry, 30 loans.

[Mitch Derenzo:]

Yes. So there's a lot of granularity Tim. And that's what we want.

[Tim O'Brien:]

Got it. And again, Mitch, I think you gave the weighted average rate on funded loans is that -- was that the...

[Mitch Derenzo:]

Yes. The transposition person's probably here, but 519 on the new and 591 on the renewed.

[Tim O'Brien:]

And I guess relative to say fourth quarter last year, now we've got two quarters under our belt as far as pricing trends on new loan production. Can you give us some color on that in terms of -- and how the market and how fierce the competition is in the market today versus half a year ago?

[Mitch Derenzo:]

I think -- I mean there's always competition obviously. I think we were doing pretty well there. I think -- don't forget we've kind of hit the ground in a little bit of a surprise for some people that were back like this. But I think we're getting the pricing that we think is appropriate and based on the credit and the relationship. And so I think we're in a pretty good shape there. I don't feel like we're buying the business or anything like that at all.

[David Ritchie:]

With the relationship-type banking Tim, we're going to give a little bit higher yields on our loans and buying loans and dealing with brokers.

[Tim O'Brien:]

But you have to make market adjustments. As the market moved, has it gotten tougher, has competition tightened up in your space with the business commercial or what have you commercial real estate business you're pursuing? Or is it about the same as it was six months ago? What's the landscape like?

[Mitch Derenzo:]

I think it's about the same Tim. I mean, I think that -- you always have fluctuations in your pricing of your loans and part of that -- part of the equation is the credit of the borrower. Some of the stronger credits they're obviously going to get probably a little bit of a premium on pricing and stuff that's down the middle, it's pretty market-driven if you ask me.

[Tim O'Brien:]

And then last question, a lot of guys have been talking about the impact or potential impact of a 25 basis point rate cut. And saying hey, we expect they hit to our margin initial hit to our margin perhaps out of the gate first quarter what have you to be X basis points first full quarter, five to eight basis points or whatever. Have you guys looked at that yourself? And can you characterize directionally what a 25 basis point cut might do to your margin?

[Mitch Derenzo:]

Yes. Tim, we do. Most of our loans, real estate loans they're fixed or they have floors. So if they are adjustable we have floors. We don't have – unfortunately, we don't have a huge C&I floating-type portfolio. We'd like for that, but here in the rates down world we're protected by the type of the loans that we do have. And then we could see some actual benefit in the -- on deposit side.

[Tim O'Brien:]

Great. Thanks for the color.

[Mitch Derenzo:]

Thanks.

[Operator:]

And your next question comes from Tim Coffey with Janney. Tim your line is open.

[Tim Coffey:]

Thank you. Good afternoon gentlemen.

[David Ritchie:]

Hey, Tim. How are you?

[Mitch Derenzo:]

Hey, Tim.

[Tim Coffey:]

Mitch I mean still a lot of banks in the west didn't see kind of that moderation of deposit costs this last quarter like I think we're all expecting. But do you think that we'll see that at American River in the second half of this year given the potential for another rate hike -- I'm sorry rate cut?

[Mitch Derenzo:]

Yes, yes. When I started writing the script I indicated -- I was -- my first draft was we haven't seen a lot of pressure. I talked to our retail -- Head of Retail and there's still some banks out there doing some silly ads. But I think overall there's been less pressure on -- I've had less calls on people wanting to negotiate rate. So, I think it is moderating. It's more of -- people hear rates are going to drop. So, they have -- their expectations are lower which is a positive on the deposit side.

[Tim Coffey:]

Okay. And then the -- Dave at the end of the prepared comments you were talking about the I guess the online banking platform. And I'm wondering is that already in your expense run rate? Or will this be additional as we're closer to launch?

[David Ritchie:]

Primarily, yes because we're paying for a service and we're switching from one service to another and so there's not a significant cost either way.

[Mitch Derenzo:]

Either way. Yes.

[Tim Coffey:]

Okay. Now this is -- this online application that you're going to be launching. Is it kind of the client on-boarding or -- for loans or is it deposits or--?

[David Ritchie:]

Online banking.

[Mitch Derenzo:]

Online banking. Pretty much online banking.

[Tim Coffey:]

Okay. Okay, that's helpful. And then Dave where are you on staffing? Do you feel like you've got the right boots on the ground? I mean you made a number of hires last year and I'm wondering do you feel kind of good with where you're at right now or could you see more people coming on?

[David Ritchie:]

Yes. Yes, I do. They have set up their teams for which we've talked about in the past and -- the teams are all pretty productive. And frankly, I think doing better than I thought.We're still a little slow in Sonoma, but I'm -- but that's starting to come around. And we've had a couple of defections some performance issues I would say and so they've moved on.And the only thing we're really doing is just replacing Tim. Haven't really had any big additions and I don't foresee that in the next six months. I think we're in pretty good shape.

[Tim Coffey:]

Okay. Great. Those are all my questions. I appreciate the time. Thank you.

[David Ritchie:]

Yes Tim.

[Operator:]

And your next question comes from Don Worthington with Raymond James. Don, your line is open.

[Don Worthington:]

Thank you. Good morning, Dave, Mitch.

[David Ritchie:]

Hi, Don.

[Don Worthington:]

Did I say good morning, I meant good afternoon. Yes, exactly. So, on capital deployment I mean you mentioned the dividend. Are repurchases part of the capital plan at some point?

[Mitch Derenzo:]

Yes. I've been saying all along that we wanted to see how the growth of the balance sheet takes fruition as well as the impact of CECL. Looks like we even crossed that CECL one-off the list for a couple of years. As you probably saw yesterday, the FASB deferred the implementation date on that. So, we're evaluating that. So, I'm going to cross that one-off.So, it's still -- the Board wants to monitor the growth in the balance sheet. I think the Board supports a buyback and we will continue to talk about that.

[Don Worthington:]

Okay, great. And then anything new on the one piece of OREO?

[David Ritchie:]

No. We're -- it's being marketed. It's just a property that we need to market. We need to clean it up a little bit I think and we're doing our best there and we just changed brokers. And we're going to give it a new look and see where that goes.

[Don Worthington:]

Okay, great. All right. Thank you.

[David Ritchie:]

Thanks Don.

[Operator:]

Okay. And there are no more questions at this time. I would like to turn the call back over to Mr. Ritchie.

[David Ritchie:]

Thank you very much. We appreciate it and we look forward to talking to you next quarter. All right.

[Mitch Derenzo:]

Thanks.

[David Ritchie:]

Thank you.

[Operator:]

Thank you. Ladies and gentlemen this concludes today's conference. Thank you for participating. You may now disconnect.