American River Bankshares
Q3 2017 Earnings Call Transcript

Published: 23 Oct 2017

[Operator:]

Welcome to the third quarter 2017 earnings call. My name is Eric, and I'll be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the call over to David Taber. Please go ahead, sir.

[David Taber:]

Eric, thank you very much, and good afternoon, everyone. I am David Taber. I'm the CEO of American River Bankshares, which is the parent company of American River Bank, headquartered in the Greater Sacramento Area. We're pleased to share company results for the third quarter of 2017. The key to success for American River Bankshares is profitable growth on both sides of the balance sheet, driving an increase in net interest income. We must do this while managing overhead. Deposit growth, especially core deposits, are up year-over-year and on a linked-quarter basis. Total loans outstanding are up year-over-year and also on a linked-quarter basis. Even with this modest growth, our net interest income is down compared to the same periods last year. We do operate 2 full-service offices in Sonoma County, which has suffered greatly from the Tubs fire. The human and financial impact in the region is great, and it will take a long time for this region to recover. We are in the process of assessing the near-term impact to our clients. Our thoughts and prayers are with everyone affected. Please be aware that three press releases went out at the market open on Thursday, October 19. This - the first was the financial results for the third quarter, the second was our quarterly cash dividend, and the third was an expansion of our stock repurchase program. Now Mitchell Derenzo, Executive Vice President and Chief Financial Officer, will provide an in-depth discussion of our quarterly financial results. Mitch?

[Mitchell Derenzo:]

Thanks, David, and thanks to all of you for listening in on the call this afternoon. Now before we get started, I need remind everyone of our safe harbor disclosures. Certain matters discussed in this presentation may constitute forward-looking statements for the purposes of 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 disclosed in the company's annual report on Form 10-Q for the year-ended December 31, 2016, and the subsequent reports filed on Forms 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 or future events, except as required by law. The links to our annual report and our 2000 Form 10-K are located on our website, americanriverbank.com. As with past conference calls, I'm going to highlight some of the key areas from our press release that we issued last Thursday, then I'm going to try to provide some additional detail and analysis, turn it back over to David for some additional comments, then we'll open to answer questions. American River Bankshares reported net income for the third quarter of $1.1 million compared to $1.8 million during the third quarter of 2016. Earnings per share were $0.17 in the third quarter of this year compared to $0.27 in the third quarter of 2016. ROA and ROE for the quarter, 0.68% and 0.537%, respectively - it's up 5.37%, respectively, sorry, compared to 1.13% for ROA last year and 8.62% for ROE. The largest difference between these 2 quarters, last year, we had a reversal of $668,000 at our loan loss allowance. This year, we actually added $300,000, so it's a swing of nearly $1 million. More on the credit area in a moment. On a year-to-date basis, net income in 2017, $3.6 million. That's $0.55 per share. That compares to $4.5 million or $0.60 per share in 2016. Talk about the balance sheet. I'll tackle the assets first. Net loans did increase, as David mentioned. They're up $6.1 million during the third quarter. And on a year-over-year basis, loans are up $8.9 million over the past 12 months, $8.9 million. On the deposits - I'm sorry, back on loans, we did add $13.3 million in new loan commitments during the quarter, and the average rate on these new loan commitments was 4.45%. And on the renewals, the average renewal rate during the quarter was 5.48%. While I wouldn't call the $13.3 million of protection in the quarter strong, it did exceed the $12.3 million of originations in the first 6 months of 2017. We didn't benefit from any prepayment penalties this quarter. That compares to $101,000 in the third quarter last of year. On a year-to-date, prepayment penalties are just $103,000 this year compared to $166,000 in 2016. For the quarter, we had recoveries of $43,000 in 2017 compared to $587,000 during the third quarter of 2016. However, loan charge-offs were much higher in 2017. We recorded $673,000 in losses in the third quarter this year compared to $68,000 in the third quarter of last year, bringing the net charge-offs to $630,000 in the third quarter of this year compared to net recoveries of $519,000 in the third quarter of last year. On a year-to-date basis, net charge-offs this year, $571,000, compared to net recoveries of $676,000 in 2016. The allowance to loans stood at 1.39% at September 30, 2017, compared to 1.57% a year ago. A couple of items on the credit quality. At June 30, we had one nonaccrual loan with a balance of $12,000. That loan paid down to $8,000 in the third quarter. We also added 2 loans during the quarter, one was a $290,000 commercial real estate property in El Dorado County. The loan was 72 days past due at quarter end, and they have made one subsequent payment since quarter end. We put the loan on nonaccrual as this borrower has been chronically delinquent. That we believe we are well secured, and we had not recorded any impairment on this loan. The other loan is the $2 million shared national credit loan that we detailed in the press release. They are in the process of reorganization, and we're hopeful they will work things out. Our impairment did result in the $673,000 charge-off I just mentioned. As we indicated in the press release, we'll continue to gather information as it becomes available and make any necessary adjustments. At quarter end, we didn't have any loans greater than 30 days past due other than the one $290,000 nonaccrual loan that I just mentioned. At June 30, we had 2 OREO properties totaling $1,348,000. During the third quarter, we did sell one of those commercial - we'd sold one commercial property at a book value of $387,000. We recorded a gain of $8,000 on that sale. That leaves us with the one property, has a book value of $961,000. The property was recently appraised, and it didn't require any adjustments to the book value. It did not require any adjustments. The classified equity ratio at September 30 was just 4.7%. That's down from 6.5% at June 30, the decrease resulting from the sale to one OREO and then the write-down of the loan to $673,000. Classified assets are comprised of the 3 nonaccrual loans totaling $2,317,000 and, of course, the OREO, which is $961,000, totaling $3,278,000. On the investment portfolio, really no changes there. It continues to be well-structured, cash-flowing mortgage products. We do have some high-credit-quality muni bonds. The portfolio was $257.9 million at quarter end. That's up a tad from the $254.5 million at June - at September - I'm sorry, at December 31. The portfolio remains U.S. government agencies, about 89% of U.S. government agencies is U.S. government-sponsored agencies, primarily, again, mortgage-backed securities. The portfolio is still short. Average lives of the mortgage products are 3.2 years, and the average lives of the munis are 5.1 years. Effective duration's still quite low, about 2.8 years, and our volatility is relative low as well with rates up 300 basis points. We have a 9.4% depreciation. The unrealized gain on the available-for-sale portfolio did increase from $916,000 at year-end to $1,131,000 at September 30. On the liabilities, as David mentioned, that we did have pretty good deposit quarter. Total deposits increased $13.1 million to $550.9 million at quarter end. Core deposits, which were up - those were up $13.6 million for the quarter or 3%. Noninterest-bearing balances moved up a tad. They're now 37% of total deposits. And the non-CD balances, which we refer to core deposits, are at 85% of total deposits. Average cost of funds did increase about 5 basis points from 0.26% in the third quarter of last year to 0.31% in the third quarter of this year. The reason for the increase is from higher rates paid on FHLB borrowing and higher CD costs. The increase in the short-term market interest rates really hasn't had an impact on our core deposit base as those rates remain stable. The deposit cost of checking, savings accounts, including money markets, are basically the same as they were in the third quarter of 2016 The increase in the CD and FHLB borrowings results from renewals rolling over at slightly higher rates. The overall cost of deposits for the third quarter of this year was 16 basis points. That's up from 13 basis points in the third quarter of last year. Of course, that increase is due to the increase in the interest expense on the CDs. Capital levels remained strong. It did increase during the quarter by about $882,000. And as David mentioned, we did increase - we did put out the press release last Thursday for the increase in our 2017 share repurchase program, for which we've been successful this year, and - as we have repurchased 333,086 shares. That's about 5% of our outstanding shares. The average price we paid was $14.99. Again, those purchases were made during the first half of 2017, and we hope to replicate that 5% target in the remainder of 2017. The leverage ratio at the end of the quarter was 10.3%. Total risk-based capital was 20.0%, up a tad from the - actually those compare pretty closely to the December 31 numbers of 10.5% and 20.3%, respectively. Tangible book value per share did increase a little bit from year-end. It was 10 - $14 at year-end. Now it's up to $10.31. Briefly on the income statement. Really no material or unusual or nonrecurring-type items. I'll start with the margin. The margin did decrease from 3.65% during the third quarter of last year to 3.33% in the third quarter of 2017. On the asset side, loans suffered the greatest - the largest decrease with yields going from 5.01% last year to 4.48% this year. Some of that decrease can be related to benefits that occurred in 2016 that didn't reoccur in 2017, such as loan prepayment penalties and interest recoveries. I mentioned a few minutes ago that we didn't receive any prepayment penalties in the third quarter of this year, nor did we benefit from interest recoveries, like we did in the third quarter of last year. Interest recoveries in the third quarter last year were about $74,000. Those 2 differences is the equivalent of about a 25 basis point bump to the yield on loans and about 10% - I'm sorry 10 basis point impact to the margin. The remainder of the decrease is loan yields put on the books now or at - they're at lower rates than what the loans are maturing. Current market rates are down, although we hope this is let on the out some, as the third quarter loan yield of 4.48% is getting closer to the yield on new loans, which I reported, was 4.45%. Also, I did previously mentioned that the cost of funds did increase 5 basis points from last year. So I won't go into that in further detail here, other than to point out that it also contributes to this decreased margin. Noninterest income, down about $22,000 from $399,000 last year to $377,000 in the third quarter this year. Really, that's the direct impact of less gain on sale of securities, and we did have a slight drop in our service charges. On the expense side, we did have a decrease in the noninterest expense at $34,000. Dropped from $3.35 million in the third quarter last year to $3.31 million in the third quarter this year. Quite a few items make up that, but we're really working hard to control the expenses and not waste money. Occupancy and furniture, those 2 areas are down. We continue to try to reduce the size of our branches. We did benefit from the lower FDIC assessments. And that, of course, relates to the Deposit Insurance Fund reaching their target level of 1.15%. That happened in 2016, so that's going to reduce our assessments as well. Salary and benefits are up slightly, but that's really related to higher benefit costs and not actually salaries. We also did see the increase in OREO expense last year, included larger gain on sales that offsets the OREO carrying costs. Now with that, I'm going to turn it back over to David for some additional comments

[David Taber:]

Mitch, thanks for that comprehensive report. American River Bank is a focused business bank serving Northern California. The company continues to focus on profitable growth, while being mindful of our overhead in addition to being diligent with asset quality. 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. In my opening, I did mention the devastating fire that ravaged Sonoma County. Of course, there were also significant fires in Mendocino, Napa and Solano counties and throughout Northern California. The losses to property is in the billions, and the near-term economic impact is huge. Our 2 offices, which are in Healdsburg and Santa Rosa, however, were not damaged and were only closed for one full day. We do have some clients who lost their homes and a few businesses that were damaged. Please note that we do not have loans on these homes. And as of today, we believe that commercial or business property damage is minimal when secured by loans from our company. Employees, which is really important to us, did have to be evacuated. But as far as we know, none have lost their homes. To put it in perspective, on September 30, we had approximately 14% of our total deposits and approximately 8% of our total loans in the Sonoma County market. The majority of these loans were secured by commercial property. After achieving a 12% loan growth in 2016, we did fund $13.6 million in loans in Q3, resulting in positive growth for the quarter. This followed $12.5 million funded in Q2. Fallout, which we describe as loans not made that have been on our pipeline or our potential opportunity list, were $40 million in Q3. The most prevalent reason this quarter were borrowers desirous of more liberal underwriting terms than we would provide. One note on the charge-off that Mitch mentioned and was also noted in our press release. In 2013, we purchased the participation in a shared national credit. Based on the information at the time, this 5-year loan seem like a reasonable risk. This was, and is, the only shared national credit we have purchased. Incidentally, we have received the payment post bankruptcy, and we're following the reorganization developments. On the deposit side, core and total deposits were up for the quarter, and checking accounts made up 49.4% of total deposits, with CDs making up just 14.7%. The vast majority of our deposit base is business relationships, providing key evidence that our business focus is working. In closing, we have considerable work to do to increase our net interest income. This will come from profitable growth on both sides of the balance sheet, while being mindful of our overhead. We have the capital and liquidity to fund growth and, of course, the announced buyback. Eric, if you'd open the lines for questions. And as he's doing that, just a reminder, please refer, as Mr. Derenzo did, to our disclosure on forward-looking statements. As an additional reminder, our company does not provide guidance, and we do not plan to change that practice any time soon. Please contact one of the analysts that currently cover our company for additional information. Eric?

[Operator:]

[Operator Instructions]. And our first question comes from Don Worthington from Raymond James.

[Donald Worthington:]

Just a of minor things. Mitch, I wanted to go back and make sure I heard what you said about no lost interest because of the nonaccruals. Is that right this quarter, so there were no reversals?

[Mitchell Derenzo:]

What I did mention was there was no benefit from interest recoveries from last year. Last year was about $74,000. The 2 loans that we did put on nonaccrual, it wasn't - I don't know the exact number here, but it wasn't significant, probably less than $10,000. Because the $2 million loan is current and still continues to pay, and the other one is roughly $70,000 - or 70 days past due. So not significant numbers.

[Donald Worthington:]

Okay. All right. And then in terms of the tax rate, where would you expect it to settle out on an annual basis?

[Mitchell Derenzo:]

It's really a little difficult to put your arms around that with the ASU 2016-09, which we actually record the benefits of exercising our options and the restricted stock. So - but the year-to-date run rate is pretty consistent with what I think it should be for the rest of the year. The quarterly was a little bit off, but I think the year-to-date is more consistent.

[Operator:]

[Operator Instructions]. I'm showing no additional questions at this time.

[David Taber:]

All right, Eric. Well, let me do this. Thank you all for participating and listening in. Have a great day, and look forward to speaking with you soon.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.