American River Bankshares
Q4 2017 Earnings Call Transcript

Published: 26 Jan 2018

[Operator:]

Welcome to the fourth quarter 2017 earnings conference call. My name is Victoria, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. Please note that this conference is being recorded. And I will now turn the call over to David Ritchie. David, you may begin.

[David Ritchie:]

Thank you and good afternoon everyone. I am David Ritchie, CEO of American River Bankshares' parent company of American River Bank, headquartered in Rancho Cordova, California. With the leadership change in the fourth quarter, I became the CEO and started my role in November 6, 2017. My background is 36 years in the industry, dating back to 1981. My first job after college at Union Bank where I was credit trained. I joined Wells Fargo Bank 1986, spend eight years in the commercial real estate group and 18 years in the commercial banking group including three years in the Sacramento marketplace in the mid-1990s. I have leadership roles for 22 years of my employment there. Just prior to joining American River Bank, I worked at US Bank in Los Angeles. In my last position there, I was a the senior portfolio manager for the Southern California commercial bank responsible for the credits in a $2 billion portfolio. My career has been all in middle-market lending including real estate and C&I. My plan for American River Bank is growth. We are very well-positioned with our capital and liquidity. Now we need to start deploying that capital. We need to build upon our 34 years of excellent reputation, expanding the existing relationships and bringing new relationships to the bank. To assist with this growth strategy, in December we successfully hired a Chief Lending Officer. We will now be upgrading our team of relationship managers and are presently evaluating resumes. We have successfully hired one new relationship manager who started this week with hopes to hire additional relationship managers in the next few months. Our chief credit officer resigned in January after 3.5 years with the bank. We certainly appreciate him for his hard work and dedication and wish them the best. We have the …

[Operator:]

[Operator Instructions]

[David Ritchie:]

… and year-end results, including the details of the reduction in our deferred tax asset base based on the most recent corporate tax changes. Second was a continuation of our 5% stock repurchase program for 2018. Now Mitch Derenzo, Executive Vice President and Chief Financial Officer will provide an in-depth discussion of our year-end financial results.

[Mitchell Derenzo:]

Thank you, David. Of course thanks to all of you for listening in on the call today. Before we get started as you know, and we do remind everyone of our 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 from this forward-looking statements. Factors that might cause such a difference are discussed in our annual report on Form 10-K for the year ended December 31, 2016 and subsequent reports filed on Forms 10-Q and Form 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 this annual report and 10-K are located on our Web site, americanriverbank.com. As with past conference calls, I'm going to highlight some of the key areas of the press release that we issued this morning. try to provide some additional details and analysis, and then we will turn it back over to Dave for some additional comments, then we'll open up for to answer questions. This morning American River Bankshares reported net loss for the fourth quarter of $392,000 compared to net income of $1.9 million during the fourth quarter of 2016. Earnings per share were negative $0.06 per share in the fourth quarter of '17 compared to a positive $0.29 in the fourth quarter of 2016/ Allotment in the fourth quarter was driven by the income tax expense adjustment to our differed tax asset. Most of you been aware than the Tax Act required us to revalue the company's deferred tax asset, using the new lower corporate federal tax rate of 21%. That’s a reduction from the company's 2017 rate of 34%. In addition, the company also recommends expenses totaling $676,000 related to the company's leadership change in the fourth quarter. Many of you also read the agreement and saw that our payments to the former CEO will continue in 2018 and 2019. But based on the accounting rules, always future payments must be expensed when the liability is created. We believe the $676,000 substantially incorporates the entire liability. The fourth quarter loss also impacted ROA and ROE. Both were negative for the quarter at 24 basis points and 1.95%, respectively. But compares with positive 1.16% and 9.04%, respectively one year-ago. We did report the core non-GAAP adjusted net income of $1.2 million and $0.19 per share figures for the fourth quarter in the press release as well as a reconciliation of the quarter to actual, so we referred you that session. The press release if you want to see that details of the reconciliation. On the year-to-date basis, net income in 2017 was $3.2 million or $0.50 per share compared to $6.4 million or $.94 per share in 2016. The biggest change is year-over-year, obviously the two unusual items that we discussed as well as change in the provision for loan and lease losses. The recoveries in 2016 allow the company to reverse $1.3 million out of the reserve. While in 2017, we added just under $0.5 million creating about a $1.8 million swing year-over-year. Some comments on the balance sheet. Net loans actually decreased $13.5 million from September 30, 2017 and for the full-year 2017 loans decreased $15.4 million. New loans added during the fourth quarter tailed off to just $4.1 million that compares to $23 million in new loans or in fourth quarter 2016. For the year, we added just $130 million compared to $89 million in new loans from 2016. The average rate of new loans during the fourth quarter of this year was 5.19% and the average rate on the renewed loans was 4.92%. Both those members are little high. However those were pretty much out of a small sample size, so one loan could skew the averages. I wouldn’t rely too much on those as a - forward-looking numbers. The loan paydowns during the fourth quarter of 2017 resulted in $111,000 of annual penalties that compares to $54,000 in the fourth quarter of 2016. Year-to-date prepayment penalties were $213,017 compared to $220,000 for 2016. Credit quality still seems pretty strong. We did benefit from $177,000 in recoveries, but we also charged-off $4,000 on one relationship. So net charge-offs were $223,000 for the fourth quarter. For the year, net charge-offs were $794,000. For 2016, we’ve $515,000 in net recoveries in the fourth quarter and $1.2 million in net recoveries for the full-year. Now the $400,000 charge-off I just mentioned that happened during the fourth quarter this year but at the same shared national credit loan that I discussed during my analysis last quarter. I discussed this a little bit further in the press release -- again they’re in the process of reorganization, we’re going to continue to monitor very closely by gathering information as it becomes available. If necessary we will make additional adjustments in the future, which may include additional write-downs. The adjusted balance was down $1.6 million and the borrower does continue to make payments. Nonaccrual loans $1.9 million at the end of 2017, down from $2.3 million at the end of September this year with the decrease being the $4,000 charge-off. Still have the same -- three nonaccrual loans that were in the books of September 30. The shared national credit of a $1.6 million, $208,000 on a commercial real estate property. That's actually in escrow to sell. We also have a small $6,000 consumer loan that is paying as agreed. On the commercial property we expect a full recovery from the sale proceeds assuming that the sale does close at the current sales price. Our allowance is now 1.43%, 3% of loans compared to 1.47% one year-ago. We’ve two loans past due over 30 days, by excluding the nonaccrual loans, of course. That total -- those two loans totaled $147,000. One of those is a chronic delinquent, down -- the balance is down $1,000, so that’s kind of big one there. The other is $146,000. They actually made their payment on January 2. We are receiving on the -- back of the nonaccruals. We are receiving payments on two of the nonaccrual loans and the one that isn't paying is the one that’s in the contract to sale. So my guess is they’re not making the payments until the -- because they’ve sold the business. We still have the one OREO property. Balance on that is $961,000. Our classified equity ratio at the end of the year was just 4.4%. Of course the classified assets being the 1.9 in nonaccrual and $961,000 in OREO, a combined total of just $2,853,000. On the investment portfolio, pretty much the same though. No major changes there. Still well structured cash flowing mortgage products and some high quality -- high credit quality municipal bonds. About 89% of the portfolio is still in U.S government agencies or U.S government sponsored agencies, primarily mortgage related products. Portfolio is still short. Average life of the mortgage products about 3.9 years and on the munis, about 4.9 years. Duration of the entire portfolio is low about 2.9 years and price change and rates up 300 is still under 10%. As you know we have experienced increase in market rates that tends to cause a decrease in the unrealized gain in our bonds. In 2017, portfolio moved from a net unrealized gain position to a net unrealized loss position. At the end of 2017, the unrealized loss was $456,000 compared to an unrealized gain of $916,000 at the end of 2016. Of course that also impacts the tangible book value per share. At the end of 2016, the unrealized gain added about $0.08 to the tangible book value per share whereas at the end of 2017 we had reduced by about $0.04 per share. So another $0.12 per share swing. On the liabilities, we did see an increase in deposits from year-over-year, increased from $544.8 million last year to $556.1 million at the end of 2017. Nearly all of that increase was in the noninterest bearing deposits. They increased from $201 million up to about $216 million at the end of 2017. Noninterest balances, those make up 39% of our total deposits. The average cost of funds did increase 4% from 26 basis points in 2016 to 30 basis points in 2017. And reason for this increase is higher rates paid on our FHLB borrowings and our CD costs -- some of the CDs that rolled during 2017. The increase in our -- in the short-term market rates does not have much of an impact on our core deposits though as rates remain stable. Deposit costs on checking and savings in money market accounts that actually decreased slightly from 6.6 basis points in 2016 to 6.1 basis points in 2017. The increase in the CDs and FHLB borrowings really that's the result of the renewals rolling over slightly higher market rates. Overall cost deposits for 2017 was 16 basis points, up from 14 basis points in 2016. Again, that’s due to the higher cost of the CDs. On the capital, capital levels remained strong. Company has a leverage ratio of 9.5% at the end of the year at a total risk-based capital of 19.3 those compared to 10.5 on the leverage and 20.3 on the total one year-ago. They did reference the press -- other press release that went out this morning. The Board's decision to continue to repurchase plan into 2018. For the fourth quarter of this year 2017, we did repurchased 241,662 shares of our common stock. Average price we paid on that was $14.99 per share. And then for the full-year of 2017, the company repurchased 574,748 shares that also was an average price of $14.99 share. We did -- last week, you might have saw, we did -- put up the other press release that we’re going to continue to cash dividend, quarterly cash dividend that will be paid next month. We believe those to be good capital management strategies. On the income statement, not much swing other than the things that I previously mentioned, but I will quickly go through this. Noninterest income was up about $449,000 -- sorry, it was down $449,000 primary that’s OREO income. We no longer have the income producing property and then investment sales, investment sales were down. Last year they were 314,00. In 2017, they were 161,000. On the expense side, we did experience increase. About $200,000 from $13.8 million last year to $14.0 million in 2017. As I did mentioned, the fourth quarter of 2017 did include the cost associated with leadership change. About 597,000 of that change was in the salaries and benefit line, and then $79,000 was in other expense primarily in professional expenses. Excluding those unusual items, the net expenses were $13.4 million. So call it a decrease from -- $400,000 from the $13.8 million in 2016. Those decreases occurred in OREO, again lower number of properties, less expense, OREO expense was down little over $200,000 and then occupancy that was down about $125,000. The lower occupancy, really that's based on -- we’re doing better job of managing the size of our facilities. Just a quick note on the taxes. Again, the $1.2 million DTA adjustment had a big impact. That occurred in the fourth quarter. That adjustment also distorted the effective tax rates for 2017. For the fourth quarter 2017, the effective tax rate was 134.3, yes 134.3. That’s just not pretty compared to 36.94 in the fourth quarter of last year. For the full-year, the effective tax rate for '17 was 54.7 compares to 34.6 during 2016 Still getting our arms around all of the impact of the tax reform, but right now we're -- we think the 2018 effective tax rate is going to be somewhere in the 24% to 28% range. Thank you and let me turn it back over to Dave for some additional comments.

[David Ritchie:]

Thank you, Mitch for that comprehensive report. American River Bank will continue to be focused -- be a focused business bank in Northern California. We have an excellent opportunity to grow based on the markets we serve, and we will be hiring some new marketing focused relationship managers in the next few months which will help us grow our business. We've also expanded our marketing budget to help us be a more visible bank and the communities we serve. I look forward to updating you on our progress in the upcoming quarters. Also we did include some economic data in our press release. In general, positive trends continue in our market in California and the nation as a whole. Now Victoria, can you open the lines for questions?

[Operator:]

[Operator Instructions] And it looks like our first question comes from Tim O'Brien from Sandler O'Neill. Please go ahead.

[Tim O'Brien:]

Good afternoon, guys.

[David Ritchie:]

Hello, Tim.

[Mitchell Derenzo:]

Hi, Jim. How are you?

[Tim O'Brien:]

Fine thanks. So just to carry on qualitatively a little bit about the hiring that you're doing. The business relationship officer you picked up where are they based -- situated in Sacramento area?

[David Ritchie:]

Yes, yes. Their first. Both of -- actually, our Chief Lending Officer as well as the first hires in Sacramento.

[Tim O'Brien:]

And where are you looking for new relationship officer is currently? What’s the priority which you are focused?

[David Ritchie:]

I’m guessing that the -- well the priority is right now is the Santa Rosa market, followed by the Sacramento market. And so we are actively with the opportunities we see in that in the coastal market. I think it's really important that we find a senior-level person for that market. So we are actively looking at a couple of resumes as we speak.

[Tim O'Brien:]

Great and stepping back and looking at what you like to accomplish how much room, how many officers, bankers do you -- would you like to -- if you’re successful, bring a board say this year. How many would you like to add? Like a dozen? Is it -- can you …

[David Ritchie:]

Yes, I think that if you might think this way, if you get the right people, it's probably not half a dozen but it's probably between 4 and 5 and strategically placed, I think we'd be in a good position. That’s not the same. We don’t have a philosophy here. If we really found somebody that's terrific and have an opportunity to hire somebody, we will probably make some room in the stable for that person.

[Tim O'Brien:]

Great. And then, do you feel Dave like -- there is a point in time here this year maybe where you are going to want to provide or intent to provide color on, a production pipeline or build out or something along those lines are how should we -- how should we and investors track success and progress in your efforts.

[David Ritchie:]

I -- I mean we’ve talked before. I think that -- where we started and I think there is truly a ramp up period here. If you talk, if you think about relationship managers, usually the hiring in that business right at the end or the middle of the first quarter because a lot of incentives, a lot of other banks were paid at that time and it takes a little time for somebody to get in here, to the extent they call and talk to some of their old clients about the new banking experience. Most clients will say, well, do you like it there, how long you’ve been there? So my guess is that -- this will be somewhat back loaded in terms of pipeline, in terms of production and just because we're starting at a very low level today. And so, I guess, -- my intention would be to keep you apprised as we go quarterly and I think the first couple of quarters will probably be a little slow. But I think after that it will ramp-up for really good kickoff for 19?

[David Ritchie:]

So initially, I guess, taking what you say the conversation probably is going to center really around the hiring itself and as far as the traction that's gained, that’s down the road maybe, I don’t know, if second half or third -- fourth quarter something you guys will start talking about. What do you guys -- how it's going to translate and maybe the numbers will start to show up by then.

[Mitchell Derenzo:]

Yes, I think it's -- what we can do is we’re going to report hires. Like Dave said, we hired a relationship manager, started this week. We will try to continue to let you know those things. Bur you know us, Tim. We’ve never given you total pipeline numbers and whatnot. We are not providing that guidance. We are not going to change any …

[Tim O'Brien:]

Hey, Mitch, hope springs eternal.

[Mitchell Derenzo:]

I know you, Tim, you keep asking. Someday we might turn on that, but right now as Dave said, we’re going to build up the salesforce. We got some good sales people right now as well. But we are just a more of them and I think the results will show on -- when you hear me talk about the numbers,

[Tim O'Brien:]

And I appreciate the guidance you gave on or the clarification on kind of what a range of tax rate might be, a lot of banks were doing that now and that's really helpful and appreciated, very helpful. So thank you for doing that, because I do understand your guidance situation. But I guess last question qualitatively, is there -- are there -- do you have -- can you share thoughts on how you might get back to and obviously there are sector driven considerations here as far as C&I is concerned and C&I growth a lot of banks are facing. A lack of interest in utilization of lines, so it's not unique to you, but you guys have seen a good C&I book of business that at peak was, I don’t know multiple times larger than what it is today. Do you have thoughts on how you can find success in growing that book of business here going forward that might be a little bit different than what you’ve been doing last year?

[David Ritchie:]

I'd answer it this way. What’s exciting for me on the C&I side, I think as we all know that the whole tax rate -- the tax rate reduction for corporate America and I think a lot of people asked the question bank, well, yes, it certainly helps us but I think the ultimate answer to that question for all of us is that it should stimulate businesses to hopefully reinvest in their businesses, take some -- maybe go out and do a little more spending and if they have more confidence in the system. And so I think the very tax situation can really help the C&I side for banks in general.

[Tim O'Brien:]

Great. Well, hopefully [indiscernible] your time. Hopefully I asked all of Worthington's questions for him already, but I will step back now. Thanks guys.

[David Ritchie:]

Thanks a lot.

[Operator:]

And our next question comes from Don Worthington from Raymond James. Please go ahead.

[Donald Worthington:]

I’ve got one or two more, Tim. So in terms of -- have you noticed any issues with the Northern California fires that have impacted businesses or any of your customers?

[David Ritchie:]

No, we talked briefly on this last quarter and really we haven't seen much change since then. Unfortunately, we’ve some of our clients lose their homes, but they’re not on -- we don’t do residential lending. So it didn’t impact any of our loans. It's going to be some -- a long, long time rebuilding. Hopefully there's something we can do to help out the community there as far as lending and whatnot, but no significant impact on the company -- on our company from the fires.

[Donald Worthington:]

Okay. Thanks. And then just kind of looking out into the future, any, I guess, initiatives to increase fee revenue?

[Mitchell Derenzo:]

Well, one of the things Dave came in -- those are questions he's asked. And we’ve -- we’re going through all of our deposit account agreement and making sure we’re getting paid for what we do. We tend to have a lot of high balance accounts. We are not nickel and diming them. But it is something -- we try to do, but it's never going to be our bread and butter. We are going to be a block-and-tackle and net interest income company.

[David Ritchie:]

And Don, I think there is some legacy accounts like that, but I do think that what -- on the retail side of this, the bank we are trying to be more market priced on new relationships coming in versus being below the market in certain situations, it's always hard to bring that back up. So we're trying to be a little creative there.

[Donald Worthington:]

Okay. All right. Thank you.

[Mitchell Derenzo:]

Thanks, Don.

[Operator:]

I’m showing no further questions at this time.

[Mitchell Derenzo:]

Well, okay. I appreciate your interest.

[David Ritchie:]

Thank you everybody. We appreciate it.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s call. Thank you for participating. You may now disconnect.