American River Bankshares
Q3 2018 Earnings Call Transcript

Published: 19 Oct 2018

[Operator:]

Welcome to the Third Quarter 2018 Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. [Operator Instructions]. Please note this conference is being recorded. I’ll now turn the call over to David Ritchie. David Ritchie, you may begin.

[Dave Ritchie:]

Thank you, Adrienne. Good afternoon. This is Dave Ritchie, President and CEO of American River Bankshares, the parent company for American River Bank. We are headquartered and sitting in Rancho Cordova, California, and this is our third quarter update. We are approaching my first year anniversary since joining the bank. And I think you'll find we have some pretty good results to share with you as it relates to the growth that we had planned for and I feel that some of this growth is a little earlier than anticipated, which is a good thing. As a company, we're continuing to focus on our shareholder value. That's always a priority for us. And we are also very focused on client satisfaction, which continues to be a priority, which we have continually had high scores and we continue to have those scores today. So I will provide you some – a more detailed update on kind of my plan and where we are and how we're tracking to that plan after I turn it over to Mitch. But it should be noted that two press releases went out in the last 24 hours, an earnings release and a cash dividend payable next month. And so with that, I will turn it over to Mitch Derenzo, our CFO, for an in-depth financial review.

[Mitch Derenzo:]

Thank you, Dave. Of course, thanks to all of you for listening on the call today. Before we get started, 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 that 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 Form 10-K for the year ended December 31, 2017, and in subsequent reports filed on Form 10-Q and Form 8-K. The company does not undertake any obligation to publicly update or revise any of these forward-looking statements, which would include information or future events, except as required by law. Links to our annual report and our 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 the press release that went out this morning, try to provide some additional detail and analysis and then I'm going to turn it back over to Dave for some additional comments and then we'll open up the lines for some questions. This morning, American River Bankshares reported net income for the third quarter of 2018 of $1.2 million. That compares to $1.1 million during the third quarter of last year. Earnings per share were $0.20 per share in the third quarter of this year. That compares to $0.17 in the third quarter of last year. ROA and ROE for the quarter, 68 basis points and 6.37%, respectively, compared to 68 basis points and 5.37%, respectively, one year ago. On a year-to-date basis, our net income was $3.8 million in 2018 compared to $3.6 million in 2017. Earnings per share in 2018 were $0.64 and that's up from $0.55 in 2017. ROA and ROE for the nine-month periods, 74 basis points and 6.95% in 2018 that compares to 74 basis points and 5.82%, respectively, one year ago. I'll talk a little bit about the asset side of the balance sheet first. Net outstanding loans increased $19.8 million during the third quarter that's a 6.8% increase. That essentially replaces the runoff we experienced in the first half of the year while we upgraded the lending team. New loans are now up $11.6 million from the balance at the beginning of the year. If you recall, I mentioned the new loan commitments in the second quarter 2018, those we're about $30 million. We did top that in the third quarter of this year with new loan commitments reaching $40 million. This is a direct result of our plan that Dave outlined earlier this year to upgrade our lending staff, experienced senior-level lenders and to be more visible in the markets we serve. The loan growth during the third quarter was secured by growth in CRE. CRE grew $13.1 million. That was growth in both investor and owner CRE. In addition, other grew by about $6.6 million. The growth here was in agriculture. We had just under $2 million of new ag loans that was split between ag equipment and ag real estate. The rest of the increase was on consumer loans. It was about $4.7 million, most of which came from the new relationship we recently established. We were selected by a lender that specializes in classic and collector cars. We began funding these loans during the third quarter and booked about 90 loans through that relationship during the third quarter. Average balance was a bit over $50,000. Our average loan rate on the $40 million of new commitments during the quarter was 5.56%. We also renewed $4.6 million in existing loans during the quarter. The rates on those averaged 5.63%. Loan prepayments were down quite a bit during the quarter, which is okay. But we did collect about $78,000 on a couple that paid off early, and those were prepayment penalties. That compares to zero in the third quarter of 2017. On a year-to-date basis, 2018, the loan prepayment penalties were $434,000 compared to $103,000 during the first nine months of last year. On the credit quality, good news here. We did resolve a shared national credit loan that we discussed over the past three quarters. After gathering information, it became clear to us that it was going to be a long-term workout with a potential for some additional write-downs on our part. We discussed our options with our participant bank. We made the decision to sell the loan. If we recall, we had a $20,000 specific reserve on the loan, and our net exposure at June 30, 2018, was $1,362,000 [ph]. As a result of the sale, we wrote off $200,000 specific reserve and also another $13,000. We did receive the sales proceeds in September and no longer have any balances due on this loan. That loan represented about 80% of our nonaccrual loans, so we're pleased to have it resolved. The nonaccrual loans remaining at September 30, 2018, are made up of

[Dave Ritchie:]

Thanks, Mitch. Yes, okay. Well, like I’ve done in the last couple of quarters, I kind of – I think it’s proactive use of everyone’s time to hear kind of where we were and where we are today. And as you recall, the first thing we did in the beginning of the year is we came up with a focused and integrated strategic plan. The real caveat of that plan was how do we get the company moving in the right direction with one single goal. The ultimate goal is to return this bank into a top performer in our peer group. And so yes, that plan was a – I think it was well done. And I think it was simple but it was to the point. And some of the things we had to take a look at and where – how do we grow, what were the areas – what were the key areas to grow profitably, grow – pursue profitable relationships, pursue relationships versus – we’ve had a – the history was more – a lot of the growth on the loan side was broker-driven and we wanted to move away from that. So that was one of the things we talked about. We did need to kind of assess the bank and what its actual needs were. And then we had to figure out what kind of staffing we needed to actually produce the growth that we’re starting to experience today and put the right people in place. And I think the last area as we needed to be more visible in the markets we serve, which is an ongoing part of our world today. And so those were kind of the big areas that we talked about. And so from a tactical standpoint, I guess I would say when you assess some of those areas, it’s interesting to look at the relationship growth. In the third quarter, we had 30 new relationships alone, which is a really good number. When I look at the loan production, I mean, in the first quarter, we hit $1.7 million of loans. The second quarter was $30 million, and the fourth quarter, we did $40 million. So I think some of the internal restructuring and some of the hirings and – have been – are panning out. I think we continue to refine those. We’re currently looking at – we continue to look at policies, and we want to be current on credit policies and things like that, which needed to be done. And overall, we want to make sure we have speed to market. I think we lacked that in the past. And we wanted the speed to the market, but we also want to keep focused on our client satisfaction focus because honestly, the client satisfaction we take very serious around here. And our numbers are off the charts. I mean, from the branches to the relationship managers, it’s really a remarkable story. And I would say this company with the – it’s the highest we’ve made. And the existing clients – the existing branch managers really offer quite a concierge, is the word I use, service to our clients. And the numbers and – the satisfaction numbers are off the charts. I mean, it’s a really great story. So from that perspective, I kind of have a 12 – three quarter – three to four quarter plan. I think we’re moving in the right direction. I think we’re probably ahead of our plan by maybe a quarter or so. And we’re moving in the right direction. Our pipeline is building. The integration of the relationship management teams and the branch management teams is working very well, a lot of joint calling. I think the other thing that’s very – that’s great is the relationship managers have all been assigned relationships, which is something – somewhat new to the company. And they each carry 25 relationships. So that’s really good for us because we have to have a few quarters where we’ve had payoffs and we haven’t maybe been at the table in time and we’ve had payoffs. So we’re trying to be – stay ahead of that and get to know the relationships better. And so that’s all well and good. From a staffing perspective, we’re thrilled. I mean, the relationship managers, their average tenure, I’ve told you this before, is probably 15 years. They’ve got skin in the game. They get it. They’re doing a great job in the markets. I think from a leadership perspective, we had changes at the highest levels in the company. Obviously, we’re doing – we’re working with someone and we’re working on a leadership development program for our senior leaders. Our goal is to be a high-performing leadership team. The results of this study will benchmark us against many, many teams worldwide and give us some good perspective on how we’re doing and where we’re – maybe where we’re lacking as a leadership team. So we’re working on that. And the other thing was pretty obvious. It’s just being visible in our markets, being a competitor, letting other people know we’re out there, we’re for real. I think we’ve done a good job of that. We’ve done a lot of PR, a lot of marketing efforts. I think we did – we had people attend, I think, 90 events in the – in our three markets in the third quarter alone. So we’re getting out there and we’re being relevant. We’re also measuring that. We’re measuring our immediate presence and our competitive position monthly, quarterly and just to see that we are doing the right things and the numbers in those areas continually to move up in the positives – in a positive way as well. So that’s kind of my update. But as always, we have included some economic data for you in the press release. And last thing before questions, we are – we started earlier, we’re initiating our plan for 2019 to build up the momentum that we feel we’ve created in the last couple of quarters. So with that, Adrienne, if you’d like to open it up for questions, that will be terrific.

[Operator:]

Thank you. [Operator Instructions] First question comes from Tim O’Brien from Sandler O’Neill. Please go ahead. Your line is open.

[Tim O’Brien:]

Good afternoon guys.

[Mitch Derenzo:]

Hey, Tim. How are you?

[Tim O’Brien:]

Fine, thanks. Hey, couple of questions. Mitch, can you go over those numbers one more time? Were there – what were the prepayments on loans, that penalty fee you captured in the third quarter?

[Mitch Derenzo:]

We had $78,000 in the third quarter. That compares to zero in the third quarter last year. On a year-to-date basis, we’re at $444,000 compared to $103,000 last year.

[Tim O’Brien:]

And last quarter was $232,000, right?

[Mitch Derenzo:]

That sounds about right.

[Tim O’Brien:]

And then for – on the $40 million in commitments, what was that rate, the yield on the new loans, average yield?

[Mitch Derenzo:]

The new loans this quarter, $40 million, 5.56%. And then we renewed $4.6 million at 5.63%.

[Tim O’Brien:]

5.63%?

[Mitch Derenzo:]

Yes.

[Tim O’Brien:]

And this is a dumb question, but the commitments that you guys booked, the $40 million, those are funded commitments, not total commitments, correct?

[Mitch Derenzo:]

Their total commitments, but the majority of those this quarter were funded, a couple of small constructions, but most of those are funded.

[Tim O’Brien:]

So, I guess what was the net new or renewed fundings, dollars, out this quarter? Ex any payoffs, just what was the new or renewed fundings, dollars, out this quarter?

[Mitch Derenzo:]

I mean, we grew $20 million in the quarter.

[Tim O'Brien:]

So, how much in payoffs did you guys have in paydowns?

[Mitch Derenzo:]

I don’t have that number with me right now.

[Tim O'Brien:]

Okay. That’s okay. Then…

[Mitch Derenzo:]

It was definitely significantly lower than it was last quarter.

[Tim O'Brien:]

And then there was a spike in yield on taxable securities this quarter. Is there anything onetime-ish in that or…

[Mitch Derenzo:]

A higher interest – everything we're putting in was at a higher market rate last couple of quarters. That's going to increase it.

[Tim O'Brien:]

None of those have call features. None of the taxable securities have call features, correct?

[Mitch Derenzo:]

Yes. We have some new and we have some call futures in there. But they're – those guys are going to call it parts. There's no gains from call. Those were…

[Tim O'Brien:]

Okay, so…

[Mitch Derenzo:]

We put those in gain on sale of securities that we did. There weren't any though.

[Tim O'Brien:]

So, what bolstered that interest income on those securities?

[Mitch Derenzo:]

Well, as the older securities matured and paid down, we have a lot of paydowns.

[Tim O'Brien:]

Okay, just churn in the portfolio?

[Mitch Derenzo:]

Yes, yes. And we did sell some things in the – more so in the second quarter than we invested at higher rates that impacted the third quarter. And the average balances are up as well, so that helps.

[Tim O'Brien:]

I appreciate the color that you gave on the other non-interest income. That $982,000 number that’s up now the past couple of quarters, is that is where we, where that number stood at the end of the quarter, is that going to be something that's ongoing in terms of, I guess, the cost of visibility in the community? Is that reflective of the running cost of…

[Mitch Derenzo:]

Basically what we've done is we have jumped out in the marketplace in a big way this year. We're out sponsoring events. We're out attending a lot more events, as Dave mentioned. Where do I look back at the end of the year and determine whether or not – what worked and what didn't work, maybe we allocate some of those dollars to that, maybe we don't. So it's kind of hard to say that's an ongoing run rate, but if you're using it for the next quarter, it's probably fairly close.

[Tim O'Brien:]

And then one last question. Long-term strategy, strategic goals, I'm sure you guys have had some discussions around that, perhaps. Is other – in the long term, once you really gain traction and have real success with this restructuring and hiring and all of the efforts – the development efforts that go with it, are there long-term ROA and ROE goals that you guys would like to achieve and deliver to shareholders?

[Mitch Derenzo:]

Tim, as I said before, we want to be high performer. Whether that's double-digit ROE or one-plus on the ROA, we don't know right now because those are going to be moving numbers as well. As the industry does better, those numbers are going to improve. So we're always going to be chasing that, but we want to continue to chase those, move those numbers up, so we're in that – we're in the top 10% again.

[Tim O'Brien:]

All right. Thank you very much. Hopefully, I left as these couple of questions were done.

[Operator:]

[Operator Instructions]. And the next question is for Don Worthington [Raymond James & Associates, Inc.] Please go ahead.

[Don Worthington:]

Okay, thank you. Thanks, Tim. A couple of questions. One, is the staffing complete? Or are you looking at hiring any more relationship managers? Or are you pretty much done there?

[Mitch Derenzo:]

Yes. I would say that it's pretty much complete. I mean, I guess you're always out there looking at somebody great who's out there and you might make an exception. But I think right now, the teams are getting integrated. We've got – we said we wanted to have nine relationship managers. We have them. So I think for now, I think we're good right now.

[Don Worthington:]

Okay, all right. Thank you. And then maybe just for Mitch, the tax rate went up linked quarter, from about 24% to 27%. Is that just related to tax exempt type things that impact the tax rate?

[Mitch Derenzo:]

Yes. We have been putting a lot of tax exempt things in the portfolio. We did sell – if you look at our muni balances, there's a decrease over the last year. So it's really – as the income goes up, it's outgrowing the benefit from the nontaxable items.

[Don Worthington:]

Okay, all right. And then just kind of a general question. Have you had any impacts on any of your borrowers from the fires in Northern California?

[Mitch Derenzo:]

Last year, we did – we kind of disclosed that in our 10-Qs. We had – in Sonoma County, we had some loans in the area. But most of our clients that were impacted were – nearly lost their homes, business owners who lost their homes. So yes, it impacted them. It might have – two have lost their focus on their business, but they didn’t do residential loans, so we didn’t lose any collateral.

[Don Worthington:]

Okay, all right. Great. Thank you.

[Operator:]

And we have no further questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.