American River Bankshares
Q4 2018 Earnings Call Transcript

Published: 25 Jan 2019

[Operator:]

Hello, and welcome to the fourth quarter 2018 earnings teleconference. My name is Michelle, and I will 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 Mr. David Ritchie. Sir, you may begin.

[David Ritchie:]

Good afternoon, and thanks for joining us. This is David Ritchie, President and CEO of American River Bankshares, the parent company of American River Bank, headquartered in Rancho Cordova, California. This is the fourth quarter update. Please note that the press release detailing our quarterly and year-end results went out at market opening today. Now I'll turn it over to Mitch Derenzo, Chief Financial Officer, and he will give you in-depth financial review of our results.

[Mitchell Derenzo:]

Thank you, Dave. I appreciate it. Of course, thanks to all of you for taking the time to listen 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 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 Form 10-K for the year ended December 31, 2017, and in 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. Links to these annual report on Form 10-K can be found on our website, americanriverbank.com. As with past conference calls, let me try to highlight some of the key areas from our press release that was issued this morning, try to provide some additional details and analysis, then will turn it back over to Dave for some additional comments, then we'll open up the lines for questions. This morning, American River Bankshares reported net income of $1.1 million for the fourth quarter of 2018, that compares to a net loss of $392,000 for the fourth quarter 2017. Earnings per share were $0.19 per share for the fourth quarter of this year compared to a negative $0.06 per share in the fourth quarter of 2017. As a reminder, that loss in the fourth quarter of 2017 was driven by the income tax expense adjustment toward deferred tax asset that relates to the federal income tax law that reduced the tax rate to 21%. In addition, the company also recognized expenses in the fourth quarter of 2017 of $676,000 that related to the company's leadership change that took place last year -- last year meaning, 2017. ROA and ROE for the quarter were 1.16 and 0.904, respectively, compared to 91 and 6.71, respectively, one year ago. ROA for the quarter -- I'm sorry, scratch that. ROA for the quarter was 65 basis points and 6.22%, respectively, compared to a negative 24 basis points and 1.92%, respectively, one year ago. As a reminder, we did report the core non-GAAP adjusted net income of $1.2 million and $0.19 per share figures in the fourth quarter of 2017 in our press release this morning as well as the reconciliation of the core to actual, so refer to that section of the press release if you want to see the reconciliation. That's the same amounts that we've been reporting and the same reconciliation that we've been reporting for the previous four quarters of this year. On a year-to-date basis, net income is $4.9 million in 2018, that's $0.83 per share that compares to $3,200,000 last year or $0.50 per share. Again, that tax hit in 2017 did have a large impact on the 2017 net income as well. On a pretax basis, 2018 was up slightly over 2017 or up $24,000. So call that slightly, but again it was higher. A few thoughts on our plan that we've been discussing. Early 2018, we indicated that it was our intention to grow the company. This year, we're going to be more active in our communities to promote brand awareness and to retool the lending team by hiring experienced senior relationship managers that focus on building relationships that covered both sides of the balance sheet and less reliance on broker deposits -- brokered loans. Just in time to find the right lenders, but we did have the place -- team in place by the end of the second quarter. We did experience a decrease in loans during the first half of 2018 as some of those nonrelationship type accounts paid off. If you recall, during the second quarter, recap call, I did mention that we had $19 million in payoffs during the second quarter that offsetted the new loan build -- loans that we added and the commitments that we added during the second quarter. We continued that pay-offs in the second half of the year. But the lending team was able to add more new relationships and increase our net loans outstanding. For the second half of 2018, loans increased by $27.9 million, that's a 9.4% increase due to annualized debt after 18.8% clip. On the deposit side, we were able to increase deposits by $34.6 million in 2018, that's a 6.2% increase. I'm pleased with the progress we've made and the excitement we have created internally among our employees and externality in our marketplace. We still have work to do, but the foundation has been laid and our plan for 2019 is to continue to focus on quality relationship-driven growth. Some comments on the balance sheet. Net loans increased $8.2 million during the fourth quarter, that's a 2.6% increase and net loans were up $9.8 million from the beginning of the year, that included the $18.1 million decrease in the first half of the year and the $27.9 million increase in the second half. If you recall, I mentioned the new loan commitments in the second quarter 2018 were about $30 million, in the third quarter they reached about $40 million and for fourth quarter they came in at $33 million. For the year, the new loan commitments were $104 million. That's up quite a bit from the $30 million we did in 2017. The new commitments in 2018 about $21.8 million have yet to be funded and relate to construction-type of projects that we should expect to fund over the next 12 to 18 months. In addition, there's about $8.4 million in business lines, many of which should revolve in 2019. The total unused commitments at 12/31/18 were $34.8 million. I'll talk to you about payoffs during 2018. Total payoffs in 2018 were $49 million, that's in addition to about $15 million in normal amortization, which would include some principal paydowns. Some of those payoffs were from relationships, but many were from broker referrals or loans we purchased a couple of years ago, what I refer to as nonrelationship-type loans. While paydowns do slow down our progress, moving the nonrelationship loans isn't necessarily a bad thing, particularly when we see prepayment penalties. For the fourth quarter 2018, we received $60,000 in prepayment penalties, bringing the amount for the full year of 2018 to $494,000. That compares to $111,000 in the fourth quarter of last year and $213,000 for the full year of 2017. The loan growth in the fourth quarter 2018 primarily came in the commercial loans, which grew by $5.1 million. And then the other category, which also grew by $5.1 million. The growth in that other category is primarily consumer loans, most of which came from a new relationship that I talked about last quarter. We established a relationship with a -- actually we're selected by a lender that specializes in classic and collectors cars. We began funding those loans in the third quarter. We did about 90 loans in the third quarter, and the average balance in the third quarter was about $50,000. For the fourth quarter, we booked another 70 loans from that relationship, and the average balance on those was about $85,000. For the quarter, the new -- the average loan rate on the $33 million of new commitments was 5.6%. We also renewed another $15.1 million in existing loans during the fourth quarter. Those rates averaged 5.27%. A more positive news on the credit quality side. At September 30, we had commercial loan -- commercial real estate loan $278,000. That loan actually paid off in the fourth quarter with resulting in new loss for the company. That left -- we also had -- look, we also had $68,000 nonaccrual equity loan in the -- as of September 30. We did charge that off in the fourth quarter. That leaves one relationship with -- one commercial relationship with two loans. Those are totaling $27,000. Those are actually down $3,000 for the quarter as both of those loans were actually current. Charge-offs in 2018, $282,000, $213,000 was the -- related to the shared national credit, which we've been discussing in prior quarters and then the remaining is the equity line I just mentioned. That's total charge-off recoveries $21,000 in 2018 to our net charge-offs with $261,000 or 8 basis points to average loans. Our allowance at the end of the year was 1.36%, that compares to 1.43% one year ago. And we did have had a $125,000 of allowance in the fourth quarter and if you recall, we had a $50,000 in the third quarter for a total of $175,000 in 2018. And really that's primarily growth driven. At the end of the quarter, we had zero capacity loans and that includes the nonaccrual loans, as I just mentioned, those recurring. We still have the one OREO property totaling $957,000. Classified equity ratio just 1.7%. The classified assets are $27,000 in nonaccrual and then the $957,000 OREO so a combined total of $100 million. Investment portfolio remains the same. Really well-structured cash flow and mortgage products, got a few high-quality municipal bonds in there. At the end of the year, that totaled $295.2 million, that's up from $262.7 million a year ago. We did end the quarter with about $7 million in fed funds. The portfolio, about 93% of it is in U.S. government agencies or U.S. government sponsored agencies, so very low credit risk. And it's actually, from an interest rate risk perspective, very low as well. The average life of the entire portfolio of 4.2 years and the effective duration of the entire portfolio is quite low at around 3.1 years. And then the change -- price change in rates up 300 is about 10.5%. Liabilities. I did mention we did have a nice increase in deposits about $34.6 million, 6.2% for the year. Increases were in

[David Ritchie:]

Thanks, Mitch. Hi, everyone. So I just thought I would -- as I've done in the past quarters, we had a plan here, and we've been trying to stick to it. And I guess, I look at this year as kind of the second half of the plan, if you will. But the most important things are I think we become much more relevant in the markets we're serving, and we have the people in place and this is the year of execution for us. I think in some respects, I think, we've had some success, which, I think, is actually kind of earlier than I thought it would be, Mitch talked about generating $104 million of new loan commitments in the last three quarters, which on average about $35 million a quarter, so that's pretty good. And we continue to increase our deposits. And I think that -- I'm optimistic there. When you think about the RM teams that we've had -- I mean, they really got started -- basically we've had them for about 5 or 6 months, and they really got started in the second half of the year. So I feel good about that. I do feel a little bit like we've been on a treadmill. We had a -- we approximately -- did approximately $60 million of new fundings and had pay-offs of $49 million. Honestly, I'm not that surprised given the previous strategies at the bank, which were to work with brokers and purchase loan portfolios over the years. And so I guess, I feel much of that's behind us. The other piece of that I would say is, we are replacing those loans at higher rates which is better for the bank. So some more to be expected. Those are tough pills to swallow, but I think it's moving in the right direction from that standpoint. As Mitch talked about, we have a little runway. We've got some construction-oriented loans, and we did it in the second half as well. We have some unfunded commitments that will help us going into this year, I believe, will -- Mitch talked a little bit about, our consumer portfolio I think that will continue at some levels each month. And so we have some additional loan opportunities with both of those or at least outstanding opportunities for both of those. And something else we talked a little bit about is fostering some new banking relationships with other banks, I think that's important. The other banks are also prospects in a way, and I think we've been pretty fortunate. We completed three participations. These are somewhat strategic, they're the right opportunities, and they are well-priced opportunities. And not necessarily all of them are in our direct markets, but in this business you kind of scratch our back, we scratch yours, and I think it's important that we have relationship to the extent we need to participate, which we actually did participate in one on ourselves in the last 12 months. The other thing I would say with all those -- with all the opportunities we hope we see the credit area is viable for this organization that we have, as Mitch said, we're really, really clean. I'm really happy that with our largest nonaccrual is paid off in September, that was big for us. Recently, it's just to beef up that area, we hired a senior vice president and credit administrator, somebody with local market experience, been in banking for 30 years. And this person is due to start with the company in February. So I think those are all good things. I think we're -- I feel we are competitive again as we go into 2019. We have a very strong pipeline. Things are heading in the right direction. I think we continue to have excellent client satisfaction scores. As you know, we continue to grow deposits as well as loan production. So overall, we reorganized -- we believe we hire the right people. Integration is an ongoing process here. I believe the management and the teams are in line to grow the company and produce results to becoming a high performing community bank again. So with that, Michelle, I would open up the lines for questions.

[Operator:]

[Operator Instructions]. [indiscernible].

[Unidentified Analyst:]

This is [indiscernible]. Just two quick questions. A point of clarification for Mitch. You said $634,000 in second half incentive accruals?

[Mitchell Derenzo:]

Correct.

[Unidentified Analyst:]

And what did you say the full year amount was, $1.1 million?

[Mitchell Derenzo:]

That's $634 million in the fourth quarter alone.

[Unidentified Analyst:]

4Q alone. And what was the other metric you gave? Did you have $1.1 million?

[Mitchell Derenzo:]

$1.1 billion for the entire year. So basically, we backloaded it, not intentionally, but the -- really the projection from the RMs kind of occurred later in the year and so most of that did in the fourth quarter as we caught up to -- accrued for it by year end.

[Unidentified Analyst:]

So I mean split the difference in figure that accruals are going to remain. I mean, you have to accrue -- those six RMs have meaningful incentive elements of their comp, right? So that's going to be additive going forward?

[Mitchell Derenzo:]

We hope so. We hope that number increases, means more production.

[Unidentified Analyst:]

And what did you say? Did you also give the third quarter incentive comp number or second half, I don't know?

[Mitchell Derenzo:]

I did not. For the Fourth quarter and year-to-date is what -- what I was trying to communicate was that a lot of that occurred in the fourth quarter. So for you to kind of figure out how to allocate that over a full year.

[Unidentified Analyst:]

And then do you happen to have or can you give color on delinquency trends?

[Mitchell Derenzo:]

0 30 days, and then I -- that's pretty good. Even though -- I said even the nonperforming loans are current to terms as well. So...

[Unidentified Analyst:]

0 30 days, all right.

[Mitchell Derenzo:]

Credit quality is pretty sound right now. I think it's worth.

[Unidentified Analyst:]

And then I didn't see it in the press release that doesn't mean it wasn't there, but do you happen to have year-end FTE count?

[Mitchell Derenzo:]

101.

[Unidentified Analyst:]

And what was it at the start of the year? How much have you...

[Mitchell Derenzo:]

91.

[Unidentified Analyst:]

91 at the start of the year? And for Dave, going forward, what are your thoughts on additional needs? Obviously, you've got one starting in February that you mentioned, beyond that?

[David Ritchie:]

Yes, and actually, Tim, that's a replacement for a previous credit administrator, so that's not a net new one, that's just a replacement. We lost our administrator back in October, so this is just a replacement. But I don't -- I mean, we've done -- and actually the count on the new RMs is seven, just to correct everybody, brand new. So I think we're in good shape. I -- in this business, as you know, you're always -- I mean, you're always kind of open for business because if somebody is out there it's really good, where that make an exception perhaps. But I feel good about the teams. I think they're -- we're staffed. There's plenty of work for them to do, but I think they still have time to market. And so I don't see any big hires that -- I mean, something to come out last year I suppose, but I don't see anything real large there at all. Trying more replacing existing if we need to.

[Unidentified Analyst:]

And you mentioned also in '18 kind of getting out there and partnering with some banks and picking up parts of three participation loans, three bigger loans. Do you happen to have the total dollar amount -- cumulative dollar amount outstanding of those loans?

[David Ritchie:]

Yes, outstanding is the commitment.

[Unidentified Analyst:]

I don't know take your pick, what do you think is more helpful? I guess, how much of the -- what kind of loans are they, first of all? Are they construction loans?

[David Ritchie:]

One, in particular, is a construction loan and there's couple of million outstanding on that one that's closed, educated guess. Another one was...

[Mitchell Derenzo:]

Maybe $4 million or $5 million committed more.

[David Ritchie:]

Yes, exactly. And another one is a straight participation, it was a small loan, it is a local deal and that was about $1.6 million was about our share was very small.

[Unidentified Analyst:]

How big is the total loan on that? Is it...

[David Ritchie:]

The Total loan was like $3.6 million, $3.7-ish million. It was...

[Unidentified Analyst:]

So these partners are smaller banks. You're not doing -- you're not working with bigger banks?

[Mitchell Derenzo:]

We're not doing a share...

[David Ritchie:]

No, we're not doing a share especially, but, yes, and then there's -- and then we actually -- in the second quarter, it was really our first big deal. We actually participated with a bank locally. There was just a large chunk for us to hold on to. It was a $10 million commitment, and we sold -- we participated $4 million out, so we held $6 million. And some of these -- honestly, a couple of them territorially, I told you strategically, we kind of look at who we participate with. Some of these are just relationships to either somebody in a company here has. I mean, one of them, particular a couple that I've had relationships, people I've worked with in the past have called me, but the other pieces, so we're not just chasing that kind of business. If it comes our way through a good relationship, we'll take a look at it with the right kind of deal. But the other piece is, if you guys all know we -- part of our market is ag. This company hasn't done a lot of ag in the past. We have a few of the hires that understand it, but that certainly is an opportunity for us and a couple of these banks actually have full ag departments and at times are at capacity, and we've talked to them about if the need to participate down, if you will, one of their better relationships as well as if there's maybe a couple other -- it's another opportunity to follow that we might be willing to help them out and so we're kind of out of market, a couple of them have ag focuses, which helps us -- I don't want to make any mistakes there, it's interesting thing to understand. So I kind of looked at it that way as well.

[Unidentified Analyst:]

Do you have any, I guess -- and you can have relationships with bankers from banks and throughout the West, potentially or even possibly across the country. It's a mobile integrated world these days. Are these relationships that you've put on now are they -- there's some geographic -- since two or more -- are they California banks or is it for deals that are California-based?

[Mitchell Derenzo:]

Yes, they are all California deals in California for sure.

[Unidentified Analyst:]

And you're probably going to stick to that. That's a big enough opportunity field for you?

[Mitchell Derenzo:]

Yes, I mean, like I said, the deal is right, the opportunity is right, the pricing is right, we've been preaching relationship banking here since I got here. I believe, it's sort of a relationship because we may need them as well and in one case somebody that we hired, just to give you an example, had worked at this particular bank for multiple years. There was a existing relationship there and they reached out to her, hence they reached out to all of us and the opportunity was really a good opportunity for us and so we did it.

[David Ritchie:]

I think the key is do we know the market, and we know most of the California market, parts of Nevada, we know that market as well. We are going to those markets, but we have people that are familiar with us, properties, other than that, we don't -- I don't know the markets in Kentucky, Alabama, Minnesota some fine markets there, but we don't know them, so I'm not comfortable with those.

[Operator:]

[Operator Instructions]. The next question in the queue comes from Don Worthington with Raymond James.

[Donald Worthington:]

Mitch, did you get a special dividend from the FHLB in the quarter? And if so, how much? And where did you report that?

[Mitchell Derenzo:]

In the fourth quarter the special dividend was around $64,000, I believe.

[David Ritchie:]

$64,000. And it had a net interest income?

[Mitchell Derenzo:]

Yes, it recorded us investment income.

[Donald Worthington:]

Investment income, okay. Okay, and then in terms of the construction lending, what types of construction? Are these are mostly single-family or do you also do commercial?

[Mitchell Derenzo:]

I would say mostly commercial, a little bit of residential, but mostly commercial.

[Donald Worthington:]

Okay, okay. And then have you had any of your collateral impacted by the Northern California fires at all or are those pretty much out of your market?

[Mitchell Derenzo:]

No, we had...

[David Ritchie:]

We are -- for a while there, we are reporting in our 10-Q the amounts of dollars in those markets, but they are really business loans, we don't have any residential loans that were impacted. I mean, the loans that we had weren't -- there was no fire damages. We disclosed how many coupled with dollar amount of loans in the Santa Rosa area for example, and it was minimal and really no. Some of our clients lost their homes unfortunately, but we didn't lend on those homes and they're -- we lend them business -- lend their businesses money and their businesses are doing fine.

[Operator:]

We have no further questions in the queue at this time. So I'll turn the call back over to Mr. Ritchie for final remarks.

[David Ritchie:]

Thank you very much. I really appreciate it. And we'll look forward to talking to you next quarter.

[Mitchell Derenzo:]

Thank you all.

[Operator:]

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