American River Bankshares
Q4 2016 Earnings Call Transcript

Published: 27 Jan 2017

[Operator:]

Welcome to the Fourth Quarter Conference Call. My name is Sherry 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. Please note this conference is being recorded. I will now turn the call over to David Taber. Mr. David Taber, you may begin.

[David Taber:]

Sherry, thanks so much and good afternoon everyone. I am David Taber, the CEO of American River Bankshares, which is the parent company of American River Bank, headquartered in the Greater Sacramento Area. We are pleased to share company results for both the fourth quarter and full year of 2016. This past year we achieved profitable growth in loans and deposits, while being diligent with our overhead. 2016 was also a year of strong loan recoveries, enabling a negative provision. These three factors resulted in a solid increase in our net income. As we have in past years, we also augmented this income by repurchasing shares in the open market. We are able buyback nearly 10% of our shares in 2016. I am personally proud of the entire team's effort in achieving a 34% increase in earnings per share this past year. These results were summarized in the press release made public prior to market opening this morning. We also want you to be aware of two other announcements made in separate press releases. The first outline the authorization of a 5% share repurchase program for 2017, and the second highlight is the company instituting a quarterly cash dividend of $0.05 per share. Now, Mitch Derenzo, Executive Vice President and Chief Financial Officer, will provide an in-depth discussion of our quarterly and year-to-date financial results. Mitch?

[Mitch Derenzo:]

Thank you, David. Thanks to everybody to the call today as well. Before I 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. The factors that might cause such a difference are discussed in our annual report on Form 10-K for the year ended December 31, 2015, and in subsequent reports filed on Form 10-Q and 8-K. We do 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 Form 10-K are located on our website, americanriverbank.com. As with past conferences calls, I'm going to highlight some of the key areas from the press release that we released this morning and then I'm also going to try to provide some additional detail and analysis, then I will turn it back over to David, he will some comments and then we will open the lines for questions. This morning American River Bankshares reported net income for the fourth quarter of $1.9 million compared to $1.5 million during the fourth quarter 2015. Earnings per share for the fourth quarter this year $0.29, that's up from $0.20 in the fourth quarter of 2015. ROA and ROE for the quarter 1.16 and 9.04 respectively that compares to 91 basis points and 6.71% respectively one year ago. On a year-to-date basis net income was $6.4 million in 2016 or $0.94 a share that compares to $5.3 million or $0.70 per share in 2015. A little bit of comments on the assets side of the balance sheet. Loans did increase $10.8 million in the fourth quarter. And for the full year of 2016 were $35 million at a 12% growth rate. We also added -- during the fourth quarter we added $23 million -- I am sorry -- for the fourth quarter we added the new loans were $23 million that compares to $26.6 million in the third quarter this year. Both those numbers are up from the $12.3 million in new loans in fourth quarter 2015. For full year, we put on $88.9 million of new loans that compares to $79.6 million in 2015. The average rate of the new loans put on in the fourth quarter 3.48% and the average rate of the renewed loans during the fourth quarter of this year is 4.34%. For the quarter, principal paydowns with our anticipated range, but we did receive a couple of prepayment penalties for the fourth quarter was amounted to $54,000 that compares the $51,000 in the fourth quarter last year. On a year-to-date basis, prepayment penalties were $220,000 compared to $249,000 in 2015. As you went through the release you might have noticed that we had another increase in multifamily loans this past quarter. They increased from $50.9 million at September 30th to $73.4 million at the end of December. That's -- included in that $22.5 million increase was another purchase loan pool that pool is $11.2 million that was made up of 12 loans. We actually purchased those from the same lender that we purchased similar pool from in the third quarter. The loans financed multifamily properties in the [indiscernible] area. And again with the last pool, they are very good current income and have relatively short reset period. The weighted average reset is 26.5 months and then these loans become quarterly rate resets. Some other highlights in loan area. You probably saw that we reserve 676,000 out of the allowance. This was possible because some additional loan recoveries. For the fourth quarter, we had net loan recoveries of $550,000. In addition we also had a large commercial construction loan that converted to a perm loan. In addition to that perm loan having less risk, they also made a schedule $1 million paid down. So that transaction freed-up roughly $285,000 in reserves. So, those two items represented $800,000 in reduction in the allowance required so that warrants in the $676,000 reduction, the difference was used to support the $10.8 million in the loan growth for the quarter. The allowance at the end of December was 1.47% that compares to 1.69% one year ago. For the fourth quarter, charge-offs were $59,000 and recoveries were $574,000, that's the net of the $515,000 I just mentioned. On a year-to-date basis, charge offs were $127,000, recoveries were $1.318 million and the net recoveries for the year were $1.191 million. Non-accrual loans at the end of the quarter, they were just $19,000, that's a decrease from $778,000 at the end of September this year -- September of 2016. There were no loans past due over 30 days. That would include the two non-accrual loans as both of those were current. At September 30th, 2016, we had five non-accrual loans and now we have just the two. But three that were removed from non-accrual during the quarter; one had September 30th balance of $273,000. That loan paid off, we recovered the principal and $50,000 in interest income. Another with the balance of $446,000, that was transferred to OREO after we had a $35,000 principal reduction from the borrower. And the other had a balance of $34,000, we charged that one off. While the OREO, we did close on the sale of the one property that we had on the books at September 30th that was land. We actually had that one of the books since 2012, so we're happy to see it go. This was a -- it was located in Sacramento County, it was land. The book value on that one $653,000, we actually recorded $89,000 gain on that sale. That was recorded as a reduction in OREO expense. Also cleaned up a couple lingering problems. One of them was the $870,000 note that then had been cost of non-performing asset that we had recorded in other assets. This note was secured by a parcel of land in Amador County. Actually it was five individual parcels, all joint. We negotiated a partial release of one of the locks that decreased the balance from the $878,000 down to $722,000 and then we accepted a deed in little. After our evaluation of that property, we determined that's a conservative market value was actually $239,000 higher and based on the accounting for OREO, we increased the value of that OREO from the $722,000 up to $961,000. The offset of that $239,000 was a recovery of $66,000 because we had a prior loan charge-off on that asset and the remaining $172,000 we recorded at in OREO income. We can assure you these transactions are rare, we actually spent quite a bit of time supporting the analysis with appraisals, some broker's opinions, and actually discussions with other developers. The other OREO was also luminescent office building in Sacramento County. We charged up $25,000 as part of taken that into Oreo and our book value on that one is now $387,000. This was actually the property that it discussed that -- on the loan that migrated from non-accrual. So, now we have two OREO properties totaling million $1.348 million. Our classified equity is just 6.4% and the classified assets now are just 19,000 in non-accrual and $1.348 million in OREO for a combined dollar amount of a $1.367 million. On the investment portfolio, pretty the same as it was last quarter continues to be comprised of well-structured cash flow and mortgage products and some high credit quality needy bonds. At December 31st, 2016, portfolio had $254.5 million compared to $274.4 million one year ago. The decrease in balances was used to fund the portion of the loan increases. About 90% of the portfolios U.S. government agencies or U.S. government sponsored agencies, primarily mortgage related. In addition to those numbers we also have $3.7 million in FHLB stock. I bring that up because we received anther special dividend from the FHLB in the fourth quarter in the amount of $125,000. That is in addition to regularly -- quarterly cash dividend that we received from FHLB. So in the fourth quarter we received 214,000 from the FHLB compared to 84,000 in the fourth quarter of last year. On a year-to-date basis, the FHLB dividends were 468,000 in 2016 compared $449,000 last year 2015 also included a special cash dividend. Portfolio remains relatively short. Average lives in the mortgage products are about 3.6 years. Average lives of munis are about 4.9 years and the effective duration of the entire portfolio remains quite low at 2.8 years. In the price change and rates up 300 is just under 10%. As you know we experienced an increase in market rates which tends to cause a decrease in unrealized gains on these deposits. Our unrealized gain on the portfolio at 12/31 was $916,000 that's down from $5.6 million at the end of September of this year. That is the major contributor to the decrease tangible book value per share which saw a increase from $10.27 at September 30th, 2016 to $10.14 at 12/31/16. On the liability side, we saw deposits increased from $530.7 million one year ago to $544.8 million this year, that's $14.1 million increase. The largest increase occurred in non-interest-bearing area which increased from $190.5 million last year to $201.1 million at 12/31/16. And also at the end of 2016 the non-interest-bearing balance is now represent 30% of the deposit totals. Average cost of funds was 26 basis points in the fourth quarter of 2015 and the fourth quarter of 2016. Overall cost deposits that factors in our non-interest-bearing balances, for the fourth quarter of 2016 was 13 basis points, that's down from 14 basis points in the fourth quarter of 2015. On our capital, the levels remain strong and actually increased during the quarter due to the addition of net income and no shares repurchased with the exception of leverage ratio which actually decreased slightly less because the average assets increased. We have a leverage ratio of 10.5, total risk-based ratio of 20.3. Hopefully you saw the other release, that David referred to, here a bit ago about the Board's decision to continue the repurchase plan in 2017 and then the announcement of the cash dividend repaid next month. We believe those to be good capital management strategies. A couple of things on the income statement. Non-interest income increased $96,000 or 22% from $433 in the fourth quarter of 2015 to $529 in the fourth quarter of 2016, with the largest increase coming in OREO area which increased from $87,000 in the fourth quarter of last year to $172,000 in the fourth quarter of this year. Again, that fourth quarter income of 2016 was solely markup in the OREO. I did -- I think I have mentioned this before we do not have any income earning properties. The two that acquired right near the end of the quarter, there were not income producing properties as well. On the expense side, we saw a decrease of $136,000, that's up 4% from the fourth quarter of 2015 to the fourth quarter of 2016, largest items being lower OREO expense and lower FDIC assessments. I mentioned the $89,000 gain on sale the OREO, that's a credit balance. That's really the -- created the negative balance in OREO expense for the quarter. Decrease the FDIC assessments that relate to the fact that the reserve ratio, the FDIC's reserve ratio reached to 1.15% level, that resulted in lower assessments for community banks. This decrease was actually retro to the third quarter of 2016 and basically it is about $9,000 a month decrease for us. Thank you. Now, I am going to turn it back over to David for some additional comments.

[David Taber:]

Mitch, thanks so much for that comprehensive report. American River Bank is a focused business bank serving Northern California and I think you would agree Mitch did a great job outlining our results in detail for the full year and for the fourth quarter of 2016. He did note a few special items that impacted our profitability this past year. The company continues to focus on profitable growth, while being mindful of overhead, in addition to being diligent on the asset quality front. We also believe share buyback continue to be a viable tool in capital management and correspondingly enhancing shareholder value. To that end, we have repurchased shares in each of the last five years. 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. To echo, many others recently we have observed an increase in business optimism subsequent to the presidential election. This optimism seems to emanate from the hope of reduce regulatory burden, lower taxes and together these might result in increased business activity. 2016 was a positive growth year for American River Bank with loans up 12%, some $35 million same percentage as the year before. This increase in 2016 was due to an increase in loan funded, year-over-year with good activity in each of our four quarters. We didn't purchase loans, Mitch mentioned that, in both the third and the fourth quarter and $11 million of the $23 million funded in Q4 were purchased loans. Payoffs and paydowns were higher than prior year and higher than we expected. Some of these payoffs included prepayment penalties which certainly lessen the staying. Fall out continues to be high at almost $59 million for the fourth quarter. We define fall out as loans we didn't make that were either in our pipeline or our potential opportunity lift those that we were working on. Of the fall out in Q4, the biggest portion was due to loans not meeting our credit criteria. We have discussed our Bay area LPO strategy in the past and to remind you we had open LPO offices in the South Bay and East Bay. Two employees working in these areas left at different times in 2016. In evaluating the strategy we decided not to continue with a strategy and instead beef up our production team in the Greater Sacramento area. We have been successful generating loan opportunities in those Bay area markets by utilizing our team in both the North Bay and in the Sacramento market. The strength of our deposit franchise continues to grow with both total and core deposits increasing this past year. 49% of total deposits are demand deposits including 37% of total deposits in non-interest-bearing. The majority of deposits are in fact business deposits. One trend that continues and is not just for us, but is the decline in branch transaction volume. The branch teams have increased both our outbound telephone and outbound in person client visit -- client visits. We feel that this strategy is crucial in keeping the relationship strong with our business clientele. To close my remarks, 2016 was another success year for our company and we are extremely proud of the 34% increase in earnings per share which followed 30% increase in 2015. The company recorded profitable growth on both sides of the balance sheet and had a strong year in loan recoveries. And as I mentioned in the beginning of the call, we did announce this morning in the separate press releases a 5% share repurchase program and a reintroduction of a quarterly cash dividend of $0.05 per share. Certainly the quarter and the full year have some noise that Mitch Derenzo explain, yet our core operating metrics continue to improve. Now Sherry, if you open the lines for questions and while you doing that, let me remind those that are listening to refer -- please refer yourself to as Mr. Derenzo did our disclosure on forward-looking statements. One additional reminder our company does not provide guidance and we do not plan to change the practice anytime soon. Please contact one of the analysts that currently cover company for additional information. Sherry?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Tim O'Brien of Sandler O'Neill.

[Tim O'Brien:]

Good afternoon, guys.

[David Taber:]

Hello, Tim.

[Mitch Derenzo:]

Hi, Tim.

[Tim O'Brien:]

I guess, first question that I have for you is, Mitch can you just go over this. What happened sequentially to loan yields between last quarter and this quarter? Can you give a little bit more color there?

[Mitch Derenzo:]

Tim, I think they were pretty close to -- the new loans in last quarter were -- I don’t have in from of me, but I think there were in 3.5% which were pretty close to -- already 348 in this quarter. So pretty close.

[Tim O'Brien:]

And so I have got, let's see, 468 December 2016, what am I looking at here, three months and then that's a taxable 496. All right. So look…

[Mitch Derenzo:]

You are looking at the total loan portfolio for the year. The loans we put in the quarter were at lower rates than with the current portfolio is, and that's really -- you could see -- if you look at last year we were down about 25 basis points from where we were a year ago.

[Tim O'Brien:]

And do you see any opportunity to -- for pricing up? Is there any firmness in the marketplace that you are seeing where we could see pricing for new productions you guys do match yield in the existing book?

[Mitch Derenzo:]

The high -- close to five -- that might be a little tough, but we do have to work hard to increase that yield. That's one of the things that I try to focus on is, getting the most bank for the buck there. We only have $70 to go around if you would like to be able to lend it at the highest yield you can.

[Tim O'Brien:]

And at year-end, can you just give a little color on how much of the book was fully floating? How much might have been hybrid with down the road resets, and how much is fixed for the duration for the life of the loan?

[Mitch Derenzo:]

I don’t have that information. But anecdotally here we can go through and look at most of our loans about -- almost 90% of our loan are in commercial real estate. Those tend to be three to five-year rate resets. Those have been made over the last five to seven years, so there will be some resets over the next -- as time goes on. But I think the biggest benefit we will see when rates go up as the new loans going on at the higher rates. We do have commercial loans which tend to reset a little quicker. But we also have in that commercial loan book we have three-year the equipment type loans as well. So the biggest benefit is going to come from new loans being put on at high rates.

[Tim O'Brien:]

And did you -- I don't -- I didn’t catch, did you guys give out the headcount at year-end and also at the start of the fourth quarter?

[Mitch Derenzo:]

I did not. I think we were -- it’s pretty consistent at 98 or so, in that range. It hasn’t changed, might be down one or so from last quarter.

[David Taber:]

We generally right around the 100.

[Tim O'Brien:]

Great. Thanks for answering my questions, guys.

[Mitch Derenzo:]

Sure, Tim.

[David Taber:]

Thanks, Tim.

[Operator:]

And at this time, I will turn the call back to you for closing remarks.

[David Taber:]

Great. Thank you very much for all of those that listened in. Certainly, please look at our three press releases for more detailed information and we look -- management looks forward to working hard on your behalf. Bye-bye.

[Operator:]

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