American River Bankshares
Q1 2017 Earnings Call Transcript

Published: 20 Apr 2017

[Operator:]

Welcome to the First Quarter 2017 Quarterly Conference Call. My name is Eric 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. [Operator Instructions] I would now like to turn the call over to David Taber. Please go ahead sir.

[David Taber:]

Eric, thank you very much and good afternoon everyone. Yes, I am David Taber; I am the CEO of American River Bankshares, the parent company of American River Bank, which is headquartered in the Greater Sacramento Area. We are pleased to share company results for the first 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. Deposit growth, especially core deposits are up year-over-year and on a linked quarter basis. Total loans outstanding are up year-over-year, but down on a linked quarter basis. Please be aware that the two press release that - we sent out two press releases this morning, one announcing our quarterly cash dividend and the other the financial results for the quarter. Now Mitch Derenzo, Executive Vice President and Chief Financial Officer will provide an in-depth discussion of our quarterly financial results. Mitch.

[Mitch Derenzo:]

Thank you David, and thanks to all of you for listening in our 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, 2016 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. The links to our Annual Report and Form 10-K can be found in our website, americanriverbank.com. As with past conferences calls, I'm going to highlight some of the key areas from the press release that David mentioned. Then I’m going to turn it back over to David for some additional comments, and then we will open the lines for questions. Today American River Bankshares reported net income for the first quarter of 2017 of $1.2 million that compares to $1.4 million in the first quarter 2016. Earnings per share, first quarter of 2017 were $0.18 per share, compared to $0.19 per share in the first quarter of 2016. On a 12-month trailing basis, earnings per share were $0.93 per share Return on equity for the quarter 74 basis points, compared to 87 basis points in the first quarter of last year and ROE 5.74 first quarter of this year versus 6.44 in the first quarter of last year. Some comments on the balance sheet, I'll start with the assets. A combination of higher than anticipated loan payoffs and lower than anticipated new loan growth resulted in a decrease in net loans of $10.1 million during the first quarter 2017. The net loans have increased $21.7 million over the past 12 months. During the first quarter of this year, we added 4.6 million in new loans and the average rate on those new loans was 4.78%. The average rate on the renewed loans during the first quarter was 4.23%. Some of those prepayments, principal pay downs on the loans resulted in some prepayment penalties. They were $83,000 in the first quarter 2017 that compares to $30,000 in the first quarter 2016. We continue to have loan recoveries. We had $11,000 loan recoveries in 2017 that compares to $107,000 in the first quarter 2016. We had no loan charge-offs in either of those quarters. The allowance in total loans was 152 at March 31, 2017 compared to 1.71 one year ago. Couple of other items on the asset quality, non-accrual loans they are just $17,000. Loans past due 30 days or more or just $63,000. The classified equity ratio, [cost by] [ph] equity ratio at March 31, 2017 was just 6.4%, really the classified assets are just $17,000 in the non-accrual loans and then we have $1.348 million in OREO for a combined total of just under $1.4 million. We didn't have any change in the OREO balances during the first three months of the year. We continue to hold the two properties that we held at year-end in the renewal write down to any of those properties as well. The investment portfolio, really no significant changes there either, primarily the well structured cash flow in mortgage products mixed with some high credit quality municipal bonds. At the end of the quarter, the portfolio was $263.6 million, compared to $254.5 million at the end of 2016. The decrease in loan balances that I mentioned, we used to fund the increase in the securities portfolio. About 90% of the portfolio remains in the US government agencies or US government sponsored agencies, again primarily mortgage related bonds. Portfolio is still relatively short, average life of the mortgage products were about 3.7 years and average life of the municipal bonds are about 5.3 years. Effective duration of the entire portfolio is still under 3% and the price change rates at 300 is just under 10%. The unrealized gain on the available for sale bond portfolio increased from $916,000 at the end of 2016 to $1.3 million at the end of the quarter. On the liability side, first quarter of the year tends to be difficult on the deposit balances as the business owners move money out to pay bonuses, take draws or to pay down taxes. However 2017, started off on a pretty positive note as deposit balances increased from $545 million at the end of the year to $551 million at the end of March that is over $6 million increase. Deposit balances have increased over $27 million over the past 12 months. I have something to point out, this is new for 2017, the IRS decided to delay the normal date for business owners to pay the prior year final tax liability. In prior years businesses had until March 15 to file or extend their prior year tax returns and pay the amount due. This year the IRS has changed that due date to April 18 and the State of California followed suit. We are hoping this extension doesn't impact the positive deposit growth we did experience in the first quarter. The increase in the deposits over the last year, the largest impact has been the non-interest-bearing deposits; those increased nearly $12 million. Money markets increased nearly $9 million. Our non-interest-bearing balances represent 36% of the entire deposit base in the CD portfolio that’s about 85%. Average cost of funds actually increased 1 basis point from the prior year. Really the reason for that is, first quarter of last year we had large FHLB borrowings and those borrowings were overnight borrowings, so they tended to be lower cost, so that diluted the overall cost of the borrowings. So the average cost of borrowings in the first quarter last year was 83 basis points, compared to 1.26% in the first quarter of this year. If we focused just on the deposits, the overall cost of deposits for the first quarter of this year was 14 basis points, no change from the first quarter of 2016. Our capital levels remain strong. They decreased slightly during the quarter due to the share repurchases and the reinstatement of our quarterly cash dividend. The leveraged ratio at 10.4%, total risk-based capital ratio of 20.2% those are down it had from year-end where they were - leverage was 10.5 and the total risk-base was 20.3. During the quarter, we did repurchase 131,000 shares of our common stack. The average price we paid was $15.01 and then on February 22 we paid the quarterly cash dividend of $0.05 per share. Tangible book value per share did increase, it was 10.14 at the end of the year and that was a 10.20 at the end of March. For some brief comments on the income statement there was really no material or unusual or non-recurring type items. The non-interest income actually decreased from 754,000 in the first quarter last year to 419,000 in the first quarter this year, with the largest decrease coming in the gain on sale of securities and in the OREO income. The decrease in the OREO income results from the fact that neither of the two properties we currently own are income producing. Last year we had one income producing property. On the expenses, they did decreased 361,000 from 3.8 million in the first quarter last year to 3.4 million in the first quarter of this year; much of that decrease is related to lower OREO expense. The OREO expense decreased $320,000, down to $20,000 in the first quarter of this year. The majority of the expense in 2016 was related to an impairment charge on one of the properties that we eventually sold in 2016. Lastly, we continued to benefit from the FDIC bank insurance funds reserve ratio reaching the 1.15% level, which results in the lower assessment for the community banks such as American River Bank. Thank you and I'm 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. We are continuing to focus on profitable growth of being mindful of our overhead and obviously being diligent with asset quality. We certainly believe that share buybacks continue to be a viable tool in capital management and correspondingly enhancing shareholder value. We included some economic data in our press release. So please take a look at that, but in general positive trends continue in the markets that we serve, as well as California and certainly the nation as a whole. After achieving 12% loan growth in 2016 we gave some of that back with payoffs ahead of fundings in the first quarter. Fall out which we describe as loans not made that have been either on our pipeline or potential opportunity list were about 56 million in Q1. The reason for the majority of that fall out were the prospects were desires of more liberal underwriting terms than we would provide. On the deposit side, the increase in the first quarter as Mitch described was a typical. Checking accounts still make up close to 50% of total deposits, while CDs are less than 15%. The vast majority of our deposits are 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. We certainly will continue to be mindful of our overhead and overall in increasing our shareholder value. Eric is going to open the lines for question in a minute and as he is preparing to do that, I want to remind you as Mr. Derenzo did to our disclosure on Forward-Looking Statements. Also, an additional reminder that our company does not provide guidance and we do not plan to change that practice anytime soon. So please contact one of the analysts that currently cover our company for additional information, and Eric if you would open up the lines for Q&A that would be great.

[Operator:]

Thank you. [Operator Instructions] And we have a question on line from Don Worthington. Don your line is now open.

[Don Worthington:]

Good afternoon David and Mitch.

[David Taber:]

Hi Don.

[Don Worthington:]

Couple of things from me, in terms of the buyback, if I calculated right you have got about roughly 200,000 shares remaining, is that correct?

[David Taber:]

That’s correct.

[Don Worthington:]

Okay. And then in terms of the elevated payoffs what was the number on that in terms of the repayments in the quarter?

[David Taber:]

I think it was a little over $15 million for the quarter.

[Don Worthington:]

Okay. And that’s compared to what was it 4.6 for new fundings?

[David Taber:]

Yes, just under 5 million in fundings, correct.

[Don Worthington:]

Okay, alright thanks. And then just one more of a subjective question, among your business customers are you noticing in terms of sentiment people being more optimistic versus say last quarter or how is the temperature there for potential borrowing by small businesses?

[David Taber:]

Yes, in general optimistic although some of the optimism had been driven by potential changes in tax law, certainly healthcare and other items from a regulatory perspective in DC and all of us have observed that that’s not happening as fast as any of us wanted to. So, I don’t think that’s really depressed the optimism, but I think folks are being a little more realistic as to the impact on some of the things coming out of the Federal Government.

[Don Worthington:]

Okay. All right thanks. That's all I have got.

[David Taber:]

Thanks Don.

[Operator:]

[Operator Instructions] And our next question comes from Tim O'Brien. Tim, your line is now open.

[Tim O'Brien:]

Good afternoon guys.

[David Taber:]

Hi, Tim.

[Tim O'Brien:]

First question I have for you is, and this is kind of drilling down into the P&L line items, so maybe Mitch you can help me on this, so looking back at service charges on deposit accounts on a trailing basis that trailing four quarters we’ve seen a steady decline in service charges, 129 in 1Q 2016, 128 in 2Q, 124, 121 this quarter, 117, are you guys doing anything, is there are any optimism that that’s going to stabilize or the dynamics is still in place, and are we going to continue to see pressure there?

[Mitch Derenzo:]

Yes, verifying here the - the big piece there is NSFs - fees on NSFs and really our clientele is building their balances in the deposit accounts. There is less over draft charges, higher quality of depositor, you can tell - call it $120,000 a quarter isn’t our big breadwinner here. So, we really don't focus on trying to nickel and dime our depositors.

[Tim O'Brien:]

Makes sense Mitch. So, I mean just given the strength of your clients there is - pressure is going to remain I guess?

[Mitch Derenzo:]

Yes, we have high - we tend to have a high average balance, deposit balances so we are not nickel and dime, but we do what we ca, we try and get paid for the services we provide, but we are not going to run out to somebody because we wanted to charge an extra five bucks a month on an account.

[Tim O'Brien:]

Yeah, understood. And then on the overhead cost side, was there any seasonal, I don't know, workman’s comp accruals or anything that hit this quarter, or something along those lines that you accrue in the first quarters of a given year that you can break out and identify for us that won’t kick in or won’t remain in the second quarter and furthermore is there anything in the second quarter, maybe comp adjustments or something that we can expect, step ups or something like that?

[Mitch Derenzo:]

Yes, typically Tim the first quarter of the year, if you compare and say first quarter to fourth quarter you are going to have a lot higher taxes because those FICA and those worker [indiscernible] things kick in again because the base salary starts [indiscernible], you look at your own paycheck there, you probably had a little bit of higher taxes in there. Same thing for the employer, so the employer’s taxes are higher there as well. Also in the first quarter, we tend to pay the year-end incentives and while we accrue the year-end incentives, the dollar amount for those, we typically don't accrue for the taxes on those. That’s probably, you know I’m going to say roughly $30,000, so it is a big number if you are just focusing on salaries and benefits, but overall it is not a, doesn't move the needle very much.

[Tim O'Brien:]

Line items did that, you know those FICA accruals or the accruals on incentive, the tax piece of the incentive that you talked about, is that hit in salary and benefits?

[Mitch Derenzo:]

Correct.

[Tim O'Brien:]

Okay great. And then also…

[Mitch Derenzo:]

[Indiscernible] are considered benefits.

[Tim O'Brien:]

Understood. Maybe that will change. Occupancy costs were down a little bit, dipped a little bit this quarter, what’s the story behind that, I am sure that I can probably go and you guys are pretty good about talking about leasing and stuff like that, was there a reset there on a lease or something along those lines or why the dip there?

[Mitch Derenzo:]

Primarily because we’ve been working over the last few years to reduce the foot prints of our branch sizes. The biggest piece here would be the Roseville, the biggest impact from last year to this year will be the Roseville. We moved from almost 4000 square foot building to like 2150 square feet or something about 2200 square feet. That occurred in the second half of 2016. So that’s probably the biggest impact there. So that’s an ongoing type savings.

[Tim O'Brien:]

Okay, and then this quarter they were a little bit lower relative to even the fourth quarter, any idea why?

[Mitch Derenzo:]

The move date if I recall was November 1. So, there probably was some rollover expenses that hit the fourth quarter. Pay the bills as you get them and those who are non-recurring in the first quarter.

[Tim O'Brien:]

And then as far as timing was concerned on those loan payoffs, it looks like average balances held up pretty well, average loan balances relative to end of period balances between the fourth quarter and this quarter, so that implies, connect the dots, those payoffs came late in the quarter?

[Mitch Derenzo:]

They really came throughout the quarter.

[Tim O'Brien:]

Okay. And…

[Mitch Derenzo:]

We might add some in the first quarter, but then we had more loan fundings in the first quarter, I'm sorry the first month of the quarter.

[Tim O'Brien:]

And securities, average securities - balance of average securities was little higher in the fourth quarter than in the first quarter, so with the additions we could see some adverse mix here on that could affect the margin here in the second quarter?

[Mitch Derenzo:]

On that I would say, I might probably look at the quarter-end balances, they probably tend to be higher than the average balance. So, I project…

[Tim O'Brien:]

Yes they were for - the average balances of loans were higher than end of period balances and the average balance of securities was lower than the end of period securities balances, so just wanted to …

[Mitch Derenzo:]

My comment was focusing really on the securities because if you project of the quarter-end balances I know that we have a lot of securities settled right near the end of March, so that is probably a better indicator of the balance to use.

[Tim O'Brien:]

And then early in the call you gave that rate, was it 778, was the weighted average rate of the existing loan book?

[Mitch Derenzo:]

That would have been the new loans that booked during the first quarter.

[Tim O'Brien:]

And what was the 428 rate?

[Mitch Derenzo:]

423 was the renewed.

[Tim O'Brien:]

423. So 478 was what, and 423 was what?

[Mitch Derenzo:]

The new loans - the 4.6 million of new loans we added, the average rate of course were 4.78%. The loans that we renewed in the quarter.

[Tim O'Brien:]

Renewed, okay, thanks.

[Mitch Derenzo:]

Sure.

[Tim O'Brien:]

Great. Those were my questions guys. Thanks for answering them.

[David Taber:]

You’re welcome Tim.

[Operator:]

We have no additional questions at this time.

[David Taber:]

Well great Eric. Thank you so much for hosting this call and thank you for those that are on the line and listening, I appreciate your interest in our company. Have a great afternoon.

[Operator:]

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