American River Bankshares
Q2 2017 Earnings Call Transcript

Published: 20 Jul 2017

[Operator:]

Welcome to the Q2 ‘17 Earnings Conference Call. My name is Ely and I will 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]. Please note that this conference is being recorded. I would now turn the call over to David Taber. David, you may begin.

[David Taber:]

Ely, thank you so much and good afternoon everyone. I am David Taber; I am the CEO of American River Bankshares, which is the parent company of American River Bank, which is headquartered in the Greater Sacramento Area. We are pleased to share company results for the second 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. We must do this, while also managing overhead. Deposits are up year-over-year, but down on a linked quarter basis. Total loans outstanding are up year-over-year, and up on a linked quarter basis. Please be aware that the two press releases went out at the market opening this morning, the first the financial results for the second quarter and the second what is our quarterly cash and dividend. 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 the Annual Report and our 2016 Form 10-K can be found 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 was issued this morning and then try to provide some additional details and analysis and then turn it back over to David for some additional comments and then we'll open up the lines of questions. This morning American River Bankshares reported net income for the second quarter 2016 of $1.3 million. That compares with similar $1.3 million that we recorded in the second quarter of last year. Earnings per share were $0.20 per share in the second quarter this year, compared to $0.19 in the second quarter of last year. Trailing 12 months EPS is $0.94 cents per share. Return on average assets and return on equity for the quarter were 80 basis points and 6.35% respectively. That compares to 84 basis points and a 6.29% respectively one year ago. On a year-to-date basis, net income was $2.5 million in 2017, compared to $2.7 million in 2016 and the earnings per share were $0.38 in 2017, compared to $0.39 in 2016. The ROA and ROE for the 6 months period was 77 basis points and 6.05% in 2017 respectively compared to 85 basis points and 6.37% respectively one year ago. Some comments on the asset side of the balance sheet. As David mentioned that net loans did increase. There were up $2.2 million during the second quarter and net loans have increased $11.1 million over the past 12 months. For the quarter, the second quarter we did add $7.7 million in new loan commitments and the average rate on those new loan commitments added were 4.38% and the average rate on the renewed loans during the quarter was 5.33%. Prepayment fees on the loans during the second quarter were $19,000 that compares to $34,000 during second quarter of last year. For the quarter we have recoveries of $48,000 in the second quarter of this year, compared to $50,000 in the second quarter of last year. And there were no loan charge-offs in either course. The allowance to loans 1.52 at June 30, ’17, compared to 1.65% one year ago. A couple other comments in the asset quality area. We did have one not-accrual loan with a balance of $12,000 and there were no loans passed to 30 days or longer. Classified equity ratio at June 30, 2017 was 6.5%, basically to classified assets being the $12,000 non-accrual loan and $1.348 million in OREO for a combined total $1.360. Of course, no change in the order or balance. We continue to hold the two properties that we held at year end. However, both are now in contract for potential sale. On the investment portfolio, again no significant changes here, continued to be comprised of primarily well-structured cash flow and mortgage products and some high credit quality muni bonds. The portfolio of total $257.9 million compared to $254.5 million at December 31st, still remains about 89% is U.S. Government agencies or US Government-sponsored agencies, primarily mortgage related products. The portfolio remains relatively short. The average life of the mortgage products about 3.6 years and the average life for the muni portfolio is 5.2 years. The effective duration of the entire portfolio remains quite low at about 2.8 years and the price change in rates at 300 is 9.4% percent. The unrealized gain on the available for sale bond portfolio increased from $916,000 at December 31 2016 million and $1.321 at March 31 2017 to $1.647 at June 30 2017. Look at the liability side. If you recall last quarter I did report when I was talking about the first quarter results that the first quarter does tend to be difficult on the deposit balances, as business owners tend to move money out, they have paid bonuses, take out new draws, paid some taxes. However I notice that deposit balance did increase from $544.8 million at December 31, 2016 to $551 at March 31. If you recall I did express some concern that the IRS decision to delay the date for business owners to pay the prior year final tax liability that it moved up from March 15 to April 18 that increased deposit balances during the first quarter maybe temporary and my concerns were valid as we did experience a $13.1 million decrease in deposits during the second quarter. However, overall deposits for some site - the overall deposits are now down $6.9 million for the year, but up $11.9 million from one year ago. But non-interest bearing balance they continue to remain at 36% of the deposit totals and then the non-CD balances which we tend to classify as core deposits those remains 85$ of total deposits. The average cost of funds did increase 2 basis points from 26 basis points in the second quarter last year to 28 basis points in the second quarter this year. The reason for that increased results from the higher rates pay on FHLB borrowings and higher CD cost. The increase in the short term market interest rates has not had much impact on our core deposit base, as those rates remain stable. The deposit costs on checking and savings accounts, including money markets are basically the same as they were in the same quarter last year. Well, actually they decreased small amount, they were 6.5 basis points in the second quarter last year versus 6.2 basis points in the second quarter of this year. An increase in the CD and FHLB borrowing expense that results from the renewals rolling over at slightly higher rates. Our overall cost deposits for the second quarter was 15 basis points, that's up from 14 basis points in the second quarter of last year with that slight increase due to the increase in the CD expense. Our capital, capital levels remain strong, although they decreased slightly during the quarter due to the share repurchases and the quarterly cash dividend. The company has a leverage ratio of 10.2% and total risk based capital of 19.7, now those are down from 10.5 and 20.3 respectively at December 31 2016. During the second quarter we did repurchase 202,086 shares of our common stock and the average price we paid on those was $14.97 per share. Then of course in May we did pay the $0.05 per share of cash dividend. For the year, we repurchased 333,086 shares of our common stock, that represents 5% of the outstanding shares and the average price we paid was $14.99. The tangible book value per share that they did increase from $10.14 cents a share at December 31 to $10.23 at June 30, 2017. Some really - some brief comments on the income statement, the income – non-interest income and non-interest income expenses really not – nothing really material or unusual or non-recurring, but just a couple of brief comments. The non-interest income did increase $76,000 from $363,000 in the second quarter last year to $439,000 in the second quarter this year, really the big increase there is gain on sale securities. We had net gains on sale the second quarter this year of $86,000 and last year we had a impairment loss of $1000. On the expense side. The expenses did decrease $47,000 from $3.42 million in the second quarter last year to $3.37 million in the second quarter this year. That decrease has set quite a few areas, quite a few line items and we’re really working hard to control the overall expenses and not waste money. Salaries and benefits are down to tad. We do have a few physicians. Occupancy and furniture, equipment are down as we continue to try to reduce the size of our branches. Less traffic means, less branches – less need for large branches. On a six month basis the expenses decreased from $7.2 million last year to $6.8 million this year. Again many areas change from last year included in the salaries and benefits and occupancy. But the largest impact would be the decrease in the OREO expense. The OREO expense decreased from 360,000 last year to just 32,000 this year and the majority of the expense last year was related to an impairment charge and one of the properties that we eventually sold in 2016. We continue to benefit from the FDIC's, the bank insurance funds - the reserve ratio actually reached at 1.15 level, so that resulting in lower and lower assessments for community banks. That's it. Thank you. And I'll 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 banks serving Northern California. The company continues to focus on profitable growth of being mindful of our overhead, in addition to being diligent with asset quality. Our press release included some economic data. In general, I’d encourage you to look through it. But in general positive trends continue in our primary markets in California and certainly in the nation as a whole. We did achieve a 12% loan growth for last year in 2016 and funded $12.5 million worth of loans in Q2. That resulted in positive growth for the quarter. We talked about fall out in the past. We described that as loans that we didn't make, that had been in our pipeline or our top potential opportunity list and that fall out actually was down from the previous quarter and it's about $31.5 million. The most prevalent reason for that was that we declined them for not meeting our credit standards and the next most prevalent was borrowers that were desirous of more liberal underwriting standards and probably the biggest one was someone that wanted to maximize the leverage further than we were willing to go. It certainly continues to be very competitive. We're actually seeing more out of area banks, meaning more aggressive in going after those deals and people. Mitch mentioned after an atypical increase in deposits in Q1, Q2 showed a drop in overall core deposits. Although the team continues to source and new business to the bank was about $4.6 million for the quarter and new business, new relationships. The vast majority of our deposits are business relationships, providing key evidence of our business focus. Checking accounts make up 48% of total deposits and CDs are just 15%. I am going to close now and know that we do have considerable work to be done to do in order to increase our net interest income. This will come from profitable growth in both sides of the balance sheet. In addition, we are continually mindful of our overhead and we did complete our 2017 share repurchase plan in Q2 as Mitch mentioned. And now Ely, we want to open and ask her to open the line for questions and as a reminder please refer as to Mr. Derenzo to our disclosure on forward-looking statements. Our company does not provide guidance and we don't plan to change that practice anytime soon. Contact anyone of the analyst that currently cover our company for a more additional information. Ely, could you open the lines for questions please.

[Operator:]

Of course. [Operator Instructions]. And our first question comes from Don Worthington from Raymond James. Please go ahead.

[Don Worthington:]

Good afternoon.

[David Taber:]

Hey, Don.

[Mitch Derenzo:]

Hi, Don.

[Don Worthington:]

In terms of loan growth, I know in the past you have purchased loans is that something you'd consider doing it again…

[David Taber:]

We're continually looking at opportunities and that's based on – we just didn’t see anything that we were able to come to terms on in Q2.

[Don Worthington:]

Okay. And then you mentioned fundings for $12.5 million. What were the pay-offs in the quarter?

[David Taber:]

[indiscernible] forward and change…

[Don Worthington:]

I didn’t…

[David Taber:]

Excuse me, I am sorry, pay-offs and pay downs were $10 million.

[Don Worthington:]

Okay. All right. Great. And then…

[David Taber:]

Just for clarification, Mitch has reported and talked about commitments of 7…

[Mitch Derenzo:]

7.7

[David Taber:]

$7.7 million I know to funding with fairly couple large construction draws, included in my fundings as well as a guidance line that the bar will finally tip down an additional $3 million to finalize our commitment to have.

[Don Worthington:]

Okay. Great. And then in terms, I think you alluded to it, but are you experiencing pressure on the deposit side in terms of rates from the competition, you know, after that the Fed rate increases?

[Mitch Derenzo:]

Don, let me jump in there. No, you know, as I kind of pointed out, our actual cost is actually down a tad in terms of a year ago on our core type deposits. The only increase in expenses is on the CDs and we have 15% in CDs and some of those are just short term CDs that are rolling at a slightly higher rate. We have moved our CD rates up a little bit, but not significant. So our core deposits, we are having a lot of pressure. We haven't had - it doesn't appear that any of our competitors are raising their rates either. So we’re kind of banking on that right now. There's still - we believe there's a lot of liquidity in the system. So we don't anticipate much pressure on the deposit rates in the short term. But we are prepared for it if it does occur.

[Don Worthington:]

Okay. All right, thanks.

[David Taber:]

All right, Don.

[Operator:]

Thank you. And our next question comes from Tim O'Brien from Sandler O'Neill & Partners. Please go ahead.

[Tim O'Brien:]

Hi, Dave. Hi, Mitch.

[Mitch Derenzo:]

Hey, Tim.

[David Taber:]

Hi, Tim.

[Tim O'Brien:]

Little color on fee income. Just looking at service charges and they are down, they steadily decline, for now, you know pretty good string of quarters. Can you give a little color on what's happening there and whether or not that's something that you anticipate you can do something about to stabilize those. So you can shore up that line item of fee income?

[Mitch Derenzo:]

Yes, Tim the biggest decrease in that line item really is the NSF charges. We’re not collecting as many NSF charges because we're not having as many clients bounced checks, you know I think that's probably a statement on the economy that things are getting better for everybody else and they’re fun. So you know, we do a real good analysis of our service charges. We bump with the competitors. We tend to have a lot of high balance accounts which a lot of these – when you’ve got seven figures in the account its tough to charge a service charge, most of them enough compensating balances to have these service charges waived. So I don't think that that's going to be an area of growth for us any time soon.

[Tim O'Brien:]

And then your - the line item, the other non-interest expense line item was up you know, a little bit here sequentially from the first quarter. Can you give a little color on what's behind that increase Mitch and is that…

[Mitch Derenzo:]

When I was doing my analysis, I was trying to go through that, there was a lot of little small items in there. There was some increase in business development, some advertising increases, some increases and some - of operation losses, but no real - nothing really jumped out at me on that one.

[Tim O'Brien:]

Is that going to – I mean, is that 8

[Mitch Derenzo:]

Yeah, it maybe a little higher than it was previous quarters. The run rate might be a little higher than previous quarters. So yes, this might have been an anomaly, how much of it. I'm not quite sure of it, somewhere between where we were last quarter and this quarter was probably the – that’s a pretty clear number.

[Tim O'Brien:]

And then if you gave them I missed it, but did you give end of quarter headcount numbers FTE headcount number to us?

[Mitch Derenzo:]

I did not. I think we're roughly 93 or 94 somewhere in that range FTE. So that’s not a significant change from last quarter.

[Tim O'Brien:]

Any plans to fill those openings, you know, before summer ends, before winter comes?

[David Taber:]

We are working hard on that Tim.

[Tim O'Brien:]

Good deal. Thanks for answering my questions, guys.

[David Taber:]

You bet.

[Operator:]

Thank you. We do have no further questions at this time.

[David Taber:]

I am sorry, did you say no questions?

[Operator:]

Yes, we have no further questions.

[David Taber:]

All right, great. Well, thanks for everybody for participating. Mitch, thanks so much for giving you a report and we look forward to continue to work hard to build our company for our shareholders and on our team. Have a great afternoon.

[Mitch Derenzo:]

Thank you.

[Operator:]

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