American River Bankshares
Q4 2014 Earnings Call Transcript

Published: 23 Jan 2015

[Operator:]

Welcome to the Fourth Quarter 2014 Earnings Conference Call. My name is Eric and I'll 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. And I'll now turn the call over to David Taber. Mr. Taber, you may begin.

[David Taber:]

Eric, thank you very much. Yes, I am David Taber, the CEO of American River Bankshares, parent company of American River Bank, which is headquartered in the Greater Sacramento Area. We serve Sacramento, Placer, Amador and Sonoma Counties as well as the South and East Bay areas. We're pleased to share company results for the fourth quarter and for the full year 2014. The banking business is a balance of profitability, growth and quality and I am pleased to say that we had success in all three areas in 2014. Relative to profitability, we're proud of recording a year-over-year increase in earnings per share of 59%. Relative to growth, total deposits grew by $27 million this past year. We also had loan growth of $6.3 million where all of the loan growth came in the fourth quarter, growing at an annualized 16% or $10.2 million. The third area is asset quality, which was also solid with net recoveries of almost $500,000 for the year. Now Mitch Derenzo, Executive Vice President and Chief Financial Officer will provide an in-depth discussion of our quarterly and annual financial results. Mitch?

[Mitch Derenzo:]

Thank you, David and of course thanks to all of you for listening in on the call today. Before we get started I need to remind everyone of our safe harbor disclosures. Certain matters discussed in this presentation make constitute forward-looking statements for the purposes of the federal securities laws and may involve risk 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, 2013 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. Link to the general report and 10-K are located on our website americanriverbank.com. As with the past calls and highlight for the key areas for the press release that we issued this morning, I am going to try to provide some additional details and analysis, then I will turn back over to David, we'll have some time for some additional -- he will have some additional comments. Then we will open it up for questions. Today American River Bankshares reported net income for the fourth quarter of $1.2 million compared to $890,000 during the fourth quarter of 2013. Earnings per share were $0.15 per share compared to $0.10 per share in the fourth quarter of 2013. On a year-to-date basis, the net income for 2014 came in at $4.4 million that's $0.54 per share, compared to $3.1 million or $0.34 per share in 2013. The net interest margin as percentage for the fourth quarter of 2014 was $3.41 compared to $3.44 in the fourth quarter of 2013. On a year-to-date basis, the margin was 3.54% in 2014, compared to 3.45% in 2013. I am happy to report that margin percentage increased in 2014 even though we experienced a slight dip in the fourth quarter margin compared to the third quarter. I am going to point out that the average loan balances were quite flat during the fourth quarter, even though we grew loans by $10 million in the quarter. The point is the new loan growth occurred late in the quarter, thus -- late in the quarter, thus the margin did not benefit much for this increased loans. I do like the fact that the margin and dollar was higher in the fourth quarter of 2014, compared to the fourth quarter of 2013 and higher in the 12 months of 2013, compared to the full year -- was higher in 2014 compared to the full year of 2013. We continue to have increases in deposit balances and those balances are primarily to work in the bond portfolio for most of the year, but lately here we added to the loan portfolio. From an average balance perspective, investments increased from $280 million in the fourth quarter of last year to $295 million in the fourth quarter of 2014. While average loan balances were down slightly from $255 million in the fourth quarter of 2013 to $253 million in the fourth quarter of 2014. The overall yield on the investments balances also increased during the same timeframe from 2.12% in the fourth quarter of last year to 2.28% in the fourth quarter of 2014. This continues to account from a slowdown in the mortgage refinance market and the related slower amortization of the premiums paid on those mortgage related bonds. Lastly we continue to see growth in the non-interest and loan cost deposit types. Average non-CD balances, those what we call our core deposits, increased $28 million during the fourth quarter of 2014 as compared to the fourth quarter of 2013, that increasing from $400 million in the fourth quarter of last year to $428 million in the fourth quarter of 2014. The overall cost of these non -- of these core deposits, which is 10 basis points during the fourth quarter of 2014. On a year-over-year basis, average investments increased from $258 million in 2013 to $284 million in 2014 and the yield increased from 1.93% in 2013 to 2.32% in 2014. Average loans increased from $253 million in 2013 to $254 million in 2014. The core deposit balances increased from $382 million in 2013 to $411 million in 2014 and the overall cost of our deposits increased from 25 basis points in 2013 and decreased from 25 basis points in 2013 to 20 basis points in 2014. On the loan side, new loan production for the fourth quarter was $24 million. That compares to $14 million in the third quarter of 2014. The weighted average loan rate on this $24 million in new loans for the fourth quarter was 4.11%. The weighted average yield on $10 million of renewed loans during the fourth quarter was 4.85%. Total $69 million of new loan production for 2014 is up from $64 million in new loan production in 2013. Outstanding net loan balances increased $10 million or 4% during the fourth quarter when compared to the September 30, 2014 balance. Compared to one year ago, net loans generally were up $6 million. Of the increase in the fourth quarter, it's mainly real estate related; however commercial was up nearly 3% during the quarter. Real estate loans were up $9.7 million or $4.4 million and commercial loans were up $700,000 or 2.7%. Current loan portfolio to mix, commercial loans that's $25.2 million or 10% of the portfolio. Business property loans at $75.5 million or 28% of the portfolio. Construction and land development at $8.1 million or 3% of the portfolio. Investor CRE is $118.4 million or 45% of the portfolio, residential one to four, that's $13.3 million or 5%, multi-family $14.1 million or 5%, and the other loan category that's mainly the consumer that's the remaining $9 million or 4%. The allowance for loan and lease losses remained at $5.3 million, that's no change from $5.3 million from one year ago as the percentage of loans outstanding though that's 2.01% at December 31, 2014, compared to 2.08% at December 31, 2013. As David mentioned, we continue to have net loan recoveries. They were $182,000 for the fourth quarter, compared to net charge-offs of $221,000 in the fourth quarter of 2013. As a percentage of outstanding loans on an annualized basis, that's a recovery of 29 basis points for the fourth quarter 2014 compared to charge-offs of 34 basis points for the fourth quarter of 2013. For the full year, 2014 had net recoveries of $496,000 or 20 basis points compared to net charge-offs of $635,000 or 25 basis points of average loans in 2013. The non-performing loans at December 31, 2014 were down to $1.6 million. That compares to $2 million at December 31, 2013. As a percentage of loans and leases, the non-performing loans represent 63 basis points at 12/31/14 versus 77 basis points at 12/31/13. We continue to see a decrease in the classified assets as the percentage of equity they were 18% at December 31, 2014, that's down from 21.3% at December 31, 2013. In dollar terms, the classified assets were 36 at the end of '14 compared to 61 at the end of 2013. Loans past due 39 days that were just $519,000 at the end of 2014, compared to $1.9 million one year ago. The OREO, we continue to have some success there as well. We had seven OREO properties at the end of 2014 totaling $4.6 million, that's down from nine properties or $6.6 million at the end of 2013. During the fourth quarter of this year, we did sell one property that had adjusted fair value of $422,000. We received a $27,000 gain on that sale and we did not add any properties -- any OREO properties during the fourth quarter. Other activity during the fourth quarter in the OREO area, we had two loans that we had updated appraisals, so we worked those down by $106,000. That charge went to OREO expense. Also at the end of 2014 we had a valuation allowance of $156,000 on a property that we have in escrow. That $156,000 is a $26,000 increase during the quarter. Compared to one year ago, we had a reserve of $105,000 on the OREO. On investments, really no dramatic change there. Current portfolio was still comprised of well structured cash flowing agency-backed mortgage products with some high credit munis in there as well and the securities portfolio was $293.6 million or 48% of our assets at the end of 2014 compared to $277.2 million or 47% of our assets at the end of 2013. Portfolio remains relatively short. The average lives of the mortgage products are about 3.5 years and the average life for the muni bond portfolio are 4.5 years. The effective duration of the portfolio remains quite low at about 2.2 years and the price change in rates of 300 is just under 10%. David mentioned the deposits. They were up $27 million during the year increasing from $483.7 million to $510.7 million. The non-CD balances, those are our core deposits. Those are up $31.5 million or 80% from one year ago and then our non-interest balances, those remained right around 30% of the total deposits as well. Non-interest income for the fourth quarter came in at $647,000 that was up from $480,000 in the fourth quarter of 2013 and on a year-to-date basis, the non-interest income is $2.2 million versus $2 million in 2013. And with the increase in non-interest income for the fourth quarter compared to 2013 and 2014 primarily related to income from security sales, they increased from $17,000 in the fourth quarter of 2013 to $108,000 in the fourth quarter of 2014. As well as we did see -- received the proceeds of a life insurance policy on a former employee. That resulted in tax free income of $99,000 in the fourth quarter of 2014. OREO income was rather flat. It was $75,000 in the fourth quarter of 2014 compared to $74,000 in the fourth quarter of 2013. On a year-to-date basis, the increase has been primarily the same. In 2014, we had a debt benefit of $99,000 and $208,000 in security sales -- gains on security sales compared to $118,000 debt benefits and 46,000 new investment gains in 2013. We have a slight increase in the OREO income from $316,000 in 2013 to $365,000 in 2014. On the expense side, I think we are still doing pretty good job of controlling those items. The non-interest expense for the fourth quarter of 2014 was $3.8 million, up slightly from $3.7 million in the fourth quarter of 2013. Then on a full year basis, both 2013 and 2014 came in -- both came in at $14.9 million. Changes during these periods, salaries and benefits increased from $2.1 million in 2013 -- the fourth quarter 2013 to $2.3 million in 2014's fourth quarter. We did have an increase during the same timeframes. OREO related expense from $299,000 in 2013 to $208,000 in 2014. On a year-over-year basis, salary and employee benefit expense increased from $8.5 million to $8.8 million. Other expense increased from $3.2 million to $3.4 million and OREO related expense decreased from $936,000 in 2013 to $364,000 in 2014. The increase in salaries and benefits resulted from the increases in incentive plan accruals and other benefits, partially offset by a decrease in core salaries. The incentive plan accruals increased by 54% from $618,000 in 2013 to $672,000 in 2014. And the other benefit, that’s really those are healthcare related costs, 401(k) matching, and employee placement fees, those increased by $162,000 from $1.4 million in 2013 to $1.5 million in 2014. Core salary expense, that decreased by $66,000, from $6.1 million in 2013 to about $6 million in 2014. The increase in the other expense, that relates really primarily to legal and professionals and that increased from $933,000 last year to $1.02 million in 2014 and that’s really the resolution of some issues related to one of our former OREO properties. We did have a decrease in OREO as I mentioned. That really is related to the sale of properties. We have less properties in 2014 and fewer write-downs in 2014 compared to 2013. The fully equivalent -- the fully taxable equivalent efficiency ratio for the fourth quarter of 2014 was 71.8% compared to 73% for the fourth quarter of 2013 and for a full year 2014, it was just about 70% compared to 75.6% in 2013. And so the primary reason for the decrease in the efficiency ratio is driven by some stabilization in the margin as I indicated earlier, it was up over $1 million year-over-year. Taxes; federal and state income taxes increased from $424,000 in the fourth quarter of 2013 to $594,000 in the fourth quarter of 2014. The provision for income taxes increased from $1.3 million for the full year 2013 to $2.3 million for the full year of 2014. The effective tax rate for the quarter ended -- the fourth quarter 2013 was $33.2 million compared to $32.4 for the fourth quarter of last year. It was $33.2 million in the fourth quarter of 2014, $32.3 million in the fourth quarter of 2013. For the full year, the effective tax rate for 2014 was 34.5 and 2013, it was 29.2. The higher provision and effective tax rate in 2014 compared to 2013 results from a higher level of pretax income in 2014 and the company realizing significantly less benefits from the Enterprise Zone on our state tax return as they pretty much wound down that program starting January 1, 2014 and the pretax income, of course, that went up $4.3 million in 2013 to $6.7 million in 2014. Shareholders equity; that increased to $89.6 million at the end of 2014. So that compares to $87 million at the end of 2013. Really, the increase is due to an increase in the other comprehensive income of $2.2 million that’s based on the unrealized gain on the securities due to the changes in the interest rates. In addition, retained earnings increased. We added a $4.4 million in earnings that was primarily offset by about $4 million in common stock due to the 2014 stock repurchase program. In 2014, we repurchased 424,462 shares of our common stock. Average price was $9.77 a share and of course, you may have seen that earlier this morning, we also announced the 2015 repurchase program. Our goal of repurchasing 5% of the outstanding shares in 2015 as well. Capital levels remained strong. The leverage ratio came in at 11.6% at the end of the year and the total risk-base was 22.9%. Thank you. And I'll turn it back over to David for some additional comments.

[David Taber:]

Mitch, thank you very much for that comprehensive report. American River Bank is a focused business bank serving Northern California. In the press release, we've included a few economic data points, which I encourage you to read. To summarize, economic indicators in general showed positive trends into 2014. Job growth was positive in 2014 in each of the markets that we serve. In both the Sacramento and Sonoma County areas, commercial real estate recorded lower overall vacancies in office, retail and industrial. While vacancy improved due to positive absorption, it has not resulted in meaningful increases in lease or rental rates. Mitch did an excellent job in detailing our success in the fourth quarter and for the full year ended December 31, 2014. I started this conference call talking about the balance needed in the banking business, the requirement to have a balance of profitability growth and quality. The increase in earnings per share of 59% was driven primarily by an increase in our margin of $1.4 million and a decrease in our provision for loan losses, coupled with a successful stock repurchase program last year. Growth is also important and our core and total deposit increased nicely in 2014. This was a result both of new business as well as existing clients having good years and keeping more money with us. Loan growth did not occur until year end. The fourth quarter had solid loan production and reasonable retention netting growth of $10.4 million. This made up for lower loan totals, which we reported at the end of the third quarter. The majority of our growth did come from commercial real estate loans. The net recoveries and the reduction in both non-performing loans and other real estate owned, reflects our overall good asset quality and so we began 2015 with momentum and resolve. Mitch also mentioned recently this morning, we announced our 5% stock repurchase plan for 2015 came out in a separate press release. So please get a hold of that, but this reflects the company’s desire to leverage our capital while providing value to our shareholders. Now Eric, if you could please open the line for questions and as he is doing that, I’d like to remind you to refer to Mr. Derenzo disclosure. As Mr. Derenzo indicated our disclosure on forward-looking statements and as an additional reminder, our company does not provide guidance and we're not planning to change that practice any time soon. So please contact one of the analysts that currently cover our company for additional information. Eric?

[Operator:]

Thank you. [Operator instructions] And our first question comes from Don Worthington. Please go ahead.l

[Don Worthington:]

Hello, good afternoon.

[David Taber:]

Hello Don.

[Mitch Derenzo:]

Hi Don.

[Don Worthington:]

Was any of the lending at the end of the quarter, would you consider seasonal say year-over-year and that you might get paid back in the first quarter?

[David Taber:]

No the majority of our -- what we did in the fourth quarter and most of that happened in December was termed commercial real estate loans.

[Don Worthington:]

Okay. Okay and then in terms of payoffs, has that slowed down some?

[David Taber:]

Yeah. I actually just were reviewing -- we were reviewing some of those numbers yesterday. Overall, our payoffs and paydowns, principal paydowns were slightly higher in 2014 than they were in 2013, but a big improvement over the prior year 2012. The last two quarters were almost identical. Our biggest payoff quarter Don was in the second quarter. So we have roughly $12 million payoffs and paydowns in the third and fourth quarter. We had 21, almost 22 in the second quarter. So from that perspective, it has moderated somewhat.

[Don Worthington:]

Okay, thank you. And then in terms of the loan production and I am not looking for specific numbers, but the LPOs in the Bay Area, did they contribute to that growth?

[David Taber:]

Yes they did.

[Don Worthington:]

Okay. All right. Thank you, David.

[Operator:]

And the next question comes from Tim O'Brien. Please go ahead.

[Tim O'Brien:]

Good afternoon Dave and Mitch.

[David Taber:]

Hi Tim.

[Tim O'Brien:]

Hey Mitch. Question for you. With mortgage rates where they are, you -- is there an expectation to see accelerated prepayments on mortgages and do you have any bonds in your portfolio that carried a premium that you are amortizing?

[Mitchell Derenzo:]

There is significant amount in have premiums Tim, primarily because where rates are, the bond with any kind of yield that it doesn’t have premium. So we do have quite a bit. Am I concerned about the drop in mortgage rates? No not really. It had most of these bonds for couple two, three years now. They have already gone from this cycle a couple of times. They are coming to a point when this is all going to burn out. It can only refinance so many times. So I am not too concerned about it. I would probably expect that -- I would expect that the premium amortization to increase a little bit over the last couple of months, but not a significant amount.

[Tim O'Brien:]

So that could just throw a little bit of margin -- pressure on the margin here in the first quarter that if the market wasn’t the way it was, that wouldn’t be the case right? Is that fair to say?

[Mitchell Derenzo:]

Well yes, your point is that when we increase the amortization of premium, it is going to reduce our interest income?

[Tim O'Brien:]

Okay and then…

[Mitchell Derenzo:]

It had happened in the preface.

[Tim O'Brien:]

Hey Mitch, do you still have that other non-performing asset that’s not OREO or a loan on the book -- on the books at $878,000?

[Mitchell Derenzo:]

Yes.

[Tim O'Brien:]

And can you tell me down of a 1,000, what your total NPAs were at quarter end. Would you mind?

[Mitchell Derenzo:]

Given -- the nonperforming loans Tim was $1.653 million.

[Tim O'Brien:]

The demand. And then, did you guys do any hiring in the quarter?

[David Taber:]

No we didn’t. Not from a Relationship Manager, Portfolio Manager kind of I think that number. So our FTE were stable at year end from the prior quarter. It could have moved one way or another a person or two.

[Tim O'Brien:]

And then Dave, do you have any I don’t know 2015 initiatives either on the back office side, either for cost saving purposes or expansion purposes. Any thoughts in mind of something you guys want to try to accomplish in the New Year strategically?

[David Taber:]

I think overall Tim not so much just for 2015. I think we acknowledge that we certainly have the right people -- probably the right number of people, the right facilities, very, very strong and solid deposit franchise sort of like quite a bit of capital and we need to leverage of all of those things on a go-forward basis. We think we can do that without adding significantly to our overhead and to drive more volume and more revenue through the existing plan if you know what I mean.

[Tim O'Brien:]

Yeah and then…

[David Taber:]

But as far as the special initiatives, that really is by design, we saw good growth, I am sorry growth come from commercial real estate towards year end and we need to continue to focus in on good C&I as well.

[Tim O'Brien:]

The pricing on that -- on the new loans that you guys put on, how does that kind of match up with similar loans -- that you have on the books kind of yield that you're getting out of that portfolio where -- is pricing still top relative to what you guys have on the books.

[Mitch Derenzo:]

Well yeah, if you look at the tax within the press release with the yields, the average yields for the quarter on the loans 580 and that’s our total book the $253 million in loans. So obviously that putting in loans at $10 million or so with 411, is going to drop that a tad.

[Tim O'Brien:]

Sure, but also Dave mentioned that those were weighted towards commercial real estate. So maybe there is some higher yielding loans that are not CRE related that -- I don’t know.

[Mitch Derenzo:]

I guess what you are fishing for here is what’s the competitive market place like? There are still plenty of quality financial institutions with plenty of liquidity that are chasing loan opportunity. So it tends to be fairly aggressive on the pricing side. Certainly it also is aggressive on the structure side although in looking back, we haven’t lost tremendous amount because of price. We are probably more aggressive than we were a couple of years ago when competing for that business.

[Tim O'Brien:]

And speaking of the new CRE that you guys put on the books, Dave and you talked about being term loans, what’s the typical duration -- not duration, but typical term that you guys are setting on this stuff and what's the longest?

[David Taber:]

Most of that I will have to go back and look at the individual, but most of that would have been five year, with a 25 amortization, we might had a seven-year fix in there. I think we did anything of volume that had 10. We're not seeing much in the 10-year, so five incentives.

[Tim O'Brien:]

Five incentive; that I didn't know, hey thanks for answering my questions guys. Nice quarter.

[David Taber:]

All right. Thanks Tim.

[Operator:]

At this time, we have no further questions.

[David Taber:]

Well fantastic, so nice to have a moment to chat about our quarter and what we feel is a successful 2014. So thank you for your interest in our company and we endeavor to continue to work hard on your behalf. Thank you and have a great day.

[Operator:]

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