American River Bankshares
Q1 2015 Earnings Call Transcript

Published: 16 Apr 2015

[Operator:]

Welcome to the first quarter 2015 earnings conference call. My name is Baqeeba and I would 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 that this conference is being recorded. I will now turn the call over to David Taber. David, you may begin.

[David Taber:]

Baqeeba, thank you so much and good afternoon everyone. Yes, 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. In addition to the Greater Sacramento Area, we serve Placer, Amador and Sonoma Counties as well as the South and East Bay. We are pleased to share company results for the first quarter of 2015. Key items of interest in the first quarter are the successful execution of our 2015 share repurchase plan, our third consecutive quarter of positive loan growth and we matched our EPS at $0.12 from the first quarter in 2014. And 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:]

Thanks, David, and of course thanks to all of you for taking the time to listen to 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 difference are discussed in the company's annual report on Form 10-K for the year ended December 31, 2014 and in subsequent reports filed on Form 10-Q and Form 8-K. The company does not undertake any obligations to publicly update or revise any of these forward-looking statements, which include information or future events, except as required by law. The links to this annual report on 10-K are located on our website americanriverbank.com. As with past conference calls, I am going to highlight some of the key areas for our press release that we issued this morning. I am going to try to provide some additional details and analysis. Then will turn it back over to David. He will have some additional comments. And then we would open up the lines for questions. This morning, American River Bankshares reported net income for the first quarter of 2015 of just under $1 million compared to just over $1 million for the first quarter of last year. Earnings per share were $0.12 for each of those periods. The company's net interest margin as a percentage for the first quarter of 2015 was 3.46% compared to 3.41% in the fourth quarter of last year and 3.60% in the first quarter of last year as well. The interest income increased by a few thousand dollars from the fourth quarter of 2014 to the first quarter of 2015 but was down $38,000 from the first quarter of last year. The fully taxable equivalent interest income decreased $89,000 from $5.1 million in the first quarter last year to $5.0 million in the first quarter of this year. The loans that we added during the fourth quarter of last year had a positive impact to the interest income, while loan income in the first quarter of 2015 in the fourth quarter of 2014, both were the same, coming in at $3.3 million, remember that the fourth quarter of last year had the two additional days when you compare that to the 90 days in the first quarter of this year. Even though the yields on the new loans pulled that yield down on the loans from 5.18% in the fourth quarter of last year to 5.10% in the first quarter this year, it's still a much higher yield than in the investment sector. Moving balances from investments to loans is our top priority. Average loan balances were up $9.7 million from the fourth quarter of last year to the first quarter of 2015. The average investment balances were down $4.8 million during that same timeframe. When comparing on a year-over-year basis, average loans have increased $3.7 million from the first quarter of last year to the first quarter of this year and average investment balances have increased $13.7 million. The average yield on loans decreased from 5.41% in the first quarter of last year to the 5.10% in the first quarter of this year that I just mentioned, while the average yield on investments has decreased from 2.35% in the first quarter of last year, down just to 2.33% in the first quarter of this year. The interest expense for the first quarter of this year was $248,000. That's down from $304,000 in the first quarter of last year. The average cost to funds decreased from 35 basis points in the first quarter last year, down to 28 basis points in the first quarter of this year. The average interest-bearing liabilities increased from $351.3 million in the first quarter of last year to $358.1 in the first quarter of this year. The overall cost of deposit for the first quarter of this year was 17 basis points. That compares to 22 basis points in the first quarter of last year. Deposit balances dipped a bit in the first quarter of 2015. However, the majority of that decrease was due to the fact that we let some over-market interest rates, i.e., high cost money market deposits, exit the bank. We did see an increase in non-interest, interest checking and savings balances during the first quarter and of course, those are the much more cost effective deposits. A little snapshot on the loan portfolio. As David did mention, we had an increase in loans. We call that a modest increase during the quarter. New loan production for the first quarter of this year was $9 million. That compares to $24 million in the fourth quarter of last year and then $12 million in the first quarter of last year. Paydowns were much more manageable in the first quarter of this year. So that helped out. Weighted average loan rate on the new loans during the first quarter of this year was 4.15%, while the rates on the renewed loans in the first quarter was 4.10%. That compares to the weighted average rate on the $24 million that we put on in the fourth quarter of last year. That rate was 4.11% and the weighted average yield on the renewed loans in the fourth quarter was 4.85%. Outstanding net loan balances increased $3.1 million or 1.2% during the first quarter when compared to the year-end balances. Compared to one year ago, loans are up $5.6 million or 2.2%. The increase in the first quarter of this year, it's mainly focused in the real estate area. Commercial loans actually decreased by about $50,000 during the quarter. The current portfolio is, commercial loans is $25.1 million, that's 9% of the portfolio. Business property loans $74.7 million, that's 28% of the portfolio. Construction and land, that's $9.8 million or 4%. Investor CRE is $121.4 million or 46%. The residential one to four, that's $13.3 million or 5%. And the multifamily is $14 million or 5%. And then the other group, which is mainly the consumer and the ag, that's $8.4 million or 3%. No real change in the allowance from March 31 to December 31. It was $5.3 million in both periods. One year ago it was $5.4 million. As a percentage in loans outstanding, that's 1.99% at the end of March this year, 2.01% at the end of December last year and 2.06% at the end of March last year. We had some minor recoveries of $7,000 in the first quarter of this year and nonperforming loans at the end of March were $1.7 million, compared to $1.9 million one year ago. As a percentage of loans, those nonperforming loans represent 65 basis points in March of this year compared to 72 basis points March one year ago. Classified assets as the percentage of equity, that dropped a bit. It was 17.4% at the end of March, compared to 21.71% year ago. In dollars, that's $8.1million at the end of March this year and $8.3 million one year ago. The nonperforming assets, that's going to include the OREO, that was $5.4 million at the end of March this year compared to $9.4 million one year ago. And the past due loans, 30 to 89 days, they were $612,000 March 31, 2015 compared to about $1 million one year ago. We did have, on the OREO, let's see, we have five properties totaling $3.7 million. That compares to seven properties totaling $4.6 million at the end of December and we had nine properties at $6.6 million one year ago. During the first quarter of this year, we did finally close on the sale that had been in escrow for a while. It was comprised two adjoining parcels of commercial land in Sacramento County. We didn't record a gain or loss on the sale. We had adjusted the reserves on that, based on the sales price we had reserved $105,000 at December 31. We did add $76,000 to that reserve earlier this year in 2015. That addition was charged to OREO expense. After the sale, we had $7,000 in OREO reserve that remains, because we do have one additional property that is in escrow that we anticipate closing here in soon. Of the $3.7 million of OREO at the end of March of this year, the largest piece, it's a 17,000 square feet office building that makes up 58% of the entire OREO balance. We did just add another tenant earlier, in fact a couple weeks ago and they are a paying tenant, which is good. The building is now 93% occupied and the rents from that building, provides a nice positive cash flow. On the investment side, really no significant changes in the investment portfolio. It continues to be primarily well structured cash flowing mortgage products mixed in with some high credit quality muni bonds. At the end of March this year, the securities portfolio was $285.9 million, roughly 47% of our total assets and that's down a tad from $293.6 million or 48% of our assets at the end of December. About 90% of the portfolio was U.S. government agencies or U.S. government-sponsored agencies primarily mortgage-backed or mortgage related securities. The portfolio remains relatively short with average lives for the mortgage products, they are about 3.5 years and the average life for the muni products are down to about 4.2 years. The effective duration for the entire portfolio was quite low at about 2.5 years and the price change in rates up 300 is just over 10%. On the funding side, total deposits were $501.2 million compared to $510.7 million at the end of December and they were about $500.9 million one year ago. Deposit balances did drop during the first quarter. However, the majority of that decrease was due to the fact that we did let some over market deposits go, as I mentioned. We did see an increase in noninterest, interest checking and savings during the first quarter. At March 31, 2015, the noninterest balances were 32% and the CD balances were about 18% of the total deposits. Noninterest income for the first quarter, $585,000 compared to $502,000 in the first quarter of last year. That increase was primarily related to an increase in income from security sales. We had zero security sales in the first quarter of last year compared to $167,000 in the first quarter of this year. That was somewhat offset by a decrease in rental income from OREO properties. We had $107,000 in the first quarter of last year versus $71,000 in the first quarter of this year and that's really due to up some sales of some income producing OREO properties that we held. On the expense side, noninterest expense was up 4% to $3.8 million in the first quarter of this year compared to $3.7 million in the first quarter of last year and it was identical to the $3.8 million in the fourth quarter of 2014. Significant changes year-over-year, we did see an increase in the salary and employee benefits. That was $2.1 million in the first quarter of last year compared to $2.3 million in the first quarter of this year. And we had an increase in OREO related expense that was about a $1,000 recovery last year, so a negative expense in the first quarter of last year compared to $147,000 expense this year, so $148,000 swing. The primary increase in salaries and benefits occurred in the actual benefit areas. That's going to be the healthcare related, 401(k), employer taxes and employee placement fees. The core salaries were up just $59,000 and that's normal salary adjustments and we did add a couple of staff over the past year, really replacement of some open positions. The average FTE in the first quarter of last year was 101 and it was 103 in the first quarter of 2015. The increase in the OREO expense, really that was -- last year as I said it was really a $1,000 credit. That was because we recorded $106,000 gain on sale last year. So that in essence wiped out all of the normal operating expenses on the OREO. And then of course, this year, as I mentioned, we did have the $76,000 expense due to selling that one piece or the two parcels of land. The fully taxable equivalent efficiency ratio for the first quarter this year was 71.8%, that's up from 69.4% in the first quarter of this year and that's really related to that increase in OREO expense. On the tax side, we did see a decrease. Obviously, the noninterest or the taxable income, pretax income was down about $100,000 from last year. So our tax provision was down as well. The effective tax is fairly consistent. It 34.7% last year compared 33% in the first quarter of this year. We still lots of capital, although it did decrease. Total shareholder's equity decreased to $87.9 million at the end of March. That compares to $89.6 million at the end of December and then $85.9 million one year ago. The change in the 2015 year, it's $1.7 million or 1.9%, primarily due to the stock repurchase program. We had a reduction of common stock by $3.9 million. That was partially offset by an increase in accumulated other comprehensive income of $1.2 million, that's obviously the result of the increase in the unrealized gain due to the fact that rates continued to decrease. And we had an increase in the retained earnings of $1 million, that's due to the net income added during the quarter. On to a repurchase program. David did mention that we wrapped it up for the year. We were able to acquire 404,481 shares or 5% of the outstanding shares during the quarter and the average price on those were $9.75. We continue to maintain a strong capital position with a leverage ratio of 11.4$ and a total risk-based capital ratio of 21.6%. And just to point out, those are based on the new capital requirements that went into effect January 1 of this year. Thank you. And I am going to 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. We have included in our press release a few economic data points, which I would encourage you to read. Generally, positive economic trends continue in each of the markets that we serve. This includes absorption, vacancy and rental rates in the commercial real estate field as well as residential real estate continues to appreciate. On the other hand, on the residential side, inventory is although fairly low, it seemed to growing somewhat. Relative to the employment picture, more people are working, as evidenced both by the lower unemployment rates and more importantly, in my mind, the higher actual employment numbers. Mitch did a great job in detailing and also contrasting our first quarter results and I would note that the operating environment continues to be very competitive with many banks including ourselves with excess liquidity and interest rates at every point on the yield curve at historical lows. In spite of this, we had good loan growth in Q1 at a little over $3 million. This is lower than what we reported at $10 million in the fourth quarter, but we continue to see opportunity in the marketplace, as this was our third consecutive quarter of profitable loan growth. The keys on the go forward basis for American River Bankshares and American River Bank is to leverage our people, to leverage our deposits and to leverage our capital. Now, Baqeeba, if would open the line for questions and as you are setting that up, as a reminder, please refer as Mr. Derenzo indicated to our disclosure on forward-looking statements. As an additional reminder, our company does not provide guidance and we do not plan to change that practice any time soon. So please contact one of the analysts the follows our company for additional information. Baqeeba?

[Operator:]

[Operator Instructions]. Our first question is going to come from Tim Coffey. Please go ahead with your question or comment.

[Tim Coffey:]

Hi. Good afternoon, gentlemen.

[David Taber:]

Hello, Tim.

[Mitch Derenzo:]

Hi, Tim.

[Tim Coffey:]

David, I was looking up the loan growth last three quarters or so specifically, investor commercial real estate and also construction. What do you attribute that growth to?

[David Taber:]

Well, with the low interest rates, there are plenty of people that are commercial real estate investors that are looking to refinance. There is also a fair amount of sales activities as folks have appreciated properties. So there is quite a bit of opportunity in commercial real estate and more so on the investors side and the owner-occupied overseeing, but we are seeing it in both cases. And relative to construction, those are special projects on the commercial side that we are seeing a few of.

[Tim Coffey:]

Okay. Do you anticipate the competition levels you discussed in the last several quarters would curtail some of the growth in the investor commercial real estate or is American River getting its fair share of the market?

[David Taber:]

Certainly we would like to have more. It continues to be hypercompetitive, but that's okay. That's the business that we are in. So we are trying to get not just our fair share but a little more than our fair share. But we expect at least for the intermediate term there would be, at least from an opportunity perspective, plenty of commercial real estate that we will be looking at and proposing on.

[Tim Coffey:]

Okay. Great. Thanks. Those were my questions.

[David Taber:]

Thanks, Tim.

[Operator:]

Thank you, Tim. And then our next question is going to come from Tim O'Brien from Sandler. Please go ahead with your question or comment.

[Tim O'Brien:]

Hi, guys.

[David Taber:]

Hi, Tim.

[Mitch Derenzo:]

Hi, Tim.

[Tim O'Brien:]

First question for you, Mitch. You talked a little bit about kind of a shift in your views on the deposit front and allowing some higher cost money market to leave. Is that process done?

[Mitch Derenzo:]

Pretty much so. Yes. I would say so.

[Tim O'Brien:]

So that rate, I think it was 16 --

[Mitch Derenzo:]

We had a couple of large depositors that had balances. It was time to let them go, because I wasn't willing to renegotiate for a higher rate. So, yes.

[Tim O'Brien:]

That 14 basis point number, when did the run off occur in the quarter?

[Mitch Derenzo:]

When that happened, it was repriced day one, early January and then the funds left. So the reason that the funds left was because they were repriced early on.

[Tim O'Brien:]

So when did they leave?

[Mitch Derenzo:]

The rate would have, for your purpose, I think you want to know when the rate dropped. The rate dropped in the beginning of the quarter.

[Tim O'Brien:]

And then they left?

[Mitch Derenzo:]

Yes.

[Tim O'Brien:]

So that 14 basis point number, that's kind of a decent run rate number. It's not going to move much.

[Mitch Derenzo:]

I would like it to, but we will see. In fact, 14 basis points, whether it goes one or two basis points either way, it's not going to be large but --

[Tim O'Brien:]

Yes, and then also you mentioned fourth quarter renewal. Weighted average yield was 4.85% and it dropped to 4.10% this quarter. Did I catch that right?

[Mitch Derenzo:]

Yes.

[Tim O'Brien:]

Can you give a little color on that?

[Mitch Derenzo:]

Really, it's just a mix of what's up for that period on the renewal side. I don't have that list in front of me, but it's not necessarily we dropped our renewal rates, it's what renewed during the quarter happened to be --

[Tim O'Brien:]

So the nature of the loan. Okay. Got it. Good enough. And then, that OREO that's in escrow, can you tell me what the size of that or what it's marked at? How big?

[Mitch Derenzo:]

Yes. It's actually pretty small. It's less than $80,000 and it's no longer an escrow. We no longer own it. So it did close.

[Tim O'Brien:]

That's great. Congratulations. Anything else in escrow?

[Mitch Derenzo:]

Working on some things, but nothing in escrow.

[Tim O'Brien:]

And then you mentioned, I caught part of this, 17,000 -- one of the largest properties you have left in OREO is 17,000 square feet. I think you said it's 93% occupied now, but you picked up a good tenant there. Is that right?

[Mitch Derenzo:]

We added another 6,000 or 7,000 square foot tenant in the first quarter. They started paying rent in April. So that rental income would not be reflected in the first quarter.

[Tim O'Brien:]

Okay. Great. And was there a contract that got publicized about that that we can pull the rent? Did you guys file an 8-K or anything on that?

[Mitch Derenzo:]

Well, no. But leases tend to be public. So find a good commercial real estate broker.

[Tim O'Brien:]

Okay. Great. And then you said in a rates up environment, 10% change in value of your securities book, did I catch that right?

[Mitch Derenzo:]

Rates up 300%, just over 10% decrease in price.

[Tim O'Brien:]

Yes. I was looking for that decrease/increase. I had a hunch but just wanted to dot the Is and cross the Ts.

[Mitch Derenzo:]

Which would compare that to our peers, our peers were around 12%. So we are taking on a little bit less interest rate risk in the investment side.

[Tim O'Brien:]

And then just shifting gears, two quick strategic questions for David. One, so repurchases are wrapped up for the year. Share repurchases, with the completion of the 2015 buyback plan with full utilization of that. Did I hear that right?

[David Taber:]

Correct.

[Tim O'Brien:]

Okay. And then next question, really high level strategic question, does the Board, I am sure you do, would you be willing to share a little bit about what kind of a profitability number, call it an ROA number, you guys would like to achieve and run at and based on what Mitch said at the very beginning of the conversation, moving balances from investments to loans is the top priority. Is that the number one key like way of hitting that ROA goal that you guys have out there that we don't quite know what the number is?

[David Taber:]

We won't talk about what our goal is for that, as you might fully well understand. But the key to our company is leveraging, capital leveraging, getting more money out of lower earning securities and the higher earning loans, although that's a challenge too because the loan environment is pretty competitive. Sometimes we are looking at deals that it is better off putting the money in securities today. But that's really the key. We have got the right number of people, we believe, in the right spots. We believe that there is capacity for process improvement and technology to grow with a fairly consistent, as far as number of people. Obviously they learn, they get better, they can do more. But that's really the key for our organization.

[Tim O'Brien:]

And then, I guess last question, David. Any hiring plans for the year?

[David Taber:]

Not anything dramatic other than replacements, no.

[Tim O'Brien:]

Thanks guys for answering my questions.

[David Taber:]

Thanks, Tim.

[Operator:]

Thank you. Our next question is going to come from Don Worthington from Raymond James. Please go ahead with your question or comment.

[Don Worthington:]

Good afternoon.

[David Taber:]

Hi, Don.

[Mitch Derenzo:]

Hi, Don.

[Don Worthington:]

Mitch, was there anything in the margin this quarter that you’d consider nonrecurring other than the foregone interest? Was there any like fees or recoveries that boosted the margin on a linked quarter basis?

[Mitch Derenzo:]

Actually, no. The fees were actually down from the fourth quarter. Primarily the fourth quarter had more payoffs. So we had some prepayment penalties, where the first quarter this year was limited.

[Don Worthington:]

Okay. And then, just may be asking Tim's question a different way, but in terms of the ability to raise the loan to deposit ratio, do you see that prospect, say over the intermediate-term, to get that higher than 52%?

[Mitch Derenzo:]

Well, yes. We need to. There is no doubt about it. And certainly there is more of an intense focus on increasing our loan portfolio profitably with good credits than increasing our deposit portfolio, although we do believe strongly that our business deposit are still very valuable franchise assets or liabilities, kind of hard to say. But our deposit franchise is very valuable to us. We continue to work on that, add new relationships, but the key is to move money into higher-yielding assets which most of the time is loans, not always.

[Don Worthington:]

Okay. All right, thanks.

[Operator:]

Thank you. We have no additional questions at this time.

[David Taber:]

Thank you so much, Baqeeba. And thank you all of our investors and friends for your interest in our company. We will continue to endeavor to work hard to build our company back to what it once was. Have a great day.

[Operator:]

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