American River Bankshares
Q3 2008 Earnings Call Transcript

Published: 17 Oct 2008

[Operator:]

Good afternoon. My name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you. Mr. Taber, you may begin your conference.

[David Taber:]

Thank you, Britney. Good afternoon, everyone. I am David Taber, the CEO of American River Bankshares. Welcome to the American River Bankshares conference call to discuss our results for the third quarter of 2008. Mitch Derenzo, Executive Vice President and Chief Financial Officer and a key member of our executive management team for the past sixteen years, will now discuss those results that were included in our press release disseminated earlier this morning. Mitch?

[Mitch Derenzo:]

Thank you, David. Of course thanks to all of you for taking the time to listen in on our call this afternoon. Before we get started, I need to reference our forward-looking statement, which lists the risks and uncertainties involved in our business. The full disclosure can be found in our annual report which is located on our website at www.AMRB.com or you can take a look at our 10-K for 2007 that was filed with the SEC in March of this year. Now, with that out of the way, I will highlight some of the key areas from our press release we issued this morning. I am going to try to provide some additional details to what you have already read and analyzed and then I am going to turn it back over to David, he will have additional comments, and then we'll have a Q&A after that. Today American River Bankshares reported its 99th consecutive profitable quarter, with earnings per share of $0.35 a share. That compares to $0.36 reported in the second quarter of this year, and $0.37 for the third quarter of last year. Just as a reminder, we did declare a 5% stock dividend during the fourth quarter, so all per share and stock related figures have been adjusted accordingly. Net income for the third quarter of this year was $1.951 million that compares to $1.981 million during the second quarter of this year and $2.152 million in the third quarter of 2007. Comparing the first nine months of 2008 to the first nine months 2007, earnings per share were down 4.6% from $1.08 per share to $1.03 per share, while net income was down 9.3% from $6.3 million to $5.7 million. For the third quarter 2008 the return on average assets was 1.32, the return on average equity was 12.51, the return on average tangible equity was 17.43%, and the efficiency ratio was 49.76%. This compares to the third quarter numbers for last year, ROA 1.50, ROAE 13.99, ROATE 19.68, and the efficiency ratio just over 50 at 50.02. The 2008 year-to-date figures are return on average assets 1.33, return on average equity, 12.63, return on average tangible equity, 17.7, and the efficiency ratio of 50.2. The year-to-date 2007 numbers return on average assets 1.47, return on average equity 13.97, return on average tangible equity 19.75, and efficiency ratio was 49.86. Net interest margin this quarter was 5.14%. That compares to 4.99% for the second quarter of this year and 5.17 for the third quarter of 2007. Net interest income for the third quarter of 2008 increased to $6.7 million that compares to $6.4 million in the second quarter of this year, and that was identical to the third quarter of last year as well at $6.7 million. Net interest income for the first nine months of this year was $19.5 million, down slightly from the $19.8 million for the first nine months of last year. Interest income for the third quarter of 2008 was $8.6 million, that's up from $8.3 million in the second quarter of this year but down from the $9.5 million recorded in the third quarter of 2007. The average yield on earning assets declined from 7.29% in the third quarter last year to 6.54% for the third quarter of this year. The decline in the yield on earning assets can be attributed to the overall lower interest rate environment. Unlike the last few quarters when the margin was negatively impacted by an increase in the level of non-accrual loans, this quarter actually benefited from the collection of interest on some of those loans classified as non-accrual. The interest payment collected on non-performing loans and interest collected on those loans returned to accrual status, more than offset the negative effect of the new loans added to non-performing and the opportunity costs of carrying loans on non-performing status during the quarter. The positive effect to interest income on loans was approximately $84,000 or roughly eight basis points for the third quarter of this year. This compares to a negative impact in the second quarter of this year of $268,000 and in the first quarter of this year that number was $339,000. Overall the yield on loans during the third quarter of 2008 was 6.99%, compared to 8.13% for the third quarter of last year. Interest expense for the third quarter of 2008 was a $1.9 million, no change from the second quarter of 2008, but down from the $2.8 million that we recorded in the third quarter of 2007. For the nine months ended September 30th, 2008, interest expense decreased from $8.6 million last year to $6.0 million this year. The average costs to funds decreased from 3.06 in the third quarter of 2007 to 1.91% for the third quarter of 2008. With regards to loan production, we have seen an increase in loans outstanding as of September 30th, 2008, compared to December 31st, 2007. Net loan balances increased $25.9 million to $420.9 million. We continue to see a steady flow of new loan opportunities. Net loan balances were up $35.7 million or 9.3% from a year ago. C&I continue to be an area of focus, and we're up $10.2 million from December 31st and up $15.7 million from one year ago. That represents 15.8% increase. We also saw an increase in our business property loans of $9.8 million. That increase was from December 31, '07, and then from a year ago we increased 16.6%, that's a 17.1% increase as well. Our current loan portfolio, commercial loans is 27.1% of the entire portfolio, and the business property loans are 26.7%, so call that about 54% of our loans are to business owners. The rest of the portfolio is broken down by construction and land development, which is now down to 13.4% of the total portfolio. That compares to about 17% one year ago. Investor CRE is 22.3% of the portfolio, and then other which is mainly consumer and then residential and multi-family real estate that makes up the remaining 10.5%. Of the combined commercial real estate balance of $209.2 million, the owner investor mix is right around 54% business owner and 46% investor. The construction portfolio which now totals $57.5 million is made up of construction 1

[David Taber:]

Mitch, thank you very much. That was a very comprehensive report and hopefully you had an opportunity to take some notes as he was speaking. What you just heard are solid results from a bank with a very simple business model. We work very hard to attract core deposit relationships where we will serve those clients better than any other bank. We then take that money and loan it out into the communities that we serve. Our focus as some of you know is small business, and we're continuing to make progress. In fact, Mitch noted that the number of accounts are actually up 4%. That comes from a group of people, a group of professionals, relationship bankers that are outbound seeking to attract new business clients to our company as we speak. The loan growth is very, very strong, up $18 million in the third quarter alone and $35 million from a year ago. We're profitable. In fact, I would say we're highly profitable compared to our peer. That comes from the basics of banking, a strong margin, and controlling our overhead, bringing our return on tangible equity to almost 17.5%. We've made significant progress on our non-performing assets which now stand at 1.58% of the total assets, and as Mitch mentioned, the number that we have is manageable. We have $61.5 million worth of capital, another $6.2 million in the allowance or reserve for loan losses, and our risk-based capital is very strong at 11.1%, much higher than the minimum. In fact, well above what the regulators refer to as well capitalized or for the top tier. Certainly this is a challenging time in our industry, and for you our investors on the line, your team here at American River Bankshares, which includes American River Bank, North Coast Bank and Bank of Amador, we're certainly up to the challenge. We're strong, we're growing, we're open for business. With that, Britney, if would open the line to questions from some of the teleconference attendees.

[Operator:]

(Operator Instructions) Your first question comes from the line of Jeff Rulis. Your line is open.

[Jeff Rulis:]

Good afternoon.

[David Taber:]

Hi, Jeff.

[Jeff Rulis:]

Mitch, I was trying to get to a core margin trend, got 506 for this quarter. The comparable number in Q2 when backing out the lost interest in margin. What was that number? Reports was 4.99.

[Mitch Derenzo:]

Last quarter we backed off $266,000.

[Jeff Rulis:]

And in basis points that's --

[Mitch Derenzo:]

Yes, I don't have my last quarter number there.

[Jeff Rulis:]

I can back into that. Okay. Separately, you guys seem okay on capital versus your peers. I didn't know if you had any incite into this TARP program, would you have any reason to believe that you wouldn't be eligible for that plan?

[David Taber:]

Certainly we are eligible, and we have looked at it briefly, and at this time it doesn't look like it's something that we would want since we don't need the capital, we've got plenty, but haven't studied it in great depth.

[Jeff Rulis:]

Okay. And then I saw an article about this, do you have any exposure to that Reynen and Bardis builder that recently filed for bankruptcy?

[David Taber:]

We had no, the person in Reynen and Bardis personally have filed bankruptcy. Reynen and Bardis, their homebuilding company has not, just to be clear about that.

[Jeff Rulis:]

Sure.

[David Taber:]

We do have not to the homebuilder, but to an associated company some of our loans that the four lot loans and the one home loan is to an affiliated business of Reynen.

[Jeff Rulis:]

And then lastly, you sort of alluded to this in the press release and also in your comments about you guys are open for business. Does that suggest that you're seeing competitors less aggressive on new business in your markets?

[David Taber:]

Without question, Jeff. What we're seeing is as we saw with loan totals going up so dramatically just in Q3 alone, we're seeing so much opportunity which translates into a good look to bring in deposits as well as loans because that's a requirement, but also the pricing is better than it had been 12 to 18 months ago.

[Jeff Rulis:]

Thanks, guys.

[Mitch Derenzo:]

Thanks, Jeff.

[Operator:]

Your next question is from the line of Don Worthington. Your line is open.

[Don Worthington:]

Thank you. Good afternoon.

[David Taber:]

Hi, Don.

[Don Worthington:]

In terms of the deposit outflows, I mean you provided some color there; I am just trying to get a little better handle on how much may be related to you letting deposits run off, because they're too high cost versus customers taking out their funds for whatever reason, either concern about insured levels or just business purposes? It sounds like when you're talking about the number of accounts going up, the average balances going down that perhaps businesses are just using some of their balances for their own liquidity reasons? Anything more there in terms of the trends behind the deposits being down?

[David Taber:]

Yes. What's interesting, Don, about that, you're hitting the nail on the head what Mitch talked about, but we look back and as part of our press release, our average deposits Q2 versus Q3 are almost identical. Because of our business banking nature, we have fairly significant fluctuations intraday, and it would almost be nice if our reports were done on an average balance basis as opposed to a particular date, but it is just the way it is. But we are seeing our business clients having less money. We've also seen some take those funds and pay down loans to try to reduce their debt load as well.

[Don Worthington:]

Okay. Good. And then in terms of the margin and just looking more for directional input here as opposed to any specific guidance. But with the Fed reducing rates 50 basis points, where do you think the margin is headed over the next quarter or two?

[David Taber:]

It is not going up. Yes.

[Mitch Derenzo:]

On the asset side, we have a lot of floors in our loans, so we shouldn't see much drop there, but also on the deposit side it is still pretty competitive out there, so I don't anticipate us being able to drop deposit rates. So, if I was going to make a comment, I would say there is not much change.

[Don Worthington:]

Okay. Thanks a lot.

[David Taber:]

Thanks, Don.

[Operator:]

Your next question comes from the line of Tim O'Brien. Your line is open.

[Tim O'Brien:]

Good afternoon.

[David Taber:]

Good afternoon, Tim.

[Tim O'Brien:]

Hi, could you guys give an update on housing trends?

[David Taber:]

Yes. Headline out of a company called Trend Graphics inventory down, sales are up. We've got Sacramento and one report I saw where Sacramento County for September and west Sacramento which is in Yellow County actually had another very strong month and the highest number of sales, I believe since 2005. And the median price, however, dropped below $200,000 in the same area. So when priced at that level there are plenty of buyers. There is still a large percentage of those, 60% to 70% depending on who you believe that are as a result of foreclosure. But there are still buyers, and they're still moving. The other thing is, and this is kind of competing numbers here, but for the three county area, that's Placer, Sacramento, and Eldorado County, we have actually seen I think about a 40% drop in unsold inventory and less than six months inventory in existing homes, and that's also a good sign. Relative to new homes, contractor built homes, the standing inventory is actually down to about less than two months of sales. So the builders are not putting up sticks until they have a solid contract with a very, very substantial down payment. And so that's keeping those inventory levels down as well. So kind of -- I would say it is fair as far as the housing outlook. Interest rates are low, people can buy a house at a very, very low price, and they are doing it today.

[Tim O'Brien:]

Would you say -- I am not going to hold you to this, Dave, but looking forward --

[David Taber:]

Yes, you will.

[Tim O'Brien:]

I won't actually, just because no one can call this, but you've got on the ground perspective that's as good as anyone's, I think. Looking out into the winter months when it starts raining and stuff, do you think that the inventory that's out there and interest from investors is going to I guess negate seasonal factors more this year than in years in the past? What's your take as far as --

[David Taber:]

If the pricing levels stay at this $200,000 or below, I think that there will be plenty of buyers still.

[Mitch Derenzo:]

We don't get a lot of rain.

[Tim O'Brien:]

And then another question for you guys, switching gears slightly, do you have access or will you able to get or monitor sales tax revenue for your market for the Sacramento area? Do you guys --

[David Taber:]

We don't have that, Tim.

[Tim O'Brien:]

Okay. That's all I got. Thanks.

[David Taber:]

All right.

[Operator:]

Your next question comes from the line of [Martha Birna]. Your line is open.

[Martha Birna:]

Hi. I am just a novice at all this, but recently on KCRA they were giving a link to going to how banks locally were rated. And I saw a lot of them that were four and five star, and I wonder why we only rated three?

[David Taber:]

There are a number -- [Martha], there are a number of rating services out there. There is another rating service IDC that we just came across that rate us in an excellent category. I would imagine, I am not sure what you're referring to, but the level of non-performing loans at the end of last quarter would be something that would drop us down in their view to a three category. But if you look at the overall strength of our company, which is profitability, the quality of our assets overall, the level of reserves we have, the level of capital we have, the liquidity we have, how we're set up relative to interest rate risk which is very, very low, I would have to say that we're very, very strong in that regard.

[Martha Birna:]

I was just surprised because Eldorado savings and some of those were 5-star rated as well as tax savings and some of those being four, and I was surprised to find us with only three.

[David Taber:]

Sure.

[Operator:]

Your next question comes from the line of [Sanford Cozlyn]. Your line is open.

[Sanford Cozlyn:]

Hi, Dave, [Sandy Cozlyn]. I have been around since you guys opened, and I've got a couple questions. One is you had some statistics in the end there on risk ratio, running about 11 or something like that. Could you explain those statistics?

[David Taber:]

Yes. What I was referring to is the regulators; federal banking regulators require a certain amount of capital depending on the risk profile of your bank. And so they came up with a risk-based capital ratio. And the minimum level is 8%, the adequate level is 9%, and the top tier is 10%, what they call well capitalized. Mitch and I both reported that our number is 11.1% meaning that we are much higher than the top level required by the regulators. And in normal times, people don't pay a lot of attention to capital ratios, but I am finding that in challenging times like these, our clients, our investors, both want to know that we have a lot of capital, and to put it in terms that most people I would think of it as your equity or your net worth. So our company has a net worth or capital of $61.5 million, which puts us in a very strong cat category.

[Sanford Cozlyn:]

Okay. Just for your information, I have been spending some time at the computer, and there is a couple of websites, one is moneyandmarkets.com, and thestreet.com, and they do ratings, and they were not very kind to American River Bank. They rated you in the weak category. You might want to take a peek at those sites because from what I am listening to here and looking at your share trading now at $11.50, of course that's just before payment of the dividend, but that's still -- you guys are looking pretty decent, and I think that you might want to take a look at those two sites and respond to them.

[David Taber:]

Sure.

[Sanford Cozlyn:]

I don't know, that could help from the portfolio side. The other thing that I would love to have is a branch in Carmichael, we've never been able to get one up here.

[David Taber:]

You've been ask asking for that for 25 years, [Sandy].

[Sanford Cozlyn:]

But if I can't have a branch, we at least got [Teresa] who your manager of [Fair Oaks] has just joined our Carmichael Kiwanis club and she is a real jewel.

[David Taber:]

Right. Thank you very much.

[Sanford Cozlyn:]

Congratulations on having her, of course she has been around for a long time. I have been looking at some of the non-performing things you've had, and I have got a little bit of cash to invest, and I am wondering what I heard you say today, you said that your non-performing ones, there is a lot of leverage, a lot of room in those non-performing assets for some margins in case some of the people there just need some capital or capitalization or maybe being willing to sell off part of their [project] or something like that. And have you guys ever thought about an American Rivers Investors Group where people could put some capital in where there is opportunity in capital as a result of a non-performing situation?

[David Taber:]

Sandy, you know what I would like to do? Those are some specifics that maybe aren't worthwhile to talk about with a fairly large group of investors on line. Would you mind giving me a call directly at 231-6714 and I can discuss that with you?

[Sanford Cozlyn:]

Okay. Thank you, Dave. That's all I got. Have a great day. Thank you for all the years. We've seen the price go up and down, but I am a dividend investor, and you guys have been taking good care of me for a lot of years, and it looks like that's not going to change.

[David Taber:]

Thank you, Sandy.

[Operator:]

Your next question comes from the line of Tim O'Brien. Your line is open.

[Tim O'Brien:]

Hi, guys, I hate to ask this, but one follow-up. Mitch, did you mention security sales this quarter or I caught the tail end of that? Did you say something about a sales security gain on sale?

[Mitch Derenzo:]

Are you looking for the dollar amount?

[Tim O'Brien:]

Yes. Did you guys have security sales this quarter?

[Mitch Derenzo:]

Yes. The income from the gain on sales for the quarter was $93,000.

[Tim O'Brien:]

$93,000. And how much in par value did you sell? How much did you sell?

[Mitch Derenzo:]

Somewhere between $16 million and $17 million.

[Tim O'Brien:]

What were they? Agencies?

[Mitch Derenzo:]

Yes. Mainly agencies, a [muni] or two in there maybe.

[Tim O'Brien:]

Okay. Thanks a lot.

[Operator:]

Your next question comes from the line of Mark Anderson. Your line is open.

[Mark Anderson:]

Hi Mitch; hi, David.

[David Taber:]

Hello, Mark.

[Mark Anderson:]

I was calling about the Fannie Mae preferred stock. You reported that earlier. I was curious, how does that show up in the balance sheets? Is that under securities sale because it wasn't a sale?

[Mitch Derenzo:]

In the balance sheet it is going to be in the investment portfolio. In the income statement it is going to show up in the non-interest income category. You will see a reduction in the non-interest income when you compare this quarter to any of the previous.

[Mark Anderson:]

And then the status of that was $250,000. Do you know what the value of that's going to be or does anyone know?

[Mitch Derenzo:]

It had a par value of $250,000. We wrote it down to the market value of $17,500. These shares are still trading, so there is a market for them and you can pretty easily get a price for them.

[Mark Anderson:]

And then did you sell them at that price or any reason to hang onto them?

[David Taber:]

I will jump in there, Mark. Since we've written them down basically to nothing, there is potential in the future that there will be some sort of recovery if Fannie Mae becomes a strong viable company again, but they haven't (inaudible). We're just going to hang onto them as almost at zero, and if something happens positive in the future, great. If not, that's okay, too.

[Mark Anderson:]

Okay. So there is no bailout applying to those shares at all?

[Mitch Derenzo:]

(inaudible)

[Mark Anderson:]

Okay. Thanks.

[David Taber:]

All right, Mark.

[Operator:]

At this time there are no further questions.

[David Taber:]

Well, great. Brittany, thank you very much, and thank you all investors, and interested clients for settling in on this call today. And as we talked about, I think we have a lot as a company to be proud of, and I certainly am. So for those that are out there and know businesses or individuals in our market area that are looking for a fantastic banks, make sure that they call me and they can call me directly at 231-6714. We'll take good care of them.

[Operator:]

This concludes today's conference call. You may now disconnect.