American River Bankshares
Q2 2015 Earnings Call Transcript

Published: 16 Jul 2015

[Operator:]

Welcome to the second quarter 2015 earnings conference call. My name is Adrienne 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. Please note this conference is being recorded. I’ll now turn the call over to Mr. David Taber. Mr. David Taber, you may begin.

[David Taber:]

Adrienne, thank you so much and yes, I am David Taber, the CEO of American River Bankshares, parent company of American River Bank, headquartered in the Greater Sacramento Area. In addition to the Sacramento, we serve Placer, Amador and Sonoma as well as the South and East Bay area. We are pleased today to share company results for the second quarter of 2015. Key items of interest includes our fourth consecutive quarter of increased loans outstanding, an increase in core deposits and a 39% increase in our earnings per share. This earnings per share increase is a result of an increase in our net interest income and a decrease in overhead along with the benefit of our share repurchase. Now Mitchell Derenzo, Executive Vice President and Chief Financial Officer will provide an in-depth discussion of our quarterly and year-to-date results.

[Mitchell Derenzo:]

Thank you, David, and of course, thanks to all of you for listening 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 vary differ -- differ materially from the results in these forward-looking statements. Factors that might cause such difference are discussed in our annual report on Form 10-K filed for year ended December 31, 2014 and in our 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 would include information or future events, except as required by law. The links to the annual report in 10-K are located on our website americanriverbank.com. As with past conference calls, I am going to highlight some of the key areas from 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 for some additional comments. And then we would open up the lines for questions. This morning, American River Bankshares reported net income for the second quarter of 2015 of just $1.4 million, that’s an increase from just under $1 million in the first quarter of this year and $1 million in the second quarter of last year. Earnings per share were $0.18 per share for the second quarter of this year compared to $0.12 a share in the first quarter of last year -- I'm sorry the first quarter of this year and $0.13 per share in the second quarter of last year. On year-to-date basis, net income was $2.4 million this year compared to $2 million last year, earnings per share $0.30 in 2015, $0.25 in 2014. On a taxable equivalent basis, the net interest income is up from $4.8 million in the second quarter of last year to $5.1 million in the second quarter of this year. On a year-to-date basis, the taxable equivalent net interest income is up from $9.6 million last year up to $9.9 million in 2015. The net interest margin as a percentage for the second quarter of 2015 was 3.69%, compared to 3.46% in the first quarter of this year and 3.66% in the second quarter of last year. And then on a year-to-date basis that margin was 3.63% in the first six months of last year, compared to 3.58% in the first six months of this year. The tax equivalent interest income increased from $5.1 million in the second quarter last year to $5.4 million in the second quarter of this year, also an increase from $5.0 million from first quarter this year. The primary driver behind the increased interest income is from the investment securities, but we are also seeing a benefit from the increased new average loans. We did experienced a decrease in average securities from the first quarter of this year to the second quarter this year and we saw an increase in the average loans as those funds were deployed in the loan portfolio. A couple things to point out. We had some unusually high loan prepayments in the second quarter of 2014, which in my opinion overstates the yield, so it’s a little bit difficult comparison to compare year-to-year. The total fees in the second quarter of last year were $190,000 compared to $56,000 in the second quarter of this year. Those loan prepayment penalties added about 21 basis points to the yield on loans last year. Another item is the special cash dividend we received from the FHLB this past quarter. The cash dividend was a one-time 15% cash dividend, that’s in addition to the quarterly cash dividends we are receiving from the FHLB. The amount of that special cash dividend was $136,000. When you compare the second quarter of 2014 to the second quarter 2015, we saw an increase in average loans from $250.2 million to $277.0 million. The average investment securities were primarily flat up about half, less than a million. Despite the slight increase in the average securities, we did experienced an increase in interest income over and above that FHLB special dividend that I just discussed, and the primary reason for that was the slowdown in the mortgage finance market and the related slower amortization to those premiums paid on those mortgage related bonds. On a year-to-date basis, the taxable equivalent interest income increased from $9.6 million in 2014 to $9.9 million in 2015. This too is primarily driven by an increase in the investments securities. The interest expense for the second quarter of 2015 was down from the first quarter of this year and also down from the second quarter of last year. Our average cost of funds deceased from 33 basis points in the second quarter of last year, down to 28 basis points from the second quarter of this year. And then the overall cost of deposits for the second quarter of this year was 16 basis points. That’s down 5 basis points from 21 basis points in the second quarter of last year. On a year-to-date basis, our cost of funds decreased from 34 basis points in 2014, down to 28 basis points this year. Onto the loans, after a few quarters of modest loan growth, we saw very nice increase in loans this past quarter. The new loan production in the second quarter of this year was $31.0 million. That compares to $9.2 million in the first quarter of this year and $19.3 million in the second quarter of last year's. The loan paydowns were manageable which helped out. The average loan rate on the new loans in the second quarter of this year was 4.63%, while rates on renewed loans were 4.72%. That compares to -- in the first quarter this year, the new loans were 4.15% and the renewed loans were 4.1%. And the weighted average loan rate for the fourth quarter, 4.11% for the new loans and 4.85% for the renewed. The outstanding loan balances increased by $14.2 million, or 5.5% during the quarter. And they are up 6.7% year-to-date. And dollar amount were up $28.8 million, or 11.7% year-over-year. The increase in the second quarter, commercial loans increased by $6.9 million, that’s 27.5% and real estate loans increased by $8 million, that’s 3.3%. The snapshot of the current portfolio; commercial loans are at $32 million or 11% of the portfolio. The business property loans are $75.6 million or 27% of the portfolio. Construction and land development, that’s $12.3 million or 4%. The investor CRE is at $122.8 million or 44%. The residential one to four, that’s $13.1 million or 5%. And the multifamily is $17.4 million or 6%. Then the other, which is mainly the consumer and the ag, that’s $7.8 million or 3%. Of the $12 million in construction and land, 72% of that is in commercial. On the allowance, that is still $5.4 million, up slightly from the year end, which was $5.3 million and then down a little bit from $5.5 million one year ago. As a percentage of loans outstanding, that’s 1.91% at the end of June, compared to 2.01% at the end of December and 2.17% one year ago. Another quarter of loan recoveries, we had $51,000 in net loan recoveries during the quarter. We had -- on a year-to-date basis we’re at $58,000 in net recoveries. The nonperforming loans at the end of the quarter were $2.5 million, now that’s up from $1.7 million at the end of December and $1.5 million one year ago. As a percentage of loans and leases, it’s still relatively low, that’s 87 basis points at the end of June 2015, compared to 63 basis points at the end of December and 60 basis points one year ago. The increase in nonperforming loans this year was predominantly the result of addition of one single owner-occupied commercial property in Sacramento Country. The borrower has been at chronic slow pace. We filed an [NOV] [ph] to expedite the collection process. Classified assets as a percentage of equity was down to 14.9% at the end of June, that compares to 18% at the end of December and down from 24.7% one year ago. In dollars, the classified loans totaled $6.4 million at the end of June 2015, compared to $8.1 million at the end of December and $10.3 million one year ago. The nonperforming assets, that’s going to include the nonperforming loans and assets plus the OREO, that was $7.1 million at the end of June 2015, compared to $7.2 million at the end of December and $9.2 million one year ago. Loans past due 89 days, they are rather favorable, they were $367,000 at the end of June, down slightly from $518,000 at the end of December and they were $1.1 million a year ago. OREO, we have four properties totaling $3.8 million, that compares to seven properties or $4.6 million at the end of December and 10 properties totaling $6.9 million at the end of June 2014. We even add new properties in the second quarter of this year. We did sell one property, that was -- we basically sold, that reduced our OREO by $68,000. There was no gain or loss as we anticipated that shortfall and we reserved towards the end of March 2015. We did capitalize in tenant improvements the amount of $126,000. That tenant improvements relates to the new tenant in our office building in Sacramento County that I mentioned last quarter. That building is now 92% occupied and providing positive cash flow. No significant change in the investment portfolio, primarily well structured cash flow in mortgage products and some high credit quality muni bonds. At the end of June, securities portfolio was $281 million, that’s about 46% of our assets, that’s down from $286 million or 47% of our assets at the end of last quarter. About 90% of the portfolio was still at U.S. government agencies and U.S. government agencies sponsors -- sponsored agencies that primarily mortgage backed, still relative short. Average lives in the mortgage products about 3.5 years and the average lives in the muni portfolio is about 4 years. The effective duration in the entire portfolio was relatively low about 2.5 years and then the price change reached 300, that’s under 11%. Our deposits, after a slight drop in deposits in the first quarter of this year due to the fact that we let some of our high cost deposits run out, primarily money markets. We did see a nice increase in the second quarter for this year. Total deposits were $512 million at the end of June, compared to $501 million at the end of March this year and $511 million at the end of December 2014. During the year, we’ve seen a nice increase in noninterest balances. They were up $17.6 million during the first half of the year, that’s an 11.3% increase and at June 30th, those balances were 34 -- those noninterest balances were 34% of our total deposits and CD balances were just 17% of our total deposits. The noninterest income for the quarter roughly the same as it was in the second quarter of last year. And year-to-date, we’re at $1.1 million, that’s up from $1 million in the first six months of last year. A year-over-year that increase was primarily the result of gain on sale of securities, resulted in income of $218,000 in the first half of this year, compared to the $17,000 in the first half of last year. Partially offsetting that increase was a decrease in rental income from OREO properties. We had $212,000 in OREO income in 2014, that’s down to $161,000 in 2015. Also we saw a slight decrease in service charges, $305,000 in 2014 compared to $244,000 in the whole year of 2015. And a decrease in OREO, really that's related to the lower number of income-producing properties. And the lower service charges is primarily lower NSF fees. On the expense side, we’re at $3.4 million for the second quarter of this year, that's down from $3.7 million in the second quarter of last year. And for the six months of 2015 came at $7.2 million, down from $7.4 million for the first six months of 2014. Some of the significant changes from this year to last year for the quarter included a decrease in legal fees, $155,000 last year, down to $56,000 in the second quarter of this year. And the OREO expense, $123,000 in 2014, down to $55,000 in the second quarter of this year. Year-over-year legal expense dropped from $318,000 last year to $100,000 this year, partially offsetting net decrease, which we actually had an increase in OREO expense for the first six months from a $122,000 last year to $202,000 this year. A primary decrease for the legal expense was a resolution of an issue associated with a former OREO property. The quarter-over-quarter decrease in OREO expense was the reduction of the OREO properties. A lot of a cost increase in year-over-year was mainly related to a gain on sale in 2014 of $106,000, that gain on sale is recorded as a reduction of the expense. Further, we’re trying to forecast expense and point out of salaries and benefits decreased $225,000 from the first quarter of this year to the second quarter of this year. Two things make that up. Once we have some open positions in the second quarter of this year, including a couple of the VP levels, couple of the manager levels along with some branch staff. I would say fully staff that would probably add about another $100,000 in the quarter. Still leaves the difference when you compare first quarter this year to second quarter this year. But the first quarter is typically higher as some of those payroll taxes or what I call frontloaded. We’re taxed until we hit certain levels, certain unused levels. We also during the first quarter of this year, we had the payout of our incentive plans for all staff, that payments include but its also going to add to the other benefit, such as 401(k) matching and taxes. I’d say that’s close to about another $100,000. So a normalized expense is going to fall somewhere between what we reported in the first quarter of this year and second quarter of this year. The fully taxable equivalent efficiency ratio in the second quarter of this year and that’s down to 60.5% from 69.1% in the second quarter of the last year. And then on the full year, we were at 66% this year, down from 69.3% of 2014. On the taxes, we did see a decrease, down from a -- I’m sorry, we have an increase from $550,000 last year to $745,000 in the second quarter of this year. And then on a year-to-date basis, we went from $1.1 million in the first six months of last year to $1.2 million in the first six month of this year. More importantly, the effective tax rate in the second quarter, that’s 34.7 last year compared to 35.0 for the second quarter of this year. And then for the full year, we actually saw a decrease. We had 34.7 for six months of the last year down to 34.2 for the first six months of this year. Now on a liquidity basis, the higher effective tax rate in 2015 results from an increase in taxable income. And in a lower effective tax rate for the first six months compared to last year results from an increase in tax benefits related to tax exempt of loan interest. Just to put that in numbers, taxable income increased from $1.6 million in the second quarter of last year to $2.1 million. Higher taxable income covers our taxes but in the second quarter, we put on some tax free loans. And so that benefit us because we had interest on tax exempt loans. Last year, they were only $3 million, this year we’re talking $130 million. So we’ve benefited those loans. On the capital, we did see a slight decrease in capital. From December 31st, we were at $89.6 million and now we’re at $88.2 million. We did increase from one year ago. $1.4 million decrease in equity this year was primarily due to the decrease in common stock of 2.8 million and that's related to the repurchases made under the 2015 repurchase program. That decrease was partially offset by the increase in returning retained earnings of $2.3 million and that's really the income added for the year. We didn’t repurchase any shares in the second quarter because we had successfully repurchased initial target of 5% in Q1. Recall, we reported that we repurchased 404,481 shares of our common stock in the first quarter and the average price was $9.75 per share. We thought of that repurchase program was so successful, we said we’ll increase it as you may have seen earlier today, we did release another press release that we’re going to -- the Board is going to approve an increase to the 2015 repurchase program by another 5%. We plan to repurchase another 386,500 shares throughout the last half of 2015. So our strong capital ratios, leverage ratio is 1.5 and the total risk based is 21.3 Thank you. I’ll turn it back 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 did include 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 commercial and residential real estate as well as employment trends. Sacramento vacancy rates continue to improve with increased absorption. Sonoma County also recorded improvement in the vacancy numbers for office, industrial and retail. Relative to residential, Sacramento and Sonoma counties saw its day inventory increase in Q1 yet reduced in Q2 to roughly 1.5 months of supply. The real driver continues to be more jobs being created with job growth in each of the markets, hours of job growth in each of our market and a corresponding decrease in the employment rate. Mitch did a very good job in explaining each aspect of our financials for the second quarter and on a year-to-date basis. To summarize his remarks, we recorded our fourth consecutive quarter of positive loan growth. As a reminder, we have positive loan growth of $10 million in Q4, $3.1 million in Q1 and $14.2 million this quarter. This loan growth in the current quarter came from balanced production that includes the owner-occupied commercial real estate, investor commercial real estate and C&I commercial loans. After dipping in the first quarter, total and core deposit increased nicely in Q2. In fact, on June 30th, we’re proud that 34% in our term deposits are noninterest bearing. I did mention last quarter that the keys to our success were to leverage our people, leverage our deposits and leverage our capital. And we are proud of the tangible results and progress we have just shared with you, an increase in earnings per share of 39%, driven by an increase in our net interest income and a reduction in our overhead. As Mitch just mentioned, we did announce in the follow-up press release this morning, our share repurchase were another 5% of our outstanding. Now, Adrianne, if you would open the line for questions and 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 don’t plan to change that practice any time soon. Please contact one of the analysts that currently cover our company for additional information. Adrianne?

[Operator:]

Thank you. [Operator Instructions] And we have Tim Coffey from FIG Partners. Please go ahead.

[Tim Coffey:]

Thank you. Good afternoon, David. Good afternoon, Mitch.

[David Taber:]

Hey, Tim.

[Mitchell Derenzo:]

Hi, Tim.

[Tim Coffey:]

Hey. So this year is a period close to loan growth, you see this as being pretty close [indiscernible] good. Are we trying to see a trend here?

[David Taber:]

Yeah. We’ve got a good team, good leadership of that team and commercial banking team. They are very active. As I’ve mentioned in prior conference calls, there is plenty of competition. We have to look at a lot of opportunities. Mitch mentioned we book commitments $31 million and there was a multiple of that that went away. So it really has to do with our efforts and our activities in the markets that we serve.

[Tim Coffey:]

Okay. All right. In terms of originations, you mentioned that during the call that employment was improving and more jobs at the community, I would assume that mean places to work. Is that one of the drivers, what’s going on with the real estate loan growth?

[David Taber:]

No. Quite a bit of the real estate loan growth still is investors either selling and using their 1031 money to buy new properties, or owners either buying properties as they're expanding or trading. We did see good increase in our commercial loan activity, which I think is a better indication of what's going on economically.

[Tim Coffey:]

Okay. And on the other side of that coin, what’s the case of paydowns this month?

[David Taber:]

I think we had about $12 million or so that paid off or paid down in Q2. That’s little higher than it was in Q1 but still pretty close and compared to the last three years, Tim, who knows what’s going to happen in the next two quarters. But certainly was a slower pace in 2015 than we were in the last three years. And we had payoffs and paydowns in 2012 of $74 million. ’13, it was $51 million. Last year was $54 million and we are just under $20 million on a year-to-date basis this year.

[Tim Coffey:]

Okay. And Mitch, I missed it during your prepared remarks, what were the [indiscernible] on the new loans, both renew and renewed?

[Mitchell Derenzo:]

Here we go. For the second quarter this year, the new loans were 4.63%, renewed 4.72%. Those were up a bit from the first quarter. Renew was 4.15% in the first quarter and then renewed was 4.10%.

[Tim Coffey:]

Okay. Mitch. Thanks. And as a follow-up, the openings that you mentioned, the zero lower salary number this quarter, have those all been so?

[Mitchell Derenzo:]

Predominantly, yes. The managers, I think we have -- I think couple of the branch personnel maybe still be open, but the higher costs once have been field.

[Tim Coffey:]

Right. And then David one last question here. The growth in the core deposits and the non-interest-bearing deposits is exceptionally strong this quarter. Is that a function of American River being able to get tons of number of people or is that a function of that the people you’ve already talked to are finally coming around?

[David Taber:]

It’s actually more a function of our existing clients' balances increasing. We have had some traction on new clients, but say most of the surge if we can call it that is from existing clients making more deposits in a couple different areas.

[Tim Coffey:]

Okay. All right. Well, thank you very much.

[David Taber:]

Thanks, Jim.

[Mitchell Derenzo:]

Thanks, Jim.

[Operator:]

And the next question comes from Don Worthington from Raymond James. Please go ahead.

[Don Worthington:]

Good afternoon.

[David Taber:]

Hi, Don.

[Don Worthington:]

Just want to clarify in terms of the margin this quarter and Mitch you mentioned the special dividend from FHLB, is that shown in the interest income against taxable investment securities?

[Mitchell Derenzo:]

Yes, it is. If you compare it quarter-to-quarter, you can see this kind of a big jump in that one area.

[Don Worthington:]

Yes. Okay. Thanks. And then in terms of the lending, David you mentioned there was balance by loan type, how about by market area? Do you have certain area markets that are contributing more to the loan growth than others?

[David Taber:]

I don’t have the numbers right in front of me, Don, but we’ve actually had pretty good balance in loans in each of the markets that we served in Bay area, we’ve been in Greater Sacramento area. We closed one significant in Amador County as well as Sonoma County.

[Don Worthington:]

Okay. Great. Thank you.

[Operator:]

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

[Tim O'Brien:]

Thank you. So question for you, Mitch. The other expense line for noninterest expense, $759,000 versus second quarter '14 of $884,000, did you say that the difference there the primary delta was on legal cost?

[Mitchell Derenzo:]

That’s not in the other, that’s in -- yes, the primary difference in the other is in the legal, right.

[Tim O'Brien:]

And could you give me those two numbers one more time?

[Mitchell Derenzo:]

The year-to-date legal, are you looking for?

[Tim O'Brien:]

No, no, quarterly legal?

[Mitchell Derenzo:]

Quarterly, yes.

[Tim O'Brien:]

You can -- I guess you better give it to me now since we’re…

[Mitchell Derenzo:]

Yes. Since you asked the question, yes, the $155,000 last year, $56,000 this year.

[Tim O'Brien:]

Do you mean for the quarter?

[Mitchell Derenzo:]

Yes.

[Tim O'Brien:]

$155,000 last year, how much this quarter?

[Mitchell Derenzo:]

The second quarter of this year was $56,000.

[Tim O'Brien:]

$56,000. And do you have the first quarter number by any chance right there?

[Mitchell Derenzo:]

No. If you take $319,000 year-to-date subtracted from -- and $100,000 year-to-date this year minus $56,000, so 44.

[Tim O'Brien:]

Okay. And then Don talked a little bit about market color. One question, have you guys had any opportunities or would you look at doing any participation, either as a leader follow-on position?

[David Taber:]

Yes. We look at those all the time and certainly we are open to that. And I don’t think that we purchased any in Q2. So it wasn’t meaningful. Some were open to, but we do have credit standards. And some of the loans are being sold at significant premium, so we can’t get a yield we’re comfortable with.

[Tim O'Brien:]

Yes. And then if heard this right, you said something about non-taxable loans, Mitch?

[Mitchell Derenzo:]

Yes.

[Tim O'Brien:]

And did you say that the balance of those loans was $1.3 million? I don’t know, a year ago and they are $130 million now?

[Mitchell Derenzo:]

Well, that would scare everybody.

[Tim O'Brien:]

There must have been short in my telephone when I heard that. Could you repeat?

[Mitchell Derenzo:]

Ramp up three zeros there. What I was saying was the interest income was $300,000 last year, $130,000 this year, the interest income on those loans.

[Tim O'Brien:]

Got it.

[Mitchell Derenzo:]

Tax exempt interest.

[Tim O'Brien:]

And those were long-term loans, so that’s potentially got some long-term benefit to it?

[Mitchell Derenzo:]

Correct.

[Tim O'Brien:]

And then question for Dave. You had some nice growth in construction this quarter. Did you also increase commitments this quarter? Kind of what’s -- can you give a little color on the status of your construction lending business?

[David Taber:]

Yeah. We in our commitments number, which Mitch mentioned was $31 million, I think $7 million of that is commercial construction, $7 million of it is commercial construction. And some of the other growth is from ongoing fundings of existing projects on the commercial side.

[Tim O'Brien:]

So those commitments for construction up in the quarter, also you guys finding new deals?

[David Taber:]

Yeah. Commitments are up.

[Tim O'Brien:]

Good. That’s great. Those were all my questions. Thanks.

[David Taber:]

Thanks, Tim.

[Operator:]

We have no further questions at this time. I will now turn the call back over to Mr. David Taber for closing remarks.

[David Taber:]

Adrienne, thank you so much and thank you all that participated in the call today for your interest in our company. And we will work and endeavor to work hard on your behalf. Thanks and have a great afternoon.

[Operator:]

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