American River Bankshares
Q3 2015 Earnings Call Transcript

Published: 23 Oct 2015

[Operator:]

Welcome to the Third 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 David Taber, President and CEO of American River Bank. Please go ahead.

[David Taber:]

Adrienne, thank you so much. Yes, I am David Taber, the CEO of American River Bankshares, the parent company of American River Bank, which is headquartered in the Greater Sacramento Area. In addition to the Sacramento, we have offices in Placer, Amador and Sonoma County, as well as the South and East Bay areas. We are pleased to share Company results for the third quarter of 2015. Items of interest include our fifth consecutive quarterly increase and loans outstanding, a solid increase in core deposits and a 43% increase in our earnings per share. This increase in earnings per share is a direct result of an increase in 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:]

Thanks, David, and of course, thanks to all of you for listening on the 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 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 year ended December 31, 2014 and then with a subsequent filings reported 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 this annual report are located on our website at americanriverbank.com. As in the past, I am going to highlight some of the key areas from the press release that David referenced just a minute ago, and then I am going to provide some additional details and analysis. Then I will turn it back over to David for some additional comments. And then we would open up the lines for some questions. This morning, American River Bankshares reported net income for the third quarter of $1.5 million compared to $1.4 million during the same quarter this year and $1.1 million reported in the third quarter of last year. Earnings per share were $0.20 per share for the third quarter of this year compared to $0.18 per share in the second quarter of this year and up from $0.14 per share in the third quarter of last year. On a year-to-date basis, net income this year is $3.8 million or $0.50 per share compared to $3.2 million or $0.39 per share in 2014. On a taxable equivalent basis, the net interest income is up from $4.7 million in the third quarter of last year to $5.3 million in the third quarter of this year. On a year-to-date basis, the taxable equivalent net interest income is up from $14.4 million last year to $15.2 million this year. The net interest margin as a percentage for the third quarter of this year was 3.73%, that compares to 3.69% in the second quarter of this year and up from 3.49% in the third quarter of last year. On a year-to-date basis, the interest margin increased from 3.58% in 2014 to 3.62% in the first nine months of this year. The taxable equivalent interest income increased from $5 million in the third quarter last year to $5.6 million in the third quarter of this year. This has also increased from $5.4 million in the second quarter of this year. While we continue to see increase interest income from the investment securities portfolio, this past quarter we actually saw more of this increased come - from the increase - in average loans outstanding. We experienced a slight decrease in the average securities for the third quarter as compared to the third quarter of last year, but we did have a nice increase in average loans over that same period. When we compare the third quarter 2014 to the third quarter of 2015, that increase in average loans went from $253.7 million to $286.9 million that is 13% increase. The investment securities decreased slightly from $285 million in the third quarter last year to $279 million in the third quarter this year. Despite the decrease in average security balances, we did see an increase in interest income from these securities. As I mentioned last quarter, that increase is related to the slowdown in the mortgage refinance market and the related slower amortization of the premium paid on those mortgage related bonds. On a year-to-date basis, the taxable equivalent interest income increased from $15.2 million last year up to $15.9 million this year. On a year-to-date basis primary driver for the increase is the interest income on investments. However, we did see loan interest income increase year-over-year. We are not pointing out is we did receive a rather large prepayments in the third quarter of this year that helps yield during the period. The loan that paid off was $4.9 million and the related fee was about $100,000. The good news is that the loan growth during the quarter was net overcome that large pay off and the prepayments fee added to the current period interest income. While this was a large prepayments fee, I don’t consider this an unusual in today’s environment. We have been benefiting from large repayment penalties in a last couple of years. Repayment penalties this year are $198,000 that’s a slightly from $161,000 in the first nine months of last year. Interest expense for the third quarter of this year was down from the second quarter of this year, as well as down from the third quarter of last year. The average cost of funds decreased from 32 basis points in the third quarter of last year, down to 26 basis points in the third quarter of this year. The overall cost of deposits for the third quarter of this year was 15 basis points. That's down from 20 basis points in the third quarter of last year. On a year-to-date basis, our cost of funds decreased from 33 basis points in 2014, down to 27 basis points in 2015. Following a nice loan growth in the second quarter this year, we are happy to report another strong loan growth quarter with an increase of $14.4 million in net outstanding or 5.2% that compares to the June 30 balance. The increase from $275.4 million on June 30 to $189.8 million at September 30. Loans increased $31.7 million or 12.3% during 2015 and if you compare that to one year ago they are up $42.1 million or 17%. The new loan production during the third quarter was $27 million compared to $31 million in the second quarter of this year and $40 million in the third quarter of last year. The weighted average loan rate on the new loans produced in the third quarter of this year was 4.06%, while rates on renewed loans during that same period were 5.2%. That compares to second quarter of this year. New loan were 4.63% and renewed loans were 4.72%. The increase in loans in the third quarter, commercial loans increased 7% or $2.2 million and real estate loans were up 5.3% or $12.7 million. The current portfolios made up of commercial loans is $34.3 million that’s 12% of outstanding portfolio. Business property loans at $78.9 million or 27% of portfolio. Construction and land development of $11.3 million or 4% and then the other that’s mainly with consumer and the ag that make up to remaining $6.7 million or 2%. The allowance is still strong at $4.9 million at the end of September compared to $5.3 million at the end of December and as a percentage of loans outstanding is 1.67% at the end of September 2015 compare to 2.01% at the end of December 2014. After run of net loan recoveries in the past couple of year we did experience a net right down this quarter. We had one commercial bond that is going to deliver process and we do believe we received some principal reductions we thought it was best to write-off the two loans to that borrower due to the length of time it’s taken to resolve the matter. The two loans totaled $610,000 although about $100,000 was specifically reserved for at June 30. So there is no real impact to the overall allowance as recoveries for the most recent quarter were $180,000. So net-net for the third quarter, net losses were $430,000 bringing the year-to-date net losses to $272,000. Nonperforming loans at September 30 were $1.9 million, that's up slightly from 1.7 million at December 31, 2014. The increases are one loan $124,000 is 90plus it’s still approving. It is a matured loan that we expect full pay-off in the fourth quarter this year. As a percentage of loans and leases, nonperforming loans represent 66 basis points at September 30 compared to 63 basis points at December 30 of last year and then 72 basis points at September 30, 2014. Classified assets as a percentage of equity was down to 14.5%, that compares 18% at the end of December and 21.5% one year ago. In dollar terms the classified loans were $5.7 million at the end of September but this year compared to $8.1 million at the end of December of last year in the $9.9 million one year ago. Nonperforming assets, which includes nonperforming loans and assets in OREO, that totaled was $6.6 million at the end of September, compared to $7.2 million at the end of December last year and then compared to $7.9 million one year ago. We had one loan that was past due 30 to 89 days, that balance was $360,000 that compares to loans totaling $518,000 at the end of December and $512,000 one year ago. We continue to have four OREO properties, the total is $3.8 million. There has really been no change from the June 30 balances that is down from eight properties to $5.2 million one year ago. We did not add or sell any properties during the third quarter and our income on these properties that we hold continues to exceed the expenses. For the quarter, rental income was 87,000 and the related expense was $58,000. To the smaller properties we own, our negotiation stage one is actually [indiscernible] but we anticipate taking that a few months to close. No significant change in the investment portfolio, it's still primarily well structured cash flow in mortgage products and some high credit quality mortgage bonds. The portfolio at the end of September $271 million, that’s 43% of the assets, that as a percentage down from 48% over $294 million at the end of December and down from 46% over $282 million one year ago. Of course the decrease in these balance is used to fund the increasing loans. About 90% of the portfolio is U.S. government agency or U.S. government sponsored agencies primarily mortgage related bonds. Portfolio is still short, the average lives of the mortgage product is about 3.5 years and the average life of the new bonds are under 3.7 years. The effective duration in the entire portfolio was still low at about 2.5 years and the price change in rates of 300, is just over 10%. If you recall during the first quarter of this year, we put a slight drop in deposits due to the fact we left some high cost money market accounts, exit bank [technical difficulty ] shares been in the non-interest balances. Non-interest balances increased $22.3 million, that’s about 14.3% during the first nine months of this year. Then on September 30, these non-interest balances were 34% in the total deposit and CD balances continue to drop there just 17% of the total deposits. Numbers changed in the non-interest income it was $490,000 for the third quarter of this year, its down slightly from $520,000 in the third quarter last year and on a year-to-date basis were 1.6 million this year versus 1.5 million in 2014, the primary changes there were really related to gains from sales of investment securities. Those gains were lower in the third quarter of this year, but slightly higher on a full year in 2015 when we compare that to the full year of 2014. Those higher gains this year on a year-to-date basis were partially offset by lower service charges and then some lower rental incomes on OREO properties [indiscernible] that have the impact on the lower fees from rent on the OREO. The noninterest expense decreased 8% down to $3.4 million third quarter of this year compared to $3.7 million in the third quarter of last year. Then on full year it was down 3% coming in at $10.7 million in 2015 down from $11 million in 2014. Lot of fluctuations rendered through the most significant change from the third quarter of last year to the third quarter of this year was decrease in professional fees. Those decrease from $245, 000 last year to $168,000 this year. And then on year-to-date basis primarily the same thing. Professional fees were down from $866,000 last year to $572,000 in 2015. Partially offsetting the decrease for the full year was the increase in OREO expense from $156,000 last year to $260,000 this year. Of course the biggest reason for the increase in OREO was last year we had a $204,000 gain, this year we don’t have any on those OREO gains or reduction of the expense. And then the - as far as the professional fees, that’s primarily related to lower legal fees related to some issues resolving a formal OREO property. Another just a thing I need to mention here part of the reduction and expenses in the third quarter, we received a fee from our debit card process, that fee was about $47,000. It's a conversion payment related to Company’s decision of switch processors early last year, that [reduced] [ph] that $47,000 is accounted for his reduction to the processing expenses. For those keeping track, I think it's probably a non-recurring type item. The fully tax and equivalent efficiency ratio for the third quarter of this year decreased down to 59.1%, that's down from almost 70% in the third quarter of last year. On a year-to-date basis for 2015, the efficiency ratio is 63.6, that's down from 69.4 in the first nine months of last year. As far as taxes, those increase from 613 in the third quarter this year - I'm sorry for the third quarter last year up to 807 in the third quarter of this year. The effective tax rate also increased from 35.3 to 35.5 in the third quarter of this year. The higher expense and the effective tax rate this year resulted from a higher amount of taxable income. Income before taxes was 31% higher, it increased from $1.7 million in the third quarter last year to $2.3 million in the third quarter this year. And then on a year-to-date basis, taxes this year were $2 million compared to $1.07 in 2014, the effective tax rate this year was 34.7, down slightly from 34.9 in 2014. A lower effective tax rate this year compared to last year really results from an increase in tax benefits related to tax exempt loan interest. Interest on tax exempt loans increased from just $10,000 in 2014, up to $222,000 in 2015. We did see a decrease in our shareholders equity, decrease down $86.3 million, down from $89.6 million at the end of 2014. The $3.3 million decrease was due to decrease in common stock of $7.6 million that's related to our repurchases into the stock repurchase program. That decrease was offset by an increase or partially offset by an increase in retained earnings of $3.8 million and the increase there is because of the income, net income for the year. During the third quarter, we repurchase 386,508 shares of our common stock and the average price paid was $10.03 of share. On a year-to-date basis we repurchased $790,989 shares and the average price was $9.87. The 2015 stock repurchase program, the one that we announced in July of this year, the second one of the year has been completed. And we'll continue to have strong capital position, leverage ratio was just 11% and the total risk based capital is over 20%. 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. We have full service offices in four County's and loan production offices and two others. In our press release we've included a few economic data points, I'd encourage you to read them. Let me give you just a couple of highlights. Generally positive economic trends continue in each of the markets that we serve, Sacramento area vacancy rates continue to improve with increased absorption, although lease rates haven't changed very much. Sonoma County has also recorded improvement in it's commercial real estate vacancy numbers as a result of positive absorption. Lease rates for office and industrial in that county are increasing, retail space saw a slight drop. Relative to residential housing, Sacramento and Sonoma County's continued their positive trends in 2015. Median prices continue to decline and the number of days of supply, just 54 days in Sacramento and 61 in Sonoma County. The California economy continues to improve State wide unemployment at 6.1%. We added 397,000 jobs in California in the eight months ended August 31. In the Sacramento MSA, the unemployment rate was just 5.7%, the Santa Rosa/Petaluma MSA just 4.3% and Amador County saw 6% unemployment rate. And previous report we noted that there was positive loan growth in all of our markets. The August 31, 2015, have showed although positive and mixed result with positive job growth in Sacramento, a tiny drop in jobs in Santa Rosa and also in Amador County. Mitch did a great job of explaining each aspect of our financials for the third quarter and as well as a year-to-date basis. Key takeaways include the fact that we recorded our fifth consecutive quarter positive loan growth also it's been 9 of the last 10 quarters of positive loan growth. We had $3.1 million in loan growth Q1, $14.2 million in Q2 and we're proud to have matched that $14 million in Q3. And over the last quarter that our production was fairly balanced by type. This quarter, it was more heavily centered in investor commercial real estate with 46% of the total multifamily at 33%, although we did sign [ph] about 13% of the total in C&I loans. I'm very proud the commercial banking team for their efforts, and production was fairly balanced with over 60% of the team exceeding their individual quarterly goals. After dropping in Q1, both total and quarter positive deposits increased nicely in Q2 and again in Q3, where core deposits increased by $11 million and as Mitch mentioned, we define core deposits as those on CD's. We continue to have the majority of our deposits from business plans, and total demand deposits are now full 46% of the total, which included 34% non-interest bearing and 12% in interest bearing demand. Management still regards this unique deposit base as critical to our franchise value. I have mentioned on previous calls that the key to our success is to leverage our people, our deposits and our capital. We are proud of the tangible results we have shared with you today. An increase in EPS of 43% driven by an increase in our net interest income and reduction in our overhead. These factors were augmented by the successful 2015 repurchase plan, which as Mitch mentioned was completed in the third quarter. Adrianne, if you'd please open the lines now for questions, and as a reminder for everybody on the call, refer to Mr. Derenzo statement on our disclosure on forward-looking statement. As an additional reminder, our Company does not provide guidance and we're not planning on changing that practice any time soon. Please contact one of the analyst that currently cover our Company for additional information. Adrianne?

[Operator:]

[Operator Instructions] And our first question comes from Tim O'Brien from Sandler O'Neill. Please go ahead.

[Tim O'Brien:]

Hi, guys. Can I get a couple of numbers from you guys? You might have said this and I just might have missed it on the call, Mitch, did you give a dollar amount production number for the quarter, I think last quarter's number was $31 million.

[Mitchell Derenzo:]

I did. For the production, so there was $26.8 million in the third quarter this year and there was $31.3 in the second quarter of last year and it was $14.1 million in the third quarter of last year.

[Tim O'Brien:]

Okay, great. And so of that $26.8 million, have you said – it was a little way towards investor on CRE 46%, 33% multi, 13% C&I, did I catch those numbers right?

[David Taber:]

Yes, and I gave you those percentages on actually funded dollars, and I think Mitch gave you on commitments, so the percentage were slightly different but very close.

[Tim O'Brien:]

So the $26.8 total commits.

[David Taber:]

We actually had funding's above that number because we had some few construction projects that money went out on large ones. So it's one of the rare times Tim that our funded dollars are higher than our commitments for the quarter by a couple of million bucks.

[Tim O'Brien:]

Kind of nice. Did you guys fund any or actually extend any new commitments on construction loans this quarter or is that reflected in the other percentage numbers you gave?

[David Taber:]

I don't think there was anything, no, I don't think there was any construction commitments made inside in Q3. Believe me, there was a fairly large one late Q2.

[Tim O'Brien:]

But the outlook for construction out there is pretty positive these days -

[David Taber:]

Yes, let me talk a little bit about that. American River Bank is not doing any residential construction. So the construction that we are doing is on the commercial side. And other event a few specialty project, commercial construction hasn't really taken off. Obviously for you, your Northern California, you know the new arena downtown is being built and that's a giant project, but other than that there's not much in the way of commercial construction going on in the greater Sacramento area.

[Tim O'Brien:]

Okay. And then Dave could you give a little bit of color just - I know you don't give guidance but just in terms of how you ended the quarter with regard to your prospect pipeline and I mean qualitatively compare it to what it look like at the end of second quarter.

[David Taber:]

Yes, the overall, and we have a couple of different pipelines that we refer to and I don't give the numbers on those. But suffice to say that it is similar - both of those are similar in size with the end of June 30 quarter. Yes.

[Tim O'Brien:]

Okay, great. That's great color, and then last question, did you guys capture much in the way of loans out of your Bay area market?

[David Taber:]

Without giving all of the dollar amounts which I don't have in front of me, we actually have mentioned that over 60% of our commercial banking team exceeded their goals for the quarter, and so we had business coming out of each of our regions including the Bay area.

[Tim O'Brien:]

Great. Thanks for answering my questions.

[Operator:]

And the next question comes from Tim Coffey from FIG Partners. Please go ahead.

[Tim Coffey:]

Thank you. Good afternoon gentlemen. Real quick, Mitch, did I hear you right that the rate on new loans for the quarter was 4.6%?

[Mitchell Derenzo:]

4.06%.

[Tim Coffey:]

4.06%, okay.

[David Taber:]

We wish it was 4.6%.

[Tim Coffey:]

Yes, and what was the rate on renewed credits?

[Mitchell Derenzo:]

5.2, just to give you little color, there were very few $5 renewed loans, less than $1 million in renewed loans. So I’m not going to move the needle very much.

[Tim Coffey:]

Okay, yeah. That was really my follow up question. What about the pace of pay-offs? Last two three quarters have they started to decline?

[David Taber:]

We actually had - each of the quarters has actually increased. We had larger pay-offs in Q3 than we did in Q2, which was larger than Q2. So we're kind of above not by much but we're slightly above the pace that we had targeted for 2015. And as Mitch mentioned in his comments relative to a big prepayment fee that was almost $5 million loan, it was a long term loan that had a substantial prepayment penalty that sold. So that was unexpected, and that happened in Q3.

[Tim Coffey:]

Okay. Are you seeing - I get the feeling that more - long term relationship be there - sell the underlying collateral or sell the business, is there more talk going on in your market?

[David Taber:]

There is a lot of chatter in the real estate world in values, prices have gone up pretty good in the last few years. We've seen significant pay-offs portfolio of our size in the last few years and we’re continuing to hear talk about investors wanting to buy and investors also wanting to sell. So I’m not seeing that relative to businesses being sold that’s something we did not heard much. We had one or two clients that have brought a competitor but that’s the exception of the rule.

[Tim Coffey:]

Okay. And then just the overall increase origination activity. Is that a function of more outbound calls or is it more risk taking more of your client base?

[David Taber:]

No, is really as we got an active commercial banking team, that’s really virtually different most people - not everyone but just probably two people they are new from just three years ago. So, it's a newer team that is very active in the marketplace.

[Tim Coffey:]

Thank you. Those were my questions.

[Operator:]

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

[Tim O'Brien:]

Okay. Just one follow-up. Mitch, did you gave an interest amount - dollar interest amount on that prepayment that hit NII?

[Mitchell Derenzo:]

Yes, the total was about $100,000.

[Tim O'Brien:]

And was there any other one-time benefit to NII this quarter besides that 100 grand?

[Mitchell Derenzo:]

No, last quarter you known, the second quarter we had that big FHLB dividend but they didn’t make that payment again this time around so just normal interest income.

[Tim O'Brien:]

Okay. Thanks a lot.

[Operator:]

We have no further questions at this time. I will now turn the call back over for final comments.

[David Taber:]

Adrienne, thank you so much and thank you for all your interest in American River Bankshares and the results and the progress of our Company. Look forward to speaking with all of you soon. Have a great afternoon.

[Operator:]

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