American River Bankshares (NASDAQ:AMRB)
Q4 2015 Results Earnings Conference Call
January 28, 2015, 04:30 PM ET
David Taber - President and CEO
Mitchell Derenzo - EVP and CFO
Tim Coffey - FIG Partners
Tim O'Brien - Sandler O'Neill
Welcome to the Fourth Quarter 2015 Earnings Conference Call. My name is Adrienne and I'll 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. David Taber, you may begin.
Adrienne, thank you very much and good afternoon, everyone. Yes, I am David Taber, and I am the CEO of American River Bankshares. We're the parent company of American River Bank, which is headquartered in the Greater Sacramento Area. In addition to Sacramento, we serve Placer, Amador and Sonoma County, as well as the South Bay and East Bay areas.
We're pleased to share company results for both the fourth quarter and the full year of 2015. In reviewing the results for the past year, we're pleased with solid balance sheet growth including a 12% increase in loans and a 5% increase in core deposits.
We're also pleased with the profit picture, which includes a 6% increase in our net interest income, a decrease in our overhead, which coupled with our successful buyback produced a 30% increase in our earnings per share for the year.
Now Mitchell Derenzo, Executive Vice President and Chief Financial Officer will provide an in-depth discussion of our quarterly and annual financial results. Mitch?
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 differ materially from the results in these forward-looking statements. Factors that might cause such a difference are discussed in the Company’s annual report on Form 10-K for year ended December 31, 2014, and in subsequent reports filed on Form 10-Q and Form 8-K.
The Company does not undertake any obligation to publicly update or revise any of these forward-looking statements, which would include information or future events, except as required by law. Links to this annual report can be found on our website americanriverbank.com.
As with past conference calls, I am going to highlight some of the areas that were included in the press release this morning. I am also going to provide by some additional highlights, some analysis and will turn it back over to David for some additional comments and then we'll open up the lines for questions.
Today American River Bankshares reported net income for the fourth quarter of $1.5 million compared to $1.2 million for the fourth quarter of 2014. Earnings per share were $0.20 per share for the fourth quarter of 2015 compared to $0.15 in the fourth quarter of 2014.
On a year-to-date basis, net income was $5.3 million or $0.70 per share compared to $4.4 million or $0.54 per share in 2014. Our plan for 2015 was to increase net interest income and to keep our non-interest expense in check. I believe we have success on both fronts.
On the interest income, the taxable equivalent basis, net interest income is up from $5 million in the fourth quarter of 2014 to $5.4 million in the fourth quarter of 2015. On a year-to-date basis this number was $1.3 million higher in 2015 coming in at $20.4 million compared to $19.1 million in 2014.
The net interest margin as a percentage fourth quarter 2015 was 3.63% compared to 3.41% in the fourth quarter of 2014. And then for the full year we were at 3.63% for 2015 compared to 3.54% in 2014.
The taxable equivalent interest income increased from let's see -- we continue to see an increase in income from the loan portfolio whereas in the past couple of years we were just seeing increases from the investment portfolio. This is of course is related to the increase in loans outstanding. Average loans outstanding increased every quarter in 2015.
When comparing the fourth quarter 2014 to the fourth quarter 2015 we saw an increase in average loans from $252.9 million to $292.1 million, that's a 15.5% increase and during that same timeframe average securities decreased from $295.3 million to $275.3 million.
Of course despite that decrease in average securities balances, we didn’t see an increase in our interest income from the bond portfolio and I've mentioned this previous quarters, but that increase continues to come from the slowdown of the mortgage refinance market.
We have the premiums on these bonds as those refinance markets slows, we slow down the amortization and that increases the interest income.
On a year-to-date basis, the taxable equivalent interest income increased from $20.2 million in 2014 to $21.3 million in 2015. On a year-to-date basis, the primary driver for this increase in interest income still comes from the investment portfolio, but we did see loan interest income increase by nearly $400,000 in 2015. This is the first year-over-year increase in interest on loans since 2007.
2015 was another good year for deposits. Those balances were being put to work primarily by funding the growth and loan portfolio. The growth in the deposit portfolio continues to be in the non-interest and low cost deposit types.
Average non-interest balances increased 11.3% from $155.5 million in 2014 to a $173.1 million in 2015. We also saw sequential growth in non-interest deposits in all four quarters of 2015. The interest expense for the fourth quarter 2015 was down from the third quarter of this year as well as the fourth quarter of 2014.
The average cost of funds decreased from 31 basis points in the fourth quarter 2014 down to 26 basis points for the fourth quarter of 2015 and decreased from 33 basis points in 2014, this is for the year 2014 the average cost was 33 basis points compared to 27 basis points in 2015.
And then if we just pull out the cost of our deposits, the fourth quarter of 2015 that was 14 basis points, that’s down 5 basis points from the fourth quarter of 2014 which registered…
[Operator Instructions] in net loans increasing from $263.6 million at the end of 2014 to $294.3 million at December 31, 2015.
New loan production for the fourth quarter was $12.3 million compared to $26.8 million in the third quarter of this year and then we had $31.3 million in the second quarter of 2015. That compares to $23.7 million in the fourth quarter of 2014. For the full year 2014, loan production was $68.9 million. We increased that to $79.6 million in 2015.
The weighted average loan rate on the new loans in the fourth quarter 2015 was 4.35%, while the average rate on renewed loans during that same quarter was 4.6%. For comparison purposes in the third quarter of 2015, the new loans were at 3.77% and the renewed loans were at 4.63%.
And then in the fourth quarter of last year 2014, the new loans, that rate was 4.11% and the renewed was 4.85%.
The current loan portfolio, not a lot of change, commercial loans $36.2 million. That's about 12% of the portfolio. The business property loans at $77.3 million or 26% of the portfolio, construction land development $14.5 million or 5% of the portfolio. The investor CRE is $122.3 million, that's 42%.
The residential $14.2 million, that's 5% and the multi-family $23.5 million or 8% and then the other, which is primarily the consumer and Ag, that's a $6.3 million or 2%.
The allowance for loan lease losses was $5.0 million at the end of December 2015 that compares to $5.3 million at the end of December 2014. As a percentage of loans outstanding, that's 1.69% at the end of 2015, compared to 2.01% at the end of 2014.
If you recall, we had a charge-off in the third quarter. We're back to net recoveries, some of which was the actual charge-off that we did in the fourth quarter -- third quarter, I am sorry.
Net loan recoveries were $46,000 for the fourth quarter of 2015, compared to $182,000 in the fourth quarter of 2014.
For the full year 2015, net charge-offs were $327,000, that's 12 basis points compared to net recoveries of $496.000 or 20 basis points of average loans in 2014.
Nonperforming loans continue to be minimal, just 56 basis points of loans at December 31, 2015, compared to 63 basis points one year ago.
Classified assets continue to increase as well. As a percentage of equity, they were just under 13%, compared to 18% one year ago. In dollars, classified assets were $9.5 million down from $13.6 million one year ago.
We continue to have a pretty good handle on the loans past due as well, 30 to 89 days or $329,000 at the end of December 2015, compared to $519,000 one year ago.
OREO, we have three properties at the end of the year totaling $3.6 million. That compares to seven properties totaling $4.6 million at the end of 2014. Activity during the fourth quarter 2015, we sold one property that had a book balance of $230,000, had a slight loss of just under $1,000. We didn't add any properties in the fourth quarter as well.
On the investment portfolio, really no significant changes there. It continues to be primarily made up of well structured, cash flowing mortgage products and some high credit quality municipal bonds.
At the end of 2015, the bond portfolio was $278.1 million, that's 44% of our total assets, that compares to $293.6 million or 48% of our assets at December 31, 2014. Of course that decrease in the bond portfolio has been used to fund the new loan growth.
Portfolio is still short. Average lives of the mortgage products are 3.7 years and the average life of the Muni portfolio is the same. It's also 3.7 years and effective duration of the entire portfolio is about 2.5 years and then our price change in rates up 300 is about 10.4%.
I mentioned earlier that 2015 was a good year for deposits and that’s also true for the fourth quarter, particularly in the non-interest bearing deposits. Noninterest bearing deposits grew $12.5 million or 7% during the fourth quarter of 2015 that now represent 36% of all our deposits.
Non-interest is balance -- non-interest balance increased $34.9 million or 22.4% during 2015 and if you recall during the first quarter of 2015, I reported that we had a slight decrease primarily because we led some high cost money markets exit, but we've seen nice increases since then.
Total deposits were up $20 million for the year increasing from $510 million at the end of 2014 to $530 million at the end of 2015. Core deposit that’s all what we considered all non-CD balances those were up $23.1 million or 5.5% from one year ago.
The non-interest income side, we did see a slight drop there and we had $647,000 in the fourth quarter of 2014. We dropped down to $433,000 in the fourth quarter of 2015 and then for the full year 2015 we came in at $2.0 million, that’s down from $2.2 million in 2014.
Again the primary causes for that gains on investment sales that would be the fourth quarter, we had $108,000 in the fourth quarter of 2014. We didn’t have any sales in the fourth quarter of 2015.
In addition in 2014 we recognized proceeds from a life insurance policy on a former employee that took in $99,000 on a tax free basis and again that was in the fourth quarter of last year that explains the drop in 2015.
In addition on a year-over-year basis, again primarily the drop in the debt benefits and then a decrease in service charges.
I mentioned we try to do focus on decreasing our non-interest expense, we did that. For the fourth quarter 2014 it was $3.8 million that dropped to $3.4 million in the fourth quarter of 2015. And for the full 12 months, 2014 that was $14.9 million, we dropped that to $14.1 million in 2015.
For the quarter to quarter change, that’s really a decrease in salary and employee benefits was dropped from $2.3 million in the fourth quarter of last year down the $2.0 million in the fourth quarter of 2015.
We also had a decrease in OREO related expenses during that same timeframe, $208,000 in 2014 down to $62,000 in 2015. On a year-over-year those numbers were the employee benefits dropped from $8.8 million in '14 down to $8.5 million in 2015.
In addition during that same timeframe we had a nice decrease in legal fees and those were $414,000 in 2014. We dropped those down to $159,000 in 2015 so $414,000 last year, $159,000 this year. The decrease in salaries and benefits primarily was due to lower incentive accruals and other benefits.
The primary reason for the drop in the OREO I talked earlier we have less properties that explains that. We also had less write downs in 2015. Legal fees, those dropped as we have problem assets to manage.
Some pretty nice taxable efficiency ratios for the fourth quarter it was $60.7 million that’s down to $71.8 million in the fourth quarter of 2014 and then for the full year the efficiency ratio was $62.9 in 2015, that’s down from 70% in 2014.
Under the taxes, taxes increased from $594,000 in the fourth quarter of 2014, the increase from $594,000 to $652,000 in the fourth quarter of 2014. The provision for the full year $2.3 million in 2014 increased to $2.7 million in 2015.
Really the higher provision year-over-year was from a higher level of pretax income. Pretax income was $6.7 million in 2014 that increased to up to $7.9 million in 2015.
The effective tax rates for these periods, the fourth quarter of this year was 30.9% compared to 33.2% in the fourth quarter of 2014 and then for the full year 2015 that came in at 33.7%, that’s down from 34.5% in 2014.
That lower effective tax rate in 2015 was a result of higher benefits from an increase in tax exempt loans and then we do some yearend true ups. I believe those yearend true ups without those we were probably have been somewhere between 34.5% and 35% as compared to actual 33.7%.
Shareholder's equity decreased from $89.6 million at the end of 2014 down to $86.1 million. That decrease was primarily -- we decreased common stock by $7.5 million and that’s related to the repurchases from the 2015 stock repurchase program.
We also saw a decrease of a $1.3 million in the cumulative to other comprehensive income and that’s really the unrealized -- decrease in the unrealized gain on securities. These items were partially offset by an increase in retain earnings of $5.3 million and that’s due to the income earned in 2015.
We believe the benefit of the repurchase program can be seen in the increase in the EPS, which increased 30% in 2015. If you compare that to the net income, net income was up 21% during that same timeframe.
In 2015 we repurchased 790,989 shares at an average price of $9.92 and then just in case you missed it, last week we did sent out another press release announcing a 5% repurchase program for 2016.
We continue to maintain strong capital positions. The leverage ratio at the end of the year was 11.0% and the total risk base was 20.6%.
Thank you and I'll turn back over to Dave for some additional comments.
Mitch thanks so much for the comprehensive report.
American River Bank is a focused business bank serving Northern California. We have included in our press release a sampling of economic data for some of the markets that we serve.
This data in general shows positive trends in commercial and residential real estate and continued positive job growth with corresponding drop in unemployment levels.
Mitch did a great job explaining the key aspects of our results for the fourth quarter and for the full year. Our company continues to focus on profitable growth while maintaining quality that requires us to focus on increasing our net interest income while managing overhead we also believe the share buybacks continue to be a valuable tool to increasing shareholder value.
2015 was a strong growth year for loans at $31 million. This was driven by an increase in total production for the year. The majority of the production though came in the second and third quarter.
The fourth quarter of 2015 started with a large pipeline of potential loan opportunities yet the level of price competition intensified and we lost more due to what we consider below target yields in the fourth quarter and that was more than any other quarter for the year and this caused slight drop in loans outstanding in the fourth quarter.
We were -- continuing to work diligently on maintaining both our underwriting and our pricing discipline. Core deposits, which Mitch mentioned exclude all CDs increased by $23 million in the year. More importantly because of our high business concentration, 36% were non-interest bearing and a full 47% were demand deposit.
The team continues to focus its efforts on expanding relationships in earning new high value to clients. 2015 was a successful year for our company and we’re proud of our 30% increase in EPS our 12% growth in loans outstanding and our continued growth in lower cost core deposits.
Mitch mentioned and I will again that we did announce last week a 2016 share repurchase plan, which anticipates repurchasing in the open market up to 5% of our shares outstanding.
The American River Bank and Bankshares’ team continues to focus its efforts on leveraging our people, our deposits and our capital.
Now Adrienne if you would please 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 anytime soon.
Please contact one of the analysts that currently cover our company for additional information. Adrianne?
Thank you. We'll now being the question-and-answer session. [Operator Instructions] And our first question comes from Timothy Coffey from FIG Partners. Please go ahead.
Thank you. Good afternoon, gentlemen.
Hi, David you the comments at the end of your call there talked about some of the pressure that you experienced on the pipeline during the 4Q. I was wondering if you could describe those pressures a little bit more. Was there a specific issue that happened? Was it hesitates by borrowers aggressiveness by competitors etcetera.
There was really aggressiveness by competitors. We saw throughout the year mainly in the second and third quarter that we were able to on a pricing basis win most of the deals that we wanted, not exclusively, but were in the game in the hunt.
And something changed in the fourth quarter where the pricing from our competitors dropped substantially and well below what we needed for our profitability targets on a go-forward basis. So, it was a distinct change for us in the fourth quarter Tim.
Okay. You’re -- the payoff level, does that accelerated in 4Q?
No, it didn’t at all. We had slightly less payoffs in 2015 than we did in 2014. So the difference in our outstanding are solid production with slightly less payoffs for net increase in loans.
Okay. How do you feel about your pipeline going in the first quarter?
We’ve got a decent pipeline but as we know from experience, we had to look at a very heavy large volume loan opportunities in 2015 just to book the $79 million roughly that Mitch talked about.
So I don’t see that changing. There is plenty of competition. Our competitors have plenty of liquidity. Certainly Northern California seems to be an area where there is interest. So I don’t see that that is going to change very much.
Okay. And then for the quarter, what were -- how much shares did you buyback and what was the average price?
We did not buyback any during the fourth quarter. We completed the roughly 10% buyback by the end of the third quarter.
Okay, thanks Mitch. Those are my questions.
[Operator Instructions] And the next question comes from Tim O'Brien from Sandler O'Neill. Please go ahead.
Hey, Dave can you give color on who is buying comp? Who caused the increased competition? Was it smaller local banks?
No, it was the majors, there was the regional, there was the small, that was really more than one particular competitor.
Yes, and there are working on yearend bonuses, but that's probably…
Everybody uniformly working on yearend bonuses.
This is cynical of me, but…
And for us it doesn’t take that many in loans that we move to change things quite a bit.
As far as kind of the missed deals that took place, was it throughout the -- was it Bay area based and when you entered the quarter, was the pipeline weighted towards kind of stuff you thought was going to hit in the Bay area or Sacramento proper.
Sacramento area, Bay area, North Bay and it was really in all of our markets and we're seeing decent activity just from what we call a look perspective in each of the markets that we serve.
Or about a third of the way through the first quarter, have you sensed any change? Was it yearend stuff or have you sensed the change in pricing tone of the marketplace that…
No, this is still very competitive for sure.
Okay. And then the other thing is and you might have mentioned this Mitch, but I didn't catch it. It looked like were comp cost down slightly on a linked quarter basis?
Did you talk about why that was?
I did, but I would be happy to talk to you again Tim. Primarily the biggest piece is center of accruals. We didn't hit all of our targets. So we reduced the incentive accruals where last year we probably increased and this year we had to drop them a little bit.
And obviously you're -- I am sure you're not going to take the eye off the ball as far as containing cost in this environment and given what you want to try to do in '16.
The focus Tim continues to be the same. We have to grow our net interest income. We have to control our expenses and supplement that with every purchasing share. Those are things we have control over.
What I wanted to ask is from a hiring standpoint, do you have the headcount, staff in place that you need right now or do you see some opportunities or plans to add folk in '16?
We think we're pretty well set. We have a pretty good infrastructure and it's just got to outwork the competition with the staff we do have. There are few open positions, but those are just replacement rather than new.
Great. Thanks a lot. Thanks a lot you guys. Sorry to see that on the loan growth side.
And we have no further questions at this time. I'll now turn the call back over to David Taber for final comments.
Adrienne, thank you very much and thank you for all of your interest in American River Bankshares and our results. Look forward to seeing and talking with each of you in the future. Have a great afternoon.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.
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