American River Bankshares (NASDAQ:AMRB)
Q2 2016 Earnings Conference Call
July 21, 2016 4:30 pm ET
David Taber - President and CEO
Mitch Derenzo - EVP and CFO
Don Worthington - Raymond James
Tim O'Brien - Sandler O'Neill
Welcome to the Second Quarter 2016 Earnings Conference Call. My name is Eric 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. I will now turn the call over to David Taber. Please go ahead, sir.
Eric, thank you very much, and good afternoon everyone. I am David Taber, the CEO of American River Bankshares, which is 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 counties as well as the South and the East Bay.
We are pleased to share Company results for the second quarter and on a year-to-date basis through June 30, 2016. We continue executing our strategy of profitable growth, focusing on increasing our net interest income while being careful with our overhead. We had modest growth in our core and total deposits in the second quarter, although still down slightly on a year-to-date basis. We did report solid loan growth in the second quarter and year-to-date through June 30.
While earnings per share is the same on a linked quarter basis, it is up compared to the same quarter last year, and on a year-to-date basis, earnings per share was up 30%. This increase was a direct result of an increase in net interest income while holding our overhead steady and executing a successful 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. Mitch?
Thank you, David, and of course thanks to all for those of you listening in 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.
The factors that might cause such a difference are discussed in the Company's annual report on Form 10-K for the year ended December 31, 2015, and in our 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 is required by law. Links to our Annual Report and our Form 10-K are located on our Web-site, americanriverbank.com.
As with past conferences, I'm going to try to highlight some of the key areas from the press release that we disseminated this morning, and then I'm going to provide some – I'm going to turn it back over to David, he'll provide some additional comments, and then we'll open up the lines for some questions.
This morning, American River Bankshares reported net income for the second quarter of 2016 of $1.3 million, compared to $1.4 million for the first quarter of this year and also the same amount for the second quarter of last year. Earnings per share were $0.19 per share in the second quarter of this year, the same amount as the first quarter of this year but up from the $0.18 recorded in the second quarter of last year.
As David mentioned, on a year-to-date basis, earnings per share was up 30%, increased from $0.30 a share in the first six months of last year to $0.39 a share in the first six months of this year. Income-wise, net income was $2.7 million in the first six months of this year compared to $2.4 million in 2015.
Our net interest income as a percentage for the second quarter of this year was 3.64%. That compares to 3.63% in the first quarter of this year and 3.69% in the second quarter of last year, I'd like to point out though that the second quarter of 2015 had the one-time special FHLB dividend of $136,000. That's the amount that's in addition to the regular quarterly cash dividend. If you were to adjust the 2015 net interest margin for that one-time benefit, the margin would be 3.59% or 10 basis points lower.
On a year-to-date basis, the interest margin increased from 3.58% in the first six months of 2015 to 3.64% in the first six months of this year. For those who are calculating that one-time FHLB dividend, it had about 5% impact on the first six months of 2015's margin.
On a taxable equivalent basis, the net interest income was $5.1 million in both the second quarter of 2015 and the second quarter of 2016. On a year-to-date basis, the taxable equivalent net interest income is up from $9.9 million last year to $10.3 million in 2016. The taxable equivalent interest income was $5.4 million in the second quarter of last year compared to $5.3 million in the second quarter of 2016. That's a $44,000 difference, a tad lower but again it's related to that $136,000 one-time FHLB cash dividend we received last year.
On a year-to-date basis, the taxable equivalent interest income increased from $10.4 million in 2015 to $10.7 million in 2016. The interest income increase for the six-month period was related to an increase in average loans, which increased from $270 million in 2015 to $298 million this year. That's a $28 million increase or almost 10.5%. This increase was partially offset by a decrease in average securities. Those decreased from $286 million to $270 million. That's about a $16 million decrease or about 5.5%.
For the three-month periods, the average loans increased from $277 million last year to just over $300 million in the second quarter of this year. That's a $23.4 million increase, that's about 8.5% increase. Average securities during that same time decreased from $281 million last year to $264 million in 2016. That's a $16.6 million decrease or just under 6%.
The new loans put on current market rates tend to be slightly lower than the weighted average of the existing portfolio, and that's going to cause [indiscernible] decrease. So we went from 5.05% in the first six months of last year to 4.91% in the first six months of this year. And for the three-month periods, the average loan rates decreased from 5.01% last year to 4.92% in 2016.
The weighted average loan rate on the new loans in the second quarter of 2016 was 3.83%, while the renewed loans during that same time period were 5.27%. That compares to our first-quarter new loan rates of 4.42% and first quarter renewed at 5.12%. Looking back one year, the average loan rate for the second quarter of last year was 4.63%m, that's for the new, and then the renewed is 4.72%.
Interest expense for the second quarter of 2016 was $221,000. That's down from the first quarter, which was $234,000, and then from the second quarter last year which was $244,000. Average cost of funds, now that decreased slightly as well, 28 basis points in the second quarter of last year down to 26 basis points in the second quarter of this year. Our overall cost of deposits, that dropped from 16 basis points in the second quarter of last year, down to 14 basis points in 2016. And our year-to-date cost of funds, 28 basis points in 2015, 26 basis points in 2016.
As David mentioned, we did see a nice increase in the loans during the quarter. Outstanding net loan balances increased $12.9 million or 4.4% during the second quarter. That's an annualized rate of 18%. And during the first six months of the year, they increased $10 million or 5.5%. Compared to one year ago, we were up just under $30 million, at $29.7 million, or 10.8%.
The new loan production during the quarter was comprised mostly of – the total was $24.3 million, most of that was – I'm sorry, the new loan production was $24.3 million. I just mentioned that the net loans increased $12.9 million. Of that, we had about $15 million of that – I'm sorry, rephrase that. The $15 million is the production in the second quarter. So it went from $15 million in the first quarter of this year up to $24.3 million. Loan paydowns continue to be manageable. Of the increase in the second quarter, most of that increase was in commercial real estate with a slight increase in C&I of about $0.5 million.
Current loan production or current loan portfolio is, $36.2 million is C&I, that's about 12% of the portfolio; business property loans at $78.8 million or 26% of the portfolio; construction and land development, $13.8 million, that's 4% of the portfolio; our investor CRE at $124.6 million, that's 40%; residential 1-4 at $16.4 million or 5%; and the multi-family, that's $35.5 million or 11%; and then that remaining group which we call 'other' which is primarily the consumer and ag, at $5.2 million or 2% of the portfolio. The $13.8 million in the construction that I mentioned, 63% of that is commercial.
The allowance for loan and lease losses is about the same as it was at the end of the year. We were at $5.1 million at the end of June, compared to $5.0 million at the end of December 2015. One year ago, it was $5.4 million. As a percentage of loans outstanding, we're at 1.65% at the end of June 2016 and 1.69% at the end of December 2015 and 1.91% one year ago.
We continue to experience net recoveries. We had 50,000 even in the second quarter of this year. Year-to-date, we had $157,000 in net recoveries. The non-performing loans at the end of the quarter were $1.1 million compared to $1.6 million at the end of December and $2.5 million one year ago. As a percentage of loans and leases, the non-performing loans represents 34 basis points of loans at the end of June compared to 56 basis points at the end of December and then 87 basis points one year ago.
Classified assets continued to drop. They were just about 9% of equity at the end of June compared to 13% at the end of December 2015 and about 15% one year ago. And in dollars, classified loans totalled $4.4 million at the end of June 2016 compared to about $6.4 million one year ago. And when you throw in the non-performing assets, that's going to include the non-performing loans and assets and the OREO. Those totalled $2.8 million at the end of June, compared to $6.1 million at the end of December and $7.1 million one year ago.
Loans past due 30 to 90 days still relatively manageable, $1.3 million at the end of June, compared to about $367,000 one year ago. On the OREO, we continue to have the two remaining properties, total is $896,000. We had three properties at the end of December and four properties totalling $3.8 million one year ago.
If you recall, last call I mentioned that we sold our one remaining income producing office building. It was right at the end of the first quarter. Therefore, we don't have any rental income anymore. We continue to have the two remaining properties. One is commercial land, if you recall, also at the end of last quarter I mentioned that we did a fair value adjustment on that, and the other one is – the other property is in Amador County, it's in escrow and we are hoping to have that closed within 30 days.
On the investments, again, really no change there, still well-structured cash flowing mortgage products, some high credit quality municipal bonds. At the end of June, the securities portfolio totalled $258.8 million, that's 41% of our assets, compared to $278.2 million or 44% of our assets at the end of December. Just under 90% of the portfolio is U.S. Government agencies or U.S. Government-sponsored agencies, primarily mortgage related.
That portfolio continues to be short. Average lives of those mortgage products are about 3.5 years and the average life of the muni portfolio is about 4.5 years. The duration of the entire portfolio remains just a tad under 2.5 years, and our [price depreciation in up 300] [ph] is just 9%.
On the deposits, David mentioned we had a slight increase in the quarter. Again after the decrease we had in the first quarter, we turned it around a little bit there. If you recall, the first quarter was related to running off some high-cost money market accounts. We totalled $525.9 million in deposits at June 30 compared to $523.8 million at the end of March.
We continue to see an increase in non-interest balances. The non-interest balances were up $22.6 million or 13% over the last year. And at June 30, 2016, the non-interest balances were 37% of our total deposits and CD balances were just about 16% of the total.
On the income side, the noninterest income was $363,000. That's down from $507,000 in the second quarter of last year. And for the first six months, we were about $1.1 million, just above $1.1 million, compared to just below $1.1 million the year ago.
On a year-over-year basis, the primary change was a gain on sale of securities offset by a decrease in rental income from the OREO properties. Gain on sales, they were $218,000 last year compared to $281,000 this year and the rental income was $161,000 last year and just $106,000 this year.
On the quarter – I mentioned that the gains on sale for the quarter were negative $1,000. Really that was the impairment we had on a small CRE related loan, our share investment we've had for a while and we deemed it uncollectible. We also had $90,000 of OREO income in the second quarter of last year and zero in the second quarter of this year as we sold the property.
On the expense side, pretty consistent with $3.4 million in the second quarters of both 2015 and 2016, and on the year-to-date basis were $7.2 million in the first six months of last year and the first six months of this year. Significant changes on a quarterly basis, decrease in OREO of $35,000, it went from $55,000 last year to $20,000 this year, and a slight increase in salaries and benefits of $56,000, that went from $2.05 million last year to $2.10 in 2016.
The decrease in the OREO expense obviously related to the lower number of properties and particularly the office building. The salary and benefits increased at 3.1%. That's normal salary adjustments and higher benefit costs.
For the six-month period, the significant changes, really that's just the opposite. OREO expense was up $158,000 from $202,000 to $360,000 and we had a slight decrease in salaries and benefits of $54,000 from $4.32 million last year to $4.26 million in 2016. The OREO difference is, last year – I'm sorry, in the first quarter this year, we had a $376,000 write-down on one of our properties and we did have a gain on sale of $117,000 which offset that. Both of those happened in the first quarter of this year.
And then the salary and benefit, that's really related to lower incentive accruals as not all the targets are being reached and that accounted for about $34,000 of the decrease, and then the difference is the lower benefit cost primarily related to lower employment placement fees, so lower employment placement fees this year. Also last year we had higher operating losses. Those were about $48,000 higher in 2015 than they were in 2016.
The efficiency ratio of second quarter of this year, 62.3%, compared to 60.5% in the second quarter of last year. That's really related to the write-down of the OREO. And then on the second quarter – that's for the quarterly – on the six-month basis, we're at 63.2% compared to 66% for the first six months of last year.
On the taxes, those decreased by $93,000 for the second quarter of this year from $745,000 compared to $652,000 in the second quarter. I'm sorry, they went from $745,000 second quarter last year to $652,000 in the second quarter of this year. On the year-to-date basis though, they increased from $1.2 million last year to $1.3 million this year.
The effective tax rate, we continue to drive that down. It was 33.3% in the second quarter of this year compared to 35.0% in the second quarter of last year. And then on a full year to date basis, we're at 32.4% this year versus 34.2% in the first six months of last year.
The higher provision for taxes in the first six months of this year compared to the first six months of last year is because of the higher taxable income. Taxable income was $3.6 million last year, $4 million this year. And then of course on the three-month basis, the provision is lower because of a decrease in taxable income that decreased from $2.1 million down to $2.0 million.
The lower effective tax rate in both periods, really that's related to we have an increase in tax-exempt loans, so we're getting a higher benefit from those. The tax exempt loan interest was $171,000 in the second quarter of this year compared to $85,000 in the second quarter of 2015. And then for the first six months it was $345,000 in 2016, up from $123,000 last year.
On the equity side, we decreased [indiscernible] an increase of $2.1 million in the accumulated other comprehensive income related to an increase in the unrealized gain on securities, and that's a benefit of the lower rate environment that we are in.
If you recall, we announced – our earnings last quarter, we also announced the second 2016 stock repurchase program, also a 5% one. During the second quarter, we successfully acquired the 5% called for in the plan or 349,715 shares. Average price we paid for those shares was $10.29. And for the year with the two repurchase programs combined, we acquired 716,897 shares, also at an average price of $10.29 per share. Despite these repurchases, the Company and American River Bank remain well above the regulatory capital guidelines.
Thank you much. I'm going to turn it back over to David for some additional comments.
Mitch, thanks so much for that comprehensive report. American River Bank, as a reminder, is a focused business bank serving Northern California. We have included in our press release a sampling and economic data for some of the markets that we serve. This data in general shows positive trends in commercial real estate and continued positive loan growth.
This morning, on a Company-wide employee only call, we discussed our balanced approach to the banking business, reiterating that our focus must be on profits, growth and quality and that we make sure that we stay balanced in these areas.
Many of you on this call have heard from national and regional banks that this period of prolonged low interest rates, excess liquidity and rising regulatory burden make the operating environment difficult. These facts highlight our focused approach as being even more important. American River Bank is determined to increase our net interest income while controlling our overhead. Mitch also mentioned how we have augmented this with a successful repurchase plan completed in the second quarter.
Growing our loan portfolio while maintaining discipline in pricing and quality is still a priority for our Company. Loan production was strong at almost $25 million in the second quarter, with the largest categories in production being investor CRE and multi-family. Paydowns and payoffs continue, and in the second quarter, was higher than the first with the majority coming from property sales and cash payoffs.
I did mention back in April on our conference call that the pipeline fallout was lower in Q1 than Q4 of 2015, and fallout for Q2 was slightly less than Q1. The largest category, and actually almost half, was loans that we declined. Another 20% was lost to the competition due to price.
Core and total deposits increased modestly in Q2 and we still maintain a strong majority of business deposits, most of which are held in core checking accounts at over 48% of total deposits. While new and expanding relationships on the deposit service side continue, another trend also has continued with some clients using excess cash to either purchase real estate, equipment or to retire debt.
The team continues to be active in the market, prospecting for additional profitable business in deposit services and lending and our Company will continue to strive to increase our net interest income while managing our overhead. These activities are designed to increase our earnings per share for the benefit of our owners.
Now, Eric, if you'd please open the line for questions, and as a reminder, please refer, as Mr. Derenzo did, to our disclosure on forward-looking statements. As an additional reminder, our Company does not provide guidance and we do not plan to change that practice anytime soon. Please contact one of the analysts that currently cover our Company for additional information. Eric?
[Operator Instructions] Our first question comes from Don Worthington. Don, your line is now open.
In terms of the lending offices in the Bay Area, how is the production there? Not necessarily looking for specifics but just proportionally relative to the total loan originations, are those offices kind of holding their own?
I don't have the precise numbers in front of me, Don, but as far as the 25 million production, I would say it's balanced to Greater Sacramento Area, North Bay and South Bay as far as the activity of those individual relationship managers.
Okay, all right. And then would you expect that there's an opportunity for more recoveries?
I don't think we've ever commented prospectively on potential recoveries, so I wouldn't comment on it at this point.
[Indiscernible], you can't determine when someone is going to write the [check] [ph].
Yes, okay. And then with the repurchase program completed, would you be looking to do another one or maybe just looking for general comments on capital management beyond the first priority, which is loan growth?
First priority is net interest income growth. Certainly loan growth helps that. As far as our capital management plan, I think since 2012, we've been fairly active in our repurchase, we announced two this year, completed two this year. We don't have any comments on a go forward basis on what our plans are.
Okay. All right. Thank you.
Our next question comes from Tim O'Brien. Tim, your line is now open.
Was there any interest recovery or anything one time in nature that benefited the margin this quarter?
No, actually going back and taking a look at this year versus last year, this was pretty much a straight core quarter.
So, clean quarter on that front?
Okay, great. And then did you guys purchase any residential loans this quarter, and I saw that residential balances were higher, those were single-family residential mortgage loans in the segment piece of your financials?
Yes, we have not purchased any residential pools, as some of our competitors have done. The increase that you see in 1-4, we've done a little student housing that is classified as single-family 1-4.
And that was in-house and under-written?
Right, those are under-written directly by us, our clients [indiscernible].
And then no other loans were purchased in the quarter, right, of any other types?
It's all in-house?
Yes, all organic.
Great. And then on the credit front, Mitch, you said that the Amador OREO property is in escrow, pending potential closure targeted for the next 30 days if things go contractually?
And then what did you say about the other OREO property because you said something right before that?
That was, I was trying to correlate that to the $376,000 write-down that we took right at the end of the first quarter. So in essence, it's been marked down to fair value.
Okay. And that was the color you gave as far as NPA disposition potential here heading into the second half of the year?
All right. And then last question, start of quarter, end of quarter FTE numbers, do you have those?
No significant change. I don't have it here on me but it was one plus one, or plus minus, it was pretty close.
And we're roughly around 100 I think.
And then you guys announced or filed those 8-K filings with – I'm going to ask another question – you have those 8-K filings with renewed leases and such, and based on kind of the macro data that you gave about commercial real estate in the note that you've been giving in the notes, did you guys get any benefit out of that, are you able to lower lease costs or are you guys at market as far as rent payments on your leased space?
One of the building [indiscernible] our headquarters, it's pretty much a breakeven, which we did an extension, up in Roseville, we are looking to move to a smaller site. So there should be some reduction there. And the third one was an extension. Plus or minus, no significant change there in the rental rate.
All right, thanks for answering my questions.
We have no additional questions at this time.
Okay. As Mitch said earlier, thank you so much for your interest in our Company and the successful results that we showed here in Q2 and we'll continue to work hard on behalf of our owners. Thank you very much.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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