American River Bankshares (NASDAQ:AMRB)
Q3 2016 Results Earnings Conference Call
October 20, 2016, 04:30 PM ET
David Taber - President and CEO
Mitch Derenzo - EVP and CFO
Tim O'Brien - Sandler O'Neill
Don Worthington - Raymond James
Welcome to the Third Quarter 2016 Earnings Conference Call. My name is Adrian 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 will now turn the call over to David Taber. David Taber, you may begin.
Adrian, thank you very much, and good afternoon everyone. I am David Taber, the CEO of American River Bankshares, parent company of American River Bank, and we are headquartered in the Greater Sacramento Area.
We are pleased today to share Company results for the third quarter and year-to-date through September 30, 2016. We continue executing our strategy of profitable growth, focusing on increasing our net interest income while being diligent with our overhead. Good core deposit growth evident in both Q3 and on a year-to-date basis. Loan growth continued in Q3 adding to the positive trend on a year-to-date basis. Both deposits and loans compare favorably to the same time last year.
And on the earnings front, for the first nine months ended September 30, earnings per share are up 32%. This increase is a result of continued growth in our net interest income, a decrease in our overhead, and a negative provision. These three factors contributed to a solid net income on year-to-date and on a quarterly basis. This growth and net income coupled with fewer shares drove the higher earnings per share number.
Now Mitchell Derenzo, Executive Vice President and Chief Financial Officer will provide an in-depth discussion of our quarterly and year-to-date financial results. Mitch?
Great, thank you David, and of course thanks all of you for 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 our annual report on Form 10-K for the year ended 2015, and in subsequent reports filed on Form 10-Q and Form 8-K. We do 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 our Annual Report and our Form 10-K are located on our Web-site, americanriverbank.com.
As with past conferences calls, I'm going to highlight some of the key areas from our press release that we released this morning. I'm also going to try to provide some additional details and analysis, then we'll turn it back over to David for his final comments.
This morning, American River Bankshares reported net income for the third quarter of 2016 of $1.8 million that compares to $1.5 million during the third quarter of 2015. Earnings per share were $0.27 per share compared to $0.20 per share in the third quarter of 2015.
The ROA and ROE numbers for the third quarter of this year, ROA 113, ROE 8.62 that compares to 92 basis points for ROA and 6.71 for ROE in the third quarter of last year. On a year-to-date basis, net income is $4.5 million or $0.66 per share compared to $3.8 million or $0.50 per share in the full year of 2015 as David mentioned that's a 32% increase.
Little comment about the asset side of the balance sheet, obviously loans that we had a nice increase there $8.2 million from the June 30 balance that's at about 11% annualized growth rate for the third quarter. Loans were up $24.2 million that's also roughly an 11% growth rate for the first nine months of 2016.
We had $26.6 million in new loans during the third quarter that compares pretty closely to the $26.8 we added in the third quarter of 2015. Year-to-date we've added $66 million in new loans compared to $67.3 million in the first nine months of 2015.
The average rate on these new loans during the third quarter was 2.43 and the average rate on the renewed loans was 4.06. We did experience a higher level of unscheduled principal payouts in the third quarter of this year of roughly $11.2 million. Now that compares to about $6.8 million in the second quarter of 2016. We typically expect close to about $6 million a quarter in normal principal paydowns so that unscheduled payments are over and above that $6 million figure.
One of the benefits of these unscheduled paydowns is many times we receive prepayment penalties. For the third quarter of 2016, the prepayment penalties amounted to $101,000. That compares to $133,000 in the third quarter of last year. And on a year-to-date basis the prepayment penalties were $166,000 this year versus $198,000 last year.
You may have noticed an increase in multifamily loans this past quarter. They increased from 35.5 million at June 30 to $50.9 million at September 30. Typically it has been a buyer of purchase loans in the past but we recently have an opportunity to cars multifamily loans from a lender that we respect. The loans totaled $13.2 million consisted of nine loans primarily by multifamily loans in the San Francisco area with 2 in Sonoma County.
What I liked about these loans is that they are good current income today and have relatively short recess period. The weighted average reset on these nine loans is 19 months and then they become annual resets.
Some other highlights the loan area, David mentioned a reversal of the allowance reversed at $668,000 out of our allowance. That was possible because we had successful outcome of the former commercial relationship.
In the third quarter of last year, I noted that we charged at $610,000 commercial loan for one relationship - a couple of commercial loans for one relationship. During the nine months since that period ending June 30, 2016, we received about 26,000 the small little recovers from that relationship. In the third quarter of this year we collected the remaining $584,000 all of which we reported as loan recoveries.
In addition we also received $74,000 from this relationship that was over above the principles we were able apply that to interest income. So not only do we recover 100% of the principal but we also added some interest income. I'm going to the call that a pretty successful outcome from our special assets department working then pretty hard.
The payoff mentioned above was also one loan for 1.9 million, it was an impaired loans received a full payoff. We had impairment reserve on that loan for $174,000 so that amount was freed-up from the allowance when the loan paid off. Again I'll call it a positive result of the loan pay off.
This reduction of the incumbent reserve, as well as the loan recovery in the commercial amount allowed us to reduce the allowance by net $668,000. So the additional reserves required by the $24 million in new loans this year because of the positive result in loan collection department, we were able to do that reverse and provide enough allowance for those new loan growth. The allowance at the end of September was 1.57 compared to 1.67 one year ago.
For the third quarter of this year, charge-offs were $68,000 and net recoveries were $584,000. So the most of the recoveries were based on that one relationship. Net recoveries for the quarter $519,000. On a year-to-date basis charge off were $68,000, same loan which I thought this quarter and then recoveries were $744,000 so our net recoveries $668,000 for the first nine months of this year.
Couple of comments on the asset quality area. Nonaccruals they were just $778,000 at the end of September down from 837,000 at the end of June. And finally we did close on the sale of commercial OREO building in Amador County that had been invested for some time.
[Indiscernible] wasn't a big one, it was $243,000 but yet we were able to record a $43,000 gain. That gain was recorded as a reduction of OREO expense. Again that's going to looking down the income statement that explains why we had a negative or credit balance in our OREO expense for the quarter, the gain was larger than the operating expenses.
That leaves one remaining OREO property, balance is $653,000 and if you recall in the first quarter of this year, we had a pretty big charge-off on that, write-down on that the one property so we believe the book value is the fair value.
Classified equity at 930 was 7.9% and then the classified assets which of the nonaccrual loans classified other assets an OREO the combined total there is 2 million - just over $2 million. There was one loan past due 3089 days and a balance of $36,000, that compares to one loan one year ago with the balance of $360,000.
No real changes in the investment portfolio continue to be primarily well structured in cash flow and mortgage products with some high credit quality needy bonds mixed in there. The securities portfolio at the end of September was about $258 million down from about $271 million a year ago. Of course that decrease in balances that we're using to fund the increase in the loan portfolio.
The proposition say about 90% of that is U.S. government so U.S. government sponsored agencies primarily mortgage related. Investment portfolio remains short, average life of the mortgage products are about 3.2 years, and the average life of the Muni portfolio about 4.9 years and the duration on - the effect of duration on the entire portfolio is still right about 2.75 years. And the price volatility changes up 300 just about 9% depreciation.
On the liability side, David mentioned deposits, we had real strong quarter and deposit growth increase from 526 million at the end of June of this year to about 546 million at the end of September. That's a $20.3million increase roughly about 15% annualized growth rate for the quarter.
Largest increase occurred in non-interest-bearing deposits which increased from 196 million at June 30 to about 210 million at September 30. Our non-interest-bearing balances now represent 38% of total deposits.
The growth - really was widespread meaning we had growth in all three of our primary regions and 90% of our branches actually showed increases during the quarter and it came primarily from the expansion of existing relationships. Cost of funds remains low, it's about 26 basis points, really no change from the prior quarter.
The overall cost deposits when you factor in the non-interest-bearing that dropped to 13 basis points compared to 15 basis points one year ago in the third quarter of last year. The capital side, capital levels remain strong and actually increased during the quarter due to the addition of the net income and the large increase in the multi-family there was 50% risk-weighted so that helps those capital ratios.
At the end of the quarter, leverage ratio was 10:6, total capital - total risk-based capital ratio was 19:7. Those are up from 10:4 and 19:2 respectively at June 30, 2006. Couple of highlights on the income statement on the net interest income side. Actually have a slight decrease. We reported 90,000 in the third quarter of last year to 391,000 in the third quarter of this year, the biggest drop coming in at OREO income area which decreased from 87,000 in the third quarter of last year to zero in the quarter this year and really as I mentioned that last quarter the result of the sale of the income producing office building that we sold in the first quarter of this year.
Our gain on sale investments was the same in both quarters - both third quarter roughly $33,000. On the expense side we had a little bit of a decrease there, $86,000 from - during the third quarter of - comparing the third quarter of 2015 to the third quarter of 2016, largest item there being salaries and benefit expense and OREO expense.
The salary and benefits decreased 112,000 and that’s really related to a lower number of full-time equivalent employees and the associated taxes and benefits that go along with these number of employees. The average FTE dropped from the 100 in the third quarter last year to 98 in the third quarter of this year.
And as I mentioned the gain on sale of OREO that $43,000 accounted for the credit balance in the OREO line item. These decreases were partially offset by $125,000 increase in other expenses from the third quarter last year's to third quarter this year. Part of that is related to higher legal fees and network administration. Legal fees relate those $26,000 increase and that relates to the resolution of that loan recovery. So that’s money well spent.
In the network administration fees those increased 45,000 and that's related to the additional work by our network vendor which now includes for hosting of the company's computing network. Also contributing to the increase was a nonrecurring rebate we received in the third quarter of last year if you call that related to our decision to switch our debit card processors. We received $47,000 in the third quarter of last year based on a decision we made in 2014 to change the processing. That rebate was accounted for as a reduction of processing expense in the third quarter of last year.
Now that’s all I have. Thank you and I'll turn it back over to David for some additional comments.
Mitch, thank you very much for that comprehensive report. Most of you know that American River Bank is a focused business bank that serves Northern California. We do strive to stay balanced in our approach focusing on keeping a balance between profit growth and quality. I’m sure many of you are the bankers in their discussions of excess liquidity, prolonged low interest rates, and increased regulatory burden that make the operating environment difficult.
Our belief is that our focus inbound approach is more important than ever. In our press release we did include a sampling of economic data for some of the markets that we serve. This data in general shows positive trends in commercial real estate, as well as continued positive job growth.
Growing our loan portfolio while maintaining a discipline in pricing and quality certainly is a priority for our company. As Mitch mentioned, we did book approximately 26 million in new loans in the third quarter and those did include 13 million in loan purchased.
On the other side however our principal paydowns and early pay-offs by and those combined for 17 million in the third quarter which is higher than both the first and the second quarter and certainly above our internal projections. We also monitor fallout certainly when I term fallout is either in the pipeline or what we determine is called pre-pipeline of those loans that we have an opportunity to work on and when and the fallout last quarter I had reported that it actually falling that improves somewhat from the previous quarter that being the first quarter.
Unfortunately fallout did increase in the third quarter. Of the fallout 30% of those loans we passed on due to either quality of the project or the proposed structure. About 25% were loss to the competition on structural related items meaning the competition was more liberal on their approach, items such loan-to-value, being more aggressive one case the terms of the leases, terms of the loan were much longer than the leases that they had in place and then another specialty case, anther bank did require reserves which we thought were important.
And the next largest category at about 23% with those that actually we declined and they didn't meet our credit standards. So on the other side of the balance sheet Mitch mentioned strong, really strong growth in Q3 and that we are very, very pleased to see that American River Bank still maintains a strong majority, a business deposit and most of those are held in core checking accounts, now are about 49% of total deposits as of September 30.
And as Mitch mentioned and I will reiterate most of that growth came from increases in the accounts of our existing clients but that certain was augmented by new relationships that had been sourced by our team.
To keep the team both on deposit services side, as well as lending side continue to be very active in the market prospecting for additional profitable business in deposit services and lending and our company is continue to strive to really focus on increasing our net interest income while being diligent with our overhead. These activities are designed to increase earnings per share for the benefit of our owners.
In this quarter as Mitch explained, we also benefited from something unusual net as a negative provision based on recoveries that we had. In spite of this noise, we are pleased with the quarter including solid metrics of an return assets in the quarter of 1.1, 1.3. Return on tangible equity above 10 and a sub 60 efficiency ratio.
Adrian if you would open the lines now for questions and as she's doing that I want to remind you please refer to what Mr. Derenzo said about our disclosure on forward-looking statements. Additionally our company doesn't provide guidance and we don't plan to change that practice any time soon. Please contact one of the analysts that currently covers American River Bankshares for additional information. Adrian?
[Operator Instructions] And our first question comes from Tim O'Brien from Sandler O'Neill. Please go ahead.
Dave you talked about loan pipeline and outlook in the past I believe did you - I didn’t catch any color you gave on that except for the fallout ratio stuff.
Yes, pipeline is still strong although I summarize that the pipeline still strong but what does continue is very competitive out there. Certainly our credit standards are relatively high I would say, and so we need a big pipe to be able generate the loan activity that we need to grow portfolio.
Certainly having the payouts that we did in unexpected payoffs in Q3 didn't help in loans totals although as Mitch mentioned having prepayments - big numbers on prepayments that certainly helps the pain if you will of the loans made.
And I noticed a little bit of a decline in C&I, was that related to I don’t know payoffs of equipment loan or something like that or was it really just paydowns and operating lines with. Can you give a little color there?
Yes, it wasn't very much in payoffs, it’s just normal activity.
Okay. And then as far as the multi-purchases this quarter, is that a one-off kind of a deal or do you anticipate that that can be a well you can draw from again here going forward?
We will see. It certainly and it’s not something that we broadcast in the past but that certainly been part of our plan is to look at participation and/or loan pools. I don’t know the exact number Tim him but well over 100 million, probably close to 200 million that we've looked at throughout 2016 maybe just a glance because it wouldn't fit the type of lending that we're doing.
So this is was an opportunity and from a company that we respect and we did all of our own diligence relative to the underwriting, essentially we underwrote them ourselves even now they have been seasoned for little while so this was a good opportunity to be able to some money out of investments into the lending portfolio and pick up some yield therefore net interest income increases.
So we will continue to look, although our standards - at least we believe our standards are consistent with the rest of our book and the rest of our portfolio.
And the kind of loans that you looked at that extends beyond just multi. Have you also looked at commercial real estate loans?
We’ve looked at commercial real estate loans, as you might expect we are shown residential, especially jumbos fairly consistently but we’re not doing those. And yes, a wide variety of credit types.
Great. And then last question, have you guys finished your annual strategic planning work with your Board for next year?
We have not.
When does that – I don’t know – when do that scheduled for like, how do that play out, when do you think you’ll kind of have the game plan set for next year?
In general the process has started in the third quarter and finished either late fourth quarter sometimes it roll depending what we’re looking at roles in a little bit to the first month of the New Year but in general we expect to have the heavy lifting done certainly before year end.
So for your 4Q call you guys might be able to give you a little color on what your goals are for 2017?
Yes, just a reminder for everybody we are generally not giving any forecast on growth rates and those kinds of things that come up our strategic planning process. Our company hasn't provided guidance in the past and we’re not planning on changing that anytime soon.
Your goals Dave?
All right. Thanks for answering my questions.
And your next question comes from Don Worthington from Raymond James. Please go ahead.
Thank you. Good afternoon. In terms of the multifamily purchase can you disclose things like LTV or the weighted average interest rate on those?
Yes, our weighted average LTV on there - I think there are 8 loans loan selling 13 million and the weighted LTV is around 52% and then the weighted DCR was right around to – so from a capital perspective which is the most important thing to us. And our - the weighted average rate Mitch is in low 3s correct?
In low 3s when you factor in the - we paid a slight premium, it's right around 3% but again their short-term I call them variable type loans because it was 19 months reset and they set from the - after that they had one year treasury plus spread. So it’s a pretty good earning assets for a relatively short adjustment timeframe.
Okay, great. And then in terms of the…
Don let me jump in here, just and I think - I wanted to mention this to everybody on the call. Part of American River Bank's discipline including this when we purchased this is either myself or the chief credit officer or somebody else in senior management actually goes and looks at each of these properties in person. That was also the case with these loans in this pool, they were looked at individually, physically so that we can look at the neighborhood, we can see what's behind and around them so we want to make sure that we're not buying just paper, we're actually investing in a property if you will.
Okay. Thanks for that color. And then in terms of the unexpected payoffs can you tell whether this is just other lenders being more competitive and the loans refinancing elsewhere or whether maybe it was liquidity event or something like that in terms of on the borrowers end?
Yes, really this was some long-term refinancing. In one case to get some cash out and so extent terms that pretty attractive from the borrowers perspective. Another case is just refinanced for the same reason to lock-in some attractive long-term financing.
Okay. All right, thank you.
Adrian, it doesn’t sound like we have anymore unless you got one right in front of you. So, on behalf of American River Bankshares, the entire team including the Board and the staff thank you so much for your interest in our company and we will continue to work hard on behalf of our investors. Have a great day.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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