American River Bankshares (NASDAQ:AMRB) Q1 2016 Earnings Conference Call April 21, 2016 4:30 PM ET
David Taber - President & CEO
Mitchell Derenzo - EVP & CFO
Don Worthington - Raymond James
Tim O'Brien - Sandler O'Neill
Welcome to the First Quarter 2016 Conference Call. My name is Eric 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 that this conference is being recorded.
I will now like to turn the call over to David Taber. Mr. Taber, please go ahead.
Eric, thank you so much and good afternoon, everyone. I am David Taber, the CEO of American River Bankshares, which is the parent company of American River Bank, headquartered in the Greater Sacramento Area. In addition to the Greater Sacramento Area, we serve Placer, Amador and Sonoma County, as well as the South and East Bay areas.
We're pleased to share company results for the first quarter of 2016. We continue executing our strategy of profitable growth focusing on increasing our net interest income while being careful with their overhead. When comparing first quarter of 2016 with the same period last year, we know that 44% increase in net income, this was augmented by share repurchases resulting in an increase in earnings per share of 58%. We are pleased with our growth in net interest income, as well as an expanded margin. Deposits in the first quarter were down a bit from year-end, yet we record modest loan growth on a linked quarter basis. We also sold our largest OREO asset for gain in this past quarter as well.
Now Mitch Derenzo, Executive Vice President and Chief Financial Officer, will provide an in-depth discussion of our quarterly financial results. Mitch?
Good, thank you, David, and thanks to all of you listening on the call this afternoon. 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 the year ended December 31, 2015, 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 our Annual Report can be found on our website americanriverbank.com.
As with past conference calls, I am going to highlight some of the areas in the press release that we issued this morning. I am also going to try to provide by some additional details and analysis, then 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 first quarter 2016 of $1.4 million. That compares to just under $1 million in the first quarter of last year. Earnings per share were $0.19 in the first quarter of this year, that's up 58% compared to $0.12 per share recorded in the first quarter of last year. Trailing 12 months earnings per share to $0.77 per share. The company's net interest margin as a percentage for the first quarter this year was 3.63% as compared to 3.46% in the first quarter of last year. On a taxable equivalent basis, the net interest income is up from $4.7 million in the first quarter of last year to $5.2 million in the first quarter of 2016.
The fully taxable equivalent interest income increased $424,000 from $5 million in the first quarter of last year to $5.4 million in the first quarter of 2016. The majority of this increase is in interest income which is now coming more from the loan portfolio and less from the bond portfolio. This is of course is due to the increase in the loan balances. Average loan balances increased $32.6 million from the first quarter of last year to the first quarter of this year. Our average investment balances were down $15.3 million during that same period.
The yield on loans decreased from 5.1% in the first quarter last year to 4.9% in the first quarter of this year. While the average yield on investments increased from 2.3% in the first quarter of last year to 2.6% in the first quarter of this year. Interest expense for the first quarter of this year was $234,000, that's down from $248,000 in the first quarter last year. Our average cost of funds decreased from 28 basis points in the first quarter of last year down to 26 basis points in the first quarter of this year. The average interest bearing liabilities decreased slightly from $358.1 million, down to $355.9 million in the first quarter of this year.
Our overall cost deposits in the first quarter of the issue was also down a drop from 17 basis points in the first quarter of last year to 14 basis points in the first quarter of this year. David mentioned deposit balances did drop during the first quarter of this year, however, the majority of that decrease was due to us managing our deposit cost and allowing some over market interest rate accounts to exit the bank.
On the loan side, we did record a modest increase, we were up $3 million or 1.1% during the quarter. The new loan production in the first quarter was $15 million, that compares to $9 million of new loan production in the first quarter last year. And the loan pay downs remain manageable. The weighted average loan rate on new loans during the first quarter of this year was 4.42% while the rates on renewed loans was 5.12%, that compares to the weighted average loan rate on the $9 million from last year. The new loans last year, 4.15%, and the renewed loans during the first quarter of last year, 4.1%.
As I mentioned the average loan balance did increase to $3.1 million or 1.1% during the quarter when compared to the December 31, 2015 balances, compared to one year ago net loans outstanding up $31.1 million or 11.9%. Of the increase in loans in the first quarter this year, it's mainly real estate related, commercial loans actually decreased by about $547,000.
Current portfolio is made up of commercial loans, that's $35.6 million or 12% of the loans; our business property loans are $78 million or 26% of the loans; construction land development, that's $11.5 million or 4% of the portfolio; investor CRE, that's $122.3 million or 41%; residential 1:4 [ph], that's $16.6 million or 6%; multi-family, $27.8 million or 9%; and then the other category which is primarily consumer and Ag, that's $5.7 million or 2% of the remaining portfolio.
The allowance for loan lease losses was $5.1 million at the end of March 2016. That compares to $5 million at the end of December 31, 2015, and $5.3 million at March 31, 2015. As a percentage of loans outstanding that's 1.71% at the end of March 2016; 1.69% at 12/30/2015 and 1.99% 3/31/2015. Good experience in other quarter of loan recoveries, we had $107,000 recoveries this quarter that compares to $7,000 in the first quarter of last year.
Non-performing loans at the end of March were down to 53 basis points, that compares to 56 basis points at the end of December. And out of the $1.6 million in non-performing loans at March 31, albeit two of those loans were actually current and those balances were $536,000 and then of that $536,000 one of those loans actually paid off in April, that was a $499,000 loan pay-off, paid off in full.
Cost by assets as a percentage of equity, 9.5%, that compares with 13% at the end of December, and 17.4% one year ago. In dollar terms to classified assets, those classes which includes classified loans and assets in the OREO, that totaled $6.7 million at the end of March of this year, that's down from $12.7 million one year ago. The non-performing assets, the non-performing loans assets an OREO, $3.4 million compared to $6.3 million one year ago. Loans past these 30 days aren't days, that's just $324,000 compared to $612,000 one year ago.
OREO, we're down to two properties at the end of March. Total balance there is $896,000 compared to one year ago we had five properties totaling $3.7 million. During the first quarter this year, we did sell -- David, mentioned we did sell one of our properties that was our sole income producing office property. We have net gain of $117,000 on that loan -- on that sale. We also took an impairment write down to expense another property during the first quarter. Those are $376,000.
As I said, we just have the two remaining properties, one of those is commercial land, that's the property that we took the write down on. And then the other property or whatever property name or county and that property is currently an Asco.
Investment portfolio, no real change there, still continues to be primarily well structured cash flow in mortgage products mixed in with some high credit quality municipal bonds. At the end of March this year, their securities portfolio totaled $265.2 million, that's 42% of our assets. That compares to $278.2 million, or 44% of our assets at year end 2015.
And the portfolio really, over 90% of it is made up of U.S. government agencies or U.S. government sponsored agencies, primarily mortgage related bonds. The portfolio remains relatively short, the average life of the mortgage products were about 3.5 years, and the average like of the municipal portfolios were about 3.7 years. The effective duration of the entire portfolio remains quite low, it's about 2.5 years. And the price change and rates, up 300 basis points is just under 10%.
On the deposit side, we were at $523.8 million, at the end of March that compares to $530.7 million at the end of December 31, 2015 and then compared to one year ago we're at $501.1 million. We did mention the deposit balances drop a little bit and the reason for those as we let some of the high rate money market accounts go.
At the end of the quarter non-interest balances were 36% of the total deposits and CD balances were just 16%. Non-interest income was up for the quarter, were $754,000 dollars compared to $585,000 in the first quarter of 2015. Increase was primarily related to an increase in income from security sales. Last year the first quarter had $167,000 dollars in gains, this year it was $282,000. In addition, rental income from OREO properties was up, it was $71,000 in the first quarter of 2015, upto $106,000 in the first quarter of this year.
The gain on the investment sales, that's really the result of the bank managing a portfolio that took advantage of the current rate environment. While the increase in the OREO income -- while there was an increase in OREO income this quarter, I will point out that I mentioned earlier that we sold our sole income producing property.
On the expense side, non-interest expense decreased slightly. We were just above $3.8 million in the first quarter last year to just below $3.8 million in the first quarter of this year. The significant changes during those timeframe; salaries and benefits were down about $100,000 from $2.3 million last year to $2.2 million in the first quarter of this year. And then we had a decrease in other expense from $846,000 in the first quarter last year to $748,000 in the first quarter of this year. Of course these decreases are partially offset by that increase in OREO expense related to the impairment of the $376,000 that I previously mentioned.
OREO expense was increased from $147,000 in the first quarter last year to $340,000 in the first quarter this year. That $376,000 impairment was offset by the $117,000 gain. So if you exclude those two items, the core, the net servicing cost for the quarter was $81,000. Last year we also had impairment, that impairment was $76,000. So if you pull that out, the first quarter 2015 net servicing costs were $71,000. The office building that we sold this quarter was also our -- as you would expect the highest carrying cost as well. Of the $81,000 in OREO expense, that's related to servicing in the first quarter of this year, $61,000 must be related to that building we sold.
I expect some of the March expense related to that building to trickle in. In the month of April, once that's done and that sale was finalized or the accounting for that sale is finalized. The fully intact will equal an efficiency ratio for the first quarter of this year is done a 64.1%, that's down from 71.8% in the first quarter of last year. And of course, the primary reason for that decrease is being the increase in income from both, interest income and non-interest income. On the taxes, we did see an increase from $470,000 in the first quarter last year, $633 in the first quarter of this year. We also saw but we saw decrease in the effective tax rate. That dropped from 33% in the first quarter last year to 31.6% in the first quarter of this year.
The higher tax expense in 2016 compared to 2015 results from a higher amount of taxable income. Taxable income increased from $1.4 million last year to $2 million this year. And the lower effective tax rate this year compared to last year results from a higher tax benefits whether its tax exempted loan interest. Interest on tax exempt loans increased from just $17,000 last year to $172,000 in the first quarter of this year.
Under the capital shareholder equity decreased, we were $86.1 million at the end of 2015, we're down $85.3 million. That $772,000 decrease was due to a decrease in common stock of $3.8 million, that's primary related to the repurchases made under the 2016 stock repurchase program. That was partially offset by an increase in retained earnings of $1.4 million, the $1.4 million is the income that we earned, the net income we earned for the first quarter. Now we also had an increase of $1.6 million, that was the increase in the accumulated other comprehensive income, and that of course is related to an increase in the unrealized gain on our bond portfolio.
During the first quarter 2016, we repurchased 367,182 shares of our common stock, average price of -- was $10.29 per share. That really finalized the 2016 program that we announced in January which calls for a 5% repurchase. You may have seen that earlier this morning we did announce that we intend to repurchase another 5% during the remainder of 2016. Capital ratio still remains strong despite the repurchasing of the shares. Our leverage ratio was 10.6% and the risk-based capital -- total risk-based was 20.2%.
Thank you and I turn it back over to David for some additional comments.
Mitch, thank you so much for that comprehensive report. As a reminder, the company does not provide guidance in with a growing trend towards not giving guidance based on financial disclosure concerns and of course, our legal counsel, we do not plan to change that practice any time soon. There are currently three analysts covering our company, please contact any of these or speak directly with them if you'd like a copy of their research report.
As I said earlier, 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 real estate and continued positive job growth and correspondingly a drop in unemployment levels. Mitch did a really good job of explaining the key aspects of our results for the first quarter. Our company continues to focus on profitable growth while maintaining quality, that requires us to focus on increasing our net interest income while managing our overhead diligently. We also believe that share buybacks continue to be a valuable tool in increasing shareholder value.
The first quarter loan production improved compared to the first quarter and fourth quarter of last year. This along with reasonable payoffs allowed us to show a modest first quarter loan growth. When discussing year-end results back in January, I noted that the price competition had intensified in the fourth quarter of last year and potential loans that were lost due to price were in fact, the largest category. Fall out in the first quarter of this year was less than the fourth quarter of last year, and the reasons were more balanced with declinations and withdrawn, being the largest two categories and lost due to price, the smallest.
As Mitch noted, total and core deposits were up slightly on a linked quarter basis yet we have a strong majority in business deposit. And a full 47% percent in checking accounts with over three quarters of those being non-interest bearing. The team continues to be active in the market prospecting for additional profitable business. And as a company, we continue to focus on increasing our net interest income while managing overhead and utilizing buybacks. All of which are designed to increase earnings per share.
Please note that our buyback announced in January was completed in the first quarter. And also take a look at our press release that we disseminated earlier this morning outlining our plan for a supplemental buyback of an additional 5%.
Now Eric if you'd open up the lines for questions. And as a reminder, please refer to Mr. Derenzo's disclosure on forward-looking statements. Eric?
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes Dan Worthington from Raymond James.
Good afternoon, David and Mitch. Mitch, could you go over the origination numbers again, I missed those.
There are $15 million in the first quarter of this year compared to nine in first quarter of last year, is that what you're looking for?
Yes, thank you. And then in terms of gain on sale securities, would you expect more of that activity?
I really can't say Don, it was -- kind of took advantage of an opportunity, a kind of a mismatch in the market, it's something I continue to watch and monitor but I can't really determine whether or not I pulled the trigger or not, it really -- it's upto market conditions.
Okay, alright. And then on the lending activity, just some color doesn't have to be specific but more directionally how the production offices in the bay area have been doing good?
Good, although we do have an opening replacement, one of the two that we have in the bay area. So we presently have one active relationship manager in the Greater Bay area looking for a second.
Okay, great. Thank you.
Our next question comes from Tim O'Brien from Sandler O'Neill.
Hi Dave, hi Mitch. A question for you Mitch, was there any -- did you guys purchase any loans this quarter or was that all internally sourced?
Organic, all organic.
Did you look at any loan post?
To say no would be a lie, I get loan pools across my email everyday but it's not really our focus so I tend to delete that pretty quick.
And can you give a little bit of color on that residential growth? You ran through those numbers, I think you broke it down multi versus single family and a quarter numbers. What was that last quarter and -- because that was kind of the biggest driver and total portfolio growth was in that residential mortgage.
We have a commercial client that had a fairly large portfolio Tim, single family homes that he had purchased in the downturn that he didn't know anything on. He wanted to utilize some of that, collateral if you well, to get some seed money's for some of those commercial projects. And so that's -- they're secured by residential and that's where they end up in that category.
And so prior to that was he kind of -- was he primarily a client who use your cash management products and maintain deposits and stuff and use for your cash for managing his cash flow. Was that kind of the bigger part?
Yes, he's been a commercial client on the deposit services side. For a very long time we've loaned money to he and his entities in over the last 20 years but that's…
Old client, and then, as far as LTVs on production in that segment. What -- how far -- what was MAX LTV or give some color there I guess. You don't have to get too specific but just give us us a sense.
I don't remember but there was -- it was conservative I do know that. Ok great, and so that's…
Just to get back to you for that question on the residential lending was -- our one to four was $14.2 million at the end of the year. And now it's $16,620. And multi -- there were growth there to then, how much Mitch. A multi-family grew from about $23.5 million to about $27.8 million. And then, I didn't spot this but looking over the financials, did you guys -- you guys didn't have any gain on sale of securities in 4Q did you?
It's minimal, I want to say like $10,000, it was minimal.
Okay. And then the property that was sold the OREO property up in Eldorado County. Was that storage you know -- was that…
It was an office building.
And how it starts from setting there as well…
How long you've had that. Just for reference, you guys worked on that. Work out for many years, right?
We voted for a couple years. We've increased the tenancy in it, it was like 50% occupied and we got it, I think we sold it was over 90%.
So qualitatively speaking Dave, was that -- all that effort and sweat equity that you guys put into getting at least up and such selling it. Are you happy with the way that worked out? Was that effort well spent relative to the other opportunities that you guys have at the bank.
No that question is whether there is cash flowing asset for the last couple of years for us. And we got out of it with a game. Didn't lose any money ever. So yeah, we were pleased with the outcome.
And you do it again. Glad you did it that, do it again.
But we're not going to have a great recession again I hope, if that's what you're suggesting. We're not often in the business of owning properties but we had to take a property, we leased it up. As a reporter we had $107,000 in income during the first quarter at OREO. And $61,000 dollars of expense related through that property. And then the uptick, the sequential quarter uptick in comcast is that Fica?
There was a decrease in comcast. On the quarter, pretty much quarter-to-quarter. I believe there were some adjustment in the fourth quarter, the incentive as well.
How much was Fica this quarter Mitch? And you only -- you accrued for that at the beginning of the year, that's just the way it's structured right?
Well, it's Fica as well as some of the other employment taxes that kick in the in the beginning in the as people hit certain salary levels. So I don't know the exact number.
Any other onetime of items in the P&L, either on the fee income side that you guys didn't mention or on the expense side?
No, I think I've laid out all the non-recurring or the unusual type items and. And no, prepaid -- accelerated prepaying income that his NII or recoveries that hit that in any way. That nobody could have every…
No, as -- you know we had -- there was no reversal in the allowance. We had one 107,000 hundred seventy thousand recovery and that's pretty much for the increase their. Back to you question, there was no gain on sales in the fourth quarter of 2015.
Alright. Hey guys, thanks for answering all my question.
Sir, you bet. We have no additional questions at this time.
Great. It has been good talking with you in and talking about a successful first quarter of 2016. And we look forward speaking with you the future have a graphic.
Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
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