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Edited Transcript of AMRB earnings conference call or presentation 17-Oct-19 8:30pm GMT

Q3 2019 American River Bankshares Earnings Call

Roncho Cordova Oct 22, 2019 (Thomson StreetEvents) -- Edited Transcript of American River Bankshares earnings conference call or presentation Thursday, October 17, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David E. Ritchie

American River Bankshares - President, CEO & Director

* Mitchell A. Derenzo

American River Bankshares - Executive VP & CFO

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Conference Call Participants

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* Timothy O'Brien

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Timothy Norton Coffey

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

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Presentation

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Operator [1]

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Welcome to the Third Quarter 2019 earnings conference call. My name is Erin, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to David Ritchie. David, you may begin.

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David E. Ritchie, American River Bankshares - President, CEO & Director [2]

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Thank you, Erin. Good afternoon. This is David Ritchie, President and CEO of American River Bankshares, the parent company of American River Bank, headquartered in Rancho Cordova, California. I'm joined by Mitch Derenzo today, our CFO, to review our third quarter update. Please be aware that 2 press releases went up as the market opened today: our earnings release, which details our quarterly results and cash dividend, that will be paid next month. As always, we do include some economic data in our press release. In general, positive trends in our market and in California and in the nation as well.

So now, I'd like to turn it over to Mitch to give you an in-depth finances -- in-depth conversation about our financial results.

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [3]

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Thanks, Dave. And of course, thanks to all of you for taking the time to listen in to the call today. As you know, before we get started, let me 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 risk and uncertainties. Actual results may differ materially from the results in these forward-looking statements. Factors that might cause such difference are discussed in our annual report on Form 10-K for the year ended December 31, 2018, and in subsequent reports filed on 10-Q and 8-K during 2019.

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.

If you go to our website, americanriverbank.com, you can find the links to our annual report and our Form 10-K.

As with past conferences, I'm going to highlight some of the key areas from our press release that was issued this morning. I'll try to provide some additional details and analysis, then turn it back to Dave for some additional comments and then we'll open up the line for questions.

This morning, American River Bankshares reported net income for the third quarter of 2019 of $1.6 million compared to $1.2 million during the third quarter of 2018, that's a 36% increase. Earnings per share were $0.27 per share in the third quarter of this year compared to $0.20 in the third quarter of 2018, that's a 35% increase. ROA and ROE for the quarter were 88 basis points and 7.65% respectively compared to 68 basis points and 6.37 respectively -- 6.37% respectively one year ago.

On a year-to-date basis, net income was $4 million in 2019 that compares to $3.8 million 1 year ago. Earnings per share for 2019 were $0.68 compared to $0.64 in 2018. ROA and ROE for the 9 months of 2019, 77 basis points and 6.81% this year compared to 74 basis points and 6.95%, respectively, one year ago.

On a pretax, pre-provision basis, net income was $5.9 million in 2019 compared to $5.1 million in 2018, that's a $791,000 increase or 15.6%.

Last quarter, I talked about how difficult to compare the second quarter 2019 with the second quarter of 2018. As we're really going to start adding the additional relationship managers and the chief credit officer into the second quarter 2018. And I think this year, the third quarter of 2019, it compares better to the third quarter of 2018.

In addition, I think the trailing 4 quarters are also pretty useful to review to really see the progress today. I'm going to give you those numbers there as well. So net income in the fourth quarter of 2018 was $1.125 million, that increased slightly to $1.146 million in the first quarter of this year. And the second quarter this year, we went up to $1.276 million and now the $1.571 million in the third quarter of this year, so that's a nice trend.

EPS is showing the same trend. We were $0.19 in the fourth quarter of last year, up to $0.20 in the first quarter of this year to $0.22 in the second quarter of this year and now to $0.27, we reported for the third quarter of this year.

While these increases are nice, we're not getting too excited because we still have quite a bit of more work to do and I think we are heading in the right direction and the numbers are starting to show up.

We're continuing to add new relationships, we're increasing our deposits, we're shifting the assets from investments in high-yielded loans and that has nice impact on our net interest income. The net interest income increased from $5.3 million in the third quarter of last year up to $5.9 million in the third quarter of this year. And on a year-to-date basis, net income was $15.1 million in 2018, that's up to $17.1 million in 2019.

I talked about this shift from investments to loans. Loans are up $60 million or 19.2% from one year ago. And for 2019, they are up $51.4 million or 16.1%. That's really helping the daily interest income. The net interest -- I'm sorry, the net daily interest income, that was 60,130 in the fourth quarter of last year, increased up to 61,655 in the first quarter, and this year, to 61,846 in the second quarter, and now it's 64,435 in the third quarter of this year.

Of course, the loan growth is requiring a higher loan provision. We added $180,000 in each of the first 2 quarters of this year and then $120,000 in the third quarter. That compares to 0 in the first 2 quarters of last year and then $50,000 in the third quarter of last year.

Third quarter 2019, we also benefited from $72,000 in loan recoveries that allowed us to not have to add to -- add as much to the allowance to expense in the third quarter of this year.

Moving to the balance sheet. Loans increased $11.5 million during the third quarter, that's a 3.2% increase. Third quarter, we funded $33.1 million in new loans. That's our 6th consecutive quarter of $30 million-plus loan fundings. The trailing over those past 6 quarters is $209 million. Unused commitments at the end of the -- end of September were $37 million. About $12 million of that is commercial, those will have the ability to evolve. The rest of that $37 million is real estate-related, and we're expecting those to fund over the next year or so.

On the payoffs, those continue to be manageable. We were just under $13 million in the third quarter, that's about the same amount that we are in the payoffs in the second quarter of this year.

The good news is, we're retaining those loans. Tough parties that like the prepayment fees like we did last year. We collected just $29,000 in prepayment fees in the third quarter of this year compared to $78,000 in the third quarter of last year. Depending on a year-to-date basis, we were at $157,000 in 2019, that's down significantly from $434,000 year-to-date 2018.

If you take that difference in the year-to-date prepayment penalties -- prepayment fees that's $277,000. And then you take the year-to-date difference in the additions to the loan -- lease loss loans of $430,000 that's $707,000. Those were benefited in 2018, we didn't get repeats of those in 2019. I guess my point I'm trying to make is despite those 2018 benefits, 2019 net income is still excluding that of 2018 with those benefits.

On the credit quality, really pretty much a repeat of what I said last quarter, nothing to discuss here. We don't have any nonaccrual loans, and there was no loans 30 days or greater past due at September 30, 2019.

I did mention, the addition of $120,000 through the -- through provision or through the loan loss launched through the provision. Really, that's due to loan growth. The allowance is now 1.32% of loans at September 30. During the quarter, we did have the $72,000 loan recovery, there was no loan losses. Year-to-date, we have $81,000 in recoveries, and again, no loan losses.

During the third quarter, we also received a $58,000 payment on the loan that would have been previously charged off. That loan was fully recovered in 2016. The principal balance was, so since there's still principal due, the entire $58,000 was applied to interest income, so kind of a nice benefit there for the quarter.

The loan growth that I mentioned, pretty diversified for the quarter. In dollars, the largest increase was in commercial, which is nice to see. We were up by $5.7 million, that's 14%. Multifamily was up $4.6 million, that's 8.1%. Real estate construction was up $3.6 million or 26.5%. Those are followed by the consumer, which grew $3.8 million or 5.7%.

We also experienced a slight decrease of CRE in the CRE area of $5.3 million or 2.6%. Our growth in the commercial loans, that includes the new loans made during the quarter and some advances on loans made in prior quarters.

On the construction side, that was all commercial construction. And in the consumer, that's our specialty asset portfolio that we did 69 of those loans during the quarter. Average on those was $88,000 compared to 60 of those loans during the second quarter of this year and the average on those was $93,000.

The average loan rate on the $33 million in new commitments during the quarter was 5.51%. We also renewed $11.7 million in existing loans during the third quarter, the rate on those was 5.82%.

Slight decrease in the classified equity ratio at the end of September, was down to 1.6%. And really, the classified assets remain are $957,000 in OREO and then we have the 1 commercial real estate loan, that balance is down to $136,000.

Best in portfolio remains pretty much the same. Primarily well-structured cash flow and mortgage products and some high credit quality municipal bonds. Portfolio still remains relatively short. Average life increased a little bit from last quarter, but the average life of the entire portfolio is about 4.0 years. The effective duration of the portfolio remains quite low, about 2.8 years, and then the price change and rates up 300 is 9.6%

On the liability side, we had a pretty good quarter on the deposits. We increased balances from $581 million at June 30 to $613 million at September 30. That's about a $32 million increase or about 5.5%. And much of those increase in -- was noninterest in our money market balances. The noninterest income -- I'm sorry, the noninterest balances increased -- from $214,000 at the end of June to $229 million -- $214 million at the end of June to $229 million at the end of September, that's about a 6.8% increase as we continue to bring in nice new relationships.

The money market that also increased. That was $136 million at the end of June, now it's up to $152 million at the end of September, that's an 11% increase. And then overall, the deposits have grown $22 million or almost 4% year-to-date.

Noninterest balance -- noninterest-bearing balances remained high at 37% of the total deposits, and then our non-CD balances, which refer to our core deposits, that's 86% from the total deposits. So a little bit of a tick up in the average cost of funds. There were 30 -- a year ago, they were 39 basis points, now there's 64, so that's a 25 basis point increase. And really, that's the overall rate environment. We are seeing an increase in the rates on our FHLB borrowings and in our CDs. As those things continue to roll, they are rolling over at the now current higher market rates.

The overall cost of deposits for the first 9 months of this year was 35 basis points, that's up from 22 basis points in the first 9 months of 2018. Again, much of that increase is the deposit expenses on the CD side. If you exclude the CDs, the cost of our deposits in 2019 was 10 basis points, that's up from 6 basis points in 2018.

Capital levels remained strong. Of course, the earnings helped increase the company's leverage ratio. We went from 8.9% at the end of December 31, 2018, to now we're at 9.2% at the end of September. Total risk-based capital ratio, those decreased, went from 17.3% at the end of December to 16.6% at the end of September.

Obviously, that switches from lower -- when we reduced the lower risk-weighted assets, the investments, by moving those into the higher risk-weighted loans, that's really causing the big change there.

Dave mentioned the press release. One of the press releases went out this morning. We're also continuing to pay our cash dividend for the year, it's -- or for the quarter, it's the same, $0.07 as we did last quarter and we have to pay next month.

Our income statements. Noninterest income was $417,000 in the third quarter of this year, that's up from 4 -- from the $377,000 in the third quarter of last year. The first 9 months, noninterest income increased about $120,000. We are at $1.1 million in 2018. We're about $1.2 million in 2019.

With the largest increase being service charges on deposit accounts, that went from $352,000 last year to $409,000 in the third quarter of this year. That's followed closely by the gains from sales of securities that went from $19,000 last year to $74,000 this year.

On the expense side, noninterest expense increased by $90,000 from $4 million in the third quarter of last year to $4.1 million in the third quarter this year. Primary area of increase was in the salaries and benefits. That increased by $347,000 from the third quarter of last year to the third quarter of this year. Again, most of that increase from a year ago is related to the salaries and benefits from the new production -- loan production team as well as new hires and normal salary increases over the past 12 months.

So the salary expenses have stabilized and been consistent the past 2 quarters, with the exception of the third quarter of this year, which did see an increase and that increase is primarily related to the higher incentive payments to the relationship managers due to the increased loan production. Offsetting this increase in salaries and benefits were lower FDIC assessment, which decreased by $109,000. Lower advertising and business development, those decreased by $72,000 and telephone expense, which decreased by $47,000.

The lower advertising and business development relates to a more focused spend in on our target markets. We remain out in the markets to strengthen our brand and develop new relationships, where we have a year behind us now and it allows us to more precisely target our marketing dollars.

The FDIC decrease is related to the insurance fund, reaching their target of 1.38%, and we were able to use our small-bank credits, which essentially gave us a credit for the assessment for second quarter, i.e., the backout the previously recorded expense in the second quarter and do not have any expense in the third quarter. Assuming the fund is not dropped below that 1.38%, we should be able to have enough credits to forego any expense in the fourth quarter of this year as well. That decrease in telephone expense, that relates to a move to a new phone system that we did.

For the first 9 months of 2019, noninterest expense increased by $1.3 million from $11.2 million in 2018 to $12.5 million in 2019. Again, most of that increase is related to the higher salaries and benefits. We also experienced increase in expense and other lines in that -- in those periods. That increase relates to the higher development of promotional costs we alluded to in the first half of this year as we were out focusing on our efforts on building our brand.

On the taxes. Income taxes provision for the quarter ended September 30 increased by $133,000. That's about 31%, one from $428,000 in the third quarter of last year to $561,000 in the third quarter of this year. And then on a year-to-date basis, we increased $143,000 or 11.6% from $1.2 million in the first quarter, for the first 9 months of last year to $1.4 million in 2019. The effective tax rate for the first 9 months of this year was 25.7% compared to 24.7% during the first 9 months of last year. The higher provision for taxes this year versus last year, primarily resulted from a lower level of tax benefits from tax-exempt investments and equity compensation.

In addition to the increased deductible income this year. The tax benefits from the equity comp decreased from $135,000 last year to just $32,000 this year. The taxable income increased by $361,000 this year, that's about 7% from $5 million in the first 9 months last year to $5.4 million in the first 9 months of this year. That's all I have. Thank you, and I'll turn it back over to Dave for some additional comments.

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David E. Ritchie, American River Bankshares - President, CEO & Director [4]

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Thanks, Mitch. Yes, so we've talked about a plan for the last the last 18 months or so, we just continue to execute on the plan. I'm particularly excited about the consistent loan growth, coupled with the increase in deposits. As you know, we drive income from both. I'm particularly excited about the pretax net income, ROE, ROA, EPS, they seem to be all going in the right direction. We continue to move the efficiency ratio down, which was expected. We had to hire the people, as you all know, and then we had to generate new revenue and that's what we're doing.

The commercial banking team in particular has a real strong pipeline. What's equally impressive is now we're getting additional business from a lot of new -- some of the new clients, that we brought in, in the last 9 months, we're getting additional looks. I think that validates our process and the service that we're providing. The retail team continues to do an outstanding job retaining clients and bringing in new deposits. They continue to do, annual reviews with our top clients. We've completed over 1,000 reviews in the past 9 months. And so all in all, I -- my comments are -- I think we're doing what we said we're going to do, and we're trying to do it the right way and in a consistent manner. And so with that, I thought -- I would ask Erin to open up the line, and Mitch and I are here to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from Tim Coffey.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [2]

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So if we just, kind of, go back and look at the trailing 4 quarters of loan growth, that would put you on an annualized run rate, somewhere around the midteens. Is that a reasonable expectation or are you a little bit ahead of yourselves right now?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [3]

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Yes. I mean, we try -- we're not trying to give projections but depending on loan-based growth, it's going to be tougher to grow that midteens level but we like to be able to shoot to double digits.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [4]

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Okay. And the commercial loans that you brought on this quarter, how much has that changed your asset-sensitivity profile?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [5]

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Looking at the resale on those things right now, they all seem to be pretty short-term repricing. So technically they will but they all have floors on them, so it impacted response, yes.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [6]

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Great. Okay. That was my next -- that was my follow-up question, where are the floors at? Or where...

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [7]

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(inaudible)

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [8]

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(inaudible)

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [9]

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Yes.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [10]

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Okay. The commercial construction you had this quarter, was any of that towards multifamily construction?

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David E. Ritchie, American River Bankshares - President, CEO & Director [11]

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No.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [12]

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Okay. And will there be any kind of expense cost saves? Because I know that your Chief Lending Officer has left and I don't think you kind of replace him. Is there going to be any anticipated cost saves from that?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [13]

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Well, as we said in the 8-K, we do not intend to replace him. So yes, there will be some cost saves. Dave is overseeing the relationship managers in the team there. So yes, it's our kind of the plan right now.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [14]

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Do you have an estimate on what that cost saves might be per quarter?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [15]

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I think just salaries for the quarter, plus the benefits from. I don't have that exact number.

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Operator [16]

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And your next question comes from Tim O'Brien with Sandler O'Neill and Partners.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [17]

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Mitch, can you run down those onetime, those -- sorry, Mitch.

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [18]

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Onetime?

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [19]

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Yes, so this is a question for Mr. Derenzo. The onetime interest income items this quarter, you had a prepay. Can you just run down those one more time for me? I've got a couple of them, I missed one or two.

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [20]

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Yes, there are 2 things to talked about that I recall unusual with the -- we have $58,000 interest recovery net interest income. The second one would be the FDIC expense, which we really had no expense for the quarter, and we had a recovery from the second quarter. I don't know if you understand how they do it but they -- the bill that we get in September 30th is for the second quarter. So we estimate that the expense should have been in the second quarter. We set up a payable, they give us the bill. They said, yes, there's no payments in the second quarters and I don't think you can reverse that out.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [21]

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So that regulatory assessment line in the press release reflects that?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [22]

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Correct. Yes, it's roughly $16,000 a month, so $46,000, $47,000 a quarter.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [23]

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And did you mention a prepaid penalty or a number of prepaid penalties that added to interest income also?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [24]

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Yes, prepayments were down. We collected just $29,000 in the third quarter, that compared to $78,000 in the third quarter of last year. And on the run rate for the year, we were $157,000 in '19 and then $434,000 in 2018.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [25]

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And do you happen to have last quarter's numbers as well? Sorry. 2Q prepay?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [26]

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I don't. I don't. I can dig that up for you. Maybe it's small because we're talking $157,000 for the year so...

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [27]

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And no interest recovery last quarter either, right? On credit related? Okay. And then qualitatively, not quantitatively, kind of given where rates have settled and what's going on in the rate environment and what you're seeing in your marketplace from other banks, et cetera, et cetera. Your sense that cost deposits is popped out here and barring increase in the rates in the market -- in market rates or something, chances are you might -- that kind of topped out, would you say directionally, that's true?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [28]

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We're pretty comfortable with the deposit expense. Primarily, our deposits are in the noninterest-bearing, we've got 37% there so that's a big, big plus there. But the money market has kind of settle down. We're not seeing much rate pressure there. Some of the CDs that we put on a year ago may continue to reprice as they mature. They were -- even though there might be lower rates today than there were a month ago, they're still going to be higher than they were a year ago. So there maybe a little bit increased expense on the deposit side. But I think overall, we are not feeling a lot of pressure from the competition.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [29]

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Very nominal. Okay, great. Okay. I have a good sense of, kind of, where you're headed on the margin. A couple of other items for you. So the $2.898 million in compensation and benefit costs this quarter, was there anything onetime in that? I know you talked about it quite a bit but I just want to make sure I'm clear on it.

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [30]

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Yes. We would -- look, as I kind of talked about the big...

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [31]

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Beside incentives for production.

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [32]

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No, that's really the big -- that's the biggie right now, nothing balances around based on whatever production was for the quarter. And sometimes, it's hard to get a handle on that.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [33]

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Nothing related to FTE change?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [34]

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No. We will see a benefit of that in the fourth quarter.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [35]

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But nothing in the third or fourth quarter. And then, do you happen to have the FTE counted core at September 30?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [36]

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I think it was 106.

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David E. Ritchie, American River Bankshares - President, CEO & Director [37]

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I think it's 106.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [38]

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106?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [39]

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Yes. Plus or minus 1.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [40]

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And then the other expense item, line 859 -- $859,000, that was, kind of, low for several -- many quarters, and you talked a little bit about telephone costs going to a new system and finding some savings there. So my takeaway, all things considered on what you -- the color you provided there is, those cost savings that decline in cost there, a lot of that is going to be recurring. Is that correct? Did I hear you right?

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Mitchell A. Derenzo, American River Bankshares - Executive VP & CFO [41]

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Yes. I think we've spent quite a bit of money on business development activities in the first half of the year. We tend to sponsor more events in the first half of the year. And not that we're not out in the marketplace during the third and fourth quarters, but we tend to be less defensive, spend bigger dollars on. So your third quarter should be pretty close to the fourth quarter, but I wouldn't be surprised to see it pop back up in the first and second quarter next year.

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Operator [42]

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And there are no more questions at this time.

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David E. Ritchie, American River Bankshares - President, CEO & Director [43]

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All right. Thank you. Talk to you the next quarter.

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Operator [44]

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