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Edited Transcript of AMRB earnings conference call or presentation 20-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 American River Bankshares Earnings Call

Roncho Cordova Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of American River Bankshares earnings conference call or presentation Thursday, April 20, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David T. Taber

American River Bankshares - CEO, President, Director, CEO of American River Bank and President of American River Bank

* Mitchell A. Derenzo

American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank

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Conference Call Participants

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* Donald Allen Worthington

Raymond James & Associates, Inc., Research Division - Research Analyst

* Timothy O'Brien

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

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Presentation

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Operator [1]

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Welcome to the First Quarter 2017 Evermore (sic) [American River] Quarterly Conference Call. My name is Eric, and I will be your operator for today's call. (Operator Instructions)

I would now like to turn the call over to David Taber. Please go ahead, sir.

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David T. Taber, American River Bankshares - CEO, President, Director, CEO of American River Bank and President of American River Bank [2]

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Eric, thank you very much, and good afternoon, everyone. Yes, I am David Taber. I am the CEO of American River Bankshares, the parent company of American River Bank, which is headquartered in the Greater Sacramento area. We are pleased to share company results for the first quarter of 2017.

The key to success for American River Bankshares is profitable growth on both sides of the balance sheet, driving an increase in net interest income. Deposit growth, especially core deposits, are up year-over-year and on a linked quarter basis. Total loans outstanding are up year-over-year but down on a linked quarter basis. Please be aware that the 2 press releases -- that we sent out 2 press releases this morning, one announcing our quarterly cash dividend and the other the financial results for the quarter.

Now Mitch Derenzo, Executive Vice President and Chief Financial Officer, will provide an in-depth discussion of our quarterly financial results. Mitch?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [3]

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Thank you, David, and thanks to all of you for listening into our call today.

Before we get started, I need to remind everyone of our safe harbor disclosures. Certain matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and may involve risks and uncertainties. Actual results may differ materially from the results in these forward-looking statements. Factors that might cause such a difference are discussed in the company's annual report on Form 10-K for the year ended December 31, 2016, 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. The links to our annual report and Form 10-K can be found on our website, americanriverbank.com.

As with past conference calls, I'm going to highlight some of the key areas from the press release that David mentioned. Then I'm going to 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 of 2017 of $1.2 million. That compares to $1.4 million in the first quarter of 2016. Earnings per share first quarter of '17 were $0.18 per share compared to $0.19 per share in the first quarter of 2016. On a trailing basis -- on a 12-month trailing basis, earnings per share were $0.93 per share.

Return on equity for the quarter, 74 basis points compared to 87 basis points in the first quarter of last year; and the ROE, 5.74% first quarter of this year versus 6.44% in the first quarter of last year.

Some comments on the balance sheet, and I'll start with the assets. A combination of higher-than-anticipated loan payoffs and lower-than-anticipated new loan growth resulted in a decrease in net loans of $10.1 million during the first quarter of 2017. The net loans have increased $21.7 million over the past 12 months.

During the first quarter of this year, we added $4.6 million in new loans. The average rate on those new loans was 4.78%. The average rate on the renewed loans during the first quarter was 4.23%. Some of those prepayments, principal paydowns on the loans resulted in some prepayment penalties. They were $83,000 in the first quarter of 2017. That compares to $30,000 in the first quarter of 2016.

We continue to have loan recoveries. We had $11,000 loan recoveries in 2017. That compares to $107,000 in the first quarter 2016. We had no loan charge-offs in either of those quarters.

The allowance of total loans was 1.52% at March 31, 2017, compared to 1.71% 1 year ago.

A couple of other items on the asset quality. Nonaccrual loans, they're just $17,000. Loans past due 30 days or more are just $63,000. The classified equity ratio -- classified Tier 1 equity ratio at March 31, 2017, was just 6.4%. Really, the classified assets are the $17,000 from the nonaccrual loans, and then we have $1,348,000 in OREO for a combined total of just under $1.4 million.

We didn't have any change in the OREO balances during the first 3 months of the year. We continue to hold the 2 properties that we held at year-end, and there were no writedown to any of those properties as well.

The investment portfolio, really no significant changes there either as primarily, they're well-structured, cash-flowing mortgage products mixed in with some high credit quality municipal bonds.

At the end of the quarter, the portfolio was $263.6 million compared to $254.5 million at the end of 2016. The decrease in loan balances that I mentioned, we used to fund the increase in the securities portfolio.

About 90% of the portfolio remains in U.S. government agencies or U.S. government-sponsored agencies, again primarily mortgage-related bonds.

The portfolio is still relatively short. Average life of the mortgage products are about 3.7 years, and average life of the municipal bonds are about 5.3 years.

The effective duration of the entire portfolio is still under 3%, and the price change and rates up 300 is just under 10%.

The unrealized gain on the available-for-sale bond portfolio increased from $916,000 at the end of 2016 to $1.3 million at the end of the quarter.

On the liability side, first quarter of the year tends to be difficult on deposit balances as the business owners move money out to pay bonuses, take draws or to pay down taxes. However, 2017 started off on a pretty positive note as deposit balances increased from $545 million at the end of the year to $551 million at the end of March. That's over a $6 million increase. Deposit balances have increased over $27 million over the past 12 months.

Something to point out, this is new for 2017, the IRS decided to delay the normal date for business owners to pay the prior year final tax liability. In prior years, businesses had until March 15 to file or extend their prior year tax returns and pay the amount due. This year, the IRS changed that due date to April 18 and the state of California followed suit. We're hoping this extension doesn't impact the positive deposit growth we did experience in the first quarter.

The increase in the deposits over the last year, the largest impact has been from the noninterest-bearing deposits. Those increased nearly $12 million. Money markets increased nearly $9 million. Our noninterest-bearing balances represent 36% of the entire deposit base, and the CD portfolio, that's about 85%.

Average cost of funds actually increased 1 basis points from the prior year. But really, the reason for that is first quarter of last year, we had large FHLB borrowings, and those borrowings were overnight borrowings, so they tended to be lower cost. So that diluted the overall cost of the borrowings. So the average cost of borrowings in the first quarter last year was 83 basis points compared to 1.26% in the first quarter this year.

If we focus just on the deposits, the overall cost of deposits for the first quarter of this year was 14 basis points. No change from the first quarter of 2016.

Our capital levels remain strong. They decreased slightly during the quarter due to the share repurchases and the reinstatement of our quarterly cash dividend. The leverage ratio, 10.4%; total risk-based capital ratio of 20.2%. Those are down a tad from year-end where they were -- leverage was 10.5% and the total risk base was 20.3%.

During the quarter, we did repurchase 131,000 shares of our common stock. The average price we paid was $15.01. And then on February 22, we paid the quarterly cash dividend of $0.05 per share.

Tangible book value per share did increase. It was $10.14 at the end of the year, and now it's at $10.20 at the end of March.

There were some brief comments on the income statement. There was really no material or unusual or nonrecurring-type items. The noninterest income actually decreased from $754,000 in the first quarter last year to $419,000 in the first quarter of this year, with the largest decrease coming in the gain on sale of securities and in the OREO income. The OREO -- decrease in the OREO income results from the fact that neither of the 2 properties we currently own are income producing where last year, we had one income-producing property.

On the expenses, they did decrease $361,000 from $3.8 million in the first quarter last year to $3.4 million in the first quarter of this year. And much of that decrease is related to lower OREO expense. The OREO expense decreased $320,000 down to $20,000 in the first quarter of this year. The majority of the expense in 2016 was related to an impairment charge on one of the properties that we eventually sold in 2016.

Lastly, we continue to benefit from the FDIC bank insurance fund's reserve ratio reaching the 1.15% level, which results in a lower assessment for the community banks such as American River Bank.

Thank you, and I'm going to turn it back over to David for some additional comments.

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David T. Taber, American River Bankshares - CEO, President, Director, CEO of American River Bank and President of American River Bank [4]

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Yes. Thanks so much for that comprehensive report. American River Bank is a focused business bank serving Northern California. We're continuing to focus on profitable growth while being mindful of our overhead and obviously being diligent with asset quality. We certainly believe that share buybacks continue to be a viable tool in capital management and correspondingly enhancing shareholder value.

We included some economic data in our press release, so please take a look at that. But in general, positive trends continue in the markets that we serve as well as California and certainly the nation as a whole.

After achieving 12% in loan growth in 2016, we gave some of that back, with payouts ahead of fundings in the first quarter. Fallout, which we describe as loans not made that have been either on our pipeline or our potential opportunity list, were about $56 million in Q1. The reason for the majority of that fallout were the prospects were desirous of more liberal underwriting terms than we would provide.

On the deposit side, the increase in the first quarter, as Mitch described, was atypical. Checking accounts still make up close to 50% of total deposits while CDs are less than 15%. The vast majority of our deposits are business relationships, providing key evidence that our business focus is working.

In closing, we have considerable work to do to increase our net interest income. This will come from profitable growth on both sides of the balance sheet. We certainly will continue to be mindful of our overhead and overall in increasing our shareholder value.

Eric is going to open the lines for question in a minute. And as he's preparing to do that, I want to remind you, as Mr. Derenzo did, to our disclosure on forward-looking statements. Also, an additional reminder that our company does not provide guidance, and we do not plan to change that practice anytime soon. So please contact one of the analysts that currently cover our company for additional information. And Eric, if you would open up the lines for Q&A, that would be great.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question on the line from Don Worthington.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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A couple things from me. In terms of the buyback, if I calculate it right, you've got about roughly 200,000 shares remaining. Is that correct?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [3]

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That's correct.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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Okay, okay. And then in terms of the elevated payoffs, what was the number on that in terms of repayments in the quarter?

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David T. Taber, American River Bankshares - CEO, President, Director, CEO of American River Bank and President of American River Bank [5]

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Yes. I think it was a little over $15 million for the quarter.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

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Okay. And that's compared to, what was it, $4.6 million for new fundings?

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David T. Taber, American River Bankshares - CEO, President, Director, CEO of American River Bank and President of American River Bank [7]

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Yes, just under $5 million in fundings, correct.

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [8]

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Yes.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Okay, all right. And then just more of a subjective question. Among your business customers, are you noticing, in terms of sentiment, people being more optimistic versus, say, last quarter? Or how's the temperature there for potential borrowing by small businesses?

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David T. Taber, American River Bankshares - CEO, President, Director, CEO of American River Bank and President of American River Bank [10]

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Yes. The -- in general, optimistic, although some of the optimism had been driven by potential changes in tax law, certainly, health care and other items from a regulatory perspective in D.C. And all of us have observed that that's not happening as fast as any of us wanted to. So I don't think that's really depressed the optimism, but I think folks are being a little more realistic as to the impact on some of the things coming out of the federal government.

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Operator [11]

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(Operator Instructions) And our next question comes from Tim O'Brien.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [12]

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First question I have for you is -- and this is kind of drilling down in the P&L line items. So maybe, Mitch, you can help me on this. So looking back at service charges on deposit accounts, on a trailing basis, the trailing 4 quarters, we've seen a steady decline in service charges: $129,000 in 1Q '16; $128,000 in 2Q; $124,000, $121,000; this quarter, $117,000. Are you guys doing anything? Is there any optimism that that's going to stabilize? Or are the dynamics still in place? And are we going to continue to see pressure there?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [13]

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Yes. The -- verifying here the -- the big pieces there is NSFs, fees on NSF. And really, our clientele is building their balances in their deposit accounts, so there's less overdraft charges. Higher quality of depositor, you could tell, call it, $120,000 a quarter isn't our big breadwinner here, so we don't really focus on trying to nickel and dime our depositors.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [14]

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Makes sense, Mitch.

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [15]

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Yes.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [16]

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But -- so I mean, just given the strength of your clients, that number -- there's -- that pressure is going to remain, I guess?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [17]

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Yes. We have high -- we tend to have a high average balance -- deposit balances. So we're not nickel and diming them. We're doing what we can. We're trying to get paid for the services we provide, but we're not going to run out to somebody because we wanted to charge an extra $5 a month on an account.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [18]

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Yes, understood. And then on the overhead cost side, was there any seasonal, I don't know, workman's comp accruals or anything that hit this quarter or something along those lines that you accrue in the first quarters of a given year that you can break out and identify for us that won't kick in or won't remain in the second quarter? And furthermore, is there anything in the second quarter, maybe comp adjustments or something, that we can expect step-ups or something like that?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [19]

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Yes. And typically, Tim, the first quarter of the year, if you compare it with, say, first quarter to fourth quarter, you're going to have a lot higher taxes because those FICA and those workers' comp things kick in again because your base salary starts over you. You look at your own paycheck there. You probably had a little bit higher taxes in there. Same thing for the employers. The employers' taxes are higher there as well. Also, in the first quarter, we tend to pay the year-end incentives. And while we accrue the year-end incentives, the dollar amount for those, we typically don't accrue for the taxes on those. That's probably -- I'm going to say, roughly $30,000. So it's a big number if you are just focusing on salaries and benefits, but overall, it's not a -- it doesn't move the needle very much.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [20]

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Line items. Did that -- those FICA accruals or the accruals on incentive -- the tax piece of the incentive that you talk about, does that hit in salary and benefits?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [21]

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Correct. Taxes are considered benefits.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [22]

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Understood. Maybe that'll change. Occupancy costs were down a little bit, dipped a little bit this quarter. What's the story behind that? I'm sure that I could probably go into -- you guys are pretty good about talking about leasing and stuff like that. What's -- was there a reset there on a lease or something along those lines? Or why the dip there?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [23]

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Primarily because we've been working over the last few years to reduce the footprints of our branch sizes. The biggest piece here would be the Roseville -- the biggest impact from last year to this year would be the Roseville. We moved from almost a 4,000-square-foot building to, like, 2,150 square feet or something, about 2,200 square feet. That occurred in the second half of 2016. So that's probably the biggest impact there. So that's an ongoing-type savings.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [24]

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Okay. And then this quarter, they were a little bit lower relative to even the fourth quarter. Any idea why?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [25]

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The move date, if I recall, was November 1. So there probably was some rollover expenses that hit the fourth quarter, pay the bills as you get them. And those were nonrecurring in the first quarter.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [26]

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And then as far as timing was concerned on those loan payoffs, it looks like average balances held up pretty well, average loan balances relative to end-of-period balances between the fourth quarter and this quarter. So that implies -- connect the dots, those payoffs came late in the quarter?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [27]

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They really came throughout the quarter.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [28]

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Okay. And...

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [29]

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We might have had some in the first quarter, but then we had more loan fundings in the first quarter -- or I'm sorry, the first month of the quarter. So -- yes.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [30]

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And securities, average securities, the balance of average securities was a little higher in the fourth quarter than in the first quarter. So with the additions, we could see some adverse mix hit here on -- that could affect the margin here in the first quarter -- in the second quarter?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [31]

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On that one, Tim, I'd probably look at the quarter-end balances. They probably tend to be higher than the average balance.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [32]

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Yes, yes. But they were for a -- the average balances of loans were higher than end-of-period balances, and the average balance of securities was lower than the end-of-period securities balances. So...

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [33]

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My comment there was focusing really on the securities because if you checked off the quarter-end balances, I know that we have a lot of securities that settled right near the end of March. So that's probably a better indicator of the balance to use.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [34]

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And then early in the call, you gave that rate. Was it 4.78% was the weighted average rate of the existing loan book?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [35]

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That would have been the new loans that booked during the first quarter.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [36]

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And what was the 4.28% rate?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [37]

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4.23% was the renewed...

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

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4.23%?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [39]

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Yes.

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

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So 4.78% was what? And 4.23% was what?

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Mitchell A. Derenzo, American River Bankshares - CFO, Principal Accounting Officer, EVP, CFO of American River Bank and EVP of American River Bank [41]

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The new loans, the $4.6 million of new loans we added, the average rate of those were 4.78%. The loans that we renewed during the quarter...

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [42]

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Oh, renewed, okay.

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Operator [43]

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We have no additional questions at this time.

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David T. Taber, American River Bankshares - CEO, President, Director, CEO of American River Bank and President of American River Bank [44]

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Well, great, Eric. Thank you so much for hosting this call, and thank you for those that are on the line and listening. Appreciate your interest in our company. Have a great afternoon.

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Operator [45]

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