American River Bankshares
Q1 2019 Earnings Call Transcript

Published: 19 Apr 2019

[Operator:]

Welcome to the First Quarter 2019 Earnings Conference Call. My name is Adriane 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. [Operator Instructions]. Please note this conference is being recorded. I will now turn the call over to David Ritchie. David Ritchie, you may begin.

[David Ritchie:]

Thank you, Adriane. Good afternoon, this is Dave Ritchie, President and CEO of American River Bankshares, the parent company of American River Bank. We're headquartered here in Rancho Cordova, California. I'm joined today with Mitch Derenzo, our CFO, who will help me give you all our first quarter update. Please be aware that two press releases went out at the market open today, our earnings release which is -- which details our quarterly results and the cash dividend that will be paid next month. We did also include some economic data in our press release and general positive trends continue in our markets in California and the nation as a whole. So with that, I will turn it over to Mitch Derenzo to give you an in-depth financial review.

[Mitch Derenzo:]

Thank you, Dave. I appreciate that. Thanks all of you for listening in on the call this afternoon. Before we get started, I need to remind everyone of our safe keeping harbor disclosures. Certain matters discussed in this presentation may constitute forward-looking statements for the purposes of 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 our Annual Report on Form 10-K for the year-ended December 31, 2018, and in the 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 and our Form 10-K are located on our website, americanriverbank.com. As with past calls, let me try to highlight some of the key areas from the press release that we issued this morning. I'm going to try to provide some additional details, some analysis, turn it back over to Dave for some wrap-up comments, and then we'll open up the lines for questions. Today American River Bankshares reported net income for the first quarter of 2019 of $1.1 million compared to $1.4 million during the first quarter of 2018. Earnings per share were $0.20 per share in 2019, $0.23 per share in the first quarter of 2018. ROA and ROE for the quarter 68 basis points and 6.17% respectively that compares to 80 basis points and 7.39% respectively one year ago. From a result basis, Q1 2019 was lower than Q1 2018. From a progress point of view though, I think we are much better off in 2019 than we were in 2018. As you recall a year-ago we baked first full quarter and we just begun to lay the foundation for our plan. At March 31, 2018, we had just three relationship managers and a newly hired Chief lending Officer and we didn't have a Chief Credit Officer at that time. One year later, we have a fully functional lending team working with our Chief Lending Officer and we hired the Chief Credit Officer, we hired in May of 2018. Of course that's reflected in the higher salaries and benefits from Q1 2018 to Q1 2019. Those increased from $2.2 million in the first quarter of last year to $2.8 million in the first quarter of this year. But we also have almost $37 million more in loans outstanding over that timeframe which had a great impact on the interest income. Interest income is up over a $1 million from the first quarter of last year to the first quarter of this year. We really started to make progress in the latter half of 2018, so I think a better comparison would be to compare the fourth quarter of 2018 to the first quarter of 2019. While the numbers are not significantly better in the first quarter of this year versus the fourth quarter of last year, there are some things to point out. The first would be the number of days. The fourth quarter of last year had 92 days and the first quarter of this year had just 90 days. Considering that our net interest income for the first quarter of 2019 was almost $62,000 you can see that the first quarter of 2019 was quite a bit better than the fourth quarter of 2018. And the salary expense that was a bit higher in the fourth quarter due to some catch-up incentive accruals came down in the first quarter of this year, decreasing by $148,000. The loan growth also required a higher provision for loan and lease losses increasing by $55,000 in the first quarter of this year when compared to the fourth quarter of last year. Average loans for the first quarter of this year were $329 million that compares to $321 million in the fourth quarter of last year. But with the ending loan totals at $341 million at March 31, 2019, we can see that the ending loans much higher than the average so they continued to grow throughout the quarter. Many of those loans were put under the end of the first quarter which should help us going forward with additional interest income. Take a look at the balance sheet. Net loans increased by $17.5 million in the first quarter. Balances with the new fundings actually increasing the payoffs, which is good for us here, we've been struggling actually with good fundings but the prepayments were pretty high as well. If you take the $17.5 million growth in the quarter that's a 5.5% growth rate, if you annualize that it's about 22%. The loan fundings in the first quarter were $31 million that's less, if you compare that to a year-ago we have less than $2 million in the first quarter of last year. It was a pretty [indiscernible] last year. As a reminder, new loan commitments in the second quarter of last year were $30 million, the third quarter they reached $40 million, and then the fourth -- I'm sorry the third quarter they were $40 million and then in the fourth quarter last year they were $33 million. So the trailing four quarter total fundings were $134 million. At the end of the first quarter, we had total unused commitments of $32 million about $11 million of that was commercial, so just have the ability to revolve most of the rest of that $32 million is real estate related and they should fund over the next year or so. Our payoffs -- I will just talk about payoffs, those decreased really were $10 million in the first quarter of this year compared to $15 million in the fourth quarter of last year. And as a reminder for all of 2018, we had $49 million in payoffs. On credit quality, really not a lot of change. Not a lot to talk about there. We did a $2,000 in payments on our non-accrual loans. We didn't add new non-accrual loans, so we ended the quarter at just $25,000. We did have one loan that was 30 days in greater past due that was $423,000 matured loan that was in the process of being renewed and has since been renewed in early April. We did put $180,000 in provision and that's basically due to the loan growth in the quarter. The allowance was 1.34% of loans at the end of March. That compares to 1.48% one year ago and 1.38% at the end of 2018. The first quarter we had a whopping $5,000 in loan recoveries but more importantly we didn't have any loan losses. And we still have one OREO property valued at $957,000. As far as the loan growth itself the $17.5 million pretty well diversified. The largest area that grew is real estate. We also had growth in commercial, consumer, and Ag, and that growth in real estate wasn't CRE related. We actually had a decrease in CRE of about $3.4 million. [Indiscernible] real estate, the residential real estate that increased by $9.5 million and construction which increased by $3.2 million. Multi-family decreased $1.04 million. The growth in the residential real estate came from a few of our borrowers that buy and rehab [one to fours] [ph] and condos and rent them out. These were refi's existing loans from external lenders and not new purchases of homes. The construction fundings were split between commercial and residential projects. The growth in the other line item that's going to be consumer, which grew by $5 million up to $50.7 million, and then the Ag that grew by $4.4 million to $8.8 million total at the end of the quarter. The consumer growth was in our specialty auto portfolio which increased by $5 million. We did 70 of those loans during the quarter for an average of 83.5 -- $83,500 and that's about same that we did the fourth quarter we booked 70 loans with an average balance of $85,000. The growth in the Ag was centered in one refinance and consolidation loans secured by three separate properties that contained peach, almond, and walnut orchards as well as some farm equipment. The average loan rate on the $31 million in new commitments during the quarter was 4.9%. We also did about $2.8 million in renewals of existing loans during the quarter. Those rates averaged 5.52%. Classified equity at the end of the quarter was just 1.7%, with the classified assets being $25,000 in non-accrual and then $957,000 in OREO, combined total of just $982,000. Our investment portfolio really remains the same well-structured cash flow and mortgage products and some high credit quality municipal bonds still relatively short. Average lives of the portfolio is about three years. The effective duration of the entire portfolio remains quite low at around three years as well. Price change and rates up 300, about 10.24%. On the other side of the balance sheet, deposits we ended the quarter at $572.4 million that was a decrease of $18.3 million from the $590.7 million at the end of the year and a decrease of $27.8 million from the $600 million at March 31, 2019. Our non-interest balances are holding us well. There's still 37.2% of deposits have had some pressure on the money market accounts, much of the decrease in the deposits during this two timeframes that I mentioned above occurred in the money market accounts. Those decreased from $164.5 million, one year ago and from $145.8 million at December 31st, we are now at $133 million at March 31, 2019. So a drop of about $12.8 million in 2019 and then from a year ago a drop of $31.5 million. If you recall last year, during our first quarter conference call, I mentioned that we had a short-term bump in the money market accounts as one of our business sold their biz -- one of our business clients sold their business. A year ago the accounts for that one client represented $22.5 million and they've since reduced that down to $150,000. So that one really wasn't -- I can't really say that was due to rate. During this year 2019, we have had some rate pressure but we've been able to retain most of those by matching rates. We did lose one $10 million deposits; the client moved their funds into investment related account. However we still retained the rest of the relationship and that relationship still averages between $6 million and $8 million. The rate pressure obviously is going to increase the interest expense. Average cost of funds for the first quarter was 60 basis points that was up from 49 basis points in the fourth quarter of last year and up from 35 basis points in the first quarter of 2018. Really the reason for the increase is from a higher rate environment and then some of our short-term FHLB borrowings and CD cost those tend to be short-term and when the short-term rates increase, we obviously have to pay a little bit more. The overall cost of deposits for the first quarter of this year was 34 basis points. That compares to 19 basis points in the first quarter last year. Again most of that increase is due to the higher CD interest expense. Our capital levels remain strong. The leverage capital ratio at the end of the quarter was at 9.1, total risk base was 17%. Those numbers compares to 8.9% and 17.3% respectively at December 31, 2018. And Dave did mention earlier that the press release went out this morning announcing a record and pay dates for the cash dividends to be paid next month. Coming to the rest of the income statement, let's start with the non-interest income that's $411,000 for the quarter that compares to $384,000 in the fourth quarter and $372,000 in the first quarter of last year. Really the fluctuation there is in the investment sales, gains from securities sales in the first quarter of this year were $36,000. In the fourth quarter, they were $12,000, and one year ago in the first quarter of last year they were just $1,000. On the expense side, non-interest expense was $4,260,000 that decreased from $4,329,000 in the fourth quarter of 2018, but up from the $3,350,000 in the first quarter of last year. Comparing from one year ago, really I mentioned the salaries and benefits in my opening comments there. We increased the lending staff, we replaced the Chief Credit Officer, and then the normal salary increases over the past 12 months. Other expense kind of a big jump there. We got $1,028,000 in the first quarter this year compared to $686,000 in the first quarter of last year, and $951,000 in the fourth quarter of 2018. Really much of that increase relates to higher business development costs and the promotional costs as we're focusing more of our efforts in our markets to strengthen our brand. On the taxes, we continue to benefit from the lower federal tax rate. If you really compare 2018 and 2019 now that that rate is 21% in both years. Pre-tax income in 2019 was $1,520,000 compared to $1,462,000 in the fourth quarter last year and that's $1,759,000 in the first quarter last year. The effective tax rate during this period was 24.6% in the first quarter of this year and then in the low 23s in the fourth quarter of last year as well as the first quarter of last year. Really the fluctuation in that rate is due to the lower level of taxes and muni bonds but really more importantly the timing of exercising and investing of restricted stock and we're accounting for those under Accounting Standards update 2016-09. They issued 2016-09 might be aware of how that works but basically we received a tax credit when non-qualified stock options are exercised as well as when restricted stock vest when the market price is higher then the restricted stock was awarded. We do have some non-qualified stock options exercised in the first quarter of this year but as of the end of the quarter there was no stock non-qualified stock options remaining. There's no future benefits from those. And on the restricted stock, if the market price is lower than the award date, they do not receive the credit as it creates a higher tax expense. So in the first quarter of this year, we actually had a tax expense of $5,000 because our stock price has increased a bit this year. So that's really the fluctuation a year ago. We had $85,000 benefit from the credit. Then a little technical on the accounting standards there but it does impact the tax rates that I shared that with you. That's it. Now I'm going to turn it back over to Dave for some additional comments.

[David Ritchie:]

Sure. Thanks, Mitch. Maybe I can just try to put this into a few key categories from my perspective and then we'll open it up to questions. But we continue to stay the course; we continue to stay committed to the plan. We kind of had about a two-year plan as you all know, management's working real hard, it's execution time and the mindset is to deliver consistent results. I'm pleased with the first quarter. We were able to close $30 million as Mitch said of new commitments and renew $3 million bucks that seems to be right down in our warehouse at least for the last four quarters, we've really booked over $30 million in loan commitments and new loan commitments. I think we show some signs of the payoffs are reducing. Those are about $10 million in the first quarter which is somewhat less than last year which I tend to kind of anticipated that happening. I think we're doing a little bit better job on the opportunities that we can keep, we are getting in front of those and some of the purchase loans that we've done in the past continue to pay off at a much slower rate. Now net new loan outstandings in the first quarter are up $18 million, I think that's -- it's refreshing for all of us because I think last year we felt really good about the deals we've put on but we seem to be running in place a little bit with all the payoffs. So I think we feel really good about that number. Net interest margin has increased 30 bps since the first quarter of 2018 as we were able to replace the pay-offs and maturing loans and securities into higher rate loans and securities which is a good thing. As Mitch said, we are seeing some pressure on the deposits with the client base we have and I think the service levels we tend to get less look from a lot of our clients and they will give us a call and say, hey can you help me out and I think we've done a pretty good job of that as we said, some of the deposits were -- some companies sold and the significant amount of deposits, I don't think we ever thought they would stay forever but we benefited last year from that. And so now we move on. The credit, the credit remains really strong here and really clean. We certainly have done a great job there. I think our whole credit department is doing a terrific job. So I'm feeling really good about that and I feel really good that we're competitive again. We're -- we continue to see really good opportunities and we continue to build the pipeline. We continue to focus our relationships and excellent service pretty much that's about I mean we're kind of doing the blocking and tackling. We take deposits, we make loans and we take care of clients. That's kind of our skill. So overall I'm really confident in the people as we strive to grow in the company we want to become. So with that, we can open it up for some questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And we do have a question from Tim O'Brien with Sandler O'Neill. Your line is open.

[Tim O’Brien:]

Good. Hey, first question I have for you, Mitch do you have the prepays this quarter and also in the year-ago quarter, the prepaid penalties that you received in interest because you mentioned some prepayments so?

[Mitch Derenzo:]

They were minimal, let me just pull that up here for you. Bear with me. So this year they were $93,000, last year $124,000 last year.

[Tim O’Brien:]

Okay, great. And then what was the average rate on new loan fundings this year?

[Mitch Derenzo:]

4.90, 4.90.

[Tim O’Brien:]

4.90?

[Mitch Derenzo:]

Yes. The renewals were 5.52.

[Tim O’Brien:]

So that's down from 5.6% last quarter?

[MitchDerenzo:]

Correct.

[Tim O'Brien:]

Okay, 4.90.

[Mitch Derenzo:]

Had a little drop in rates in a couple of the larger loans that we did were a little more competitive as far as the rate goes.

[Tim O’Brien:]

And again the residential real estate loans that was tied to existing clients. And it was I guess they're redoing and renting those properties out?

[Mitch Derenzo:]

Yes, basically they own these properties, they own these homes and condos in the rental markets and they came to us for - to take [out another bank] [ph] in essence. So there was no -- no new purchases of homes just [refinance another] [ph] institution.

[Tim O’Brien:]

So all the growth do you guys had was internally generated. There wasn't any -- there weren't any loan purchases?

[David Ritchie:]

Yes.

[Mitch Derenzo:]

We're still doing our auto -- auto loan.

[Tim O’Brien:]

Except for that?

[Mitch Derenzo:]

We've got $5 million or so. But other than that, yes, organic.

[Tim O’Brien:]

Is there a threshold for how much auto you might be inclined to put on the books as a percentage of total loans or numerically a dollar number -- dollar number or something?

[Mitch Derenzo:]

We do, it's kind of an internal number, I'd say we're probably slightly over half of kind of our initial thought process there. We don't want to become distraction for what we're doing. It's a good way to diversify our loan assets. The high quality loans they're all making their payments really, really high credit quality. But if it's going to distract from our overall core business function then we will slow that down.

[Tim O’Brien:]

And then with regard to comp costs this quarter, was there - do you have a dollar amount of I guess seasonal payrolls, tax accrual, or workman's comp all-in kind of that hits every year in the first quarter. Do you have a dollar amount there?

[Mitch Derenzo:]

I do but it's hard to compare to the prior year because we had a lot less folks. As you know --

[Tim O’Brien:]

That's okay.

[Mitch Derenzo:]

It ramps up a little bit more in the beginning of the year and then tails down. We do pay incentives to the team in the first quarter. The incentive is accrued but the taxes and 401(NYSE

[Tim O’Brien:]

So if I take what you're saying, if I get what you're saying then quarterly incentive accrual is going to increase incrementally through the remainder of the year each quarter?

[Mitch Derenzo:]

Correct.

[Tim O’Brien:]

How much was the incentive accrual for the first quarter?

[Mitch Derenzo:]

That would be $225,000.

[Tim O’Brien:]

All right.

[Mitch Derenzo:]

Compared to a 120 a year ago.

[Tim O’Brien:]

Last quarter you guys had a pretty sizable true-up, what was it was like, $634,000.

[Mitch Derenzo:]

I believe so.

[Tim O’Brien:]

That was -- my impression from last quarter's call was that was an exceptional number, I guess reflecting the strong loan production and growth and performance in the fourth quarter as much as anything right?

[Mitch Derenzo:]

In catch-up, catch-up with -- the third quarter growth was higher than anticipated. So we didn't accrue enough in the third quarter, we had catch-up in the fourth quarter.

[Tim O’Brien:]

And then one other question that I have for you is a macro question. I noticed in your presentation that there was an uptick in unemployment rates throughout your market footprint in each of the markets that you guys operate in year-to-date. Do you have any color on what's going on there, you must in our local newspapers reflect that or something but what can you tell us there?

[Mitch Derenzo:]

There were small, small changes. So I [kind of chalk] [ph] it up by seasonal type.

[Tim O’Brien:]

So one of them look like there was a one point change or something at first glance maybe it was Amador County which is --

[Mitch Derenzo:]

[Indiscernible] which is you get a few bottoms were moved at.

[Tim O’Brien:]

Yes, okay. And then last question securities portfolio, there was some growth in end of your balances there and they came down a little bit in the first quarter. Is there kind of a range that manages towards or can you give any color on --?

[Mitch Derenzo:]

It's - because the portfolio consists primarily of mortgage related products we're getting principal paydowns every month. What we'll do is if we need to reinvest because of anticipated lower loan growth or higher deposit growth then we will. This past quarter we had low loan -- low deposit growth or negative deposit growth and high loan growth. So there was really no need to continue to reinvest that. Sorry for those bond sales people that are listening on the call, it's well-known these days and funding the loan portfolio is the key. So we will use that securities portfolio to -- we will run that down if need be because we're making 2.75%, 3% in the investment portfolio and call it 5% in the loan portfolio.

[Operator:]

[Operator Instructions]. And the next question comes from Tim Coffey from FIG Partners. Your line is open.

[Tim Coffey:]

So you guys got out of the gate pretty quickly this quarter here in loan growth, would it be a stretch to say that we can see year-in loan growth be much, much better than was last year?

[Mitch Derenzo:]

You got us [indiscernible], if the year-ended right now we get $17.5 million right. We do have a good pipeline and the loan prepayments appear to be toning down with $15 million in the fourth quarter versus $10 million in the first quarter. We're hoping that trend continues and we flush out those nonrelationship type loans. So I mean we're anticipating to continue to see further loan growth, whether [indiscernible] 22% that maybe ...

[Tim Coffey:]

Understood.

[Mitch Derenzo:]

I'd like to see somewhere between 10 and 15.

[Tim Coffey:]

It's great.

[David Ritchie:]

I mean Tim that's kind of part of the plan, I mean we hired the people as you know. Yes, we brought in hopefully the right people and I think it's kind of showing some signs of consistency which makes me feel good and we really have kind of real pipeline you don't get everything in your pipeline as you know. But it seems like it's really kind of execution now I mean we just got to work well as a management team to make sure we deliver. I mean you can - it's nice to get packages and everything but if you can't deliver, you can't -- you're not going to [indiscernible] on your market. So yes I think like Mitch said I think it's been kind of consistent. We're hoping for consistency and we'll see what the actual numbers are. But there is some really unique opportunities in there.

[Mitch Derenzo:]

The teams are working together, it's great, there's a lot of excitement. So I'm optimistic.

[Tim Coffey:]

Okay. And Dave, I can stick with you on the pipeline aspect of that. When applications or loan fall out of pipeline, what's usually the leading cause?

[David Ritchie:]

Probably the leading cause for us right now is just we may just be turning it down. So when it gets actually what we've done to try to streamline as we've really doesn't even hit the pipeline until we actually get to the actual numbers or whatever. So it's kind of -- kind of until it gets there, it's kind of real. And we did $30 million and I don’t know the exact number have turned out, we are not doing everything that walks in here obviously, we're pretty conservative. But I mean it's somewhat comparative but I think to note the biggest thing it's not been like we're losing it over pricing or things like that or we could lose something today. There is some aggressive banks maybe a little bit over structure but most of its probably, it's either something we don't want to do or something we probably shouldn't do.

[Tim Coffey:]

Okay. And then did you have any construction loans booked last year, they expect it will come due this year and if so how much?

[MitchDerenzo:]

And we've got about -- in construction outstanding it's relatively $8 million or so, we still have $20 million or so in commitments in unfunded commitments. Most of those are 12 to 18 months. So we want to put them all in the latter part of last year. So there could be some --

[David Ritchie:]

The logic would be hopefully because we are seeing some more, we're hopefully going to kind of balance out with replacing new as we get, because some of our for sale projects so they will go away. There is a little bit of housing in there and things like that. But to me right now, we had zero when you looked at us a year ago. So we built it up a little bit and now those are getting funded. My guess is of course since some of those will go away. But I think we also have enough pipeline that we're going to kind of balance out and there may not be a big, big swing.

[Tim Coffey:]

Okay. And then your footprint, where is most of your loan growth coming from?

[David Ritchie:]

Right now it's obviously in Sacramento. We don't have a lot at Amador. And Sacramento I don't worry about a bit. I mean we have a bigger team here. Santa Rosa and our Sonoma County, we had -- I think we've talked about it before we probably had a little more work to do to get our name out there and get it done. But they have -- they are starting to build the pipeline. We have a pretty good team up there. Yesterday, we actually had our board meeting, our April board meeting up there and had a big client perspective client, COI events, and I think we weren't exactly sure because how many people would be there. We had a pretty good turnout and a lot of people have a lot of interest and we're trying to create some opportunities for our team up there with the senior management and the board of directors and it was really well received. We heard a lot of good comments about what we're doing up there and so we always started -- started a little behind Sacramento and building a pipeline but frankly it's got some nice new opportunities and there's a little bit of Ag and some winery stuff up there and there's some construction obviously from the fires and some opportunities there. So yes, if there is probably a fire where we really need to focus on is probably Sonoma, I mean I think I'm not worried about Sacramento.

[Tim Coffey:]

Okay. And then from staffing levels, are you pretty much done with kind of the planned additions to the ranks?

[David Ritchie:]

Tim, yes I think anything we do not I'm not going to say a 100% of this is correct but pretty close. If we today I think if we -- something we will have we would replace, I don't think we're looking. You never stop looking because you know so many opportunity you really think could help you out, you might take a look at somebody but I don't think we've anticipated any large hires of any large positions or anything like that. I think we're pretty good right now like I said.

[Mitch Derenzo:]

If we did new hires then we will have to pay consultancy pretty quickly.

[David Ritchie:]

Pretty quickly, yes.

[Tim Coffey:]

Okay, okay. And then just last question on capital and managing your capital levels potential distributions to shareholders, use of it. What is -- what are the priorities rank in terms of how you look at managing capital?

[Mitch Derenzo:]

I think we'd like to be focused -- focused on leverage capital. Obviously the risk-based is as important right now because we have pretty healthy risk-based numbers. Those will come down as we put on 100% risk-weighted loans. So will take care of themselves. So if you look at the leverage capital where we're around 9%, I'm pretty comfortable at 9%. So I think you're probably alluding to buyback, we did announce -- we did not announce a buyback this year. It doesn't mean that we won't but we want to kind of see where this growth takes us. If we're growing fast and the earnings aren't committing our originating capital then we want to make sure that we slowdown things like buybacks. The dividend is what it is; we're going to continue to pay a dividend until somebody smashes on the head. But I don't anticipate huge increases in our dividend, we will probably continue to take a look at that and evaluate each quarter to see if it makes sense to increase as with the buyback there. We've got CSO [ph] -- we're running some parallel models right now. Some of the bigger banks have announced some hits to their capital because of CSO [ph]. I don't anticipate a huge hit but I don't really know what that is. So I kind of want to stay a little conservative on that and the capital retention until I've got a real strong idea of where the growth is going and what CSO [ph] could impact.

[Tim Coffey:]

Okay, great color.

[Mitch Derenzo:]

How do you guys confirm?

[Tim Coffey:]

Yes, that was a complete answer. I appreciate that. All right, those are my questions. Thank you.

[David Ritchie:]

Thank you, Tim.

[Mitch Derenzo:]

Thanks, Tim.

[Operator:]

And the next question comes from Tim O'Brien from Sandler O'Neill. Your line is open.

[Tim O'Brien:]

Hey, one follow-up to that. That $1 million in other operating expense you've attributed that to business development cost. Is that going to be volatile or seasonal through the year or can we kind of expect that number to remain above $1 million bucks here quarterly going forward?

[Mitch Derenzo:]

Well.

[Tim O'Brien:]

Obviously the million doesn't account --

[Mitch Derenzo:]

[Indiscernible] don't start bring up like that. We said $1 million but included in that number, yes it’s -- you could say that we might have front-loaded some of the expense this quarter but going forward we’re still going to be out in the marketplace, there's still looking at the events coming up in the next quarter we're going to be active. We still have to get our name out there as Dave said we have a new branch at Santa Rosa last night, that's going to cost us a few dollars but that's part of the plan. As long as we're spending our dollars, we think we're getting business, we'll continue to do so.

[Tim O'Brien:]

Yes, thanks guys.

[David Ritchie:]

I was going to say we watch those dollars vary and then we'll take a hard look at those. We monitor what the kind of -- we get feedback from the community to see what -- we're putting our money in the right spots. And so we're not just willy-nilly spending money, we're really trying to make sure that we're getting the right coverage in the towns, we're doing it and so it's not something that doesn't go, there is obviously something we don't look at, how about that.

[Tim O'Brien:]

So I guess if I hear what Mitch said clearly the full-year budgeted number for business development you might have front-loaded that you might have spent a little bit more here in the first quarter out of the gate maybe a little bit or something but there's more to come for sure?

[David Ritchie:]

Yes.

[MitchDerenzo:]

Yes.

[David Ritchie:]

Yes, it could be. Yes.

[Operator:]

And your next question comes from Don Worthington from Raymond James. Your line is open.

[Don Worthington:]

Just one or two more questions. I know you don't give specific guidance but directionally kind of where you see the margin going from the first quarter level?

[Mitch Derenzo:]

So kind of on -- following on the question on the securities there as we continue to shrink the securities portfolio and put that into loans that's got to help the margin. We have had some pressure on the expense side but I think the margin should continue to grow and expand based on the fact that we're getting 5% for assets versus two to three quarters to 2.5%, 3%.

[Don Worthington:]

Okay, great. And then did you see any opportunities with the recently announced acquisition of Mechanics part of the Rabobank franchise?

[Mitch Derenzo:]

I mean it really is as far as opportunity, it's going to be our BD people, we have making their calls. Let's take a little time to have clients to switch over but we'll be focusing on that. As far as people goes, we went through that discussion a minute or two ago, I don't think we're in a position to just hire people to hire people. So we're focusing on trying to knock on those doors and take that business.

[Operator:]

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

[David Ritchie:]

Thank you.