RBB Bancorp (RBB) 2017 Q3 法說會逐字稿

Good morning and welcome to the RBB Bancorp third-quarter 2017 earnings conference call. My name is Michelle and I will be your operator today. (Operator Instructions). This call is being recorded and will be available for replay through October 31, 2017, starting this afternoon approximately one hour after the completion of this call. (Operator Instructions).

I would now like to turn the call over to Mr. Larry Clark, Investor Relations for the Company. Please go ahead, Mr. Clark.

Thank you, Michelle. Good morning, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the third quarter ended September 30, 2017. With me today from management are Chairman and President, CEO, Alan Thian; Executive Vice President and Chief Financial Officer, David Morris; Executive Vice President and Chief Credit Officer, Jeffrey Yeh; Executive Vice President and Chief Risk Officer, Vincent Liu. Management will provide a brief summary of the results, and then we'll open up the call to your questions.

During the course of this conference call statements made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions that may or may not prove correct. Forward-looking statements are also subject to known and unknown risks and uncertainties and other factors relating to RBB Bancorp's operations and business environment, all of which are difficult to predict, and many of which are beyond the control of the Company.

For a detailed discussion of these risks and uncertainties, please refer to the required documents the Company has filed with the SEC. If any of these uncertainties materialize, or any of these assumptions prove incorrect, RBB Bancorp's results could differ materially from its expectations as set forth in these statements. The Company assumes no obligation to update such forward-looking statements unless required by law.

At this time, I'd like to turn the call over to Alan Thian. Alan?

Thank you, Larry. Good morning, everyone, and thank you for joining us today. I'm going to provide an overview of our third-quarter performance, and then David will provide some additional details on our financial results.

We had a strong quarter and executed well on our strategic and financial plan. We generated $6.6 million in net income, or $0.42 per share. This performance was driven by positive trends across most areas of our operations. As a result, we are seeing higher revenue, well-managed expenses, and improvement in our credit quality.

From a business development perspective, we had a very strong quarter. Our total loans increased by more than $50 million, which resulted in more than 17% growth on an annualized basis. We saw the strongest growth in our commercial and residential real estate portfolios. We originated $119 million in residential mortgage loans in the third quarter, an increase of more than $21 million compared to the previous quarter. This led to both strong growth in our retained portfolio and an increase in our gain on sale income compared to last quarter.

Our SBA loan production was lighter in the third quarter, coming in at $19.3 million, compared with $34.4 million last quarter. We lost one of our loan originators in the third quarter, which caused the decrease in production. We are currently recruiting for additional loan officers, and it's likely that our SBA production will remain at this lower level until we build the team up again.

Moving to deposits, we were very effective in managing our deposit costs during the third quarter. We saw strong inflows of core deposits, particularly in non-interest-bearing deposits, which increased by $72 million during the quarter. We continue to aggressively pursue core deposit relationship at all levels of our organization. Our success in this area enabled us to reduce our balances of CDs during the quarter. The resulting positive shift in our deposit mix helped keep our cost of deposits relatively stable during the quarter.

Looking ahead, our loan pipeline remains strong with the exception of SBA, which is a bit lighter. However, due to the strength in other areas, we expect to continue to see positive revenue trends and a higher level of profitability. Our current plan calls for selling more of our mortgage origination in the fourth quarter. So, it's likely that we'll see higher gain on sale of mortgages this quarter, and a lower level of growth in the retained portfolio.

We are also on track to launch our Wealth Management business by the beginning of 2018. With our current customer base, we believe we have good opportunities to cross-sell Wealth Management services from an institution that they have already come to know and trust. We anticipate the Wealth Management will provide a stable, recurring source of non-interest income that will provide important diversification in our revenue mix, as well as providing another catalyst for the continued growth of our franchise.

With that as an overview, let me turn the call over to David to provide additional details on our financial performance in the third quarters. David?

Good morning and thank you, Alan. As I walk through the income statement and balance sheet, I'm going to focus just on those items where some additional discussion is warranted.

I'll start with our net interest margin. On a reported basis, it declined by 11 basis points to 3.91%. The decrease was primarily attributable to lower loan discounts accretions, which declined by $230,000; and we carried excess liquidity throughout the quarter following our IPO.

We are still in the process of seeing our variable rate loans move off their floors. With the last rate increase in June, approximately 70% of our variable rate loans are above their floors, but we did not see a meaningful impact on our average loan yields. As a result, our average loan yields were relatively stable from the prior quarter.

On the funding side, as Alan mentioned, we benefited from the strong inflow of non-interest-bearing deposits. This enabled us to be more conservative on our overall deposit pricing. And our total cost of interest-bearing liabilities only increased 1 basis point from the prior quarter. However, we are certainly seeing rising deposit pricing within our markets, and it is likely that we will start to see larger increases in our deposit costs in the future quarters.

Our total noninterest income increased by $621,000 from the prior quarter. The most significant variance was a $319,000 increase in our loan servicing fees. As discussed last quarter, this variance is due to a one-time correction in the market value of the mortgage servicing asset caused by prepayment of mortgage loans. Our mortgage servicing portfolio was $311 million at the end of the third quarter, up $32 million from June 30.

The other major variance was in our gain on sale of loans, which increased by $295,000. We sold $43.4 million of mortgage loans for a net gain of $969,000, an increase of $167,000 compared to last quarter. We sold $22.4 million of SBA loans for a net gain of $1.6 million, an increase of approximately $100,000.

Our total noninterest expense was $240,000 higher than last quarter, but there were no meaningful variances in any particular area.

Going into the fourth quarter, we are in the process of adding some personnel to strengthen our infrastructure to help manage our growth as well as building out the Wealth Management group. These additions to our headcount should lead to a modest increase in our expenses.

We also have a couple of facilities-related moves planned that will impact our expense levels in the future. We plan on moving our headquarters approximately 2 blocks away from our current location and consolidate our downtown office, our City of Industry LPO, and our San Gabriel loan and administration offices to it. This will result in a modest level of cost savings in the long term as well as providing more room to support our future growth.

In addition, we have located a location to open an office in Irvine, California, and are currently negotiating a lease with the landlord. Therefore, at this time, it is not a definite item.

Looking at our balance sheet, Alan already discussed the major trends we saw in loans and deposits, so I will focus on our asset quality, where we saw substantial improvement. The most significant development during the third quarter was an $18.5 million decline in our delinquent loans. This was largely driven by the return to current status of a $12.7 million loan. This was the same loan that we discussed on our last quarter's earnings call. The underlying collateral is still in escrow and we expect it to close by year-end.

Our nonperforming assets declined to $4.2 million or 26 basis points of total assets at September 30, down from $9.3 million or 61 basis point of total assets at the end of the prior quarter. The decline was primarily due to the $3.6 million SBA loan guarantee payment that was received during the third quarter.

We had no charge-offs in the quarter, and net recoveries of approximately $100,000. And year-to-date, the net recoveries have been $747,000. With the improvement in our asset quality and the net recoveries in the quarter, our provision expense was just $700,000. This was primarily attributable to the growth in the loan portfolio. The provision increased our total allowance for loan losses by 2 basis points to 95 basis points of total loans.

Concerning loan sales, we will be selling $80 million to $90 million of single family mortgage loans in the fourth quarter. However, we will lower the amount of SBA loan sales by approximately one-third; and, therefore, gain on sale income will be approximately the same as the third quarter.

Book value is $16.49, and tangible book value is $14.49 per share for the quarter. Third-quarter basic shares outstanding was 14,767,457; and the diluted shares outstanding was 15,851,929.

With that, let's open the call to answer any questions you may have. Operator, please open the call.

(Operator Instructions). Aaron Deer, Sandler O'Neill.

Alan, I just wanted to follow up on your commentary regarding the loan outlook. You sound pretty positive in terms of the pipeline of originations. When you look out over the coming year and consider that outlook combined with what your projected loan sales might be, and what the anticipated paydowns might be on the book, including this larger loan that's likely to pay down here in the fourth quarter, where do you see the -- your held-for-investment balances going over, say, the next one, two, three quarters?

Basically, we generate a lot of loans. And, again, we have a lot of payoffs as well. Again, in this next year, we see that most of the growth will actually come from residential mortgages.

I would have Larsen talk a little bit more about the pipeline and what to anticipate further out.

Okay. Good morning, everybody. My name is Larsen Lee. The spike in production was due to an increase in correspondent lenders. And we launched a new wholesale lending program in the second quarter. Now it is paying off. We do see the market slowing down in the purchase market, but we were limited to the Southern California market. We are expanding to Northern California, Las Vegas, and the San Diego region. And the production seems to be increasing dramatically. And we will continue to grow and expand our operations and marketing.

Does that answer your question?

Yes. I guess if the held-for-investment balances overall were at $1.2 billion at September 30, where -- what's your outlook for those balances at year end? And what kind of growth are you anticipating as we head into 2018?

Well, it really depends on how much we sell. On the organic growth, we are still targeting a 12% increase, net increase, in almost all areas of the loan assets.

Okay. That's helpful. And then on the -- with respect to the loan yields, it sounds like you didn't get the expected improvements in loan yields that we might've had coming off of the latest rate hike. As more of that translates through the portfolio, might we expect an improvement in yields to help offset some of this prospective deposit pricing increase, going forward? Or do you think that the net result of these higher funding costs is going to offset any improvement in asset yields and cause some margin compression?

Right now in our modeling, it shows that we are still asset-sensitive, and we will have an improvement in our overall NIM. But the complicating factor is what happens with our loan accretion. And that is going away; so, consequently, our average yield on loans is going down because of that. So it's masking some of the other things that are happening.

Yes, I guess I'm just talking on a core basis, if you back out the impact of the interest accretion.

I think we will begin to see some increased rates in our loan portfolio because of the rates, starting with the next rate increase.

Okay, that's great. And then (multiple speakers) -- sorry, go ahead.

Well, it's because we're already at 70% of our portfolio that is over the floors. So we should begin to see some of this coming through our income statement.

Right. Understood. Okay. And then lastly with the -- given the mix of the commercial real estate growth that you saw this quarter, as well as the new capital that was brought in through the IPO, where does your commercial real estate concentration currently stand in terms of relative to capital levels?

Jeffrey?

Okay. Our composition of our CRE loans is almost the same. However, now in the third quarter we have a little bit of increase of these loans, mainly on the multifamily real estate -- retail and office. And they have increased -- the overall increased by about $50 million.

Okay. And do you have the -- I was curious about the commercial real estate concentration as a percentage of regulatory capital, where that stands today.

The concentration decreased, actually, because of an increase of the capital.

Right. So I'm wondering where it stands today versus at June 30.

Actually it decreased about 7% compared to June 30.

Okay. And what is the number today?

I don't have it with me. I can pull it up in a second.

Okay, that's fine.

We'll pull it up and get back to you on it. Okay?

Okay, that's perfect. I've got a few other questions, but I'll get back into the queue. Thank you.

Jacque Bohlen, KBW.

Can you provide a little bit of background on some of the marketing efforts that you put in place that drove the deposit growth in the quarter?

Well, actually this all started from the beginning of the year; we restructured our branches so that we almost changed all of our branches from an operations branch to a marketing branch. What that means, was that most of the paperwork that used to be done in the branch previously was so heavy in the paperwork and the internal controls.

Since beginning of the year, we gradually shifted those workloads to the back-room operations. So it gave the front-line goal and a target to target the customer. At the same time, since the last quarter we've been really focused on pushing the pipeline on DDA and targeting our top customers that have partial relationships to generate to a more full relationship.

And actually that pays off, because we now find out that through analysis or through big data, we have started to capture all those top 20% customers. And they do not only have relationships with us; they have relationships with quite a few other competitors. So it is just an additional effort to reach out to our customers on a more systematic basis through a lot of data gathering. And it's really through a few of our people who are working on this big data, and on data analysis, to come up with a list of our existing good customers and to enhance our relationships.

And approximately where do you stand on the reach-out with the customers that you are targeting? Meaning have you reached out to everyone on the list, or is there still more leads that you might be able to reach out to, in the future?

I believe we still are just at the beginning of it. We start targeting from the top of the customer list. Right now we are -- I will say we're only targeting, at each of the branches, we probably have targeted only 5% to 10% of the top customers, and we definitely will work that down. Now, that is one area.

The other area is going after that new customer. Right now what we are doing is we are only looking at our existing portfolio, going with our existing customers and working out on the total relationship. So we believe definitely that we will bring it down. We will bring down the list -- we are targeting the top 25% of the customers and ask for the total relationship.

Okay. So it's fair to say that we could continue to see strong growth in deposits, and that a good portion of that growth would come from DDAs?

Yes.

Okay. Thank you, that's very helpful. And then secondly if you could provide a little bit of info, just where you stand in the process of establishing wealth management, and any impacts you foresee in the near term on expenses and on fee income.

Right now, we have hired Wealth Management managers, and we are working with a wholesale company to target some of the investment products. What we see would be from the beginning, we will offer some basic products first, like annuities, investments or life insurance to start with. From the beginning because this will be on a commission basis, so there will not be a lot of expenses. We are anticipating the first year that the income should be between $600,000 to $800,000, and it should move up to about $2 million in the second year.

And where -- what do you consider the starting point for the first year? Is it as of 1Q 2018? Or is it something that will come into play a little bit later in the year as it develops?

We start launching from the beginning of the year. Again, from the beginning, the strategy is the same: we are working with our top customers. Again, we will try to sell the product to our customers. And hopefully because in our niche market, most of the customers maybe they have three institutions they are banking with. So our strategy is that the investment product that we try to offer will target the customer to bring in their investments from other competitors, to buy their investments. So, it is started from in-house as well.

Okay. Thank you, that's very helpful. I'll step back now.

(Operator Instructions). I'm not showing any questions at this time. I'd like to turn the call back over to Mr. Thian for any closing remarks.

Sure. Once again, thank you all for joining us today. We look forward to speaking with you next quarter. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.