RBB Bancorp (RBB) 2017 Q4 法說會逐字稿

Good morning, and welcome to the RBB Bancorp Fourth Quarter and Year-end 2017 Earnings Conference Call. My name is Latif, and I will be your operator today.

(Operator Instructions) This call is being recorded and will be available for replay through January 30, 2018, starting this afternoon approximately 1 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, Latif. Good morning, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the fourth quarter ended December 31, 2017.

With me today from management are: Chairman and President, CEO, Alan Thian; EVP and Chief Financial Officer, David Morris; EVP and Chief Credit Officer, Jeffrey Yeh; EVP and Chief Risk Officer, Vincent Liu; and EVP and Director of Mortgage Lending, Larsen Lee.

Management will provide a brief summary of the results and then we'll open 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 fourth quarter performance, and then, David will provide some additional details on our financial results.

We had another strong quarter and continue to execute well on our strategic and financial plan. We generated $4.9 million in net income or $0.29 per share, which includes a $2.4 million or $0.14 per share write-down of our net deferred tax assets due to the newly enacted tax reform act.

We continued our positive momentum in most areas of the company, generating strong loan growth, an improvement in our efficiency ratio and excellent credit quality.

From a loan growth perspective, we had a very solid quarter. Our total loans increased by more than $50 million, which resulted in more than 17% growth on an annualized basis. Most of the growth was driven by our commercial and industrial portfolio, while we had smaller increases in our commercial and residential real estate portfolios.

We originated $121 million in residential mortgage loans in the fourth quarter. This led to both solid growth in our retained single-family portfolio, and an increase in our gain on loan sale income compared to last quarter.

The growth in our commercial and industrial loan portfolio was due to a combination of factors, including an increase in our warehouse lines to our residential mortgage correspondent lenders, increases in line utilization among existing customers, and some participations in syndicated credits.

As expected, our SBA loan production decreased significantly in the fourth quarter due to the departure of a number of our SBA business development officers. Recently, we had been in negotiations to acquire the SBA division of a nationally established SBA lender. We are unable to reach an agreement under terms and conditions that we found acceptable, therefore, we have decided to organically rebuild our SBA department. We have hired a new SBA manager who will lead our business development efforts, as well as recruit new team members.

Our target is for our SBA loan production to return to its previous levels by the second quarter of this year.

Moving to deposits, we are very pleased that we actually saw a decline in our cost of deposits in the fourth quarter, which was primarily due to a favorable shift in our mix of deposits. Our efforts to deepen our relationship with our largest customers continues to provide positive results and a greater share of their deposit balances. We saw healthy inflows of core deposits, particularly in savings, NOW and money market accounts, which increased by $50 million during the quarter. This enabled us to run off some of our higher-cost time deposits, while still maintaining our desired liquidity.

Turning to our outlook for 2018, we expect another strong performance. We're planning to continue expanding our franchise through a combination of organic growth, acquisitions and de novo branch openings.

From an organic growth perspective, the pipelines in our core commercial and real estate markets remain strong and should deliver another year of quality balance sheet growth. We plan to open an office in Orange County in the second quarter, which we believe will enhance our ability to tap into the large Chinese-American community.

We are also investing in new banking talent to help us diversify into new attractive lending areas. We recently hired a specialist to start up an income property lending unit. This group will focus on originating loans for apartment buildings, mobile home parks and student housing properties. We anticipate that this group will produce approximately $50 million of production this year with yields in the 4.25% to 4.75% range.

We also recently launched our Wealth Management business. Initially, this group will focus on offering annuities and life insurance, and over time, we plan to add mutual funds to the offering as well. We expect the Wealth Management business to generate about $1 million in revenue and $0.5 million of pretax income in 2018. As this business scales, we believe it will serve as another driver of our earnings growth, while also providing important diversification to our revenue mix.

We are excited about the success we are having in attracting new customers to our banks in a variety of areas, and we believe the investment that we are making in our business will add to our positive momentum. We are on track towards our goal of diversification in our revenue mix and providing additional catalysts for increased profitability and the continued growth of our franchise in 2018 and beyond.

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

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 increased by 71 basis points to 4.62%. The increase was primarily attributable to two factors. First, discount accretion increased by $2.1 million, primarily from the early payoff of one large acquired loan. And second, we had a favorable shift in the mix of earning assets as we continued to deploy the excess liquidity from our IPO into higher-yielding loans and securities.

Excluding discount accretion income, our core net interest margin was 3.91%, an increase of 17 basis points from the third quarter, driven by higher average loan yields and relatively stable deposit costs. The higher loan yields were primarily due to the repricing of a number of our variable rate loans. Heading into the December Fed rate increase, approximately 70% of our variable rate loans were above their floors, so we expect to see a more positive impact on our average loan yields as we get the full quarter impact of the rate increase during the first quarter.

On the funding side, as Alan mentioned, we benefited from the strong inflows of core deposits, both interest bearing and noninterest bearing. The resulting change in deposit mix enabled us to be more conservative on our overall deposit pricing and as a result, our total cost of interest-bearing deposits only increased 1 basis point from the prior quarter.

That being said, the competitive environment for deposits remains strong and we expect that we will have more pressure from our customers to increase deposit rates as interest rates continue to increase.

Our total noninterest income was unchanged from the prior quarter. We had an increase on gain on loan sales of $364,000, but this was offset by a decrease in service charges and loan servicing fees, as well as no gains on OREO sales recognized this quarter.

We sold $90.3 million of mortgage loans for a net gain of $2 million, an increase of approximately $1 million compared to last quarter. We sold $16.6 million of SBA loans for a net gain of $1 million, a decrease of approximately $600,000. Until we rebuild our SBA department, we don't anticipate recognizing historical levels of income from the sale of SBA loans. We anticipate normalized SBA loan production and a return to a more historical level of loan sales in the second quarter of the year.

Our total non-interest expense declined by $317,000 from the prior quarter, primarily driven by lower professional fees. With the decline in expenses and the strong revenue growth we generated, our efficiency ratio improved to 31.7% in the fourth quarter, compared to 38.9% in the prior quarter.

Turning to our income tax expense, we recorded additional tax expense of $2.4 million in the fourth quarter to reflect the impact of the lower federal corporate tax rate on the value of our net deferred tax assets.

For 2018, we anticipate an effective tax rate of between 29% and 31%. With this lower effective tax rate, we expect to earn back the one-time write-down of our deferred tax assets in approximately two quarters.

Looking at our balance sheet, Alan already discussed the major trends we saw on loans and deposits, so I'll focus on our asset quality, where we had another quarter of positive trends.

Our nonperforming assets declined to $2.9 million, or 17 basis points of total assets as of December 31, down from $4.2 million, or 26 basis points of total assets, at the end of the prior quarter. The decline was primarily due to loan payoffs.

Our net charge-offs in the quarter totaled just 1 basis point of average loans.

We recorded provision expense of $2.4 million in the quarter. Approximately $1.5 million of this was attributable to the growth in the loan portfolio. The remainder went to rebuild our allowance level, which had declined after the large payoff of an acquired loan we received this quarter, which had a credit discount of approximately $1 million.

The provision increased our total allowance for loan losses by 15 basis points to 110 basis points of total loans.

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

(Operator Instructions) Our first question comes from the line of Aaron Deer of Sandler O'Neill.

I just wanted to dig a little deeper into the C&I growth in the quarter since that was very impressive. I was hoping -- you kind of broke it down into the 3 parts in terms of the contribution from participations, the benefit from the warehouse lines being used more and then just a general uptick in line usage. Can you talk about what the volume of participations or SNCs were in the quarter, what the increase was in line usage from the fourth quarter back to the third quarter? And then also talk about with the warehouse lines, just given the seasonality in that business, where you might expect that to go heading into the first quarter?

Okay. Aaron, it's David. So the biggest part of this was the syndicated loans of $28 million. The additional amount was probably mostly in the warehouse lending lines and then about $2 million additional from utilization. So about $10 million of it -- $8 to $10 million was in the warehouse lines. And we anticipate that to continue to increase over the quarters.

Okay. So you think just a general growth in that business should offset any sort of, kind of seasonality?

Yes.

Okay. And then on the deposit side, obviously, some very encouraging inflows there, too. Can you talk about -- you made -- in your comments, you talked about customer expectations for pricing. As we kind of head into the new year here, are you -- is that already being evidenced in kind of where you are needing to bring your offered rates or in the number of kind of one-off customer combinations you might be making on rates? And what -- where might we expect to see your cost of deposits go as we head into the new year?

I think our costs of deposits are going to continue to increase, and as rates increase, I think we're going to do our best to hold them down. But for example today, there was an ad from Cathay Bank at 1.61% for a 1-year CD out there. What our goal is, is to go back and ask our clients, if you want 1.61%. We want to have -- and you want to put in $1 million, we also want $1 million in DDA. So then you get the blended rate of 0.8 instead of a total of 1.61.

Okay.

That's what our goal is to do. Difficult to do that, so we may not be able to do it 1 for 1.

Okay. And then, if I may, just one last question on the residential mortgage business. There, too, it seems like you guys are seeing very good traction. Again, anything you can -- any guidance you can give in terms of the seasonality in that business and what kind of sale volumes we might expect here in the first couple of quarters of the year?

Larsen?

The business is doing well. We have entered into new markets, which are San Diego and Northern California, and we are seeing some production from San Diego. We just signed up a huge correspondent lender in the San Francisco area. We expect to see volume increase there, probably in the second quarter. And the sales are -- we're getting new customers. We do believe that demand is going to be there for our product, more so than we can produce, and so premiums should go up, probably in the second quarter.

Okay. So the -- so I guess, if -- I think there is $90 million in single-family residential sales in the fourth quarter. Is that something that can build in the first quarter yet, given this traction? Or might we see that just drift down a little bit just given seasonal trends?

Usually, in the beginning of the year, the market is pretty much slow. We won't see those kind of sales in the first quarter, but I think the production will continue to increase. Depending upon the strategy of the executives, how much to sell will be discussed. But we plan to sell at least $40 million in the first quarter.

Our next question comes from the line of Tyler Stafford of Stephens Inc.

I wanted to start on the SBA side and the comments that was included in the press release and in your earlier opening remarks. I missed exactly what happened and why those SBA developing officers left. Can you just give us a framework of how many left, how many are still there and a little bit more context to what happened this quarter?

Our previous SBA team, the three people who left us, actually, it's due to the types of loans that they've been producing. And we pretty much want to see a broader range of loans from different industries. I think the previous teams pretty much focused on hotels, motels and gas stations. Hotel, motels and gas stations are typical SBA loan products. However, at some point, we want to broaden the range to include more general service properties, such as industrial property warehouses; and professional, such as medical offices, dental offices, law offices and CPA offices. So that's why we believe that the new team we are hiring, in fact, that person is going to join us on February 5. He will concentrate in more of what I just said, a more general product mix that we really want to see. We anticipate that he will give us about the same volume as the other team we're bringing to get with us. This team will come with three people as well, so we anticipate that our volume will go up to approximately $120 million to $150 million a year.

Got it, okay. That was very helpful. So going back to the IPO, I believe you guys talked about in the first quarter of '18 initiating your dividend. And I'm just curious what the tax reform change and earnings windfall from that, how you guys were thinking about the size of the dividend and if that was still your timing around the first quarter?

Okay. As you know, Tyler, we've paid dividends every quarter; approximately 5% of diluted earnings has been our dividend rate. And we do believe that our dividend rate will go up because of the tax reform act. We haven't set the exact dollar amount yet. We're looking at that, but we do believe it will go up.

This is Alan. However, this year, we see quite a few very interesting targets. During our IPO, we mentioned that we'll probably grow organically, as well as through M&A. And because we will continue growth through M&A, we do not expect the increase in dividend will be a big amount because we still need the money for our M&A activities.

Okay. And that -- I guess that parlays into my next question just around expectations this year for M&A. Any kind of commentary how conversations are going and expectations in terms of pricing from guys you're talking to?

Well, I would say that, surprisingly, there are a few candidates that we are looking at right now and they are all targets that we've identified, like we presented during the IPO. And again, we are still exercising our discipline -- estimating that we'll be looking at full year payback, David?

Yes. And the change in the tax law makes some of these acquisitions a little bit easier to do because, when you look at it in after tax dollars, you're not giving away as much to Uncle Sam. But we do have a number of candidates that we're actively talking to right now and -- without giving names. I think we said in December, if we don't, for example, aren't able to acquire up in the Bay Area and so forth, we will open our own de novo office up there, if we're not able to acquire within a reasonable amount of time this year.

(Operator Instructions) Our next question comes from the line of Jackie Bohlen of KBW.

Just starting off with a quick housekeeping question. With the large loan payoff that you had in the quarter that drove the accretion, how does that impact forward amortization on the remaining acquired portfolio?

Our amortization on a quarterly basis is now only about $180,000 to $200,000 a quarter.

And how much...

It was about $700,000, I believe.

Okay, so significantly lower.

Yes.

Okay. And how much in total is left on that to amortize?

There's about $4 million in total between the credit discount and the liquidity discount.

Okay, that's very helpful. And looking to expenses. I mean, your results speak for themselves in terms of the control you have over that. And just given the efficiency ratio and the way it's been trending, how are you thinking about expenses heading into 2018? And have you already started to incur some public company expenses or are we likely to see more of that in '18?

Well, we already, in our financials, have the additional expenses for our audits and for our public relations and NASDAQ, all those fees are all in our expenses already; plus, the additional staff in finance. But for this quarter, we had -- of course, we lost our full SBA team -- not the full SBA team. We actually have nine people in SBA, we lost three of them. So replenishing them, we're also adding to mortgage staff, we're adding the investment property staff for the apartments. And we also are adding in Wealth Management and we're adding -- we're actually opening up a very small lending office for auto. So that's all here also, and the branches, we are strengthening our branch management staff also. So all of that will be coming onboard sometime during the first quarter of this year. And I would expect our expense ratio to build back up to that 38% to 40% range that you saw. The big change in professional fees is really because going public, we are not allowed to keep any buffer out there anymore, so that everything we have right at the moment is covered by insurance right now. So we don't have any really large legal expenses at this moment, so we have to reverse some of the legal expenses.

Okay, so the legal line item will go back to a more normalized level. And it sounds like maybe a little growth in occupancy, just given some openings and then the majority of your expense growth centered in the salary line item?

Yes, our salaries will increase by 10% to 15%.

And that's off of 4Q? I guess you have the same run rate all year, so -- okay.

Yes, yes.

Okay. And most of those hires you said will take place in the first quarter?

Yes. Or they're already here or they'll take place later on this quarter.

Okay. And then, I guess just lastly, the income -- sorry, running through my list of questions -- the income property division that you've added to, and I think you mentioned you might do some more additions there as well, how do you see that ramping up over time? And what kind of a ramp period are you looking for before you can start working on that $50 million origination goal?

I think he'll be at that level of originations by the end of the first quarter. I mean, he won't originate $50 million, but if -- he'll be on the track to make that for the full year. If you look at it on a monthly basis, he will be on that track. As far as 2019 and beyond, he has another position to hire, I understand. So we do expect that 2019 production would be significantly higher than the $50 million.

Thank you. At this time, I'd like to turn the call back over to Mr. Thian for any closing remarks. Sir?

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

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.