RBB Bancorp (RBB) 2018 Q1 法說會逐字稿

Good day, and welcome to the RBB Bancorp First Quarter 2018 Earnings Conference Call. My name is Victor, and I'll be your operator for today. (Operator Instructions) This call is being recorded and will be available for replay through April 30, 2018, starting this afternoon, approximately 1 hour after the completion of this call.

I'd now like to turn the call over to Mr. Larry Clark, Investor Relations for the company. Please go ahead, Mr. Clark.

Thank you, Victor. Good morning, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the first quarter ended March 31, 2018. This morning, the company distributed its first quarter earnings press release as well as a press release announcing its agreement to acquire First American International Corp. Both of today's press releases are available on the company's website at www.royalbusinessbankusa.com.

In addition, the company has developed a slide presentation with additional information on the First American International transaction. You can access these slides in the Investor Relations section of the website.

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 proposed First American International transaction and the quarterly results, and then we'll open the call up 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 the First American International Corp. transaction that we announced today, and then David will review off -- our financial results.

One of our key goals is to expand our franchise to other geographies that have a high concentration of Asian Americans and in areas with similar characteristics as our existing markets. Those that are showing favorable economic trends and who have relationship-based community banking is valued by customers.

We are very pleased to announce that the proposed transaction with First American could enable us to expand the RBB franchise to the New York City markets and serve its large community of Asian-Americans. This transaction combines 2 organizations that share similar business models and will create a $2.5 billion institution with improved scale, efficiencies and profitabilities.

First American International Corp. is a holding company for First American International Bank, a community development financial institution and a minority depository institution with total assets of nearly $900 million, total gross loans of over $700 million, and total deposits of over $630 million, including a meaningful presentation of noninterest-bearing deposits.

The bank has 8 full-service branches, offering consumer and business loan products and banking services, including wealth management services and also has one satellite mortgage origination office, all serving the Chinese-American communities in Manhattan, Queens and Brooklyn in New York City.

First American is highly compatible with RBB. We have an excellent cultural fit, strong residential and commercial loan production platforms, a shared discipline of high underwriting standards and a commitment to strong asset qualities.

Furthermore, this transaction offers compelling economics as it is highly accretive to our earnings per share, and it has a relatively short tangible book value dilution earnback periods.

First American is delivering strong and improving profitabilities. Since 2015, loan has grown at a 17% CAGR; deposits at a 19% CAGR; and net income has increased by a multiple of over 7x.

Their asset quality is excellent. NPA has averaged less than 0.5% of total assets in the last 3 years. And during that time, they have had virtually no net charge-offs.

In summary, we are very excited about welcoming First American International Bank into the RBB Bancorp family. We have the opportunity to expand into the attractive New York City market, where we adding a highly regarded, profitable and growing institution with a shared culture and a commitment to relationship-based community bank.

We believe that the combined company will be well positioned to continue to grow the RBB franchise and creating value for our shareholders in the year ahead.

I will now turn it over to David for discussion of our first quarter results. David?

Thank you, Alan. We had another solid quarter and continued to execute well on our strategic and financial plan.

We generated $8.8 million in net income or $0.52 per share, which was up 30% year-over-year, and up $0.29 per share in the fourth quarter of 2017, which included a $0.14 per share write-down of our net deferred tax assets.

Our loan growth was strong for the quarter. Total loans, including loans held for sale, increased by $70 million, which resulted in 20% growth on an annualized basis. Contributing to the increase was $58 million increase in mortgage loans held for sale and $19 million increase in residential mortgage loans held for investment, an increase in commercial real estate and construction portfolio. Partially offsetting these increases was a decrease in our SBA portfolio. We sold some loans out of that portfolio and didn't have a meaningful amount of originations as the new additions to the SBA team are still building their pipeline.

Based on the trends in the pipeline, we expect our SBA loan production to return to its previous levels during the third quarter.

Moving to the other side of the balance sheet. We had healthy inflows of deposits, which grew at an annualized pace of 11%, and more than provided for the funding of our increase in portfolio loans.

We continue to effectively execute on our strategy to proactively engage with our largest customers and capture a great share of their deposit balances. This helped drive a $30 million increase in noninterest-bearing deposits from the end of the prior quarter. As a result of our success in bringing in lower-cost deposits, we only experienced a 4-basis-point increase in the cost of our total deposits during the first quarter.

Turning to our interest -- net interest margin. On a reported basis, it decreased by 36 basis points to 4.26%, the decline mostly attributable to a 32 basis point decrease in yield on earning assets due to lower loans discount accretion.

Income following the early payoff, we had on a large acquired loan last quarter. The lower accretion income was partially offset by a favorable shift in the mix of earning assets.

Excluding discount accretion income, our core net interest margin was 4.17%, an increase of 26 basis points from the fourth quarter.

Going forward, we believe we will have a modest expansion in our NIM. Our total net -- noninterest income was down $1.3 million from the fourth quarter, mostly driven by lower gains on loan sales. Our mortgage loans held for sale at the quarter-end were $58 million, higher than at the end of the prior quarter. So we expect to see an increase in gain on loan sales in the fourth -- in the second quarter.

Our total noninterest expense increased by $1.4 million from the prior quarter, primarily driven by higher salaries and employee benefits, reflecting the additions we have made in our income property lending, SBA and Wealth Management businesses.

Additionally, our other expense was impacted by $500,000 increase in our provision for unfunded commitments.

Turning to our income tax expense, our effective tax rate for the quarter was 15.2%. The lower tax rate reflects the impact of a deduction for stock options exercise in the amount of $1.2 million.

Excluding the stock option impact, the effective tax rate would have been 26.7%. We continue to anticipate an effective tax rate of between 27% and 30% for this year.

Looking at our asset quality, we continue to experience generally positive trends. We continue to experience very low credit losses, and we had 0 net charge-offs during the quarter. With the lack of charge-offs in this specific reserves required for the large loans placed on nonaccrual, our provision for loan loss was just $184,000 for the quarter, which was primarily attributable to the growth in total loans during the quarter.

This brings our allowance for loan losses to 1.11% of total loans, up 1 basis point from the end of the prior quarter.

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

(Operator Instructions) And our first question comes from the line of Tyler Stafford from Stephens.

I wanted to start just on the deposits and just curious if you could spend a couple of minutes talking about just the competition for core deposits, what kind of market rates out there is becoming more and more prevalent for you to really compete? And just expectations for deposit growth this year?

We see competition as fierce right now. We're seeing deposit rates over 2.25% in our marketplace. Currently, our rates are about 1.68% for a 1 year CD. We will probably have to increase those until about the 2% rate, sometime during this quarter. We may decide to lengthen that to like a 15-month CD or 18-month CD, but we're looking at those things now. So it is fierce right now. I think our deposit generation as far as the noninterest-bearing deposits will -- it's tough to continue to bring in more than 15% increases in those areas. I think we'll still well be in around the 10% area on a quarterly basis in bringing noninterest-bearing deposits.

Okay. Very helpful. And then just that competition that you just spoke about, that would be already kind of embedded in that modest expansion of the NIM going-forward comment that you made in your prepared remarks, correct?

Yes.

And does that modest expansion, does that include the impacts of the First American acquisition once that closes? It looks like their margin was precisely below yours?

No, we have not completely modeled that yet -- out yet. So...

Okay. Okay, got it. And just on their fee income, it looks like their servicing fees bounced around quite a bit. Is there a good approximation in terms of our modeling that we should use for their fee income on a quarterly basis?

It's 25 basis points on the servicing portfolio. They have about almost $900 million outside servicing right now. Maybe that's closer to $1 billion now. So that's what it should be. But then we have the amortization of the servicing assets with that also.

Okay. Okay. That's helpful.

I can get more specifics on all of these to you. I'm writing these questions down, and we will get more specifics to you.

Yes, that would be fine. And then just last one for me, David. Just the comfort level around the loan-to-deposit ratio going forward on a combined basis, just remind us how you think about that?

Well, our policy states that we can match fund our available-for-sale loans with FHLB borrowings. So we will have about $200 million above or more loans than deposits at the close of this deal, which would fit, we have approximately $158-or-so million in available-for-sale loans on our books now and they'll be also the First Asian. So we'll be within our policy with what we've discussed with the regulators in the past. Having said that, we may also look at selling additional loans to bring us closer to a 100% loan-to-deposit ratio after the combined bank.

And our next question comes from the line of Jackie Bohlen of KBW.

Starting off with the quick housekeeping question. What form of CDI amortization schedule do you use?

We do straight line.

Okay. For how many years?

Typically 5.

Okay. So as I think about your institution combined, just more broadly speaking, how does this impact your growth rates in both loans and deposits going forward? And my question is twofold: one being that, you'll have a much larger balance sheet that you'll be calculating those growth rates off of, but also you'll have a much larger market area as well to get that growth from.

Okay. We see that -- typically, we see during the conversion period a little bit of slowdown in growth, because we're focused on doing the conversion and doing the conversion correctly. Okay? So the conversion period is usually 3 to 6 months.

After that, we would see similar growth from both institutions. We plan on introducing some of the products we have into First Asian's (sic) [First American] mix. I'm talking about SBA and C&I lending, remote deposit capture to First Asian -- First American, I'm sorry, First American. And then expect to move some of their products, for example, the Fannie Mae servicing product, to our lineup of things also. And so, there is going to be some cross-utilization of products that they have developed and we have developed, okay?

So how is that conversion and integration and everything with double-digit loan and deposit growth remain appropriate?

I would say -- this is Alan. I would say it still would be low double-digit. Yes, low double digits.

Okay. And when you think about the possible closing time frame, 2 half '18 as a relatively broad time frame. Are you thinking more 3Q or 4Q?

We would hope to close in 3Q, but I can't promise that. It's up to the regulatory agencies more than it is up to us, okay? So we will get our applications in as soon as humanly possible. So that we could try to close in the third quarter. If we get approval in the late third quarter, because of logistics and so forth, we would close on October 1st.

Okay. And then start to -- I would assume that conversion would probably take place in early 2019, if that were the case?

It could. It could. If everything goes right, conversion could be as early as November.

Okay. And then...

Okay. If everything is perfect. I'm saying, if everything goes perfect.

And then understanding that there are a lot of moving parts, some of which are completely outside of control. And then just cost savings with -- once the conversion takes place, I would assume that there's maybe month or 2 left of cleanup and cost savings would be pretty much integrated at that point.

Yes.

(Operator Instructions) And we have a follow-up from Ms. Jackie Bohlen from KBW.

The 1-4 family portfolio on First American, what type of mortgages are those? Are they fixed rates? Are they conforming? Or most of them nonconforming? How should we think about those?

They have pretty much a 5-1, 7-1 products, they also have some 3-1s. And they are almost exactly the same portfolio that we have. Also, they do have a Fannie Mae product that goes directly to Fannie Mae, and that's what they are -- in their servicing bucket, a big portion of that is that. So that's something that we don't have and we would like to begin doing that on the West Coast.

Okay. So is it fair to say that most of their gain on sale income comes from their Fannie Mae product rather than single-family loans?

Yes.

Okay. And I think you referenced this in the prepared remarks, and I apologize if I missed it. The satellite mortgage office, is that also in the New York City metro area?

Yes, everything's in the -- I guess they're all in the New York's boroughs.

(Operator Instructions) All right. I'm showing no further questions at this time. I'd now like to turn the call back to Chairman and CEO, Mr. Alan Thian for closing remarks.

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

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.