RBB Bancorp (RBB) 2018 Q2 法說會逐字稿

Good morning, and welcome to the RBB Bancorp Second Quarter 2018 Earnings Conference Call.

My name is Shannon, and I will be your operator today. (Operator Instructions) This call is being recorded and will be available for replay through July 31, 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, Shannon. Good morning, everybody, and thank you, for joining us to discuss RBB Bancorp's financial results for the second quarter ended June 30, 2018.

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

Management will provide a brief summary of the results and then we'll open up the call for 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 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 any 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 update on the pending acquisition of First American International Corp., and then David will provide an overview of our financial results.

We are pleased to report that the proposed transaction with First American is on track, and we continue to expect it to close in early October. We have a well-developed integration plan, including an ongoing physical presence from our management team in order to work through the integration process and to ensure that we effectively capture all of the expected synergies, making for a smooth transition for all employees and customers.

Teams from both organizations are working very diligently to prepare for the system conversion in December, which should put us on track to start 2019 with most of the projected cost savings in place.

We continue to be optimistic about the benefits of this combination as it will enable us to achieve greater operational scale, improved profitability and enhanced geographic diversification.

As we mentioned on our last call, First American is an excellent cultural fit with RBB. We both have strong loan origination and deposit capturing platforms, a shared discipline of high underwriting standards, and a commitment to strong asset quality.

From a marketing perspective, First American has a loyal customer base and a good reputation in its communities it serves. Therefore, we'll initially retain the First American brand identity in order to maintain continuity and optimize our business development efforts.

We're excited about the opportunities to leverage the individual strengths of both organizations to expand our lending capabilities in each market. RBB will bring strong commercial loan production capabilities to First American, and they in turn will bring Fannie Mae residential mortgage production expertise to the RBB platform.

Finally, we are optimistic about our ability to capitalize on recent larger American bank consolidation activity in the New York market. We believe the disruption in the market has created some opportunities for us to acquire high-quality talent, pursue new customer relationships and make potential branch additions in attractive locations.

In summary, we are very excited about welcoming First American International Bank into the RBB Bancorp family. We are expanding into the attractive New York City market, where we are adding a highly-regarded institution with a shared culture and a commitment to relationship-based community banking. We believe that the combined family will be positioned well to continue growing the RBB franchise and creating value for our shareholders in the years ahead.

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

Thank you, Alan. We are very pleased with our operating performance for the second quarter, as we delivered another strong quarter of net income, driven by continued momentum in mortgage originations, improved fee income, good credit quality and careful management of expenses.

We generated net income of $9.4 million or $0.54 per diluted share compared to net income of $8.8 million or $0.52 diluted earnings per share, for the first quarter of 2018.

We had a very solid quarter of loan growth. Our total loans increased by just over $120 million, which consisted of $22 million increase in loans held for investment and $98 million increase in residential mortgage loans held for sale.

During the quarter, we deliberately limited the growth our loans held for investment by placing some of the lower-yielding,fixed-rate loans in the available-for-sale bucket. We plan to sell those loans in this quarter.

The growth in our held-for-investment loan portfolio was driven by increases in our commercial and industrial portfolio, as well as our single-family residential portfolio, and was partially offset by decreases in our commercial real estate, construction and SBA portfolios.

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 corresponding lenders, increases in line utilization among existing customers, and some participations in syndicated credits.

We originated $184.1 million in residential mortgage loans in the second quarter. This led to both the growth in our retained single-family portfolio and an increase in our gain-on-loan sale income compared to last quarter.

We were pleased to see increased production across our markets, but particularly in San Diego and Northern California, New York markets that we have been recently targeting.

Our SBA loan production showed a nice increase from the first quarter, as our recently expanded SBA team has ramped up its production and continues to build its pipeline. We continue to expect our SBA loan production to return to its previous levels during the third quarter, although, we are seeing an elevated level of SBA loan payoffs impacting our servicing income.

Moving to our funding. We grew total deposits by nearly $40 million, which more than covered the growth in our retained loan portfolio. NOW, money market accounts and time deposits drove that growth, while we experienced modest declines in DDAs and savings accounts.

We had one large customer shift approximately $40 million from DDA into money market accounts during the quarter. Excluding the movement from this one customer, our DDA balances would have increased by approximately $30 million, as we continue to have success in getting more of the overall deposit balances from our existing customers.

Given the shift in our deposit mix, and combined with the increase in the Fed fund rates during the quarter, the cost of our average interest-bearing deposits increased 19 basis points from the first quarter.

The competitive environment for deposits remains high and we expect that we will have more pressures from our customers to increase deposit rates.

We are increasing our marketing efforts in order to gather more core deposits, particularly on the retail side, both to help mitigate the higher deposit cost pressures, as well as to move towards being less reliant on large deposit relationships that are becoming more interest rate sensitive.

We funded the growth in our held-for-sale portfolio, primarily through the combination of our excess liquidity and increases in short-term borrowings.

Turning to our net interest margin. On a reported basis, it increased by 11 basis points to 4.37%. The increase was mostly attributable to a 24 basis point increase in the yield on earning assets, offset by the previously referred to increase in deposit funding costs.

We had higher loan discount accretions income during the quarter, which positively impacted the reported yield. Excluding the discount accretion income, loan yields increased 11 basis points and our core interest margin was 4.14%, a 3 basis point decrease from the first quarter.

Going forward, we expect to continue to see an increase in earning asset yields, but likely more than offset by higher deposit costs. Therefore, we expect to see some modest additional contraction in our NIM.

Our total noninterest income increased by $300,000 from the first quarter, driven by higher gains on loan sales, as I previously mentioned.

Our mortgage loans held-for-sale at quarter-end were $98 million higher than at the end of the prior quarter. So we expect to see another increase in gain on loan sales in the third quarter.

Our total noninterest expense declined $100,000 from the prior quarter, primarily driven by lower salaries and employee benefits, reflecting lower payroll taxes associated with the year-end bonuses that were paid and expensed in the first quarter, partially offset by higher legal and professional fees. Approximately $183,000 of these fees were the result of the pending First American acquisition. As a result of our well-controlled expenses relative to our growth in revenue, our efficiency ratio improved to 39.7% down from 43.9% in the first quarter.

Going forward, we expect our expenses will increase modestly as we continue to add professionals in the area of private banking and branch administration. In addition, we are increasing our marketing spend to support our deposit gathering as I mentioned earlier.

As we have discussed on previous calls, we are in the process of opening up a new office in Irvine, which is now scheduled to open late in the third quarter and will enable us to better tap into the large Chinese-American community in Orange County.

Turning to our income tax expense. Our effective tax rate for the quarter was 19.5%. The tax rate reflects the impact of a deduction for stock options exercised in the amount of $1.1 million. Excluding the stock option impact, the effective tax rate would have been 27.7%. We continue to anticipate an effective tax rate of between 27% and 29% for the year.

Looking at our asset quality, we continue to experience generally positive trends. Our nonperforming assets totaled $7.4 million or 0.58% of total assets at the end of the quarter, an increase from $4.8 million or 28 basis points of total assets at March 31. The increase was primarily due to TDRs totaling $2.1 million that were placed on nonaccrual status at the end of the quarter, but are still performing.

We continued to experience various low credit losses, and we had 0 net charge-offs during the quarter.

Our provision for loan losses were $700,000 for the quarter, which was primarily attributable to loan growth. This brought our allowance for loan losses to 1.14% of total loans, up 3 basis points 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 your call.

(Operator Instructions) Our first question comes from Jackie Bohlen with KBW.

First thing that I just wanted to clarify on the tax rate, the 27% and 29% guidance, is that what you're anticipating in the third and fourth quarter? Or do you anticipate a higher rate in those quarter, so that the year comes out to 27% to 29%?

Actually, we kind of said this wrong. We expect for the rest of this year that we will probably have another quarter of about a 20% effective tax rate and then the following quarter will probably be about 27%, again, to back up. Because we're still going to have about probably another $1.1 million deduction from tax expense in the third quarter, most likely, about that number.

Okay. So a lower rate in 3Q and then more normalized levels in 4Q and into 2019?

Yes.

Okay, that's very helpful. And you mentioned -- I'm not sure who it was who had mentioned it in prepared remarks, just -- the movements in line utilization in the quarter, if you could just provide some color to that and how it impacted loan growth?

The loan growth...

This is Jeffrey.

This is Jeffrey. The loan growth, because of loan utilization, is about $20 million increase during the second quarter.

Okay. And that just relates purely to the change in line utilization?

Yes. It's mainly on the C&I loan, because those are the lines of credit.

And do you happen to have what utilization was at March 31 versus what it was at June 30? The percentage?

No, we don't have that at this moment. We can get that for you -- we'll get that for you and get back to you Jackie, okay?

Okay, no rush. It's more just curiosity than anything else. And then just one last one for me and then I'll step back. You'd mentioned that the yields on some of the loans drove you to put those into held-for-sale. What was -- what are some of the yields that you put in that portfolio? And how does that compare to yields that you were putting into the investment -- or the held-for-investment portfolio?

The yields that we moved there are averaging about 4.62%. And now since we've raised our rates on mortgages to 4.75%, the new loans that we're putting on the books are about 4.85% to 4.92%, in that range.

Our next question comes from Aaron Deer with Sandler O'Neill.

Alan, thanks for giving us the update on the First American deal. It sounds that's coming together well. I want to I guess begin my questions on the loans held-for-sale. It seems like the origination volumes this quarter were just extremely strong. So of the, I think $282 million, was it in loans held-for-sale at period end? Can you breakout what percentage of that, I'm guessing most of it was single-family residential, but what if that was also SBA? And then where you -- what you expect the timing of the sales to be on what's -- what was held at period end? And what kind of gain on sale premium or margin you would expect on those sales?

Okay. I'll break that up in some multiple answers, here. First of all, it's 100% mortgage loans, okay? Single-family mortgages. We do have a small pool of multifamily loans, but we have not yet moved them over to available-for-sale, that we're looking at possibly selling too, and that's only $12 million. The volume. We have a $100 million tape out there right now, that we're trying to market. That tape will be -- the premium on that tape would not be as high as we are used to. It will not be a 2.5% premium, it would be much lower. However, the gain on sale will still be significant, because the amount that we're selling and all, okay -- well, the amount that we're selling will offset the interest that we would lose for the months period of time before we can recapture new originate new loans. So that's our thinking on that, Aaron. There is another -- we expect to sell another $20 million to $40 million in our local market at consistent rates of about 2.5%, okay?

Okay.

So I didn't give you a concrete answer, because right now, we don't know, it's out there looking at 3 organizations and they're bidding the tape right now.

Understand. Okay. And then in terms of the held-for-investment, I guess the growth there was maybe a little below, maybe where you guys had been guiding toward. Can you talk about what the pipeline looks like for what the type of production that you'd want to keep? So give us a sense of what kind of growth we might see in the back half of the year in the held-for-investment? And then also what was the percentage of -- or what was the dollar value I guess of loans that were added in the quarter that were participations or purchased loans?

We'll have Jeffrey answer it.

Okay. This is Jeffrey Yeh. For the loan participation during the quarter, we add about $11.2 million in terms of participation, mainly share national credits. Just give you a little bit of information, we classified that into a C&I. And then our total C&I production during the quarter is about $40 million, and it accounts for 30% of that increase.

Okay. And then how about the overall pipeline for what you'd keep the held-for-sale for the back half of the year, what kind of growth might we expect there?

You want in terms of available held to maturity, right?

I'm sorry. Yes, yes, I'm sorry, held for investment, my apologies.

Okay. Are you talking about pipeline for the entire quarter, the next quarter?

For the third quarter.

So our pipeline for the third quarter at this time, we're in the first month of the third quarter. We're projecting about -- in average, about $60 million of increase every month, which will increase about $180 million in loan production. Having said that, we have not discounted by payoffs at this time.

So we don't know the exact payoffs yet.

Sure.

And that does not include mortgage.

So would you expect the -- so would you expect the held-for-investment portfolio to get back to a double-digit growth rate? Or you think it's stays down here in the single digits?

It'll be back in the double digits. We're still projecting 10% to 12%, yes.

And then I'm curious about the commentary about focusing on -- for your deposit gathering on the retail side versus commercial. So it would seem to me that the retail depositors are arguably more price-sensitive than commercial depositors would. It -- isn't there perhaps more value in going after commercial operating accounts and balances there where it might flow into non-interest-bearing versus getting more in the retail CDs as such?

Well, you're correct that it is more beneficial for us to go after the business accounts and so forth. But we also want to diversify. One of the criticisms that we've had in the past, Aaron, was that we have too much into large depositors. So what we also want to do is look at getting smaller core depositors also. So we haven't abandoned our business track, we're just saying that we need to also do both.

So it's more matter of getting more granularity in the deposit base.

Yes.

Our next question comes from Tyler Stafford with Stephens.

This is actually Gordon McGuire on for Tyler. So Alan, did I hear you correctly in your prepared remarks that you guys are anticipating October 30 close for First American?

No.

No.

No, we expect a close between September 15 and October 15.

Right.

But let's say, if the timing is very close to the end of September, then we be tentatively -- we will move our closing to October 1 or 2.

We won't close till last week of September.

Yes.

Understood. And then just on the pro forma NIM impacts, I know First American had a lower NIM than you guys. Can you talk to maybe what we would expect for the NIM? And I appreciate the guidance for maybe some modest pressure organically, but maybe can you speak to what we would expect for the NIM exiting this year on a pro forma basis?

Including First American?

Yes.

I think our NIM will probably drop 10 basis points to 15 basis points, maybe a little bit more than that, because of adding First American. That's why we're also looking at -- it's very complicated here. That's why we're looking at possibly selling some of their mortgage portfolio to reduce the lower yielding portfolio and fixed-rate portfolio.

Understood. And so even with First American, you will still have a pretty robust capital position. Alan, I was wondering if you could speak to prospects for additional M&A? What conversations have been going on or just the pipeline for future M&A, what geographies you look to and maybe what asset size you're going to look at?

Well, as you know, we discipline ourselves to look at only one deal at one time. So in this case, our timing would be beginning of next year, because like David just said, we probably would close First American on October 1 or October 2, unless we can do it sometime in the earlier September, which is very unlikely. And we also have a conversion date of December 2 on the systems conversion. So during our past experience, normally it will take us between 3 months to 6 months to stabilize. So -- because First American is in New York, where there is a time difference, we still expect that 3 months after the conversion, we should have everything being stabilized. Probably at that time we would be able to, I will not say, come up with a definite (inaudible) impact. I would say that we'll be able to discuss other deals. In fact, there are two areas that we're looking at would be Northern California and Seattle. So the reason I mentioned two rather than one, because I just said that we want to do one at a time. So that for these two deals, it would depend on which deal will come available first. So if Seattle becomes available first, we'll do Seattle, if San Francisco is available first, we'll do San Francisco. But these are the two areas and they are the prospects that we've been highlighting (inaudible) to certain range that we believe that we can come to an agreement. So that will be something that we would like to do. Hopefully, we will have something come up in the first quarter of 2019.

Okay. And just last housekeeping for me. David, do you have the dollar balances for loan services -- loan service for others at the period end?

Yes. I have the loan service, just give me one second, for others. Sold and serviced $433 million.

And does that include the SBA servicing portfolio?

No, that does that not. And I don't have that number with me. I just have mortgages.

(Operator Instructions) And I'm currently showing no other questions at this time. I'd like to turn the call back over to 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.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.