RBB Bancorp (RBB) 2018 Q3 法說會逐字稿

Good morning, and welcome to the RBB Bancorp Third Quarter 2018 Earnings Conference Call. My name is Jewel, and I'll be your operator today. (Operator Instructions) This call is being recorded and will be available for replay through October 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, Jewel. Good morning, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the third quarter ended September 30, 2018. With me today from management are Chairman, President and 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 Branch Administrator, Wilson Mach; Executive Vice President and Chief Risk Officer, Vincent Liu; and Executive Vice President and Director of Mortgage Lending, Larsen Lee. 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 will start by discussing our third quarter performance at a high level as well as our acquisition of First American International Corp., which we closed October 15. David will then provide more detail on our financial results.

We reported third quarter net income of $8.3 million or $0.48 diluted earnings per share, up 26% and 14%, respectively, from a year earlier. We are pleased with another solid quarter of performance, which was driven by robust balance sheet growth.

We're also very pleased with the work that both the RBB and First American teams completed to bring the merger together smoothly. Their effort will continue as we execute our integration plan and make sure that we provide a seamless transition for all employees and our customers.

We believe that First American is an ideal culture fit with RBB. As I have noted several times, we are bringing together two banks with well-established loan origination and deposit gathering platforms as well as shared commitment to strong underwriting standards and asset qualities. Additionally, we are working to ensure that we are well positioned to capitalize on all the expected benefits of this combination, including greater scale, stronger profitabilities and the growth opportunities that come with entering the New York market. We are on track for the system conversion to occur in December, and that will enable us to begin 2019 with most of the expected cost savings in place.

First American has a well-established brand and customer base in New York. And for that reason, we'll initially retain the First American name there while emphasizing that it is now part of RBB. We want to make sure that we maintain strong customer relationships while we work to build out our deposit gathering and lending efforts.

Once we have completed the system conversions, we are able to significantly enhance First American's business banking capabilities. The new products and services that we will be adding to the New York platform includes analysis checking, remote deposit capture and online banking for businesses. We are confident that our collective strengths will enhance our business development capabilities in a time when there are clear market opportunities in New York to win new customer relationships. As we do this, we'll also look to open new branches in high-traffic locations.

Again, we are delighted to welcome aboard our First American colleagues and, importantly, all of our new customers. This combination strengthens our longstanding commitment to relationship banking and positions us to pursue continued growth in commercial lending, revenue enhancement and greater value to our shareholders.

I will now turn over to David for more detail on our third quarter results. David?

Thank you, Alan. We delivered another strong performance in the third quarter, where our third quarter net income of $8.3 million resulted in an annualized return on average assets of 1.73% and an annualized return on average tangible common equity of 12.7%.

Loan growth in the quarter was strong as we continued to respond to healthy loan demand from our customers. Loans held for investment totaled $1.4 billion, an increase of nearly $100 million from the previous quarter. This growth was driven primarily by growth in residential real estate and commercial real estate.

The growth in our commercial real estate portfolio was primarily attributable to our income property lending group. This group that we brought on board late last year to focus on originating loans for apartment buildings, mobile home parks and student housing properties, has steadily increased production levels and is generating very positive results for the company.

As we have anticipated and discussed on previous calls, our SBA loan originations have returned to previous levels at $20 million for the quarter. They were up notably from $11 million in the prior quarter. Our recently expanded SBA business development team is gaining traction in the marketplace and continues to build our pipeline.

Mortgage loans held for sale were $379 million at the end of the third quarter, an increase of $97 million from the close of the previous quarter. While loan production increased in the quarter, we sold fewer loans to our usual group of buyers as they had less capacity during the third quarter for mortgage purchases. We believe that the decline in mortgage loan sales is temporary, and we expect to sell a greater volume of mortgages in the fourth quarter. In addition to our normal group of purchasers, we are in the process of preparing more residential loans to be sold via traditional channels in the secondary market, which will enable us to reduce the amount of loans held for sale on our balance sheet.

Turning to deposits. Deposits totaled $1.6 billion in September 30, representing annualized growth of 39% from June 30. Growth in interest-bearing non-maturing deposits and certificates of deposits include $108 million of brokered CDs drove the increase during the quarter. Excluding brokered deposits, total deposits increased at an annualized rate of 9%.

Due to the slower pace of loan sales than anticipated, we had to be more aggressive in deposit gathering and pricing to fund the higher levels of mortgage loans held on our balance sheet. As we ramp up mortgage sales in the fourth quarter, we expect to return to a more normalized rate of deposit gathering. This shift in our deposit mix in the third quarter, coupled with the ongoing level of deposit competition and interest rate increases has resulted in a 20 basis point increase in the cost of our average interest-bearing deposits, when compared with the previous quarter.

Our cash balances were notably higher at the end of the third quarter. We increased our FHLB advances in order to manage through late-quarter volatility in our deposits. We have since paid back many of those advances to manage down the excess liquidity we had at September 30.

Moving on to the net interest margin. On a reported basis, the NIM decreased by 26 basis points from the previous quarter to 4.11%. Excluding purchase discount accretion, our core NIM only declined 8 basis points during the third quarter. The contraction was due largely to higher funding costs, partially offset by higher loan yields as we are seeing the benefits of repricing in our loan portfolio. Looking ahead, we anticipate further NIM contraction. We continue to see upward pressure on deposit cost, and in the fourth quarter, we will have First American's portfolio added to our balance sheet, which produces a lower NIM than the rest of our portfolio.

Turning to noninterest income. It declined to $2.1 million in the quarter due to the lower mortgage loan sales that I've already discussed. We are also seeing lower premiums in the secondary market for our sales on SBA loans, primarily due to higher prepayment fees, which impacted our total gain on loan sale income. As mortgage loan sales increase in the fourth quarter, we expect that we will see a higher level of noninterest income.

Our total noninterest expense was $8.7 million, up from $8.2 million for the second quarter of 2018. The increase was primarily attributable to a $207,000 increase in salaries and employee benefit expenses and a $180,000 increase in occupancy and equipment expenses to support our expansion. We just opened a new location in Irvine to increase business with the large Chinese-American community in the Orange County region of Southern California. And we are paying rent at both L.A. locations, pending the completion of our new headquarters office on Wilshire Boulevard in Los Angeles, which we move into next month.

The efficiency ratio for the third quarter was 41.8%, up from 39.7% for the prior quarter due to the higher expenses and lower noninterest income. Going forward, we expect our efficiency ratio to be in the 39% to 43% range. After we complete the integration of First American Bank, we expect our quarterly run rate on noninterest expenses in 2019 will be in the range of $14 million to $14.4 million. That's including both First American and us.

Shifting to income tax expenses. Our effective tax rate for the quarter was 19.7%. This includes the impact of a deduction for stock options exercised in the amount of $991,000. Our effective tax rate for the previous quarter was 19.5%. We anticipate an effective tax rate between 19% and 23% for the full year.

Our asset quality meanwhile remained solid. Our nonperforming assets were 32 basis points of total assets at September 30, an improvement from 38 basis points of total assets at June 30. Our credit losses remain low. We recorded one charge-off for $175,000 during the third quarter. Our provision for loan losses was $1.7 million for the third quarter, primarily reflecting growth in total loans. This brought our allowance for loan losses to 1.17% of total loans held for investment, up 3 basis points from the end of the prior quarter.

I will sum things up by noting that we are focused in the fourth quarter on the integration of First American and our balance sheet management strategy, which includes reducing residential mortgages held for sale, shifting the growth in our loan portfolio more towards commercial and commercial real estate loans, and more effectively managing our deposit costs to alleviate pressures on our margin. We are optimistic about the opportunities we are seeing to gain market share and attract new customers in Southern California as well as new opportunities to gather deposits and bolster lending in New York. We think this will position us well for growth and strong profitability in 2019.

At this time, we're happy to take your questions. Operator, please open our call.

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

Starting first on fee income, I'm just trying to understand the forward trends with all the moving parts. I guess touching first on the held-for-sale portfolio, where would you like to see that at the end of the year in terms of balances? I guess where would you like to see it? And where do you think it's plausible you would see it?

Okay. We would like to see it at probably $100 million to $150 million less than it is today. We think what's plausible to do, we know we can do $60 million as we speak. We're comfortable in that dollar amount. We're actually working with Fannie Mae, trying to see if we can securitize some of our portfolio and get that off because one of the benefits of First American is they have been doing that all along. So we would like to incorporate that also, but I don't know if that can be done by year-end.

Okay. So the balance over the $60 million that could get you to that $100 million, $150 million would be determined by the speed with which you can work on the securitization?

Yes.

Okay. And how are you thinking about income under those two scenarios?

We're seeing some decrease in our premiums there from 2.5% down to like 1.75%, in that area. So we're seeing that. But at the same time, we're seeing the servicing assets increasing because of the interest rate increase. The discount rate is increasing, so we see that going up as part of the total gain. On SBA, I don't think we have seen any change in the market yet on premiums. I think the premiums are still lower than they were this time last year, and we haven't seen any changes in that.

Okay. So volume on SBA similar, premiums similar. So income, likely similar from that piece of the segment, but then your higher income from mortgage loan sales, and that'll be partly dependent on the timing in terms of a securitization. Is that a fair assessment?

Correct, that is correct.

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

The loan growth obviously is very impressive in the quarter, but I wanted to focus more on the funding side if we could. Can you tell me where were the brokered CDs that you brought in during the quarter? What was the price on those? And what are you paying today for your incremental funding costs?

Our cost was in between 2.1% and 2.4% with the 3-month and 6-month money. Now right now, if you go out and you do overnight FHLB borrowings, that is in the 2.45% range as of today, 2.45%, 2.50% range.

Okay. And I mean, how comfortable are you in terms of being able to bring in more in terms of core deposits? And obviously, some of that's going to be in the form of CDs, but particularly some of your efforts to bring in more non-time deposits.

Well, again -- this is Alan. It is always our intention to continue bringing in our core deposits. In fact, like you just said, some core deposits are interest-bearing deposits. Again, as of today, I do not see that we are having customers that take money away. Assisting customer, I do not see any customers that are taking money away to other institutions. In fact, we continue seeing more customers spending money from China -- it's not directly from China. It's that our Chinese customers are bringing in money from other financial institutions, our competitors, to us as well as we are still seeing some money inflow from other countries like Hong Kong and even Europe and Canada that belong to those Chinese customers. So the continued effort of bringing business customer to us is on track.

Okay. So I guess when you look at where your current kind of incremental funding costs are as well as bringing together these 2 asset bases, where do you see -- I guess both on a core basis, where do you see the margin in the fourth quarter and maybe at the end of the first quarter of 2019? And what what level of accretion would you expect to be kind of on a normalized level to be on top of that?

Okay. So just on the core NIM for RBB, I see it still decreasing probably about the same amount, 8 basis points to 10 basis points. Then we're going to be adding on FAIB. Now if we just add on their core book without the mark-to-markets to it, we would have a substantial amount of decrease in our NIM. But because of what we're going to see as the mark-to-market on these, because most of these are fixed-rate loans and their new pricing is much higher, we're probably going to get a large liquidity discount and also a credit discount at the same time. So I could see all NIM variances going away with purchase accounting. But that's just theoretical right now because we haven't gotten the final purchase accounting back yet.

Okay, understood. So I guess on a core basis, you're probably looking at something just -- well, then I guess -- let's forget on -- I guess, on an aggregate basis. On a reported basis, you're probably down something akin to that, to that 8 or 10 basis points, but then that's going to diminish from there as the amount of accretion depletes over time. Is that a decent way to think about this?

That's correct.

Our next question comes from Tyler Stafford with Stephens Inc.

Just a couple more for me that I'm going to ask you. Just around the tax rate expectations for '19, would you still expect that to normalize in the higher 20s level? Or any thoughts on where that goes in 2019 on the tax rate?

Yes. The first quarter may have some benefit of options being exercised. But after that, I think pretty much everybody has done their 2018 and 2019 exercises, and then there's nothing really else, and there's nothing big until 2023 or 2022. So people may see some of that as they go along, but I don't see it right away. I don't see it at this stock price, quite frankly.

Yes. So I guess for the full year then, you should be fairly close to that 27% range. Is that fair?

Yes, yes. We should, yes.

Okay. And then can you just walk through the expense expectations for next year that you mentioned in your prepared remarks and just remind us about the cost savings from First American and when you'd expect to see those?

Okay. We should see the expense savings kicking in based on our plan, and knock on wood, hopefully, we can resolve it, is that it's by the end of December that we will have everything, the merger completely resolved. And at that time, December 31, all the people that are going to be laid off are going to be laid off, substantially all. As always, there could be one or two afterwards. And the system conversion is done, and we cut out all the duplicate stuff by the end of December 31. That's our goal. Because of legal issues and so forth and timing of payments and all that type of stuff, some of that may run into January. But we're hoping to get it all done by year-end. So you would...

But what was the quarterly -- I'm sorry, go ahead.

Right now, based on the numbers I have today, it's between 30% and 35% decrease in expenses from the total, which is about what we projected earlier.

And David, what was the quarterly expense run rate that you mentioned in your prepared remarks? I just want to make sure I heard that correctly.

Well, okay, there's a total of between $14 million and $14.4 million, and looks like FAIB is about $5.5 million a quarter, and ours is about $8.5 million. That's a little bit higher than if you take out our extraordinary expenses today, it's about where we are today.

And our next question comes from Aaron Deer with Sandler O'Neill + Partners.

Just a couple of quick follow-ups. One, just in terms of the -- as you bring these institutions together, and maybe there's a little bit of runoff as often happens in deals, but it seems like you should be able to get some good traction with your lenders and as you push stronger into New York, and certainly, it seems that they've had good trends in California. So what are you guys thinking just in terms of the general outlook for loan or deposit growth into 2019?

We think our loan growth will be between 10% and 12%. Our deposit growth is going to have to be higher than that to keep our loan-to-deposit ratio in line. So our deposit growth is going to have to be like 14%, 15%.

Okay. And then your credit still seems very healthy, but you guys took a pretty decent provision in the quarter. What was kind of the thinking behind that? Obviously, just to cover the loan growth. Anything else driving that increase?

Just the loan growth. And we just had the $175,000 write-off, so we had to replace that right back, of course, but that's really minimal. So loan growth mainly.

Okay. You're not looking to necessarily build the reserve from here?

Not yet, we do have a CECL task force, and if that proves fruitful for us, we may begin doing something like that down the road. But right now, our task force hasn't produced the numbers that we can project out.

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

Just one quick follow-up question for me. During the prepared remarks, you mentioned the possibility of opening up additional branches in high-traffic areas. And I'm just wondering if any of that is incorporated into the expense guidance and what you think the timing on some of that might be.

Okay. There's one branch that we have signed a lease for and we have announced, and that's on Roosevelt Street in Flushing, New York. So it's in a high, high, high concentrated Chinese area. We have two other branches in the area also and so forth. So that's the one branch that we're talking about. We opened Irvine already as of the press release and we are negotiating a lease up in Cupertino to be a stepping stone into San Francisco.

Okay. And the cost associated with staffing and opening these branches, is that included in your expense outlook?

The staff is -- on Roosevelt, the staff is and so forth. But in Cupertino, it is not yet into our numbers because we haven't even negotiated the lease.

And understanding that you still have that -- those negotiations ongoing, do you have a rough estimate for how much it generally costs to operate a branch?

$500,000.

$500,000 a year.

I'm not showing any further questions at this time. I would now like to turn the call back over to Alan Thian for any closing remarks.

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

Thank you.

Thank you.

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