RBB Bancorp (RBB) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your RBB Bancorp Quarter 4 2018 Earnings Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Larry Clark with Investor Relations. Sir, you may begin.

Thank you, Sydney. Good morning, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the fourth quarter and year ended December 31, 2018. 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 Branch Administrator, Wilson Mach; 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 up the call to questions.

During the course of this conference call, statements may be made by management that 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 full year accomplishment at a high level, and then David will provide more details on our fourth quarter financial results.

We are very pleased with our financial performance for our first full year as a public company as we generated the highest level of net income in the company's history. We also continue to execute well on our strategic goals by growing our franchise authentically within our existing markets and by entering the attractive New York City markets through the acquisition of First American International Corp., which added over $800 million in assets, 8 branches and 2 loan offices.

On a standalone basis, RBB delivered total loan growth of over $470 million for the year, up 34%. This was driven by strong production in our residential mortgage business as well as our commercial real estate and construction lending. We also added nearly 307 -- excuse me, nearly $730 million of loans with the FAIC acquisition.

Our total loan growth helped drive a 30% increase in our net interest income for the year despite higher deposit costs and a flattening yield curve. During the year, we opened one new branch and relocated another in Southern California and relocated our corporate headquarters in downtown Los Angeles. We also invested in business development personnel as well as increased our operational staff in order to support our growth. Even with all of this new investment, we were able to keep our efficiency ratio below 50% for the year.

Our asset quality remained pristine. We had less than $700,000 of net charge-offs for the year against an average loan balance of just under $1.5 billion. Our profitability metric remained strong for the year. We generated an annualized return on average asset of 1.8% and an annualized return on average tangible common equity of 13.8%. And finally, our capital ratios are solid. We ended the year with total capital risk-weighted assets at 21.6% and tangible common equity to tangible assets at 10.6%.

In 2019, we plan to continue expanding our franchise through a combination of organic growth and de novo branch openings. We are investing in the business to diversify our revenue mix and provide additional opportunities for increased profitabilities.

Our loan pipeline remains healthy, but we anticipate selling more of our loans in the coming quarters, which we believe will lead to higher gain-on-sales income. This should also help us manage our liquidity, at least try to match the growth in our held-for-investment portfolio with our core deposit growth.

We also are very pleased with the acquisition of First American. We are bringing together 2 banks with a shared vision, mission and culture. The teams at both RBB and First American continue to execute the integration plan smoothly, ensuring that we provide a seamless transition for all employees and customers. The system commercial was also recently completed without any major issues.

We are now in a position to enhance First American's business banking capabilities. We are introducing new products and services that will help it build upon a well-established brand and strong customer relationships, while also enhancing its deposit gathering and lending efforts. Again, we want to welcome our new customers, shareholders and employees into the RBB Bancorp family. We are pleased to have FAIC directors, Raymond Yu and Alfonso Lau, join our board. We're excited about the opportunities to expand into the attractive New York markets, and we believe that the combined company will be well positioned to continue growing the RBB franchise, enhancing the value of our shareholders in the year ahead.

I will now turn it over to David for more details on our fourth quarter results. David?

Thank you, Alan. We delivered another strong performance in the fourth quarter, where our net income of $9.9 million resulted in an annualized return on average assets of 1.41% and an annualized return on average tangible common equity of 12.8%.

Organic loan growth in the quarter was solid at $89 million. Approximately, $44 million of this organic growth was in loans held for investments, while the remaining added to our balance of residential mortgage loans held for sale.

RBB contributed $32 million of the portfolio loan growth and First American, $12 million. The increase was primarily driven by growth in residential and commercial real estate.

Mortgage loans held for sale were $435 million at the end of the year, an increase of $56 million from the close of the third quarter. While loan production increased in the quarter, we sold fewer loans to our usual group of buyers as they had less capacity at year-end for mortgage purchases.

We also found the secondary markets to be temporarily less attractive in the fourth quarter, primarily driven by the overall volatilities in the equity and fixed income markets, particularly in October and November. However, we did sell $125 million of mortgages in the quarter, including $114 million pool to Fannie Mae. We plan to significantly reduce the balance of loans held for sale over the next 2 quarters. As a result, our total loan balances will likely decline over that period as the anticipated decline in loans held for sale will more than offset whatever growth we achieve in our held-for-investment portfolio.

Now turning to deposits. Deposits increased by $579 million in the quarter, all being attributable to the deposits that were acquired at First American at the date of the acquisition, partially offset by a moderate runoff there in November and December. Deposits were flat at RBB during the quarter.

We experienced a favorable shift in mix of deposits as a result of the First American transaction. Our noninterest-bearing deposits now represent 20% of our total deposit base, up from 18% at the end of the third quarter.

As First American holds a higher mix of DDAs than RBB, savings now and money market accounts represent 27% of total deposits and time deposits make up the remaining 53%, including 5% of brokered CDs. The overall shift in our average deposit mix, including the higher percent of time deposits, coupled with the ongoing level of deposit competition and the Fed interest rate increases resulted in a 16 basis point increase in the cost of our average interest-bearing deposits when compared with the prior quarter. We also increased our FHLB advances in the quarter to manage through the late quarter volatility in our deposits, increase in loan balances from First American and the increase in our loans held for sale. We anticipate reducing these advances as we sell down our available-for-sale mortgage portfolio and we gather more deposits.

Moving on to net interest margin. On a reported basis, the NIM decreased by 23 basis points from the previous quarter to 3.88%. Excluding purchase discount accretion, our core NIM declined 32 basis points during the quarter. The contraction was due to several factors: first, the addition of the First American portfolio to our balance sheet, adversely impacting NIM by 9 basis points; second, the approximately $100 million increase in the average balance of loans held for sale, which generally carries a lower average yield and have largely been funded by higher cost advances from the FHLB, negatively impacted NIM by 14 basis points. Excluding these 2 impacts, our core NIM declined by 9 basis points, driven by higher cost -- funding costs and particularly offset by higher loan -- I'm sorry, and partially offset by higher loans as we are experiencing higher yields on new loans and seeing the benefit of repricing in our existing loan portfolio.

Another point that I would like to make is that if we carry a more normalized balance of the available-for-sale loans, which have -- which would have been closer to $200 million, our NIM for the quarter would have been 4.01% instead of 3.88%.

Looking ahead, we anticipate slightly further NIM contraction. We will continue to see modest upward pressure on deposit cost as a number of our lower-cost CDs will continue to roll over at incrementally higher rates, partially offset by higher loan yields, but our NIM will benefit from a reduced balance of loans held for sale going forward.

Turning to noninterest income. It increased by $3.4 million in the quarter due to higher mortgage loans, sales relative to the third quarter, higher servicing fees and the higher service charges and fees, primarily from First American as they have a large servicing portfolio and a large number of safe deposit boxes. Our total noninterest expense was $15.5 million, up from $8.7 million for the third quarter of 2018. The increase was primarily due to a $3.8 million increase in salaries and employee benefit expense, a $900,000 increase in occupancy and equipment expenses and a $738,000 increase in merger expenses, all mainly due to the First American acquisition.

We expect our expense run rate to be between $14.3 million to $14.9 million for the next couple of quarters. The efficiency ratio for the fourth quarter was 49.9%, up from 41.8% from the prior quarter. Going forward, we expect our efficiency ratio to be in the 41% to 45% range.

Shifting to income tax expense. Our effective tax rate for the quarter was 27.5%. This includes the impact of a deduction for stock option expense in the amount of $401,000. Our effective tax rate was higher than last quarter's 19.7% rate due to the number of options exercised being significantly less than in the third quarter. We anticipate an effective tax rate of between 27% and 29% for 2019.

Our asset quality remained solid. Our nonperforming assets were 21 basis points of total assets at December 31, an improvement from 32 basis points of total assets at September 30. Our credit losses remained low. During the quarter, we recorded an additional charge of about $526,000 that was added to one SBA loan we initially charged off in the third quarter. Our provision for loan loss was $1.9 million for the fourth quarter, primarily reflecting growth in total loans. This brought our allowance for loan losses to 82 basis points of total loans held for investment, down 35 basis points from the end of the prior quarter.

We did see an increase in loans past due during the quarter, but they're not believed as reflective of any larger asset-quality variation. We continue to believe that we have a very strong credit quality culture and will remain vigilant on asset quality.

I will sum things up by now here. And as we enter 2019, we are focused on the continued innovation of First American in 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 loan and more effectively managing our deposit cost to alleviate pressure on our margin. We are optimistic about our ability to continue to gain market share and attract new customers in Southern California as well as new opportunities to strengthen our presence in New York. We think this is well positioned -- this will well position us for an improved profitability in 2019.

At this time, we'll -- we are happy to answer your questions. Operator, please open the call.

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

I guess I'd like to start on the -- on deposits. Looking at the combined balances of post-integration with First American, deposit balances came in a good deal below what I -- where I would have anticipated. Just curious if you could maybe give some color, how much of anticipated or purposeful runoff was there in the quarter, and was there any expected outflows and -- I'm sorry, any unexpected outflows in the quarter?

Well, I could talk a little bit about the First American side. We were planning for some runoff because of -- this normally happens in an acquisition. We had about $16 million worth of wholesale deposits that went off. We also had their -- some of their DDAs that were in-house DDAs kind of got mixed in with ours, and so that's all accounted for elsewhere. But they also had a runoff of about 10% in CDs, which, given where they are with pricing, is probably not that significant. I mean, it's -- they're not the highest in the market. They have people at 2.70% and 2.75%, and their rates are lower than that. So that's where we are with that. Now on the L.A. side, Wilson, do you have any inputs? It's like end-of-the-year deposits not growing as much as they expected.

Well, typically, at year-end, we always see a small drop in the deposit and while some customers are free market obligations. But looking forward, we will look at our DDAs and expand our online banking program, frankly, to increase in that area.

Okay. And then I'm curious, with the guidance for higher projected loan sales early in the year, I guess coming out of the held-for-sale bucket, what -- it sounds like you're kind of expecting overall flattish loan balances for the first couple of quarters, what -- as you kind of lay off that strategy, what does that mean for expectations for full year loan growth?

Full year loan growth is, right now, projected to be -- the total loan growth would only be between -- in the low single digits, 5%, 4%, something of that nature.

Okay. And then have you tested the waters at all in the secondary market this quarter to see if, in fact, the pricing has improved relative to what you were seeing in the fourth quarter? And if it -- if not, does that mean you might reconsider your strategy of higher loan sales during the first part of the year?

The -- I'll start off and I'll let Larsen finish. We have seen a great improvement in pricing, okay, whereas before, we would have had to sell for a loss, we're seeing that we're selling comeback -- back for a gain, not as high as they were when we were of -- when we sell to individual banks in our local markets. Larsen, would you like to add?

Yes. I guess after the merger, our target would be dealing with the private investment banker rather than a community bank here in Los Angeles. The price will be lower, but we do expect a profit. Now the price has improved tremendously. We have many offers on the table. We're determining which is the best bank to deal with, would likely to service retain. And we are in a negotiation with a couple of banks to try to retain all the service that we sell on the full loans.

Okay. And then if I could just ask you to repeat, David, because the audio is pretty bad. You identified 2 components to the margin that were -- that skewed the results in the quarter. I heard one of them has been the holding the higher level of held-for-sale balances. What was the other? And can you repeat what the basis point impact was of those 2 items?

Okay. There's actually 3 items. One is adding First American. And well, adding First American is around a 9-basis-points decrease. The other is the 14-basis-point increase for the available-for-sale mortgage loans being funded by FHLB balances. And then our NIM decreased by 9 basis points also. Covering your stock, core base is at 34 -- 32 basis points difference is made up of those, those items.

Our next question comes from Jackie Bohlen with KBW.

Based on the rebound that you've had in pricing with the secondary market and the offers that you're currently entertaining, it sounds like there could be a significant decline in the first quarter that might bring you back down to that $200 million level. Is that a fair assumption, or might some of that still flow into 2Q?

I think some of it can flow into Q2, but our goal is to try to get the $200 million off this quarter. The -- that, again, that may not be average balances so you may not see the effect with the NIM until the second quarter because of average balances, okay?

We already closed some, and we are, like I say, we are in a negotiation. We have approximately $250 million that could be sold before end of this quarter. Depending upon service retain or service release, we're determining that.

Okay. So in light of those expectations, how should we think about gain-on-sale income in both the first quarter and then for the balance of the year?

Let's take this into 2 pieces. SBA is going to be much lower because the premiums on SBA are not there, okay? So that's number one. So SBA is going to be probably where it is today, about $500 million or something like that in gains per quarter. But on the other side, I would say that we're going to make -- we are being cautiously optimistic here. So when I have looked at these things, I have -- I'm trying to find the exact number so that I could just tell you.

We have a $427 million held-for-sale bucket.

I know, I know. But I'm looking for a specific number here. We're looking at something like about what we did in the last quarter, I guess, ongoing, okay, because we'd sold $132 million -- or sorry, that's wrong, $124 million in the last quarter, so we would see something about the same going forward.

And so that's -- so basically, 4Q's income would be a normalized level. And then 1Q's income, assuming that the additional $250 million, give or take, is sold, that would be an added benefit on top of that $2 million?

No, I think we'll be about $2 million every quarter. Okay?

SO then -- I guess I'm just trying to reconcile the impact of the larger sale in 1Q versus 2Q through 4Q.

We're going to be selling to the -- we're going to sell a large portion of this to Fannie Mae. And Fannie Mae, even though they are -- even though their gain is -- there's a significant gain there, it's still not as large as if we could sell it to the individual market. Okay? That's, partially, the reason.

Okay. All right. So if we're looking, just from a modeling perspective, if we're thinking about around $2 million a quarter, that's a conservative approach to take?

Okay. Yes.

Our next question comes from Tyler Stafford with Stephens Inc.

I just wanted to maybe take a portion of the -- of both the earlier questions and just try to triangulate it back to the efficiency outlook that you gave. So if the margin is going to be under pressure, continued under pressure from here, you gave us the expense run rate, I think, of the $14.3 million to $14.7 million and then the balance sheet and the NII impacts and the fees, I'm struggling to get to that 41% to 45% efficiency ratio relative to, I guess, the 46% efficiency ratio you had this quarter. Is there something else that I'm missing? Is there additional cost savings that are going to drive that expense level lower? How do you get to that 41% to 45% efficiency ratio?

Did you take the merger expense out, Tyler?

I did, yes.

Okay. $2 million in -- is certainly a -- is conservative. Because $2 million on gain-on-sale is conservative too. So that's a conservative number. So we can -- we also -- our provision for loan loss is probably a lot less lower than you're putting in because we're liable -- even though these are available-for-sale loans that we're going to be selling in our production, it's not going to be as huge over the first quarter, second quarter.

Yes. I guess I was thinking about it more from the efficiency ratio though, with the provision, what an impact. Just from a -- how about this? What about the remaining cost savings, can you walk us through the time line of the First American cost savings you'd expect to realize?

So most of the cost savings have gone through already. Okay? So we -- almost all of them. We only have -- really, we have the mortgage conversion left to do, okay, and that's -- right now, the expense on that is $40,000 a month and we think we can knock out half of that once we do the conversion, okay? Then we have -- and there -- and then we have -- I don't think there's much more -- we have some items in compliance that we want to finish and so forth, but I think it's all relatively complete. This is our estimate for the full year range, so we will decrease -- we'll get more efficient as we go forward, okay?

(Operator Instructions) We have a follow-up question from Aaron Deer.

Just a quick follow-up. On the margin-related items. The level of accretion that you've recorded in the fourth quarter, I think it was 950,000-ish, is that a decent kind of run rate to think of as we think about the accretion level? Going forward, obviously, it will diminish over time. But I'm just curious if there was any outsized or undersized level that would have been there in the fourth quarter that we should think about?

Well, the accretion, certainly, well, it would be the same as it is today, approximately, except if we sell loans out of the available-to-maturity bucket that are New York loans.

Sure. Then you get an acceleration. I understand.

Just immediately as part of the gain on sale, okay? So -- and -- okay?

Okay. And then maybe if you just give some color on the additional charge-off you had on the SBA loan in the quarter, what drove that?

The additional charge-off...

The additional charge-off there is one of the SBA loans that we have a guaranteed decline by SBA, and the amount is about [$500,000].

And what was missing in the underwriting there that the SBA elected to decline the request?

Just maybe because of a rate default in an SBA guidelines. If this default is taking months, then the chance of being declined is higher.

I'm sorry, what was higher?

It was the chance of being declined is higher.

And I'm showing no further questions at this time. I would now like to turn the call back to your speakers for any closing remarks.

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

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.