RBB Bancorp (RBB) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the RBB Bancorp first quarter earnings conference call. (Operator Instructions) As a reminder, today's conference will be recorded.

I would now like to turn the call over to Mr. Larry Clark, 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 first quarter ended March 31, 2019. 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 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 begin with an overview of our first quarter performance, and then David will provide some additional details on our financial results.

We are pleased with our start to the year. We generated $10.4 million of net income or $0.51 per share compared to $9.5 million or $0.48 per share in the fourth quarter of 2018. The increase was due to high average loan balances, stable fee income and strong credit quality.

During the quarter, we continued to execute our plan to reduce our loans held for sales as we saw $130 million of them. As a result, our total loans at quarter end were down by $81 million from the beginning of the year.

Going forward, we plan to sell approximately $150 million of mortgage loans per quarter as we look to continue to drive the overall balance of loans held for sales lower.

With respect to deposits, we grew total deposits by $40 million, driven by a strong increase in our time deposits, probably due to a number of customers rotating out of lower-interest nonmaturity deposits into high yielding CDs. We also saw our savings, NOW account and money market account balances declines because some customers drew down their funds in order to invest in their businesses, real estate, and/or investment portfolios.

We are making good progress with our integration of First American, introducing many of our business deposit products to their branch network, with commercial lending to soon to follow. We also have been successfully selling some of their Fannie Mae loans portfolio as part of our balance sheet management strategy. We remain optimistic about our ability to penetrate from the larger Asian bank consolidation activity in the New York market.

We believe that disruption in the markets has created some opportunities for us to acquire high-quality tenants -- talents, pursue new customer relationships and make potential branch additions in attractive locations. To that end, we opened a new branch in Queens during the first quarter. However, we plan to close an underperforming branch in this May in Manhattan. So our total branch locations in region remain at 8.

In summary, we see this year as a rebalancing year as we remain focused on reducing the size of our portfolio of loans held for sale, which will likely offset the growth in our loans held for investment. We will continue to invest in our business to diversify our revenue mix and provide more opportunities for generating increased profitabilities, all with the view of creating additional long-term value for our shareholders.

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

Thank you, Alan. I'll start with a discussion about our loan activity. As Alan mentioned, our total loans were down $81 million at quarter end due to loan sales and payoffs exceeding our new production. However, our average loan balance was up $92 million during the quarter as most of our loan sales occurred near the end of the quarter.

Total loan production for the first quarter was down when compared to the fourth quarter, partly driven by seasonality and mostly in the area of single-family residential.

Currently, our pipelines are healthy, both in residential and commercial. So we would expect origination volume to pick up as the year progresses. And as Alan mentioned, we also expect to sell more loans in the coming quarters. So it is likely that our total loan growth for the year will be relatively flat.

We continue to see healthy demand in the secondary market for our loans, and we also have been expanding our channels.

During the first quarter, we sold approximately 50% of our mortgages to other banks, 30% to Fannie Mae and the remaining 20% to institutional investors.

Now turning to deposits. As Alan mentioned, total deposits increased $40 million in the quarter, but there were a lot of moving parts. The 3 main factors that are at play were as follows. First, we saw the rotation out of lower interest nonmaturity deposits into higher-yielding CDs as customers wanted to lock in higher rates. Second, we increased our brokerage CDs in order to fund our higher average loan balances for the quarter. And third, we had a number of customers, mainly in our Los Angeles market, draw down their funds from nonmaturity accounts in order to invest in their businesses, real estate and/or investment portfolios.

Despite the runoff of these deposits in the first quarter, a majority of our customers that withdrew funds continued to maintain significant balances with us, and we consider the movement of funds to be driven by rational business decisions rather than customers leaving the bank.

The overall shift in our deposit mix, which included a higher percentage of time deposits combined with a higher fed fund rate resulted in a 26 basis point increase in the cost of our average interest-bearing liabilities when compared with prior quarters or 17 basis points for our interest-bearing deposits.

In addition, we increased our average FHLB advances as we managed through the volatility in our deposits and our higher average loan balances. By quarter end, we have reduced these balances and will anticipate further reduction as we continue to reduce our held for sale loan portfolio, and we grow our deposits.

Going forward, we expect the increase in our cost of deposits to moderate. As the interest rates remain stable, we gather more core deposits, and the gap between the rates that we pay on new CDs and the rate we pay on maturity in CDs narrows.

Moving on to the net interest margin. On a reported basis, NIM decreased 4 basis points from the previous quarter to 3.84%. Excluding purchased discount accretion, our core NIM declined 6 basis points during the quarter. The contraction was primarily due to higher cost of funds, more than offsetting the higher yields that we are receiving on our loans.

In addition, as our $92 million increase in average loan balances was primarily funded by a combination of brokered CDs and FHLB advances, it [negatively] impacted our NIM.

Going forward, given our expectations for continued modest increases in average loan yields, combined with a deceleration and an increase in our cost of funds, we expect our net interest margin decrease [slightly] in the third -- second quarter, stabilize in the third quarter, and then gradually increase throughout the remainder of the year.

Turning to the noninterest income. While our fee income was essentially flat quarter-over-quarter, noninterest income decreased by $1.3 million primarily due to a $1.4 million recovery in the fourth quarter of a loan acquired from a previously -- previous acquisition. Going forward, we expect a moderate increase in noninterest income due to a higher level of loan sales as demand remains strong for our loans.

Our total noninterest expense was $15.3 million, down from $15.5 million for the fourth quarter of 2018. The decrease was primarily due to a $1 million decrease in merger-related expenses and a $230,000 decrease in legal and professional expenses. These were partially offset by a $440,000 increase in salaries and employee benefit expenses, a $338,000 increase in occupancy and equipment expenses, and a $157,000 increase in data processing expenses. The increases in salaries and benefits is due to additional staff for expansion as well as increased wages related to retaining and recruiting new talent.

We still have some cost savings to achieve with the First American integration, particularly with respect to some vendor contract renewals. We also plan to install a second data site on the East Coast, a wireless backup system in all branches and increase our cybersecurity staff.

Furthermore, in 2019, we are looking at relocating our loan operations center in Brooklyn to Manhattan. In addition, with the merger and the new headquarters location, we have sufficient space to growth of $4 billion in assets. Our expectation for noninterest expense for the second quarter are that they will be relatively flat, with gradual decreases in the third and fourth quarter.

The efficiency ratio for the first quarter was 51.7%, up from 49.9% for the prior quarters. Going forward, we expect our efficiency ratios to be around 50%.

Shifting to income taxes. Our effective tax rate for the quarter was 27.1%. This includes the impact of a deduction for stock options exercised in the amount of $133,000. We anticipate an effective tax rate of between 27% and 29% for 2019.

Our asset quality remained solid. Our nonperforming loans decreased by $700,000 for the quarter as we moved one loan from nonaccrual to OREO.

Our nonperforming assets increased slightly to $4.6 million during the quarter and stood at 16 basis points of total assets at March 31, similar to the 15 basis points of total assets at December 31.

Our credit losses remained low. During the quarter, we had no net charge-offs, and we had a net recovery of $109,000 on one commercial and industrial loan.

Our provision for loan losses was $550,000 for the first quarter, primarily reflecting the lower growth in our average loan balances. This brought our allowance for loan losses to 86 basis points of the total loans held for investments, up 4 basis points from the end of the prior quarter. We did see an increase in loans past due during the quarter but do not believe it is reflective of any larger asset-quality deterioration. We continue to believe that we have a very strong credit quality culture, and we remain vigilant on asset quality.

With that, we are happy to take your questions. Operator, please open the call.

(Operator Instructions) And our first question comes from Aaron Deer with Sandler O'Neill + Partners.

Alan, you said that the plan at this point is to be selling around $150 million in loans per quarter. For how many quarters do you expect to kind of continue with that pace? And do you expect the gain on sale on those loans to kind of run at about the same level as it was here in the first quarter?

Okay. Aaron, this is David. We expect the gain on sale to be similar to this quarter and so forth. Our goal is to -- after we sell the $300 million that we originally said we would sell, is to continue to originate and sell everything that we originate in the mortgage area.

Okay. And then how about with the SBA business? It seems like the originations that come out of that group are a little light. I wonder what your expectations are there. And also, what kind of gain-on-sale premium you've been getting and what you might expect going forward?

Okay. We saw minimal SBA loans this last quarter and probably minimal this quarter also. We're seeing gains of between 6% and 8% and so forth. I think our production will be in the neighborhood of $6 million a month or $5 million to $6 million a month.

Okay. And then selling 75%, 85% of that?

Yes, yes, right.

75% of that if the premium is sold out.

All right. And then on the expense side, I guess you gave some indication in terms of your expectations from the absolute value. I'm curious what percentage of the cost saves would you say that you have currently achieved from First American? And what amount do you expect to come yet as you kind of finalize with the systems integration and other efforts there?

I would say most of the cost saves have been -- we have seen. We still have really 2 vendors that we are negotiating with right now. And the cost saves there can end up being anywhere from $25,000 a month to $60,000, $70,000 a month.

And our following question comes from Jackie Bohlen with KBW.

Just want to make sure I fully understand production of single-family and then the added sales that are coming in. So if we sold roughly -- I think it was roughly around -- sorry, I should have had this number written down. So perhaps nearly $130 million this quarter versus expectations for $150 million in the future.

Of that $130 million, how much of that would you say was an intentional somewhat accelerated sale based on the level of the overall held-for-sale portfolio versus just normal origination over the course of business?

Well, it wasn't on a accelerated sale, it was a planned sale. On the first quarter, the market was very tough, the premium was very low. On the second quarter, which we plan to close in the second quarter, was the deal was made in the first quarter, premiums are up, all the deals that we plan is going well. If we need to sell more, we have a backup where Fannie Mae has reduced the seasoning requirement from 12 months to 6 months. We have an additional $100 million we can sell. So all the production that we plan here going forward will be on market.

Okay. So when I think about that roughly $150 million a quarter, you're trying to -- that you'd like to sell, kind of in 2 parts, what level do you intend to bring the held-for-sale portfolio down to? And what -- of that $150 million in sales, what portion of that would be newly generated?

So meaning if I look at the ending balance of $375 million at March 31, you're going to sell $150 million, but I wouldn't expect that would be a direct reduction of that level. I would expect that some of that $150 million is generation that'll take place during the second quarter. So I'm trying to get a sense of how many quarters it would take to reach that normalized level?

Okay. Jackie, our plan is to bring our available-for-sale number back down to what our budget as an item is, and we're thinking about between $150 million to about $250 million, okay, is the range there. And we will also possibly at the end of this quarter coming up here because we sell both out of our available-for-sale and our held-to-maturity bucket, we have been. So the exact same loans if only were they -- most of our held-to-maturity bucket were those that were originated through our retail channel versus our correspondent channel. So we're selling out of both buckets, and we will probably move some of the loans out of the available for sale at the end of this quarter over to HTM, okay, to achieve the appropriate level we want to be at, not only the older loans.

So you might hit that $150 million to $250 million, assuming some transfers from available sale that held to the portfolio by June 30?

Yes, that's the goal. It's to get down to about the -- between in that range by the end of 6/30. And then from there, we expect that every -- that what we're selling will be what's in that $150 million to $250 million pool plus any new originations that come on board. Okay?

And in that scenario, are you still selling approximately $150 million a quarter?

Well, on the second quarter, we already have a LOI for $200 million. So I think $150 million is a conservative figure. So if we need to sell, we could sell more. Currently, by end of June, we would've sold close to $200 million, and we could sell more in the next quarter if necessary.

Okay. And then just one last one and then I'll step back. In terms of the impact to the liability side of the balance sheet with the sales that you anticipate, how do you expect that to impact liabilities knowing that the reduction in the available-for-sale portfolio won't necessarily fully impact liability if you're transferring it into the held to maturity?

We expect over the course of the year to reduce our brokered deposits down to, hopefully, close to 0. Our policy states that we can fund our available-for-sale portfolio by using wholesale funding mechanisms. So again, we will use FHLB borrowings, but we will use the cheapest borrowing vehicle, I should say, out there to fund that available-for-sale portfolio, okay?

Okay. So that adds that portfolio...

On the wholesale front, okay?

So as the balance of that decline even if they're transferred into held to maturity, we should expect to see those wholesale funds decline as well?

Yes, you should. Because I do -- the other point is that we do expect to see some of the runoff of deposits that happened this -- in the first quarter come back, especially the runoff that was due to buying inventory. Because of the possible trade war, we had a couple of customers buy inventory, and we expect that to come back in as they sell their inventory later in this year.

And our following question comes from Tyler Stafford with Stephens.

Just a couple of follow-ups from me. Maybe just to start on the SBA side of the house, I just wanted to confirm, you said $5 million to $6 million per month of SBA gains is your expectation from here, is that correct?

Yes, $5 million to $6 million in originations.

In originations. Okay, got it. That makes more sense. On the -- maybe what Jackie left off just on the liability side. Within deposits, can you just spend a couple of minutes talking about what you are seeing from a DDA perspective and the migration there? And then give us some color for what the rate for new CDs are that you're putting on the balance sheet today? And maybe what the rate on the CDs that are rolling off are right now? Just trying to understand what the incremental pressure on the CD side is.

Okay. On the CD side, the 2 coasts are slightly different. It's -- New York has higher pressure right at the moment. You're seeing easily in the market 2.80 -- 2.70, 2.80 in the market. Here we're seeing 2.40, 2.50 up to 2.60 in the marketplace so we see that. It depends on what's rolling off. We're seeing a lot of items. Last year, we were in the 1.75 range. So a lot of that is rolling off and being replaced with the 2.50 yield.

Okay. And then just lastly for me, David. Just kind of stepping back big picture, given the, I guess, mix change from the held for sale and the held for investment that you expect to see this year, keeping overall loan balances roughly flat year-over-year and then the margin commentary and outlook from here, do you think NII grows from the 1Q level throughout the remainder of the year? Or is it kind of flattish to maybe down?

The plan really is for us to swap out these mortgages, at least the $300 million mortgages, that are at $450 million and $475 million with prime-plus loans. So that will take us all year to do. So that's $300 million that were taken off the books, but we have to put back on $300 million. So we're replacing that with higher-yielding loans.

So we're hoping by the end of the year, what we're thinking is by the end of the year, you should be able to see some -- you'll be able to see NIM begin to creep back, begin to go back up as we reposition the balance sheet. In fact, if you look at our budget, that's what happens. But mix changes, I haven't redone a forecast yet with the changes in the mix, and so forth. I'll be doing that in the next week or so. And maybe we can update you after I do that.

And it looks like we have a follow-up question from Aaron Deer with Sandler O'Neill + Partners.

I just wanted to touch on capital. Given that it sounds like the balance sheet growth is going to be pretty muted by the sales and given your very strong capital levels, I'm just curious, I guess, too vis-a-vis given the strong profitability, what your thoughts might be in terms of doing some sort of share repurchases to help keep that -- keep your capital levels from inching too high?

Okay. Well, the plan this year is for us to come up with a plan, a capital repurchase plan that will have 2 components to it. The first component is to -- is that it will be able to buy the options directly so that we have no further dilution from option holders. So we would buy back those options -- buy back the options immediately upon exercise to the optionees.

The second component would be to be able to go out and protect our stock price and do some buybacks and so forth.

However, the whole reason we went out and got the sub debt was because we really thought in October and November of last year that we would be hitting -- running into a recession. And we wanted to have the store house just in case that happened so that we could be opportunistic in further acquisitions and so forth as the economy turns and management teams and so forth do not want to go through another downturn like they had in the past.

All right. It sounds like the intent then is to maintain a pretty robust level of capital to keep that dry powder on hand.

Yes.

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

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