RBB Bancorp (RBB) 2022 Q2 法說會逐字稿

Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the Second Quarter 2022. (Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Catherine Wei.

Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the second quarter of 2022. With me today from Management are Interim President and CEO and CFO, David Morris; EVP and Chief Credit Officer, Jeffrey Yeh; EVP and Chief Strategy Officer, Simon Pang; EVP and Chief Risk Officer, Vincent Liu; EVP and Director of Private Banking, T. T. Huang; EVP and Branch Administrator, Ashley Chang. David will provide a brief summary of the results, which can be found in the earnings press release that is available on our Investor Relations website, and then we'll open up the call to your questions.

During 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 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 expectations as set forth in these statements. The company assumes no obligation to update such forward-looking statements unless required by law.

Now I'd like to turn the call over to David Morris. David?

Thank you, Catherine. Good day, everyone, and thank you for joining us today. Royal Business Bank had another great quarter with strong earnings, improving margins and solid loan growth. We also announced several new hires and rehires during the quarter, positioning the bank for continued profitable growth.

Expenses were higher than anticipated due to the ongoing costs related to the Board of Directors' investigation, but we expect those costs to wind down over the next 2 quarters.

Despite elevated expenses, net income increased by 5.9% from last quarter and by 15.7% from the last year to $15.5 million or $0.80 per diluted share in the second quarter. Adjusting for the $1.7 million of non-recurring investigation expenses. Net income has been a record $17.2 million or $0.90 per diluted share.

Net income benefited from solid loan growth, increasing asset yields and a stable interest expense, all of which combined to drive record net interest income of $37.1 million which was a $2.6 million increase from last quarter and a $7 million increase from a year ago.

Second quarter non-interest income increased by $478,000 from the previous quarter due to a $757,000 gain on a corporate real estate that we disposed of, offset by a decline in loan sales as Fannie Mae originations continue to lag.

Non-interest expense increased from last quarter, primarily due to the $1.7 million expense related to the ongoing Board of Directors' investigation. Net interest margin was one of the highlights of the quarter, increasing to 4.08% from 3.49% last quarter and 3.33% a year ago.

We are cautiously optimistic that we'll be able to maintain our NIM above 4% in the coming quarters as asset yields continue to increase more quickly than deposit costs. Annualized ROA and ROTCE increased in the second quarter to 1.6% and 15.89% respectively.

Net loans held for investments increased by about $39 million in the second quarter, which equates to about 5% annualized growth rate. C&I, SBA and CRE decrease from the last quarter though we had growth in construction and single-family mortgages.

The decline in C&I and CRE were due to normal payoff which means for property purchases or to competitors at lower rates. Our yield on average earning assets increased to 4.66%, which was a 66-point increase -- basis point increase from last quarter and 67 basis point increase from the prior year with respect to funding, anticipated commercial customers' activity drove a $219 million decrease in average noninterest-bearing deposits over the quarter.

Our average cost of interest-bearing deposits for the quarter was 0.49%, which was up 5 basis points from the prior quarter, but down 10 basis points from the prior year.

Given the rapid increase in rates, we do expect some upward pressure on deposit costs for the remainder of the year. Non-performing loans decreased to $13.9 million due to the $7 million April repayment I mentioned during last quarter's call, we took a provision of credit loss of $915,000 in the second quarter, primarily attributable to loan growth.

Our capital levels remained strong. With all of our capital ratios way above regulatory minimums. We took an advantage of the temporary dislocation in our share price to repurchase 527,754 shares or 2.7% of outstanding shares in the second quarter.

After renewing our buyback last week, we now have the capacity to repurchase up to 500,000 more shares. We understand how the recent personnel announcements have impacted our share price, but we remain confident in our strategy and believe it continues to be an effective driver of shareholder value.

Lastly, I would like to say this is a very important day in our history. Today, 5 years ago, was our first trading day on the NASDAQ. Thanks to all of our investors, Management Board and investment bankers for the past 5 years who have supported us.

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

(Operator Instructions) Our first question will come from Nick Cucharale with Piper Sandler.

With all the hires you mentioned, do you currently have the teams in place to restart growth in the commercial book? Or should we expect growth to continue to be tilted towards the single-family portfolio in coming quarters?

Well, I'm going to answer that with it, yes. And a yes.

We have the people in place for commercial growth. okay? But at the same time, the non-QM market, which we are not selling quite yet, has really picked up for us. So I think you will see loans increased in both sectors next quarter.

And I'm going to answer another question which you haven't asked, but you'll probably ask, when will you do more loan sales? And we're hoping to be able to do some sales late in this quarter, but I doubt that will happen. I think we will have to wait until the fourth quarter to begin to sell the mortgage loans. Okay?

In that vein, can you update us on your expectations for the gain on sale business? Do you feel like you're going to get to a sustainable level in 2023 or is still below where you were in previous years?

No, I think we'll be back to sustainable level in 2023. The second -- the last quarter of this year, I'm hoping to be there with the SBA team back in place, maybe not in the third quarter a lot, but in the fourth quarter and in subsequent quarters, I think we should be back in that market, and I think we'll be back in the mortgage market. Also, it's a Fannie Mae. Fannie Mae is off -- nobody is getting the Fannie Mae loan right now.

Okay. Could you just refresh us on your full year organic growth targets for loan growth?

Well, right now, we're probably going to have for this year about 7% because we only had about a 5% this quarter. But -- and we budgeted around 9%, 10%. So I think we'll be closer to around 7%, 8%. Okay.

Our next question will come from Kelly Motta with KBW.

Maybe your NIM expansion this quarter was incredible. Was there anything more onetime in there? Any interest recoveries we should be aware about? And with your expectation for NIM to hopefully stay above 4% is, I believe, what you said, what kind of deposit betas and assumptions go into that? Because I would assume those would accelerate as rates rise.

Okay. Let's talk about deposits first. Deposits, we really haven't raised our rates yet. That is going to happen. So I would project that our beta will be probably around 65 or 75, given starting at the next rate hike or so. okay? That's going to be pretty high. I realize that.

But again, we haven't raised our rates, and we have competitors at 2 right now. We have competitors at 250 even on a 1-year CD. And we're still at 70 basis points sort of -- or so forth. So that's number 1.

Number 2 is, yes, we always have prepayments of loans, the prepayment fees in our numbers. And we probably had a little bit higher than normal. We typically have like a couple of hundred thousand. We had about $500,000 this quarter in prepayment fees in our calculated NIM. So it's about $300,000 there. That is probably above normal.

Got it. And on the other side, can you just remind us about the repricing schedule of the loan book, how much of it flows and maybe where do loans are coming on now?

Okay. About 1/3 of our book is floating rate, maybe up to the most 40%, but 1/3. It was truly floating rate. So on the mortgage side, although we're pricing at [625] right now on the mortgage side, were in the queue because it takes 60 days or 90 days to fund the mortgage loan, we're in the low 5s right now, okay?

In on CRE, we're looking at -- I would have to say the spreads have narrowed we're looking at prime plus one to prime plus 1.5 pricing at the most right now. If it's a fixed rate loan, I'm telling everybody 6.5% unless it's a very high-quality, very high-quality apartment building or in that nature, which we're still in the 5.5 ratio. Okay. So that's where we are at this time, okay? That may change tomorrow.

Maybe a last kind of question about M&A. Just wondering an update if you have any update on Gateway, if that's still supposed to close during the year? And if with the CEO search, you guys have any updated thoughts on maximizing shareholder value through a potential sale?

We've looked at a number of things. Number one, we do expect Gateway to sell, okay, number one. Number two, we do always look at potential partners either on our side to acquire or on their side to acquire us I don't know if it's the right time for us to be out in the marketplace until we can prove that -- we can prove that we can grow over a period of time as a management team here, okay?

Did I answer all 3 of those? I think I did. Gateway, I anticipate Gateway to close by the end of this year if not, early next year. I mean January 2 of next year.

(Operator Instructions) Question will come from Andrew Terrell with Stephens.

I just want to follow-up on that last question there. Any update on kind of CEO search at this point?

I am meeting with the CNG Committee, the last -- I met with them last week, and I'm meeting with Dr. Kao, Christina Kao, again, this week or early next week and to go over the plans and so forth. And I'm hoping that we will have an announcement soon. Soon being within the next months or so -- month.

And I heard you on the kind of loan growth outlook for the balance of the year seems to imply kind of a mid-single-digit type level for the next couple of quarters? I just want to get your thoughts on growth on the other side of the balance sheet. Just I think you're just a little above 100% loan-to-deposit ratio at the end of the second quarter. Just want to hear your thoughts on whether you think you can fund that loan growth with core deposit growth? Or should we expect any kind of incremental reliance on wholesale funding in the balance of the year?

I think we will be able to fund our loan growth. The -- I don't -- I may not call them core deposits, but through deposits that we originate on the retail side, okay? Because it's up to us to make a $1 million deposit our core, you know what I mean? It's up to us to cross-sell, it's up to us bring them into the family and make it a true relationship. So if somebody comes to us, let's say, for rate reasons, it's up to us to turn them into a true core depositor.

Yes. Understood. Okay. Last one for me, just a modeling question. I know there was a pretax about $1.2 million you called out elevated in the legal and professional line item. It sounded like that should dissipate over the coming couple of quarters. Do you have an estimated kind of dollar amount remaining to kind of recognize that line item? And is that correct? It should fall out of the run rate in the next couple of quarters?

It should. I think our legal and professional line item should be between $500,000 and $600,000 a quarter. Having said that, it -- so having said that, I think you're probably still going to see close to a $1 million a quarter this quarter and hopefully something more normal coming the fourth quarter. Because there's still ongoing odds and ins being researched.

Our next question will come from Tim Coffey with Janney.

Just a question on additional recruitment. What is the appetite for that? And what is the likelihood of that, do you think?

Very interesting question. Okay. That's -- let's look at the -- let's look at lenders first, and then we'll go to the deposit side. And then some other general questions.

And the reason it's interesting is because if we're going into a recession, do I want to have a ton of lenders on our -- that I hire and then they have nothing to do. Okay? So I would like to have another -- we are hiring a lender that will be out of our Orange County, Irvine office to take care of the Orange County market and assist in SBA lending and Commercial lending. That person comes on in September.

But after that, I still have open positions for New York and Chicago and L.A. But I don't think we'll fill that on that side of the game. Until after we know what's going to happen with the economy in the next couple of months.

On the deposit side, we are constantly looking to upgrade our staff in areas where we may have some underperforming branches. And if we find those people, we will bring those people on it immediately because our franchise value is tied to our core funding. So that, that would not wait for the recession figuring it out.

But if we find those people, we would bring those on to upgrade our staff that we have. We have 2 or 3 branches that do not have branch managers right now just because we cannot find them. And if we can find them, we will bring them on and go from there.

All right. That's very helpful. The rest of my question has been asked.

Our next question will come from Ben Gerlinger with Hovde Group.

I know -- I'm pretty -- like -- a minute to look at the kind of the funding. I know you said the deposit beta was kind of in that 75% area, which is pretty high. But I mean, when you compare to banks that are growing at your pace, it's a little bit more level set in kind of in the range of normality. Is there anything that you guys can do on a proactive approach from a funding perspective that you're not already doing that could potentially limit that? Or that could help support the margin moving up into the right?

Okay. Let me tell you what we're doing. We're doing a lot of little things here. We -- number one is, we have -- we don't really have a cash management department, although we have all the products. And we found out that a lot of our customers on the loan side would bank with us if they knew we had those products.

So what we're trying to do is bundle those up and have brochures that our lenders can easily go out to explain to our customers, that's number one, okay?

Number 2 is -- this is certainly not this year. It may be next year. Eventually, all banks are going to have to be dealing with marijuana and banking marijuana customers. We have them already in the lower tiers, whether it be the property, they're leasing our property to our borrowers leasing out properly. But we have no dispensaries or something of that nature. That is on the pipeline to go after.

And that's always -- that's been in the pipeline for the last year or 2. Just haven't gotten to it yet, but I'm putting that as a higher priority because of their cash deposit, it's cash and no interest rate.

And the third is, that we have some trust companies that we bank. And that's where you see the fluctuation. But why don't we go after more trust companies and bank them also because some of the trust companies we bank actually do some crypto stuff, and that's why you see this wide fluctuation sometimes during the quarter on our noninterest-bearing accounts because they may have a flush of cash coming in, and sometimes they may have a flush cash going out. We projected that we would have $300 million to $350 million worth of cash going out of those accounts at the beginning of this year -- during the first 6 months of the year.

So -- but we can expand -- if we expand that market these trust companies and especially the ones that may not be fintech related, just trust companies, you'll see a lot more noninterest-bearing deposits coming into us.

So that's a strategy to help our NIM, our NIM not increase as much. When you look at beta, beta is the CD product, but as a CD and money market type item, but that's -- the overall strategy is to get more noninterest-bearing deposits and to capture -- fully capture our customer via full relationship. And that has always been our strategy. We are a relationship bank.

No, that's great color. And you have a lot of little things can really add up. My only other question, I don't mean to put your feet to the fire here too much, but when you think about your overall profitability, you're running at, let's call it, a 1.5% ROA, you have a healthy amount of capital. And I guess you said the shares outstanding. You don't have a huge amount of volumes so you can repurchase. What's preventing you guys from doing something more aggressive consider the trading close to tangible here. It's around 1.1 of tangible. So like why not put out a tender or something to that degree, given your high level of profitability?

We have considered a tender, and we thought it would be better to buy at market instead of paying a premium.

Thank you. It appears we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Okay. Once again, I want to thank everybody for joining us today. I especially want to thank our investors and our investment bankers for the last 5 years of supporting us. We look forward to speaking to many of you in the next couple of days since I'm going to be out on the road visiting people and so forth. Please have a nice day.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.