RBB Bancorp (RBB) 2020 Q4 法說會逐字稿

Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the Fourth Quarter and Fiscal Year 2020. (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 fourth quarter of 2020. With me today from management are Chairman, President and CEO, Alan Thian; EVP and Chief Financial Officer, David Morris; and EVP and Chief Credit Officer, Jeffrey Yeh. Management 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 required documents the company has filed with the SEC. If any of these uncertainties materialize, or any those 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.

Now I'd like to turn the call over to Alan Thian. Alan?

Thank you, Catherine. Good day, everyone, and thank you for joining us today. We finished 2020 with strong fourth quarter results, concluding a challenging year that demonstrates the resilience of our differentiated business model. For the full year, our pretax preprovision income increased modestly from 2019 as we manage expenses while growing our assets significantly.

Fourth quarter earnings benefited from an increase in our net interest margin and gains on sales, which we anticipate will continue in the first quarter. Higher-than-anticipated loan payoffs in the fourth quarter resulted in a modest reduction of our loan portfolio following the strong growth we saw in the third quarter. We anticipate limited loan growth in the first quarter but expect to finish the year with growth similar to last year's.

Our asset quality remains solid, and we remain all well capitalized with ample access to liquidity. Deferred loans continued to decrease and now represent less than 2% of loans on for investment.

Last week, our Board of Directors approved a quarterly dividend of $0.12 per share. This increase returns our dividend to its pre-pandemic level and is consistent with our guidance that we would restore the dividend at a higher level once we have more clarity on future business conditions and the earnings potential of the company.

Before I hand the call over to David, I'd like to take a moment to thank all of our banks' employees for their hard work and dedication and the strong support from our investors over this last year. The pandemic has disrupted the economy and people's lives. Through it all, our employees remained focused on serving the financial needs of our clients and the companies we serve. David?

Thank you, Alan. I'll start by reviewing some of the highlights of our income statement before moving on to our balance sheet.

Net income grew 31% from last quarter and 4% from a year early year to a record $11.1 million or $0.56 per diluted share in the fourth quarter. We reported record pretax preprovision income of $18.9 million an increase of $2.9 million from the prior quarter.

Our net income benefited from several factors. First, net interest income increased $2.4 million due to higher average earning assets, an improvement in our cost of deposits. Second, noninterest income increased by about $1.8 million as loan sales continued to increase, mainly in the Fannie Mae qualified market. Although it can be difficult to forecast, we are cautiously optimistic that loan sales will continue at a similar pace in the first quarter.

Net interest margin was 3.67% for the third -- for the fourth quarter, an increase from 3.59% in the third quarter and up from 3.47% a year prior as declines in the cost of our liabilities continue to outpace declines in the yield of our earning assets.

Loans held for investments totaled $2.7 billion as of December 31, decreasing $48.3 million from September 30. Higher-than-anticipated CRE payoffs of $97 million reduced the impact of an otherwise robust $127 million of CRE originations in the quarter. Mortgage payoffs and loan sales exceeded mortgage originations for the quarter, resulting in a $40 million decrease in our portfolio of mortgage loans.

C&I and SBA loans also decreased in the quarter due to normal payoffs and some loan sales. As Alan mentioned, we anticipate our loan portfolio will grow slightly in the first quarter but expect that loan growth for the year to be similar to that of last year.

Our average yield on earning assets for the quarter was 4.55%, down 8 basis points from the prior quarter and 54 basis points from the prior year. Deposits were relatively stable at $2.6 billion from the end of the third quarter with the usual decrease in demand deposits that we see every December. Our cost of interest-bearing deposits for the quarter was 0.93%, which was down 21 basis points from the prior quarter and 100 basis points from the prior year. We expect the cost of our deposits to continue to decline in the first quarter as higher-cost CDs mature and are replaced by lower-cost deposits.

Nonperforming assets increased by $1.6 million to $19.8 million in the fourth quarter, increasing 5 basis points to 0.59% of total assets. As Alan mentioned, deferred loans have continued to decrease. As of January 15, we had 35 loans in deferment totaling about $50 million. Of these, 2 loans with outstanding principal of $23.5 million were on principal deferment only and are still making their interest payments.

We took a provision of credit losses of $3 million in the fourth quarter primarily attributable to the higher loan balances and the impact of COVID-19 pandemic. Our allowance for loan losses is now slightly above our target of 1%. So absent any deterioration in credit quality, we expect our COVID-19-related provision to moderate in future quarters. Our capital levels remain strong with our capital ratios well above regulatory minimums.

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

(Operator Instructions) Your first question is from Nick Cucharale with Piper Sandler.

This is [Sean] on for Nick. So it was nice to see the rebound in the gain on sale business. I was wondering if you could give us a little color on the margin expansion and the sales to private investors.

The -- these were mostly Fannie Mae loans that were sold. And we're getting [103 to 104] on pricing on Fannie Mae loans right now. So -- and it's only $10 million of non-QM loans, and they were priced at [102.75].

Got it. Okay. And I appreciate the commentary on the all-in deposit costs and the CDs maturing into 1Q '21. Just curious, what are your current offering rates on CDs? And do you have the amount scheduled to mature in the quarter ended March 31, offhand?

Yes, I do. Just give me 1 second, so I could pull it up. I have it right here, 1 second. We have -- I just have to find where I have it. Okay. Our interest rates for 100 to -- for a CD over $100,000 is about 0.4% right now, okay? Right now, we have $328 million in CDs that we'll reprice in the first quarter. The average rate is 1.58%, okay?

That's perfect. Perfect. And then just one last one, if I could. After you reinstated the repurchase program back in October, it looks like you may have bought back some shares in 4Q. Just curious as to what your appetite is for repurchasing shares. And can you remind us of the share quantity on your current authorization?

Well, there's only about 325,000 shares left in the plan, okay? And so we still have our -- we're still under the blackout period. So the plan that we put, the specifics that we've told our people to repurchase is still in place, and that will probably continue. If we continue the plan right now, it will probably take another 2 to 3 months to get through that 300,000 shares because of the volume limitations and the volume of trading right now, okay?

Your next question is from Kelly Motta with KBW.

I was hoping -- maybe just some clarity on the loan growth outlook. I appreciate the comments that would be similar to last year. I was just -- wanted to clarify, do you mean similar to 2020 organic growth or stripping out PGB? Or is that inclusive?

Our organic growth, we -- I think we said last year, we would grow loans and deposits by high single digits, very low double digits, and that's what our plans are for this year, too, okay?

Okay. That is helpful. And then building off the prior question about buybacks, just wondering, given where your stock is trading below tangible book value, was the decision to not be more active on the repurchase last quarter more a function of volume rather than appetite? I'm just...

We were out there, and the -- we were -- I mean, it's -- we were out there every day, just we couldn't get that shares back, okay? So it's just (inaudible) we were out there every day. I mean, some days, we bought back 1,000 shares.

Got it. Okay. And then maybe on credit, can you just remind me when you're adopting CECL and if there's any additional costs to prepare for that, that you're expecting next year?

CECL has to be fully implemented by 20 -- by December 31, 2022, because that's when our EGC runs out, okay? So that's when we have to put our entry towards the equity or -- and so forth at that point in time. And we have to be running CECL starting January 1, 2023. Having said that, we will have to have disclosures 6 months prior in our Q, 6 months prior to that. So our game plan is to have concrete numbers that are -- have our first validation of the model sometime in early 2022, okay? But that is an expense that we don't have right now. We do not have the expense of the validation of the model. And we do not have -- we don't know what that will be right at the moment either. And we do not have any extra data that we may have to buy such as the economic reports or whatever that we may have to put into the model. We don't have that also at this time.

Okay. So if I'm just -- if I'm understanding you correctly, the actual CECL implementation will be that 4Q 2022.

Yes.

For our models, okay. And then with expenses, are there any other kind of incremental expense adds or saves that we should keep in mind off of this mid-$14 million number in 4Q? I know you went through in your release, I know you're doing a bunch of things with your branches and shifting costs around that. So just wondering how kind of like the gives and takes of the expense outlook relative to where you are now.

Okay. Typically, our first quarter is our highest expense month -- highest expense quarter of the year, though. And it will probably be very similar to the fourth quarter. But typically, after that, our expenses go down a couple of hundred thousand dollars every -- for the remainder of the year, okay, per quarter. So I would see that our next quarter will be about the same. And then I think you'll see reductions of a couple of hundred thousand dollars after that. And a lot of this comes from tax, the tax expense that is higher for the first quarter, and there's benefit expenses that are higher for the first quarter. And there's also expenses, professional services expenses that are higher in the first quarter, okay?

(Operator Instructions) Your next question is from Andrew Terrell with Stephens.

I just wanted to start on the growth commentary, just to make sure I got this right, similar rate to last year in terms of loan growth kind of on an organic basis. Does that include any kind of assumption for PPP round 2 loans? Or is that going to be exclusive of that?

That is exclusive of -- excluding PPP. I don't -- we were not a huge player in PPP. We did $32 million last year. And I don't think we'll see -- I don't know if -- we're just beginning to do it now, but I don't think we'll see more than that this year. Plus, we're beginning to get the application -- we just get the application in these few days. Yes. We're just getting the applications now on that, but we also are just getting some of the forgiveness in. So we'll probably see that just wipe out any growth if the forgiveness equal on the first go round, okay?

Okay. Got it. That's helpful. Maybe just on the margin really quickly. So securities yield stepped down about another 30 -- 31 basis points this quarter. Just curious, what type of yield are you getting on new securities that you're purchasing right now? And is it, I guess, just safe to assume just given the yield the book is t that kind of further purchases are margin-accretive from here?

Well, if I go out and I -- what we have right now is about $200 million in what I would call liquid money and lower-yielding money, which we're probably going to put to use to something better than that in the first quarter. And what I mean by that is we have a lot of money in commercial paper and so forth. And we used to be able to get 50, 60 basis points, and we're now getting only 30 basis points on that money. So we're going to put some of that fees to longer securities during the first quarter, okay?

Perfect. And then last one for me, just quickly on the reserves. You guys built the reserve up to about close to 1.1%. I guess just thoughts on how the reserve trends over the next couple of quarters. Do you think it's fair to start maybe releasing some reserve here? Or would you like to kind of maintain it flat with where it's at?

We're going to keep the reserves where they are. We're not going to release any reserves, a significant dollar amount. I mean there could be some reason we'd do a little tiny bit because until COVID is fully known, and at that time, we will be adjusting the reserves then. We budget our reserve at 1.25%. So that's how you get on growth. So that's how you should view it in your models. That's a pretty good average. So as we continue to grow, our provision will continue to grow because it's artificially depressed because of the purchase discounts that we have that we do not include the loans that we purchased in our ALLL model as such. So -- okay?

Our next question is from Kelly Motta with KBW.

I just -- you've talked about M&A in the past, and you've been buying the past couple of years of a small bank a year, and you've got a ton of capital. I'm just wondering if there was any changes in the pace of conversations given that it just seems like M&A across the banking industry is picking up a bit.

I would say that there is some increase in talk. There is nothing that is imminent. We -- as our stock price gets stronger, we will really begin to be active in that. But right now, our main goal is to buy -- to use our extra capital to buy back our stock is our main goal right at the moment, okay?

There are no further questions in queue at this time.

Okay, no question?

No question.

Okay. Yes. So once again, thank you all for joining us today. We look forward to speaking to many of you in the coming days and weeks. Have a nice day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.