RBB Bancorp (RBB) 2020 Q2 法說會逐字稿

Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the Second Quarter of 2020. (Operator Instructions) Please note that today's event is being recorded.

I would now like to turn the conference over to Larry Clark from Financial Profiles, Inc. Please go ahead, Mr. Clark.

Thank you, Laurie. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's Financial Results for the Second Quarter of 2020. With (technical difficulty) are Chairman and President and CEO, Alan Thian; EVP and Chief Financial Officer, David Morris; EVP and Chief Credit Officer, Jeffrey Yeh; and EVP and Chief Risk Officer, Vincent Liu.

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'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 day, everyone, and thank you for joining us today. I will start by providing a brief overview of our financial performance, and then David will discuss our results in more detail.

As the COVID-19 crisis continues to impact our country and the economy, our top priority remains the health of our employees and customers. I'm proud of our entire team for doing what it takes to support our local businesses and the communities that we serve during these difficult times. Despite the challenges caused by the pandemic, we've delivered improved performance in a number of areas during the second quarter, including growing our core loans and deposits; expanding our net interest margin; achieving improved credit quality; and managing our operating expenses in line with expectations.

While our financial performance was impacted by lower loan sales and increased provision of loan losses, we managed to maintain our EPS at $0.33 per share, and we are building a potential for future earnings growth. Our loan highlights remains strong, and we continue to drive down our deposit costs while increasing our core noninterest-bearing deposits. We expect to resume higher loan sales by the fourth quarter as we adjust to our production levels and the market conditions for loan sales improve.

We continue to work with all of our customers who are affected by this crisis, providing them guidance, support, including loan payment rebates as needed. At quarter end, we had a standard payment relief on $411 million loans across our entire $2.6 billion loan portfolio, representing 15.8% of the total. We have granted $192 million of these payment deferrals to our commercial customers and $219 million to our single-family residence mortgage borrowers. I'm pleased to report that as of July 20, $185 million or 45% of these loans have resumed making payments. We expect further improvement by the end of August as 45% of our loans did not start receiving deferrals until May and 85% of the loans that received deferrals in April have resumed making payments.

To date, we have had limited requests for a second round of deferrals. And at this time, we anticipate that less than 25% of our loan balances that participated in the first round of the program will need additional assistance. We believe that this speaks to both the high quality of our loan portfolio and the strength of our local markets. However, it is still difficult to predict the ultimate impact that this pandemic will have on our customer, given economic uncertainties, the original government stimulus package ending soon and the number of new COVID-19 cases continuing to increase across some of our primary markets.

So we believe that bolstering reserves, maintaining strong liquidity and building upon our already solid capital base is prudent at this time. With respect to our dividend, the Board decided that it was prudent to again declare a $0.06 per share dividend this quarter with the ongoing uncertainty around the pandemic. However, we anticipate being able to restore the dividends to a higher level once we obtain more clarity on future business conditions and the earnings potential of the company.

I'm generally pleased with our second quarter financial performance and the healthy underlying fundamentals of the company. We plan to continue to originate new loans across all of our business lines in a disciplined manner, and we remain focused on maintaining strong liquidity to help our existing customer to operate through this crisis. We will also continue to execute on our strategic goals by growing our franchise organically with our existing markets and by expanding our franchise beyond our existing markets.

I want to thank the entire RBB family for their dedication to our customers and their hard work as we manage through this environment. There remains more work to do, but I'm confident that our bank will emerge from this pandemic a stronger organization.

I will now turn the call over to David for further discussion of our second quarter results. David?

Thank you, Alan. We have provided a great level of detail in our press release, so I'm going to focus only on those items where some additional discussion is warranted. Our total loans held for investments were up just over $140 million during the quarter, driven both by organic loan growth across most of our segments and also due to $33 million of new PPP loans. We also transferred $53 million of single-family mortgages from the available-for-sale bucket as part of our ongoing balance sheet strategy.

Total single-family loan production in the second quarter was $118 million, up from $107 million in the first quarter. Payoffs and paydowns were also modestly lower in the second quarter. We only sold $5 million of mortgages in the second quarter, down from $101 million in the first quarter. Going forward, we expect to sell more of our residential mortgage production, but it will depend upon market conditions and our production levels. And as Alan mentioned, we plan to continue making new loans in a disciplined manner. However, given uncertainty surrounding the economy, we likely won't see the same demand that we saw in the second quarter.

Now turning to deposits. Total deposits, excluding brokered deposits, increased by $62 million during the quarter, mainly due to the healthy increase in noninterest-bearing deposits and non-maturity deposits which increased by $100 million in the quarter. Partially offsetting this increase was a $100 million decline in our time deposits, which included a $32 million decrease in our brokered deposits as we have higher CDs -- higher-cost CDs runoff the balance sheet, given our strength -- strong core deposit-gathering activities, which has reduced our need for wholesale funding.

Our average cost of interest-bearing deposits was down 30 basis points in the quarter. We experienced lower cost on both our nonmaterial deposits and on our CDs given the lower interest rate environment. Going forward, we expect the cost of our deposits to be down as the gap between the rates that we pay on new CDs and the rates we paid on maturing CDs continued to work in our favor.

Moving on to the net interest margin. NIM increased by 5 basis points on a reported basis. NIM and 1 basis points when it's adjusted for purchase discount accretion. Our relatively positive NIM performance was driven by our lower overall deposit cost due to both rate and mix and the fact that our loan yields didn't decline as much as our deposit cost. In addition, we are still being impacted by the pandemic. Going forward, we believe that our net interest margin should be slightly up, but it depends on a number of factors that are very hard to predict at this point, including the direction of loan yields and the ongoing levels of liquidity that we will carry on our balance sheet.

Turning to noninterest income and expense. Our noninterest income was down in the second quarter, mainly due to fewer loan sales in the quarter, as previously discussed. Our total noninterest expense was down meaningful from the first quarter, driven lower sequential expenses in salaries and benefits, marketing and business promotions, data processing and merger expense. We saw modest increases in occupancy and equipment expenses, insurance and regulatory assessments, legal and professional and other expenses, the latter being driven by $366,000 write-down on our mortgage servicing line. In the current environment, we continue to maintain our focus on controlling costs. Going forward, our total noninterest expense should be relatively stable to slightly increasing as our Edison branch comes online and we enhance our online capabilities. However, loan collection expense may increase depending upon the duration and severity of the economic downturn.

Shifting to income taxes. Our effective tax rate for the quarter was 31%, slightly lower than the first quarter due to the impact of affordable housing tax credits. We anticipate an effective tax rate of between 29% and 33% for the full year of 2020, excluding the impact from stock option activity that we may experience from quarter-to-quarter. Now turning to the asset quality. Our nonperforming loans decreased by $3.3 million during the quarter as we sold 2 hotel franchises and had 1 loan return to accrual status. As a result, our NPL to total loans improved 10 basis points to 56 basis points at quarter end.

During the quarter, we had $319,000 in net charge-offs related to the 2 hotels we sold. This was down from $631,000 in the first quarter. Our provision for loan losses was $3 million for the second quarter, up from $1.9 million in the first quarter. The increase was due to higher loan balances and the expected impact of the pandemic. Our allowance for loan losses stood at 0.88% of total held to (sic) [for] investment, up from 0.84% at the end of March. As Alan mentioned, we believe that it is prudent to continue to build our reserves until we get more clarity on the ultimate impact that the economic slowdown may have on our asset quality. We are encouraged by the number of our customers resuming their payments, and we expect to see continued improvement going forward.

Our capital levels remains strong, and we believe that we have the liquidity to help our clients weather the storm. And we also believe that we will emerge from this a stronger company, well positioned to continue the pursuit of our long-term goal of growth and value creation, both organically and through strategic acquisition.

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

(Operator Instructions) Your first question comes from the line of Kelly Motta of KBW.

Your deferral trends looked really encouraging. Thanks for the color on that 85% pull-through rate that you've had. I just wanted to clarify, of the ones that have resumed making payments, are those back to full payment status or are they still just making partial payments?

They have their -- they default P&I payment for the month of July. If they've made a partial payment or they came back and said, they made their payment and want another deferral or if they didn't make their payment, we treated them as not making their payment, okay?

Great. And then, I guess with your loan and mortgage sales, your prepared comments said that you expect they're going to return to normal levels later this year. Do you expect any loan sales in 3Q? Or do you think it's really going to take till the end of the year to kind of get that pipeline revved up and going?

Okay. Just to let you know that we'll still sell to Fannie Mae, and I don't know what that volume would be for this quarter. That was $5 million last quarter. I'm hoping that we'll get back to -- closer to a normal level of about $30 million, okay? I'm not sure if that will happen or not.

We also have about -- we have a $11 million contract out with another bank that will settle this year in this month. There is nothing from the big Wall Street firms nor is there anything from the Fannie Mae pool sales at the moment, okay? We hopefully will expect those. There's a lot of discussion with us right now. But I don't -- if we don't have a contract by the end of this week, it's not going to happen elsewhere. It will be in the fourth quarter, okay?

Great. And then maybe lastly, if I can slip a third in. Loan growth is, obviously, super strong, even without the impact of PPP. What's really driving that? What's driving the demand in -- with you being selective going forward and your comments that loan growth, obviously, won't be at this level, what's kind of reasonable to expect from here?

Okay. Kelly, there's multiple reasons why we have seen such strong loan growth. The first reason is the lower rates and people have cash and want to put that cash to work. The second reason is there are other banks that are not as well capitalized as we are or are pulling back on their capabilities, okay, and so forth. And that's what we're mainly seeing in the market right now. I see our commercial production being very strong for the second quarter right now, very strong for the second quarter. Maybe slightly lower than the first quarter, but -- even in the second quarter, but getting maybe very close to that. And then, of course, if we don't sell any mortgage loans, we would have -- it's an increase on that also, okay?

(Operator Instructions) Your next question comes from the line of Nick Cucharale of Piper Sandler.

Just a follow-up on the gain on sales side. So I heard the commentary on Fannie. Are you seeing a thawing of private sales at this point? And was that part of your remarks for a return in the fourth quarter?

Yes. That's -- we're seeing some falling there. But like I said, if we don't have a deal done by the end of this week, we won't be able to close probably by the end of the quarter, okay? It takes -- we have to have at least an LOI and some understanding or at least discussions around the LOI. And although we're talking with a number of people, including Fannie Mae, by the way, so there's nothing concrete yet.

Okay. And then with respect to expenses, thanks for your commentary on the run rate. Is it fair to say that the cost savings from the PGB deal are complete at this point?

Yes. And what you're going to see is probably a little bit of an increase because, in expenses, we will be putting Edison online pretty soon near the end of the quarter. We also have some expenses for additional -- couple of little systems we're putting in. They're not big. So we're also going to hire some -- we'll hire some people to backfill for the people that we've lost within the quarter, okay, to help with the processes.

That's helpful. And then in the CD book, where does your current offering rate end? How much of the portfolio is expected to mature in the September quarter?

Okay. We expect $313 million to mature at a 2.02 rate. I expect that to go in at or under 1. Our posted rates, I believe, right now are like 0.78. So I expect there may be some people who'd get to 1, but I would expect most people to be below 1.

(Operator Instructions) Your next question is a follow-up from Kelly Motta of KBW.

I wanted to follow-up on the margin here. Your loan yields seem to hold in pretty well, better than expected. What is new production coming on relative to the book? And I know you said you expect NIM to be up, but I'm just kind of interested in how production is coming in versus roll off?

Well, let's break it down. The mortgage -- the non-QM mortgage loans, our start rate is around 4.75% on West Coast. On the East Coast, it's 4 and 3/8 plus 1 point, I believe it is. In -- on CRE, most of our CRE is starting at around 4.50%, okay? We will do, for very good customers, I guess we shouldn't say this out loud, but we will do, for very good customers, flows below 4.5%, but they have to be very good deposit base customers for us.

Great. That's helpful. And then in your release, I really appreciated the comments about the dividend, and you have really strong capital. And you mentioned that you're still -- will evaluate expansions in other markets. I'm wondering, with the environment really challenging and multiples depressed, like is there -- do you think this is an opportunity for kind of just throwing in the towel and you could buy some new partnerships? Or is it just kind of a wait-and-see at this point with all the uncertainty going on?

Well, I think it depends on how long this goes because, yes, I think there will be people who will be throwing in the towel and so forth. But I don't think -- I think everybody is hopeful that this will end within a quarter or 2 from now. And -- but there will be a lot of fallout. And depending upon their capital level, whether they can withstand how that -- the kind of fallout, because there will be a certain number of businesses that will never open again, okay? So we know that and -- but we know that at some point in time there will be banks out there going to market, okay?

At this time, there are no further questions. I will now turn the call back to Mr. Thian for any additional or closing remarks.

Well, 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, and stay safe. Thank you.

Thank you for participating in the RBB Bancorp earnings conference call for the second quarter of 2020. You may now disconnect your lines, and have a wonderful day.