RBB Bancorp (RBB) Q3 2020 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the Third Quarter of 2020. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] And please note that today's event is being recorded. Thank you. At this time, I would like to turn the conference over to Catherine Wei. Please go ahead.

Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the third quarter of 2020. With me today from management are Chairman, 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, 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 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. Now, I would like to turn the call over to Alan Thian. Alan?

Thank you, Catherine. Good day, everyone, and thank you for joining us today. I will start by providing a brief overview of our third quarter results, and then David will discuss our financial performance in more detail. Our third quarter's results demonstrated the strength and resiliency of our expanding franchise, as we generated strong earnings, net interest margin and assets and deposit growth. Effective management of our commercial real estate and C&I loan exposure in previous quarter created an opportunity to originate attractive loans in market in which our competitors were forced to pull back. Much of this growth came from the New York region, which we entered two years ago with our acquisition of First American International Bank. I'm sure we'll get questions, but we feel confident that we maintain our rigorous underwriting standard for these new loans. We believe this growth validates our strategy of expansion and are optimistic that the growth will continue as the economy slowly returns to normal. Our strong deposit growth was accompanied by declines in deposit costs as we benefited from ongoing efforts to improve our deposit franchise and a declining rate environment. Our efforts to improve the deposit franchise are beginning to take effect. Our asset quality remained solid and remained well capitalized with ample access to liquidity. Deferred loans outstanding decreased 76% over the quarter to just 4% of loans outstanding. Given our improved results and consistent with our guidance that we would increase the dividend when our earnings outlook becomes more certain, the Board decided to increase the dividend to $0.09 per share this quarter. While not a full restoration to the $0.12 we were paying before the pandemic, we believe that this increase when combined with the resumption of stock repurchase program, strike the proper capital allocation balance, while remaining maximum flexibilities in the event of a sudden economic deterioration. I am very pleased with our third quarter financial performance. We delivered strong earnings while growing our loan portfolios and improving our deposit franchise. Our expanding national presence combined with our flexible balance sheet, focus on servicing the financial needs of our clients and conservative credit culture has positioned us to emerge from the pandemic stronger than ever. I will now turn the call over to David for further discussion of our second quarter results. 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 6% from a year earlier to $8.5 million or $0.43 per diluted share in the third quarter. We reported record pre-tax pre-provision income of $16 million, an increase of $3.6 million from the prior quarter. Our net income benefited from several factors. First, net interest income increased $2.2 million due to loan growth and improvements in our cost of deposits. Second, non-interest income increased by about $0.5 million as we were able to sell more loans as market activity returned, mainly in the Fannie Mae qualified market. Third, non-interest expense declined by about $800,000 as temporary merger-related expenses began to roll off. Net interest margin was 3.59% for the third quarter, an increase from 3.42% in the second quarter and stable from a year prior, as decline in the cost of our liabilities more than made up for the decline in the yield on our earning assets and the excess liquidity we continue to carry. Loans held for investment totaled $2.8 billion as of September 30, increasing $160.5 million from June 30. This 24.6% annualized growth was primarily due to organic loan growth and included a $74.9 million increase in commercial real estate loans, $37.8 million increase in construction and land development loans and $50.4 million increase in commercial industrial loans. I think it's worth extending on Alan's comments that much of our growth this quarter was made possible by effective management of our CRE and C&I exposure in prior quarters and our capital levels. A 300% of regulatory capital, our current CRE concentration is relatively low compared to our peers. As a result of this, we can take advantage of opportunities to make high quality CRE and C&I loans when our competitors are forced to step back. Single family residential mortgages stayed relatively flat for the quarter at $1.2 billion and remained our largest asset class with 42% of loans held for investment. Given industry-wide concerns about credit quality, it's worth noting that the average LTV on our residential mortgage portfolio was 61%. Our average yield on earning assets for the quarter was 4.63%, which was down only 2 basis points from the prior quarter, but 66 basis points from the prior year. Deposits were $2.6 billion at September 30, increase of $175 million from June 30. Non-interest bearing deposits increased by $58 million and interest-bearing non-maturity deposits increased by $52 million. Time deposits increased by $55 million including a $15 million increase in brokered CDs, as we took advantage of favorable rates to fund our loan growth. Our cost of interest-bearing deposits for the quarter was 1.14%, which was down 28 basis points from the prior quarter and 88 basis points from the prior year. We expect the cost of our deposits to continue to decline in the fourth quarter as higher cost CDs mature and are replaced by lower cost deposits. Non-performing assets increased by $800,000 to $18.3 million in the third quarter, but due to growth declined by 2 basis points to 0.54% of total assets. We took a provision on credit losses of $3.9 million in the third quarter, primarily attributable to higher loan balances and the impact of COVID-19 pandemic. Our allowance for loan losses has been close to our target 1%. So, absent any deterioration in credit quality, we expect our COVID-19-related provision to be moderated in future quarters. Our capital levels remained strong with all our capital ratios well above regulatory minimums. I'll finish with a quick word on deferrals before we open it up for questions. The dollar amount of the FERC loans came down 76% from June 30 to October 23, as most of our borrowers resumed making regular payments on their deferred loans. Two large CRE loans represent 38% of the remaining $105 million in deferrals outstanding. One was a general retail loan for $22.7 million with an LTV of 65%, and one was a commercial office and other loan for $17 million with the principal only deferment and an LTV of about 63.4%. In both cases, we are working with the borrowers to resolve them upfront. With that, we are happy to take your questions. Operator, please open up the call.

Yes, sir. [Operator Instructions] Okay, we do have a question from Nick Cucharale with Piper Sandler. Please go ahead.

Hi guys, good afternoon.

Hey, Nick.

On the mortgage sales, I heard your commentary on that line returning to previous levels in the fourth quarter. Can you help quantify your expectation over the coming quarters?

Okay. Nick, I don't think we said it will be coming back to the previous levels in the fourth quarter, but I do think we are going to have continued increase in mortgage sales, especially on the Fannie Mae side in the fourth quarter. And then in the first quarter I think as the non-QM loan production comes back to prior levels, we will expect that to increase in the first, second quarters of next year. Okay?

Okay. And then you're expecting a relatively consistent single-family production or just a little bit higher percentage of the production to be sold?

I would expect the production to be about the same. Okay?

Yes. That's good. Can you just remind us how many shares remain on your current repurchase authorization?

There's about 600,000.

Then lastly, just on the moderated provision remarks. You continue to prudently build the allowance, you pretty much hit your previous guidance for 10 basis points of increase in the reserve this quarter. Understanding that credit is a fluid situation, is your expectation that the provision will be more of a function of loss content in future periods? Or do you anticipate a continued reserve build?

We still have a 3 basis point reserve build that we want - there is 3 basis points to 5 basis points I would say, we would want to continue on. As far as losses are concerned, we only know of two other loans, there's the two hotel loans that we've talked about I think like every quarter that haven't closed yet and we do expect them to close in the fourth quarter. There may be some cleanup loss there of around $200,000 at maximum, we believe. And besides that, we don't have anything on the horizon I guess until the COVID-19 crisis is declared over.

Thank you for taking my questions.

The next question is from Kelly Motta with KBW. Please go ahead.

Hey everyone, good afternoon. I really appreciate the commentary about loan growth and your ability to be proactive when others are pulling back. I was wondering if there's been any change now early in the fourth quarter of the competitive landscape and if you expect that can continue to help you grow your loan balances at a rapid clip? Thanks.

Okay. Just so that you know Kelly that typically our best two quarters for loan growth are the second and third quarter of the year, and then followed by the fourth and our first quarter is the worst quarter. So I don't expect that we will grow as strong in the fourth quarter as we did in the third quarter. Although we have a very, very strong pipeline we don't believe we'll be able to grow that much. The second thing I think you have to realize is a lot of our growth is in, I would call safer class CRE but multifamily, and so forth although we did have a lot of construction work this last quarter too.

Thanks. You actually led until kind of my next question there. You mentioned a lot of that CRE growth was in New York City market. I'm wondering if you could provide any color around maybe LTVs that you're putting on there, to just kind of help us gauge the safety of the asset class that you have.

Kelly, its average is 65%.

Great, thank you. And maybe if I could sneak another one in… sorry.

That's a six-month deferment, plus the six months of P&I on top of that. Okay. So every loan that we do we just required a P&I reserve of six months. That's not booked into the underwriting process. Okay?

Yes. That's helpful. And then with margin, it really holds up on a core basis really strong and the loan yields seem to hang in a bit more and it kind of helps the pressure on average earning assets. Wondering if there was anything unusual, any unusually high loan fees or anything like that that was helping in the quarter or if it was just a function of mix?

It's a function of mix really, right now, and it's a function of the decrease in the - it's not about the yield, it's really a function of mix. Overall NIM is a function of mix and the decrease in the deposit.

Right. And just as a final question, can you just help me out on kind of where new CRE production is coming in, in terms of yield versus resi mortgage?

Resi mortgage, the non-QM is still at 5%. I'm going to say our other loans, our CRE loans are anywhere probably about the same rate, 4.75%, 5%, construction is even little bit higher than that. Okay?

Great, thank you.

[Operator Instructions] And at this time there are no further questions. I would like to turn the conference over to Alan Thian for any closing comments.

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. Thank you.

Ladies and gentlemen thank you for participating in today's conference call. You may now disconnect.