RBB Bancorp (RBB) Q2 2021 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the Second Quarter 2021. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today’s event is being recorded. I would now like to turn the conference over to Catherine Wei. Thank you. Please go ahead.

Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the second quarter of 2021. With me today from management are 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 will 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 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. The continued strength of our differentiated business model delivered record earnings and a healthy return on tangible common equity in the second quarter. Consistent focus on deposit franchise resulted in significant growth of non-interest bearing deposit, which now represents approximately 30% of our total deposits. Our reported interest market declines due to excess liquidity, our discipline, loan origination efforts, loan balances and yields stable. We had a strong quarter of non-mortgage loan growth, which make up for another soft quarter in mortgage. We were also pleased to announce our entry into the Hawaiian market, that is home to a vibrant Asian-American communities. We are excited to enter this new market and bring our relationship-based banking model to Hawaii. We remain well positioned to pursue additional organic and strategic growth opportunities and look forward to continuing to enhance long-term shareholders’ value. With that, I will turn the call over to David to discuss some of the quarter’s financial highlights before opening up the call for questions. David?

Thank you, Alan. I will start by reviewing some of the highlights of our income statement before moving on to our balance sheet. Net income grew 7.4% from last quarter and more than doubled from a year earlier to a record $13.4 million or $0.67 per diluted share. We reported stable quarter-over-quarter pretax pre-provision income of $19.5 million. Our net income benefited from several factors. First, net income increased $1.4 million due to stable interest income and interest expense and a decrease in provision for loan losses, non-interest income decreased by [indiscernible], primarily due to lower mortgage loan sales, but was largely offset by lower non-interest expense as costs normalized after a seasonally high first quarter. Net interest margin was 3.33% for the second quarter, a decrease of 40 basis points from the first quarter and down nine basis points from a year prior. Adjusting for the excess liquidity we are carrying, our net interest margin in the second quarter would have been 3.8%. Loans held for investment totaled $2.7 billion as of June 30, which was stable from last quarter. We had another good quarter of growth in commercial real estate which grew at a 15% annualized rate and construction, which grew at a 52% annualized rate. Unfortunately, our non-QM mortgage production, which is our most profitable mortgage product, continues to lag leading to a $57 million decrease in our mortgage loan portfolio. We are acting to revitalize the non-QM origination channel, but continue to be challenged by the rate environment. Our average yield on earning assets for the quarter was 3.99%, down 50 basis points from the prior quarter and 66 basis points from the prior year. As with the NIM, this decrease was due almost entirely to lower returns on our excess capital. Deposits, once again showed very strong growth with total deposits increasing by 249 million, and non-interest-bearing deposits increasing by 153 million. We are pleased with the rapid progress we have made improving our deposit base, but intend to monitor the new balances for some time before we deploy them into higher-yielding assets. Our average cost of interest-bearing deposits for the quarter was 0.59%, which was down 14 basis points from the prior quarter and 83 basis points from the prior year. We still expect some improvements in our deposits as the less of our high-cost CDs mature and are replaced by lower-cost deposits. Non-performing assets decreased by $700,000 to 19.5 million in the second quarter, decreasing five basis points to 0.5% of total assets. As of July 15th, we had four loans in deferment totaling about $3 million. We took a provision for credit losses of $628,000 in the second quarter, primarily attributable to loan growth. Our capital levels remain strong with all of our capital ratios well above regulatory minimum. Finally, before we take your questions, in mid-June, we were notified that we were awarded a $1.8 million under the U.S. Treasury CDFI Rapid Response Program. We were one of only eight banks in California to receive this award, and we feel it is a testament to our reputation as a community-focused lender. These funds will allow us to respond to the economic impacts of the COVID-19 pandemic in distressed and underserved communities. With that, we are happy to take your questions. Operator, please open up the call.

[Operator Instructions] Your first question is from the line of Nick Cucharale with Piper Sandler.

Yes. I would like to start on loan growth. It looks like paydowns and payoffs have impeded the year-to-date growth in the single-family book. But what is your expectation for net loan growth for the remainder of the year?

I still think we will be on target at 10%. 9% to 10% loan growth.

Okay. Is that target predicated on the prepayment and paydown slowing significantly from the second quarter level?

I see in the mortgage side of things the prepays are beginning to slow. We also believe that the second quarter in the commercial side are going to decrease significantly, but also our loan origination pipeline is very strong right at the moment, very strong in the commercial side. It is strong.

And as you mentioned, this is the second quarter in a row with very strong non-interest-bearing deposit growth even when compared to the industry. Can you give us some color on how you have been able to drive such a robust advance there? And secondly, has that prompted any change in strategy at the bank?

Okay. I will break it out to three groups. One group is existing customer base and just going back and asking for more deposits from that. That is maybe a third of this, okay. A third of it is maybe half of the - a third of it is maybe new customers, deposit customers with the bank, putting in significant balances. And then a third of it is just the amount of excess liquidity there is in the market. There is just a ton of excess liquidity out there. And that is showing up in the bank accounts because everything is delayed. You hear the market. You hear all the commentaries. The purchase of and everything is delayed. So money is just sitting until it is being used. Has that changed our strategy at all. We believe that some of this excess liquidity in 2022 will go away. The excess liquidity that is in the market will go away, hopefully, over a period of time instead of at once. And so therefore, we are not going to invest a certain amount of it. We want to increase our loan production as much as possible. We are not selling non-QM loans at this moment. We are holding on to every month loan we can if I keep our mortgage loans stable until that comes back to normal production there. And finally, we are putting a couple of hundred million dollars into investments that are short-term or shorter term in relation, average life of three years, to get more than the eight basis points that we are earning on Fed funds, okay. But we want to keep it short because we do believe rates will rise.

That is great color, David. And lastly, just a nice pop in SBA sales in the quarter. It looks like you are capitalizing on a favorable environment there. What is your expectation for that business and the revenue it can generate?

Well, this is Alan. The third and fourth quarter on SBA, it would at least be the same as our first two quarters.

Yes. I do think that SBA is - last year, it was all PPP. And now it is - just more operational now, it is PPP forgiveness. But our origination people are out and about. And so I think we will be doing okay for the rest of the year.

And in addition, it seems like a lot of small business last year, they are really suffering or just trying to survive. And thanks to the PPP and all the other assistance. Hopefully, with the slowing down of the pandemic, we see a lot more small business getting back on their feet and starting to increase their productivities or increase their inventory, trying to back to the business. So we see quite a lot more inquiries about SBA financing either on inventory or improvement or even purchase of the warehouse and industrial properties. The expiration in Southern California, the industrial property has been so strong that it really has multiple bids on almost all industrial property that a small business are looking for. So we see a strong, strong growth in the business and industrial sector.

Thanks for the color and thank you for taking my questions.

Your next question comes from the line of Kelly Motta with KBW.

Alan, I believe earlier in your prepared remarks, you talked about there is still a lot of strategic growth opportunities. And obviously, you are entering Hawaii, which is a new market for you. Just wondering if you guys can expand a bit more on any update on how M&A is looking since the last quarter?

Yes. In fact, after the pandemic, we see a lot more institution that looking for some kind of alliance or partnerships. So in fact, right now, we probably see at least two to three more targets that we have been looking at. So looking at those banks that we consider, they are not a big bank. It is just that after the pandemic, I believe a lot of board members or a lot of management believe that the better way for survive or better way of growth is to just become part of a larger organization or part of the larger bank. This is how I see that. A few banks actually, they are pretty good in asset quality, but they are in quite good strategic location with some nice distribution outlet. They are looking for a partnership. It is more that to bet on one plus one is larger than two. So we see quite a few opportunities in the areas that we are looking at, including Northern California, including Texas and including Georgia, Atlanta and of course, Washington states as well. So we see a lot more opportunity now than pre-pandemic.

Great thanks Alan. And a follow-up question on if the market ever still the same. I just also wanted to ask a bit about the non-QM mortgages. David, you spoke about the one priority is getting that channel up and running. Do you have a sense of when production is going to normalize on that and kind of what needs to happen in order to get it there?

It seems pandemic recover for certain reasons, we see most of our competition for the non-QM actually is from land bank lenders. Land bank lender, they are looking on a smaller margin. They are really looking for the volume. Unfortunately, at the same time, because the land bank lender has quite a lot less of the compliance issue than the bank. They tend to be quite aggressive in underwriting and in processing. This is what we see. So since about beginning of the year, even though we still work with correspondent and brokers, we shift a lot of our focus on retail banking to bring in our customers from our own branch system. That in these past three months, it is proven to be pretty successful of bringing in our customers who know us, they are not really trying to go to the land bank lender. So we see that volume picking up. I will say that it probably will need as to have at least two quarters to bring the volume back to close to normal.

Got it. Thanks Alan that is helpful. Last question for me. It is on expenses. They dropped pretty nicely quarter-over-quarter, kind of similar to I think what was said on the call last time. Just wanted to see if there is any update on how we should be thinking about the expense run rate as we get into the back half of the year?

Well, as probably every company is around the country, we are having pressures on salaries and so forth. So I would say that we would be between $14.7 million and $15 million range in our quarterly expenses, okay.

Thanks David, thanks you. I will set back.

Your next question comes from the line of Andrew Terrell with Stephens.

So I hear you loud and clear on the non-QM piece of the mortgage business. But David, any kind of updated expectations on Fannie mortgage sales in the back half of the year or is there any kind of increased appetite just given where non-QM production is at. Is there any more appetite to balance sheet more of the Fannie production?

Well, we have thought about putting on Fannie, they are 30-year loans, they probably will not prepay very fast when you are in a sub-2.75% range and so forth. So you are going to be stuck with us forever. So we have kind of made the decision that we will continue to sell our Fannie Mae production at this time. We review it quarterly, because we don’t know what is going to happen with the economy, and we don’t know where rates are going to go and so forth. We review it quarterly. We think our production is going to remain about the same as it has been. We are going to be the $20 million range and just a reminder that all of our production comes out of the New York region and Fannie Mae. I shouldn’t say all, 98% of it comes out of New York region and we are happy with that performance there at this time.

Okay, great. And then just looking at the blended mortgage gain on sale margin this quarter, it was around 2.5% or so. Just given there might be a lesser mix of non-QM sale volume. Do you think the gain on sale margin could compress a little bit from here or are we likely kind of at or near floor?

No. Well, our Fannie Mae gain on sale margin has been averaging closer to two point - I would say our gain on sale margin is close to 2.5%, 2.6% in Fannie Mae, which is about the last non-QM than we had was a similar to that. So I would hope because of some of the things that we have done, we have come to mandatory delivery and so forth, that in the third quarter, especially in August and September, you will begin to see our margin gain on sales go up slightly because of that. But I would say, right now, the 2.6, 2.5, 2.4 that range is where the average is right at the moment.

Understood. Okay. And then if I can squeeze one last one in. I might have missed it, but did you repurchase any shares this quarter? And can you maybe just talk about the appetite for repurchases moving forward? I know the valuations improved a bit since we last spoke.

We repurchased. I have it here. I just have to find it. I believe 222,000 shares, as I believe, is what we repurchased in the quarter. And yes, it all depends on where our stock is trading, if we are going to be active in the market or not, but we do probably believe that we will be repurchasing more during the third quarter also probably to the same degree, about 250,000 shares. We still have 456,000 in our program that we could do.

Okay. I appreciate you taking my questions. I will step back.

[Operator Instructions] We do have a question from Andrew Terrell with Stephens.

Just one more quick one. Can you remind us what you have in CDs repricing in the back half of the year and just what the rate differential between the back book and the new CDs is today?

Okay. We have 415 million will mature in the third quarter at 87 bps. Our ongoing one year rate is about 50 bps. And I just have to turn a couple of pages here, because I do have the fourth quarter, too, if you ask, but I have to find it. The fourth quarter is 272 million. Again, it is at approximately 73 bps, so it will be going down to the 5o bps quarter, okay.

Okay. Perfect. And then just one last one on the margin as well. I know loan yields over the past several quarters have been in kind of the low 5% range for new originations or credit you are originating today, is the kind of new production yield still around that low 5% level and the bulk of any kind of loan yield compression is behind us or are you seeing competition or anything step up in your markets that is pressuring or you are expecting the pressure in new origination yields moving forward?

I think our yields on - it is very competitive out there, but I still believe that we are able to maintain our yields throughout the rest of this year at the same level they are now. Yes. Okay.

Okay. Thanks for taking my questions. Congrats on the quarter.

Okay. Thank you.

There are no additional questions at this time. I will turn the call back over to management for closing remarks.

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.

This does conclude today’s conference call. Thank you for participating. You may now disconnect.