RBB Bancorp Q4 FY2020 Earnings Call

Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the Fourth Quarter and Fiscal Year 2020. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please note that today's event is being recorded. I'd 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 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. 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, pre-provision income increased modestly from 2019 as we managed expenses while growing our assets significantly. Fourth quarter earnings benefitted from an increase in our net interest margin and gains on sales, which we anticipate will continue in the first quarter. Higher net 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. Asset quality remains solid, and we remain well capitalized with ample access to liquidity. Deferred loans continue to decrease and now represent less than 2% of loans held for investment. Last week, our Board of Directors approved a quantitative 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 had 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 our bank's employees for their hard work and dedication, and the strong support from our investors over these last few years. The pandemic has disrupted the economy and people's lives. 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 earlier to a record $11.1 million or $0.56 per diluted share in the fourth quarter. We reported record pretax pre-provision 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 by $2.4 million due to higher average earning assets and improvement in our cost of deposits. Second, noninterest income increased by about $1.8 million as loan sales continue 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 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 the yield on our earning assets. Loans held for investment totaled $2.7 billion as of December 31, decreasing $48.3 million from September 30. Higher than anticipated CRE sales 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 expected 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 eight 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 quarter, increasing five 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, two loans with an outstanding principal of $23.5 million. Our principal deferment total rate and are still making their interest payments. Because of the provision for 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%. We anticipate any deterioration in credit quality, and we expect our COVID-19 related provision to moderate in future quarters. Our capital levels remain strong, with our capital ratios well above regulatory minimum. With that, we are happy to take your questions. Operator, please open up the call.

Your first question is from Nick Cucharale with Piper Sandler.

Hi guys. It's [indiscernible] for Nick. So it's nice to see the rebound in the gain on sales business. I was wondering if you could give us a little color on the margin expansion in the sales to private investors?

These were mostly Fannie Mae loans that we saw and we're getting 103 to 104 on pricing on Fannie Mae loans right now. There is only $10 million of non-QM loans that were priced at 102.75.

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?

Yes, I do. Just give me one second, so I can pull it up. I have it right here. Our interest rate was 100 for a CD over $100,000 and it's about 0.4% right now. Right now we have $328 million on CDs that will reprice in the first quarter. The average rate is 1.58%.

Perfect. Thank you. And then just one last one if I could, you reinstated the repurchase program back in October and 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?

There is only about 325,000 shares left in the plan, okay? 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, they're still in place, and that will probably continue. If we continue the plan right now, it will probably take another two to three months to get through the 300,000 shares because of the volume limitation and the volume of trading right now.

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 it would be similar to last year. I wanted to clarify, do you mean similar to 2020 organic growth or stripping out PGB or is that inclusive of…

…our organic growth. I think we said last year, we will grow loans and deposits by high single digits, very low double digits, and that's what our plans are for the year.

It's helpful. Thank you very much. And then building up 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…

We were out every day. Just we couldn't get our shares back. We were out every day. Some days we bought back a thousand shares.

And then mainly on credit, can you just remind me when you're adopting CECIL and if there is any additional cost to prepare for that that you're expecting next year?

CECIL has to be fully implemented by December 31, 2022 because that's when we recall ECC rundown. So that's when we have to record our entries towards equity and so forth at that point in time, and we have to be running CECIL starting January 1, 2023. Having said that, we will have to have the closures six months prior in our Q. So our game plan is to have concrete numbers that are -- have our first validation of the model sometime in early 2022. But that is the next step that we don’t have right now. We do not have the expense of the validation of the model, and we do not know what that will give at this moment either. We do not have any extra data that we may have to obtain such as economic reports or whatever that we may have to input into the model. We don't have that also at this time.

Okay, so if I am understanding you correctly, the actual CECIL implementation will be in 4Q 2022 for our model, okay? And then with expenses, are there any other kind of incremental expenses for saves that we should keep in mind off of this mid $14 million in Q4? I know you went through in your release that I know you're budgeting with your branches and checking costs around the bank. So just wondering how the gives and takes of the expense outlook relative to what you are now?

Okay, typically our first quarter is our highest quarter of the year although and it will probably be very similar to the fourth quarter. But typically after that, our expenses go down a couple hundred thousand dollars for the remainder of the year. So I would see that our next quarter will be about the same, and then I think you'll see reductions of a couple hundred thousand dollars after that. A lot of that is tax expense that is higher for the first quarter and is benefit expenses that are higher for the first quarter, and there are also expenses, professional services expenses that are higher for the first quarter.

Your next question is from Andrew Terrell with Stephens.

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

That is excluding PPP loans. We were not a huge player of PPP with $32 million last year, and I don't anticipate that we will see more than that this year, plus we're beginning to get 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 for any growth as the forgiveness goes on the first round.

Okay. Got it. That's helpful. Maybe just margin really quickly so just curious about a step down of about another 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 just staying to assume given the yield on the book of bad debt further purchases are margin accretive from here?

What we have right now is about $200 million in what I'll 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. 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 only getting 30 basis points on that money. So we're going to put some of that fees of loan growth securities during the first quarter.

And then last one for me just quickly on the reserves, you guys built the reserve up to about also 1.1%. I guess just thoughts on how the reserve trends over the next couple of quarters. Do you think if the market conditions improve, maybe releasing some reserve here or would you like to kind of maintain it flat with where it is?

We're kind of keeping the reserve where they are. We're not going to raise any reserves significant dollar amount. I mean there could be some reason we 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 should deal in your model, 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 model as such.

Okay. That's very helpful. I'll step back. Thanks for taking my questions.

Your next question is from Kelly Motta with KBW.

Thanks for the follow-up. You talked about M&A in the past; you’ve been buying small banks for the past couple of years with your kind of capital. I am just wondering if there is any change in the pace of conversation given that it just seems like M&A across the banking industry is picking up a bit. Thanks?

I would say that there is some increase in talk; there is nothing that is imminent. As our stock price gets stronger, we will really begin to be active in that, but right now our main goal is to buy back our stock as our main goal right at the moment.

And there are no further questions in queue at this time.

Once again, thank you all for joining us today. We look forward to seeing 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.