RBB Bancorp Q4 FY2021 Earnings Call

Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the Fourth Quarter and Full Year 2021. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. Please note this call may be 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 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'll open 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 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'd like to turn the call over to Alan Thian. Alan?

Thank you, Catherine. Good day, everyone, and thank you for joining us today. Royal Business Bank's excellent fourth quarter results contributed to a record year of growth and performance since 2021. Our expansion strategy has proven to be an effective driver of earnings, loan growth, improvements in our deposit franchise, and most importantly, shareholder value. Our nationwide footprint gives us the ability to focus our loan and deposit origination efforts in regions with high economic growth. Our focus on serving the financial needs of underbanked first-generation Americans gives us access to deposits and loans that have long been ignored by commercial banks. And our long history of underwriting and monitoring these differentiated assets gives us the confidence that we are appropriately pricing risks and addressing issues as they arise. Our recent expansion into the Hawaiian market and our announced acquisition of Gateway Bank in the San Francisco Bay area will provide us with additional opportunities to bring our unique model to new markets. We now have a physical presence in six of our nine target markets and expect to have additional expansion opportunities to discuss in the near future. While we are pleased with our record financial results, we are also proud to have been recognized for our service to the communities in which we serve and operate. Last year, both Simon Pang, our EVP and Chief Strategy Officer, and I were appointed to national commissions to advise on community developments. And we were awarded a $1.8 million CDFI grant by the U.S. Treasury. We believe these appointments and the grant are a testament to the work we do in the communities we serve. 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'll start by reviewing some of the highlights of our income statement before moving on to our balance sheet. Net income grew 2.2% from last quarter and 40.9% from a year earlier to a record $15.9 million or $0.79 per diluted share in the fourth quarter. Net income benefited from several factors including a $135.9 million increase in average earning assets and a stable yield drove a $1.6 million increase in net interest income from the prior quarter. Net interest income also benefited from a decline in interest expense due to a decline in average interest-bearing liabilities and a modest decline in deposit costs. Fourth quarter non-interest income decreased by $2.4 million from the previous quarter, primarily due to last quarter's CDFI grants and some unrealized losses on equity investments and derivatives this quarter. Non-interest expense decreased from last quarter as a $2 million decrease in compensation expense was offset by a $940,000 increase in legal and professional expenses. The decrease in compensation expense was due in part to an increase in the percentage of compensation paid in restricted stock units that will vest over time. The increase in legal and professional expenses was due, in part, to expenses related to the acquisition of the branch in Honolulu and the announced acquisition of Gateway Bank and the revision of the compensation plan. Net interest margin was 3.43% for the fourth quarter, an increase of five basis points from the third quarter and a decrease of 24 basis points from the prior year. Annualized return on average assets and return on tangible common equity were relatively stable in the fourth quarter at 1.52% and 15.98%, following the impact of the CDFI grant in the third quarter. Net loans held for investments totaled $2.9 billion as of December 31, which was a $90.3 million increase from last quarter. We had good growth in all our products except C&I, which decreased by $8 million from the prior quarter and SBA, which decreased by $12.6 million. Our non-QM mortgage product, which is our most profitable mortgage product, continues to lag due to the rate environment. Our yield on average earning assets for the quarter was stable from the last quarter at 3.97% and down 58 basis points from the prior year. As with the net interest margin, this year-over-year decrease was almost entirely due to lower returns on excess capital. With respect to funding, commercial customer activity drove $175 million of growth in average non-interest-bearing deposits over the quarter. Year-end commercial activity drove an increase in deposits at December 31, which has remained elevated but could decline somewhat if rates increase. Our average cost of interest-bearing deposits for the quarter was 0.47%, which was down four basis points from the prior quarter and 46 basis points from the fourth quarter of 2020. Non-performing assets increased by $6.5 million to $21 million in the fourth quarter, increasing 12 basis points to 0.5% of total assets. We anticipate this increase will be temporary and will return to previous levels by the end of the second quarter. As of January 15, we had no loans in COVID-19 deferment. We took a provision for credit losses of $635,000 in the fourth quarter, primarily attributable to loan growth. Our capital levels remain strong, with our capital ratios well above regulatory minimums. With that, we are happy to take your questions.

Certainly. And we will take our first question from Nick Cucharale with Piper Sandler. Your line is now open.

I'd like to start with the exceptional deposit growth this quarter. So you noted the expanding relationships with a number of your commercial clients. But can you give us some more detail on this? Are there any concentrations in this quarter's growth that we should be aware of?

Yes, we have a couple of big clients who have come on board. We have been monitoring their progress. We had one client that took some money out at the end of the third quarter and put some money back in, and we have seen significant growth from another client as well.

Are we talking about like a majority of this quarter's growth coming from one or two clients? I just would like to kind of decipher that a little bit?

I would say the majority of the growth is coming from a few clients, but we have also seen good growth from our franchises.

Okay. Just from an overarching perspective, are you expecting non-interest-bearing deposits to increase as a percentage of total deposits from this level?

No, we actually anticipate as all the COVID-19 related funds go away and as interest rates go up. We expect $300 million to $500 million of non-interest-bearing deposits to either run off the bank or shift into higher-yielding instruments.

Okay. And then related to that, just to stay on the topic, you've driven your cost of funds down significantly due to both rate and mix? Now, does this significant change in the funding base change the strategy at all?

I don't think so.

I'll just add that we don't think so. The interest rate environment has been so low for these past years that we just continue to drive our rates lower. Again, I would say that one of the reasons is because during the pandemic, many depositors were afraid to come to the bank, and many of the renewals were done without negotiation on rates. Therefore, we saw very little pushback from our existing customers in recent years. However, that may change if rates continue to increase over time. There are banks in our communities that are already promoting higher rates to attract deposits. However, we are not going to follow that trend.

That's very helpful. And just my last question on loan growth, can you update us on your organic targets for 2022? And just how the pipeline compares to this time last quarter?

Yes, again our loan growth is still between 8% to 10%. However, this will depend on how quickly interest rates increase. If interest rates move up quickly, we may see the loan growth decline to around 7% or 8%. The reason is that as interest rates rise, the debt coverage ratio will be impacted, and some loans that previously qualified at lower rates may not qualify in the future. Therefore, it will be a lot of moving parts, but we are looking conservatively at 7% to 8% growth.

And we'll take our next question from Andrew Terrell with Stephens Inc. Your line is open.

Hi, I just want to circle back to the non-interest-bearing deposit increase we saw this quarter. And just to clarify, do you expect some of the increase this quarter to be transitory, potentially run-off in the next couple of quarters? And if so, can you quantify that amount?

Yes, we do expect that it's transitory. We expect that, you know, we were talking about $175 million in average balances. We expect close to half of what increased over the quarter will run off in the next six months.

Okay. And is that incremental to the - I think you referenced $300 million to $500 million of non-interest-bearing that you expected either run-off?

No, quite a bit less.

Looking at the kind of mortgage gain on sale margin, it looks like it ticked up a little bit this quarter. Should we expect the gain on sale margin for mortgage to step down a little bit from here given the outlook on interest rates? And can you just provide an updated expectation on mortgage production or sold volume for both the QM and non-QM business as we head into 2022?

Okay, the volume for the non-QM business right now is zero for mortgage sales. For Fannie Mae, we're still hoping that we can meet our $8 million to $10 million mark, which will give us our gain on sale that we would need to maintain. In August, we moved to mandatory delivery and began hedging all of our mortgages, which has been beneficial as we ended up earning about four points more than we were earning prior. However, as rates go up, we would expect that the amount we earn on our mortgage sales will decrease, possibly by 50 basis points, depending on how quickly and how high they go.

Okay, thank you. And then just on the expense base, it was nice to see kind of the quarter-on-quarter decline this quarter, if you adjust for some of the merger. Can you help us think about kind of the full year 2022 expenses? I understand it may be a little lumpy with some of the deal costs.

I think our expenses are going to be very close, if not a little bit higher than our third quarter of 2021. It's probably going to be higher than that because our demand for employees is extremely high. Even our average performers are probably getting raises close to 5%, while our better performers are seeing increases of up to 10%. This is essential for us to retain our staff.

And we'll take our next question from Kelly Motta with KBW. Your line is now open.

Hi, thank you so much for the question. Most of mine have been asked and answered already. But if you have the time, could you give us an update on the M&A environment? I know you've got a deal pending; you just closed the Hawaii Bridge acquisition. Does this kind of keep you out for the next year or so? Or do you still have the capacity and desire to continue to look for acquisitions?

Well, I would say that our strategy all along is to grow both organically and through M&A. So, our strategy on organic growth is about 8% on loans and 11% to 12% on deposits. The M&A side really depends on whether a bank of interest becomes available. We are looking at specific markets where financial institutions serve first-generation immigrants or potentially underserved markets. We always have our eyes on a few institutions in areas like Seattle, Texas, and some metropolitan cities like Phoenix, Miami, and Atlanta. So again, it depends on whether a particular institution we are interested in becomes available.

And we have a follow-up question from Andrew Terrell with Stephens Inc. Your line is now open.

Thanks for taking the follow-up. I did want to ask one quick one just on the buyback. I saw you purchased some shares, I think 75,000 shares back during the quarter. Obviously, we've seen an improvement in price from there and you've got a pending acquisition now. Just wanted to get kind of updated thoughts on appetite as it pertains to the buyback moving forward?

Right now, we're over our target price for the buyback. So, there probably won't be any buybacks for the foreseeable future as long as we're still at a $29 price. However, if the price drops below a predetermined level, we do have allocations to buyback more shares, as we still have about 333,000 shares available for that purpose. However, our store is the volume. There are days when we're buying, and we are in the market, we're buying less than 1,000 shares.

And we have no further questions on the line at this time. I will turn the program back over to our presenters for any additional or 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 program. Thank you for your participation. You may disconnect at this time and have a wonderful day.