RBB Bancorp Q2 FY2022 Earnings Call

Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the Second Quarter 2022. 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 that today’s event is being recorded. I would now 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 second quarter of 2022. With me today from management are Interim President and CEO and CFO, David Morris; EVP and Chief Credit Officer, Jeffrey Yeh; EVP and Chief Strategy Officer, Simon Pang; EVP and Chief Risk Officer, Vincent Liu; EVP and Director of Private Banking, TT Huang; EVP and Branch Administrator, Ashley Chang. David 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 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 David Morris. David?

Thank you, Catherine. Good day, everyone, and thank you for joining us today. Royal Business Bank had another great quarter with strong earnings, improving margins, and solid loan growth. We also announced several new hires and rehires during the quarter, positioning the bank for continued profitable growth. Expenses were higher than anticipated due to the ongoing costs related to the Board of Directors investigation. But we expect those costs to wind down over the next two quarters. Despite elevated expenses, net income increased by 5.9% from last quarter and by 15.7% from last year to $15.5 million or $0.80 per diluted share in the second quarter. Adjusting for the $1.7 million of non-recurring investigation expenses, net income would have been a record $17.2 million or $0.90 per diluted share. Net income benefited from solid loan growth, increasing asset yields, and a stable interest expense, all of which combined to drive record net interest income of $37.1 million, which was a $2.6 million increase from last quarter and a $7 million increase from a year ago. Second quarter non-interest income increased by $478,000 from the previous quarter due to a $757,000 gain on a corporate real estate that was disposed of, offset by a decline in loan sales as Fannie Mae originations continue to lag. Non-interest expense increased from last quarter, primarily due to the $1.7 million expense related to the ongoing Board of Directors investigation. Net interest margin was one of the highlights of the quarter increasing to 4.08% from 3.49% last quarter and 3.33% a year ago. We are cautiously optimistic that we'll be able to maintain our NIM above 4 in the coming quarters as asset yields continue to increase more quickly than deposit costs. Annualized ROA and ROTCE increased in the second quarter to 1.6% and 15.89% respectively. Net loans held for investments increased by about $39 million in the second quarter, which equates to about a 5% annualized growth rate. C&I, SBA and CRE have decreased from the last quarter. But we had growth in construction and single-family mortgages; that decline in C&I and CRE was due to normal payoffs, which means for property purchases, or two competitors at lower rates. Our yield on average earning assets increased to 4.66%, which was a 66 basis point increase from last quarter and a 67 basis point increase from the prior year. With respect to funding, anticipated commercial customers' activity drove a $219 million decrease in average non-interest bearing deposits over the quarter. Our average cost of interest-bearing deposits for the quarter was 0.49%, which was up five basis points from the prior quarter but down 10 basis points from the prior year. Given the rapid increase in rates, we do expect some upward pressure on deposit costs for the remainder of the year. Non-performing loans decreased to $13.9 million due to the $7 million April repayment I mentioned during last quarter's call. We took the provisional credit loss of $915,000 in the second quarter, primarily attributable to loan growth. Our capital levels remained strong, with all of our capital ratios well above regulatory minimums. We took advantage of the temporary dislocation in our share price to repurchase 527,754 shares or 2.7% of outstanding shares in the second quarter. After renewing our buyback last week, we now have the capacity to repurchase up to 500,000 more shares. We understand how the recent personnel announcements have impacted our share price, but we remain confident in our strategy and believe it continues to be an effective driver of shareholder value. Lastly, I would like to say this is a very important day in our history. Today, five years ago, was our first trading day on the NASDAQ. Thanks to all of our investors and management board and investment bankers for the past five years who have supported us. With that, we are happy to take your questions. Operator, please open up the call.

Thank you. Our first question will come from Nick Cucharale with Piper Sandler. Your line is now open.

David, how are you?

I'm okay. Nick, how about yourself?

I'm good. Thank you. With all the hires you mentioned, do you currently have the teams in place to restart growth in the commercial book? Or should we expect growth to continue to be tilted towards the single-family portfolio in coming quarters?

Well, I'm going to answer that with a yes and a yes. We have the people in place for commercial growth. Okay, but at the same time, the non-QM market, which we are not selling quite yet, has really picked up for us. So I think you'll see loans increase in both sectors next quarter. I'm going to answer another question which you haven't asked. But you'll probably ask, when will you do more loan sales? And we're hoping to be able to do some sales late in this quarter. But I doubt that will happen. I think we will have to wait until the fourth quarter to begin to sell the mortgage loans. Okay.

In that vein, can you update us on your expectations for the gain on sale business? Do you feel like you're going to get to a sustainable level in 2023 or still below where you were in previous years?

I believe we will return to a sustainable level in 2023. I hope to have the SBA team back in place by the fourth quarter, if not earlier in the third quarter. I expect we will be engaged in that market again, as well as the mortgage market, particularly with Fannie Mae. Currently, no one is able to secure a loan from Fannie Mae.

Okay. Could you just refresh us on your full-year organic growth targets for loan growth?

Well, right now, we're probably going to have for this year about 7%, because we only had about a 5% this quarter, but we budgeted around a 9%, 10%. So I think we'll be closer to about 7%, 8%. Okay.

Thank you for taking my questions.

Thank you. Our next question will come from Kelly Motta with KBW. Your line is now open.

Hi, good morning, David, thank you so much for the question. Maybe your NIM expansion this quarter was incredible. Was there anything more one time in there, any interest recoveries we should be aware about? And what's your expectation for NIM to hopefully stay above 4%, I believe what you said? What kind of deposit data and assumptions go into that? Because I would assume those would accelerate as rates rise? Thanks.

Let's discuss deposits first. We haven't increased our rates yet, but that will change soon. I expect our beta to be around 65 to 75 with the next rate hike. I know that's relatively high, but we still haven't raised our rates, and our competitors are currently offering rates of 2% and up to 2.50%, even on a one-year CD, while we're at about 0.70%. That's the first point. Secondly, we do account for prepayment fees in our figures, and this quarter our prepayments were higher than usual. We normally see around a couple hundred thousand, but this time it was about 500,000, which impacted our net interest margin. So, there’s roughly $300,000 that’s likely above the typical level.

Got it. Thank you. And on the other side, can you just remind us about the repricing schedule of the loan book, how much of the float and maybe where the loans are coming on now?

Okay. About a third of our book is floating rate, maybe at the most 40% by a third; it was truly floating rate. So on the mortgage side, although we're pricing at 6.25 right now, on the mortgage side, we're in the queue because it takes us 60 days or 90 days to find a mortgage loan. We're in the low fives right now, okay. CRE we're looking at; I would have to say the spreads have narrowed; we're looking at prime plus one to prime plus 1.5 pricing at the most right now. If it's a fixed-rate loan, I'm telling everybody 6.5%, unless it's a very high quality, very high-quality apartment building on that nature, which we're still in the 5.5 ratio. Okay. So that's where we are at this time. Okay, that may change tomorrow.

Thank you, David. Maybe a last kind of question about M&A. Just wondering an update. If you have any update on Gateway, if that's still supposed to close during the year and if with the CEO search, you guys have any updated thoughts on maximizing shareholder value through a potential sale? Thank you.

We've looked at a number of things. Number one, we do expect Gateway to sell. Number two, we do always look at potential partners either on our side to acquire or on their site to acquire us. I don't know if it's the right time for us to be out in the marketplace until we can prove that we can grow over a period of time and so forth as a management team here. Did I answer all three of those? I think I did. Oh, Gateway. I anticipate Gateway to close by the end of this year, if not early next year. I mean, January 2 of next year.

Got it. Thank you so much for the questions, David. I appreciate it.

Okay.

Thank you. Our next question will come from Andrew Terrell with Stephens. Your line is open.

Hi, Andrew.

Hey, good morning. I just wanted to follow up on that last question there. Any update on a kind of CEO search at this point?

I am meeting with the C&G committee, I met with them last week. And I'm meeting with Dr. Kao and Christina Koo, again, this week, early next week, and to go over the plans and so forth. And I'm hoping that we will have an announcement soon. Okay, soon being within the next month or so.

Okay, perfect. Thank you. And I heard you on the kind of loan growth outlook for the balance of the year seems to imply kind of a mid-single digit type level for the next couple of quarters. I just want to get your thoughts on growth on the other side of the balance sheet, just I think you're just a little above 100% loan to deposit ratio at the end of the second quarter. Just want to hear your thoughts on whether you think you can fund that loan growth with core deposit growth? Or should we expect a kind of incremental reliance on wholesale funding in the balance of the year?

I believe we can support our loan growth. While I may not refer to them as core deposits, we can use the deposits we generate from our retail operations. It’s our responsibility to convert a million-dollar deposit into a core deposit. It's essential for us to effectively cross-sell and build genuine relationships with our clients. If someone approaches us for the right reasons, we need to focus on turning them into a true core deposit.

Understood. Okay. Last one, for me just a modeling question. I know there was pretax about $1.2 million, you call it out elevated in the legal and professional line item. It's kind of like that should dissipate over the coming couple of quarters. Do you have an estimated kind of dollar amount remaining to kind of recognize that line item? And is that correct, it should fall out of the run rate in the next couple of quarters?

I believe our legal and professional expenses should be between $500,000 and $600,000 per quarter. That said, you might still see close to $1 million this quarter. I hope to see more normalized figures in the fourth quarter, as there are still various ongoing tasks that need to be addressed.

Okay, very good. I appreciate you taking my questions.

Thank you. Our next question will come from Tim Coffey with Janney. Your line is now open.

Great. Thank you. Good morning, David.

Hey, Tim. How are you?

I'm good. Good. Thank you. This is a question on additional recruitment. What is the appetite for that and what is the likelihood of that, do you think?

Very interesting question. Okay. Let's look at lenders first and then we'll go to the deposit side. And then some other general questions. And the reason it's interesting is because if we're going into a recession, do I want to have a ton of lenders on our team that I hire and then they have nothing to do? Okay. So I would like to have another, we are hiring a lender that will be out of our Orange County, Irvine office to take care of the Orange County market and assist in SBA lending and commercial lending; that person comes on in September. But after that, I still have open positions for New York, Chicago, and LA, but I don't think we'll fill them on that side of the game until after we know what's going to happen with the economy in the next couple of months. On the deposit side, we are constantly looking to upgrade our staff in areas where we may have some underperforming branches. And if we find those people, we will bring those people on immediately. Because our franchise value is tied to our core funding. So that will not wait for the recession to figure it out. But if we find those people, we would bring those on to upgrade our staff that we have. We have two or three branches that do not have branch managers right now just because we cannot find them. And if we can find them, we will bring them on and go from there.

All right. That's very helpful. The rest of my questions have been asked. Thank you.

Thank you. Our next question will come from Ben Gerlinger with Hovde Group. Your line is now open.

Good morning. I don't know if we can take a minute to look at the kind of the funding and I know you said the deposit beta was kind of in that 75 area, which is pretty high. But I mean, when you compare it to banks that are growing at your pace, it's a little bit more level setting kind of in the range of normality. Is there anything that you guys can do on a proactive approach, from a funding perspective that you're not already doing that could potentially limit that or like can help support the margin moving up into the right?

We're currently working on several initiatives. First, we lack a dedicated cash management department, even though we offer the necessary products. We've discovered that many of our customers would choose to bank with us if they were aware of these offerings. Therefore, we're aiming to package these products along with brochures that our lenders can use to inform our customers. Second, while it may not materialize this year, we anticipate that eventually all banks will need to manage banking services for marijuana customers. We already serve some lower-tier customers, such as those leasing property to borrowers, but we don't yet have dispensaries. This effort is a priority for us due to the cash deposits involved, which generate no interest. Finally, we work with several trust companies, which is why there's some fluctuation in our accounts. We should pursue additional trust companies, particularly those not involved in FinTech, to broaden our non-interest-bearing deposits. We expected approximately $300 million to $350 million to flow out of those accounts in the first half of this year. Expanding into this trust company market can enhance our non-interest-bearing deposits, ultimately supporting our net interest margin strategy. Our overarching goal is to increase non-interest-bearing deposits and strengthen our customer relationships, as we are fundamentally a relationship bank.

Got you. Now that's a great color. A lot of little things can really add up. My only other question, I don't mean to put your feet to the fire here too much. But when you think about your overall profitability, running at, let's call it 1.5 ROA, never a healthy amount of capital. And you get the shares outstanding, you don't have a huge amount of volume, so you can repurchase what's preventing you guys from doing something more aggressive, considering the trading close to tangible here. It’s around one-one of tangible so like, why not put out a tender or something to that degree given your high level of profitability?

We have considered a tender and we thought it would be better to buy at market instead of paying a premium.

Got you. That's fair. Appreciate the color.

Thank you. It appears we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Okay, once again, I want to thank everybody for joining us today. I especially want to thank our investors and our investment bankers for the last five years for supporting us. We look forward to speaking to many of you in the next couple of days since I'm going to be out on the road visiting people and so forth. Please have a nice day.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.