Q3 2019 Earnings Call

Hello, and welcome to the RMB Bancorp third quarter 2019 earnings Conference call. My name is Sheree and I will be your operator today at this time all participants are in listen only mode. This call is being recorded and will be available for replay through October 29, 2019, starting this afternoon approximately.

One hour after the completion of this call.

After the speakers presentation, there will be a question and answer session.

The question during the session you want me to press Star one on your telephone I would now like to turn the call over to Mr., Larry Clark Investor Relations for the company. Please go ahead mr. apart.

Thank you very good morning, everybody and thank you for joining us to discuss our BV Bancorp's financial results for the third quarter ended September 30, 29 team.

With me today for management, or chairman and President CEO Alex yen.

<unk> Chief Financial Officer, David Morris.

VP and Chief Credit Officer, Jeff for you.

He VP and Chief Ranch administrator Wilson Mark <unk>.

He VP and chief risk officer visit Lou.

And the VP and director of mortgage lending Larsen Lee.

Management will provide a brief summary, the results and then we'll open the call up to your question.

During the course of this conference call statements made by management May include forward looking statements within the meeting other 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 uncertainties and other factors relating to our BB bancorp's operations and business environment, all which are difficult to predict and many of which are beyond the control the company.

For a detailed discussion are these risks and uncertainties. Please refer to the required documents the company as filed with the FCC.

If any these uncertainties materialize or any of these assumptions prove incorrect RB 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.

At this time I'd like to turn the call over to Alan can Alan.

Thank you Larry good money, everyone and thank you for training and ask today.

I'm going to begin with an overview off on the quarter performance and then David will provide more details on our financial results.

We are pleased with outperformance for the quarter, which was inline with expectations.

We have complete the op and actually three puts you should mean and have now becoming too we show our loan growth.

During the partners, we generate that's from productions in both residential and commercial real estate lending.

Which translated into a 7.4% annualized growth rate.

The growth would have been even stronger except that we had a high level off loan pay offs than we normally XP witness.

I'll focus on increasing coffee policy.

Helped drive deposit growth and reduce our reliance on wholesale funding.

Well the interest margin was like that could be impacted by temporary assess liquidity.

Our ongoing low credit cost and well manage expenses and aber us to me I'll, probably typically peak goal for the Quantus.

As we discussed on last call Baucus rug sales was significant be caught back in the quantus.

We expect to RECIUM suddenly a mortgage loans in the current quarters and dependent on a process that most yeah toggling between Howard and 50 and to around 25 million thought a spot of quarters.

Our integration office Amrica Internet your bank is complete and Vietnam reaping the benefits on both sides of the balance sheets.

The equity. She has also present that Neil efficiencies that I'd de stocking in reduced expenses, well continue to optimize <unk> Americans operational footprint likely closing and not up.

<unk> too.

We also plan on opening a new branch in as you said you just see in order to better stuff the sizable Asian American population that come need peaks.

We oh, so break priest.

To be acquiring Pacific Global Bank, which enable us to S band the RPP franchise to the attractive Chicago market and stuff. It's large company piece of Asian Americans, we intend to opened two new branches in Metro Chicago next year I seem to pet should be go both.

She's been three benches.

We believe that these transaction well positioned us well for continued growth and is consistent with our goal to grow.

Okay, and he'd be and true branch.

Oh opinions and strategic acquisitions.

Finally.

Well continue to invest in AWP business in order to diversify our revenue mix and create more opportunities to increase earnings all with a view of creating additional long term value to our shareholders.

I will now turn it over to David for more details on not the quite he got quarters' results maybe.

Thank you Alan I'll start with our loan activity.

Our total loans were up $44 million at quarter end due to healthy new production and both residential and commercial real estate, but as Alan mentioned, our growth was impacted by higher payoffs and pay down.

For the quarter total loan production was $174.8 million loan payoffs and Paydowns were $98.4 million and loan sales were $17 million, the latter consisting of SB eight loans and Fannie Mae Tourette mortgages. This compares to a tone.

The loan production of one.

$105.9 million loan payoffs and paydowns of $92.1 million on loan sales of $187 million and the second quarter.

Total commercial loan production for the third quarter was $82.8 million up $27.7 million from the second quarter during the third quarter to quarter, we were still ramping up commercial funding across our branch network. So expect that production will be at a higher pace in Q4.

Residential mortgage loan production was.

$92 million in the third quarter up from $50.4 million in the second quarter.

We continue to expect origination volumes increase in the fourth quarter.

Now turning to deposit.

While total deposits increased by $16 million in the quarter, our non maturity deposits increased by $42 million as our deposit gathering efforts have continued to gain traction offsetting this increase was a 20.

6 million dollar decrease since Cds with brokered Cds declining by $32 million and retail and jumbo Cds growing by $6 million.

Our.

Average cost of interest bearing deposits was up three basis points in the quarter, while we experienced lower cost on our non maturity deposits.

Given the lower interest rate environment, the cost of our time deposits was up four basis points. That's a result that that we paid on new cities.

While down from prior quarters in many instances was higher than rate.

That were paid on maturing Cds that were longer term in nature, particularly at first American going forward, we expect the cost of our deposits to be flat to modestly down.

As the gap between the rates that we pay on new Cds and rates, we pay on maturing Cds continued to narrow.

Moving on to net interest margin on a reported basis NIM decreased by five basis points.

From the previous quarter to 3.59%, excluding purchase discount accretion our core NIM declined four basis points during the quarter as Alan mentioned on NIM was negatively impacted by the temporarily temporary excess liquidity.

We had.

Due to loan sales prior to quarter end.

As well as a modest decrease in our loan yield and the slight increase in deposit costs that I mentioned going forward, we expect that our loan yields will be relatively stable as commercial lender originations continue to pick up and they generate higher start starting yields on our residential loans.

Given that we are deploying our excess liquidity and we anticipate a further decrease and our cost of funds. We expect that our net interest margin will be relatively stable to increasing slightly in the fourth quarter.

Turning to noninterest income as expected we generated lower gain on sale income due to the curtailment of our loan sales during the quarter.

For the fourth quarter, we expect non interest income to increase significantly as we are targeting between 175 and $225 million alone sales for the quarter once again, depending them.

Depending upon our production levels.

Based on our forecast, we anticipate noninterest income to be in the range of $6.5 million to $7.2 million in the fourth quarter and then right.

And then returned to more typical level and the first quarter 2020, when we resume a more normalized schedule the loan sale.

Our total noninterest expense was down $1.1 million from the second quarter. The decrease was there's quite a number of factors first incentive compensation was lower in the quarter due to the absence of loan sales second we had lower occupancy and equipment cost and lower.

Data processing costs due to the integration consolidation that we had in New York.

And third our legal and professional costs were lower we had a few other puts and takes but so this world where our main three drivers.

We expect that our noninterest expense will increase during the due to merger activity additional commissions from mortgage loan sales and bonus expense.

Have a $400000 all of the expenses will remain stable for the fourth quarter as we continue to focus on controlling our costs.

The efficiency ratio for the third quarter was 52.4% off from the second quarter due to lower revenues.

Longer term, we expect to maintain our efficiency ratio at or below 50% and it will likely be below 50% in the fourth quarter due to the higher expected the amount of loan sale.

Shifting to income taxes, our effective tax rate for the quarter was 31.5 for so that's a close the impact of a deduction for stock options exercised and they amounted to $38000. We anticipate an effective tax rate of between 29% and 32% for the fourth quarter now turning to.

Asset quality, Weve, which remain solid our nonperforming loans increased by.

$3.4 million during the quarter as we placed.

Six loans on non accrual status at the at the end of the quarter, including $2.9 million off related commercial and SB a long.

Secured by.

$2.9 million unrealistic collateral of which 1.5 million of the 2.9 million dollar SP, a low because guaranteed after taking into account they expect expense the sell the properly we set aside a specific reserve a $430000. The other loans all have more than sufficient.

Collateral values. So we do not believe that any impairment exists our credit losses remain low during the quarter, we had no charge offs and a small recovery a provision for loan losses was 824000 for the third quarter up.

$467000 for the second quarter.

The increase was due to the S.P.A. loans. This brought our allowance for loan losses to 91 basis points of total loans held.

For investments up two basis points from the end of the prior quarter.

We're not seeing any asset deterioration, we continue to maintain a strong a very strong credit quality.

Culture and will remain vigilant on asset quality.

With respect to our capital of our capital levels remain strong our tangible common equity to tangible assets increased to 12.12% at the end of September up from 12.1 at the end of June we believe that we have sufficient equity capital to port forecast as well.

With that we're happy to take your questions [noise].

Thank you as a reminder to ask a question do you want me to press Star one on your telephone.

Joe Your question. Please press the pound key please standby, while we compile the chemo nave roster.

My first question comes from Aaron Deer, with Sandler O'neill.

Hi, good morning, everyone.

Good morning, good money Aaron.

David you went through the credit quality stuff pretty quickly there I'm just curious it sounded like you say if I heard you correctly. The research credits that drove the uptick in the Nonperformers in you gave some details on the one is there any.

Is there any.

Overriding similarities between any of these other credits that are having some challenges.

No we don't think so.

Oh.

You know I thought I stated.

I think individually.

And to some other hum.

Since the prior that the longest Sps alone. So it's actually going to be three SBS alone for total loan related loans that are associated with these hotels that will eventually all go on non accrual they're still one that is not there.

Yeah, and all so that's the only thing that's in the that similar as has is gonna be a total of four loans that are two that are related.

To one group of people.

Okay.

And then in terms of the the growth it sounds encouraging in terms of the the the production that you're getting notwithstanding the pay downs to tread here in the in the third quarter.

Given the volume of loan sales that you have planned for for this quarter.

Where would you expect your total loan balances to end the year, including both your your held for sale and held for investment.

Okay, I'll separate that out into two categories on mortgage.

Three category.

Mortgage.

I would expect our loan balances to be flat, okay no growth at all.

Okay. So that's not available for sale bucket and our our.

Held to maturity bucket.

For SB eight loans will probably sell in dollars again.

I don't know what's in the pipeline right now for pay off but a payoff on SP A's have been.

Around 10 million also.

So and we produce about 10 million. So I would expect that go down by $10 million, Okay, and then on commercial how it all depends on what are our.

Hey, I'll SAR, but I would expect commercials to increase.

For.

Community.

Yeah 10, yes, that's it.

I mean commercial loan from Nashville net net.

You should be mall.

It should be I was expecting about 40 million.

Okay.

Okay.

We can this month.

Okay.

Okay, Okay about $40 million okay.

So okay.

Okay, and that's we aren't seeing higher levels of pay off in all areas SP, a continuing to <unk> high level pay offs mortgage.

Popped up really heavily this last quarter Emrs and also we still expect that to happen.

Okay.

And then how much would you.

Calculate the excess liquidity weighed on the margin in the third quarter and and do you expect that to be kind of fully deployed done as we go into the fourth quarter.

Yeah, we would have that invested in at least the other investments, but I would think it would be you know the NIM would be a couple of you know only a couple of basis points not huge.

And then.

It is are there any additional cost seems to be recognized her from the first American deal or is that pretty much entirely in the run rate at this point.

Well, we aren't going to close one more branch sometime in the next six months it would be in the six months early next year. So you don't that won't that will be added.

Cost saves.

But as I stated in my talk because of the lower mortgage and lower income.

Commission and so forth expenses were not well also lower.

And I don't think we talked about that.

Last conference call.

Okay. So that will be we had it back so I would not at 1.1 million dollar deduction ongoing Ivan [laughter] and your mouth.

Understood Okay, great. Thanks for taking my questions.

Okay.

Thank you. Our next question comes from Tyler Stafford with Stephens.

Hey, Tyler.

Hey, this is actually Andrew.

Tyler Good morning, guys Hi, Andrew.

Hi, I just wanted to start on the margin gone back to the commentary you guys gave around me.

The flat to increasing margin headed into the fourth quarter.

On October rate.

No it does not okay.

If we did get an October rate could you quantify just what that with a basis point impact that would be on the margin.

I I ran a model.

Quarter over quarter point.

Correct.

And that it increases.

I like to just say, it's flat because it increases our margin by $45000 on a quarter.

So I would prefer just say it's flat.

Understood. Thanks.

Oh.

<unk> discussion can you give us the rates that these are currently.

Rolling off versus what the what the news CD prices currently.

Yes hold on let me get pulled that I have that information here, okay based upon.

Faced the funds I have to do it in two different.

Side, Okay for the Western region.

I have about $164 million the Cts in the next quarter maturing in the fourth quarter.

That's excluding brokered Cds with a weighted average trade up to 2.25, a weighted average term of 10.5 month.

And the projected at weighted average rate is 1.79 and the weighted average term is.

9.7 month.

For the East coast.

[noise], we do on separately Bafthree hundred $39 million from mature with a weighted average 2.37.

Weighted share much trying of 18 month checked at weighted average rate is 1.87.

The weighted average term is expected to be a 11 months.

Okay and this also assumes no.

No rate decrease.

Got it okay. That's that's very helpful.

Yes.

The new CD rate could potentially go down from from the rates you just gave.

<unk>.

They could go farther down if we have a rate yes.

Okay. Thanks.

Just on the commercial loan yields I thought was moved up.

15 basis points up to 6.62% in the quarter can you just talked about.

What's you're getting for new pricing in this portfolio.

Well.

I don't foresee.

Our yields still creeping up on our on on the or commercial portfolio because.

Because of the pressure on rates and especially if there's another rate the decrease because most of our commercial portfolio is prime based okay.

So it all depends upon our mix.

So if we do more construction loans, that's got to be prime plus one pine plus one and a half.

Okay, we do.

Hi, that's kobi prime plus prior to the prime plus.

You know to one quarter, very small and and even our traditional C.R.E. cheese well be.

Crime.

It probably just basically price that's where we are now having we're seeing the rate.

In today's market.

So SP, a because still triumphalist one in one of the half so one.

So you know that's why we are today with our rate.

Okay. That's helpful. That's it for me thanks for taking my questions.

Okay.

Thank you. Our next question comes from Kelly Motta with KBW.

Hi, Thanks for taking my my question.

Good morning.

I was wondering if we could talk a bit more about your plans in Chicago and your announcement that you're also opening two branches. There I'm just wondering in terms of timing, how we should be thinking about that next year.

Okay. The branches I mean, we haven't even found the location, yet, so maybe where a little bit premature and the now but we would like to have Oh open up two branches one in the westmont area and the other is yet to be decided okay.

So that will be at least.

Probably at the earliest the ended the second quarter third quarter at the earliest I would think okay. Okay, great and then going back maybe to one of the Aarons questions. You mentioned, a couple times that commissions will be higher next quarter, given there weren't any more.

Good sales this quarter, just kind of wondering how we should be thinking about the incremental step up in expenses kinda sizing how that how big that usually as of quarter to get a better idea. Okay. I think you're the they expense the expenses are low.

Bye.

Well approximately $400000.

Hi.

Hi.

I sit back actually one last one and two I'm wondering where they gain on sale premiums you anticipate those kind of coming out for your regular mortgage product on.

If there was it picked up at all.

We're seeing a well we have we seen about 2.5% one or two.

0.5.

Okay, great. Thank you.

Have picked up.

Thank you and today's final question will come from day, one does Allman with Titan capital.

Thank you I wanted to touch on C.. So Oh now that we're almost on top of implementation what are your thoughts relative to the original allowance or initial oh allowance that you will need to to make the adjustment you'll need to make and secondarily what are your thoughts on the ongoing provisions.

Turning next year.

Okay odd on Cecil.

Okay, we have to.

We're oh emerging growth companies. So we have an extra year.

But we have run parallel well running parallel now and we've tested three different models out and are the biggest issue we have with <unk> with impact is on the.

Act acquired book of business. So they acquired book business, because they most of them or not.

PC eyes or on the new World Peace Cds were going to have to put as Cecil reserve on them.

And so were projecting anywhere from $6 million to $8 million will be that at this time.

$6 million to $8 million will be that that initial hits capital.

And all now office concerning.

Hey, AAA well.

You know, even though we run lower than this.

On average.

My our view is that a triple l. needs to be between a one in 125, Okay and that's what we in fact, we budget at 121 1.25, it's what we budget or a triple well add okay.

And then all depends on the product mix of course, because construction us more.

[laughter] more risky then let's say a single family home so depending on what our mixes, but we said on average to be 125.

Thank you okay.

Ladies and gentlemen, thank you for participating in today's question and answer session I would now like to turn the call back over to management for any closing remarks.

[noise] once again.

Thank you all for joining US today, we look forward to speaking with you next quarter.

Thank you again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.