Q4 2019 Earnings Call

And I'll 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 February four 2000.

Starting this afternoon approximately one hour after the completion of this call I.

I'd now like to turn the call over to Mr., Larry Clark Investor Relations for the company. Please go ahead Mr. Clark.

Thank you Stephanie good.

Good morning, everyone and thank you for joining us to discuss our BB Bancorp's financial results for the fourth quarter and your ended December 31st 2019.

With me today for management, our chairman and President and CEO Alan Chin.

Executive Vice President Chief Financial Officer, David Morris.

He VP and Chief Credit Officer, Jeff for you.

VP and Chief risk Officer Vincent Yu.

And he BP and director of mortgage lending Larsen Lee.

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

During the course of 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 RB 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 to these risks and uncertainties. Please refer to the required documents.

The company as filed with the FCC [noise].

If any of 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 10, Alan.

Thank you Larry.

Good morning, everyone and thank you for Chinese <unk> to Perry.

I will stop by discussing our full year accomplishments at a high level and then David will provide more details.

On our fourth quarter financial results.

Well I repeat with off I didn't shipments for the year as we generated the highest level off net income in the history of the company.

Posted to be itself, what you've been by strong remedy growth.

Due to both record net interest and non interest income well managed expenses and disciplined balance sheet management.

We also continue to execute well on our strategic goals by growing our franchise organically within a actually see markets and fight entering the attractive Chicago markets true <unk> <unk> Pacific Rabobank, which we Croaks earlier this month.

We went to work, especially with global banks customer and then probably needs to IP VPN copper.

I should grow about you said actually like cultural fit with our VP actually we have similar business models.

On the residential mortgage loan production platforms and they focus on the Chinese American markets.

[noise], we're excited to be entering the Chicago market and plan to open two new branches in that market in the next two years.

Actually we began 2019, we view it as a b badly senior being focused on reducing the size of our portfolio of loans held for sale complicate the integration office Amrica International and continue to invest in our business to Diversifies, our revenue mix and <unk>.

Foundation <unk> improved returns for shareholders.

During the year, we successfully compete at the integration office American and we are now reaping the benefits.

Both sites up the balance sheet.

We realize efficiencies that resulted in reduced expenses.

And we will continue to optimize yeah operational footprint.

And we're also making good progress on producing AWP business deposits.

Commercial lending products to the young.

It gets network and I suspect future growth from that group.

We also have compete that the balance sheet replenishing that weekend at the beginning of the year. Our loan growth has resumed actually got generating strong production in both ready to drink how much a red states.

We're also successful in bookings down to tilt the balance of loans held for sale over the course something here.

As we saw over 500 million residential mortgages and decided to retain some on our balance sheet.

Finally, I'll focus on increasing coffee policies has helped drive deposit growth and reduced reliance on wholesale funding.

Our net interest margin was negatively impacted you into ya due to a number of factors.

Chris.

We have a challenging yield curve of eat into good second we also can be assessed liquidity the on our balance sheets doing to second half of the year sorry, we saw pressures on our cost of funds due to a shift in mix from savings and money market accounts to higher yielding Phoebe.

And finally be the lending environment has remained very competitive.

Making a challenging to increase our rate.

Most so that's great came down in the laid up hot off the year.

You want to get off the moving parts do into year 2019, what study year for RPP.

You actually have to our record net income and strong revenue growth. We grew our tangible book value, but in London per se.

Generally to an attractive return on average tangible common equity up 11.9%.

Okay that was improved significantly and at the higher end of the banks with assets between 1 billion to 5 billion I.

Asset quality remains solid as we continue to.

Maintain a underwriting discipline and strong credit culture, despite the competitive landscape and my Roman.

Since we went public in 2017, we have more than topper, the silent hobby and built a strong business model centered around call community banking, we now have a strong presence in that like just.

Patient America markets in three of the top major metro areas in the country, which positions us well for future growth and attractive long term returns for our shareholders.

I will now pending I'll, let with David for more detail on Alfalfa Kaka results David.

Thank you Alan.

We have provided a great level of detail and our press release, so I'm going to focus on those items with some additional discussion it's worth it.

I'll start with our loan activity as they were a lot of moving pieces this quarter.

Our total loans were down $80 million during the quarter, but this was primarily driven by a 150 million dollar decline in mortgage loans held for sale.

As we sold 162 million in the secondary market and transferred approximately 100 million into held for investment portfolio.

As part of our ongoing balance sheet strategy.

Combined with.

Total new production and after netting out payoffs and pay down our loans held for investments increased by 71 million for the third quarter.

We experienced healthy new production in both residential and commercial real estate and our payoffs and paydowns were down quarter over quarter for the quarter total loan production was $192 million loan payoffs were.

Paydowns were 123 million.

Looking ahead, we expect our total loans held for investments to grow.

Between 8% and 10% for the year.

Some variability.

For the quarter, depending on production and pay off.

Now turning to deposit.

While total deposits were relatively flat from from the third quarter or non maturity deposits increased $56 million, including a 13 million dollar increase in checking accounts as our deposit gathering efforts have continued to gain traction.

Offsetting.

This increase was $59 million decrease and CBS .

Including a 35 million reduction and brokered Cds.

Our strong.

Growth in core deposits has had a good foundation for future loan growth. However, typically we see a run off and our non maturity deposits during the first quarter every year.

Our average cost of interest bearing deposits was down nine basis points in the quarter.

We experienced lower cost of both our non maturity deposit and our cities given the lower interest rate environment.

And we also benefited from a shift in the mix of deposits towards a higher percentage of non maturity deposits.

Which.

Hey, lower rates that are timed deposits going for it we expect the cost about the Pos is to be modestly down as a gap between the rate.

That we pay on nude Cds and rate, we pay on maturing Cds continued to work in our favor.

Moving on to the.

Net interest.

Margin.

On both have reported basis, an adjustment Justin for purchase discount accretion NIM decreased by 12 basis points from the previous quarter. Our NIM was negatively impacted by 17 basis point decrease.

In our loan yield.

Only being partially offset by nine basis point decline total deposit cost as well as.

Temporary excess liquidity.

We had due to the timing of loan sales and our strong deposit gathering efforts.

Our lower loan yields were due to the fourth quarter drop in short term rates, but also due to a very competitive lending environment, particularly in the area commercial real estate calibre commercial loans still come on the books at higher rates on our residential mortgages, so last week rather.

<unk> business that should help lift the overall.

Average yield.

Given that we are deploying our excess liquidity and we anticipate a modest reduction in cost of funds.

However, we are in the very competitive lending environment, we still expect pressure on our commercial loan yield.

Therefore, we expect that our net interest margin will be relatively stable.

Turning to non interest income as expected we generate at higher gain on sale income due to the resumption off our loan sales during the quarter as mentioned, we sold $162 million that residential mortgages.

The thing of 61 million, Fannie Mae direct and indirect mortgages and $100 million.

Mortgages to private investors.

Oh It for me back.

Alfie Queen.

125.150 billion.

Dollars of residential mortgages per quarter and 2020.

Again subject to variability from quarter to quarter, depending on market conditions and our production levels.

Our total non interest expense was down modestly from the third quarter, we experienced higher marketing and business.

This expense in addition to higher Oreo expenses.

As slightly higher merger expenses.

These.

Increases were mostly offset by lower legal and professional expenses and data processing costs as we realize a full quarter benefit.

From our New York integration.

We expect that are non interest expense will increase and the first quarter due to higher merger expenses. The addition of Pacific global and the non seasonal.

And the normal seasonal uptick and employee cost.

Controlling our costs remain a key focus so we expect must.

Other expenses remained stable for the first quarter.

Starting the second quarter, we expect to begin to see the cost savings associated with PGP. In addition, we have already announced the closure of a branch and news and the New York region.

And opening a branch and Edison New Jersey during the second quarter.

The net annual savings to us of the closing another one branch and opening up the other branch.

Approximately approximately $800000.

Shifting to income taxes.

Our effective tax rate.

The quarter was 28%.

Yes, no impact from the exercise of stock options during the quarter, we anticipate an effective tax rate of between 30% and 32% for the full year 2020 and between 29%, 31% for the first quarter, excluding the impact of stock option activity that we may experience.

From quarter to quarter.

Our asset quality remained strong.

That being said, our nonperforming loans increased by $3.6 million during the quarter as we placed three SB eight loans and one mortgage.

Loan on nonaccrual status.

At the end of the quarter.

The three S.P.A. loans totaled $5.1 million.

And our secured by $6.5 million in real estate collateral and $3.9 million of the 5.1 million.

SB eight loans are guaranteed.

However, the like liquidation value on one of the Sps loans is lower than the book value and beginning being conservative.

Resulted in approximately a $450000 right off.

The 440.

Thousand dollar mortgage loan has more than sufficient collateral value. So we didnt don't believe that any impairment exist.

These increases are partially offset by a 1 million dollar commercial real estate loan payoff and $974000 decrease in other real estate dome.

During the quarter, we had 1.2 million and net charge offs related to the hotel loans mentioned last quarter.

And the.

Our and the $450000 I just talked about.

Our provision for loan losses was 659000 for the fourth quarter down from.

$824000 for the third quarter.

The decrease was mostly due to slightly higher provision in the third quarter due to.

Some specific reserves taken in the SB eight portfolio.

This brought our allowance for loan losses down slightly to.

86 basis points of total loans held for investment.

From 91 basis point that the kinda the third quarter.

We're not seeing any system wide asset quality deterioration and we continue to maintain a very strong credit quality culture and will remain built.

Vigilant on asset quality.

With respect to capital our capital levels remain strong our tangible capital equity to tangible assets increased to 12 point, 59%.

At the ended the quarter up from 12 point, 12% at the end of into September and 10.61 at the end of last year.

We believe that.

We have ample.

Equity capital to support forecasted growth, what's that we're happy to take any questions. Operator, Please open up a call.

Ladies and gentlemen to ask a question.

Yes.

On your telephone.

Your question press the pound.

Standby compiled acuity roster.

And our first question comes from.

Paper Sandler. Please proceed with your question.

Hi, good morning, everyone.

Hi, good money laundering, Eric.

I guess I'd like to start on the on the margin because your guidance for.

Stability at this point seems to me anyway, it fairly conservative given the opportunity to lower deposit costs from what's still seems to be fairly high level.

As was get deployed you know I'm guessing somewhere around 100 million of excess liquidity. So can you talk about what you know just how pervasive these pressures on the asset side do you mentioned commercial real estate that.

Cause you to not be a little bit more optimistic on your margin outlook.

Okay, let me start with that on.

We can see continued to see the 10 year Treasury and about the 165 level right now.

And in the commercial real estate.

Arena, we are seeing our competitors in the low fours and even in the threes, Okay high threes.

Commercial real estate, including you know malt multifamily is all in the high threes, but including regular old.

Commercial real estate type of of of loan.

We were at the 450 or our minimum fourfifty for 75% to 5% is where we would like to prices, but we're seeing extreme pressure to be closer to four.

Okay.

We do have significant amount of Cds that will reprice, but are still in our market. The four large customers were a C still seeing around a 170 rate.

So and and all but we'll see that repricing from us probably a 240 down until 170.

Over over the next quarter. The question is how is how much of the.

What portion of our loans that we have to do sub 4.5%.

Okay.

I guess, maybe just hoping to expand on that the your cost of deposits was 155 all in in the quarter.

You have what that number was at yearend just trying to gauge what the you know what the pay some decline as or maybe meaning that as of December 31st Yeah, Yeah exactly.

For the month.

I don't have it right here, because I have all quarterly data, but I can get it right yeah.

Okay, Yeah, we can follow up on that.

But definitely habit.

Sure.

And then just to.

Clarified because the drop in your data processing was was pretty sharp in the quarter. It sounds like that was.

I still related to the first American saves maybe a systems.

Payment that's no longer needed.

What happen, yes that is Ah, yes that is still first American.

So it just I'm just trying to turn to think about building off of the fourth quarter run rate with.

With the new deal coming in.

Is it looks like you're probably setting up for a run rate starting in the in the in the first quarter.

Somewhere a little north of 15 with the with the seasonal compensation costs is that.

So it sounds about right.

I mean, little north of 15 million on quarterly basis.

Yeah.

Yeah that should be fine yes.

Okay.

Okay, and then lastly, I might've missed this in your in your opening comments. It did you give guidance with respect to.

Expected volumes of loan sales through the year.

Yes on on I've said in the earlier I said between 125 am 150 million.

And mortgages and.

[noise] per quarter per quarter okay.

And any sense in terms of what the mix would be into four.

The Fannie Mae versus to private investors.

I think we will similar to this.

To be similar to this year, our Fannie Mae.

I would say, it's always been approximately one third.

Fannie Mae two thirds and two thirds other but yeah. It will be around that but you know every quarter is gonna be it a little bit different at fluctuate of course yep.

Okay very good. Thank you for taking my questions I'll step back okay.

Our next question comes from.

Please proceed with your question.

Hi.

I guess.

<unk>.

Hi.

It seems that.

Quarter.

A little bit below.

That's it for fourth quarter.

About the decision process there.

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Maybe we should refer to lacing, Okay. Oh, we were scheduled to sell 200 million. We just ran out of time, we closed the another 40 million in January .

Because of the merger with the Chicago, Oh, we just couldn't close another batch in December you got delayed.

Yes.

Was there are no option.

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January .

We sold and.

We can't recognize that income.

In December also I think when you look at the yes.

<unk>.

I'm just curious.

Not to those wells that yes or no.

And just some Kelly just so that everybody on the phone understands this.

We can we will sell out of either bucket. Okay. It all comes back down to what the Investor wants, but we have a certain criteria of where we're guided by fast be and loans held for sale have to me that certain criteria and those get moved out.

After they leave.

Leave that criteria okay.

Okay. Thanks, that's helpful.

Okay.

If I wasn't that 125 to 150 guidance.

What you expect.

Pretty or it.

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Right now.

We didn't even that and we don't even expect to sell any of this right at the moment until we finish the conversion process and I don't expect anything could really come on our books that as our product until the third quarter or late or possibly even the fourth quarter.

Also one thing I do want to point out what is that when we.

When we look at the staffing up our group and the origination process and so forth right now our capacity to sell is probably maxed out at the most probably $175 million quarter. Yeah. Okay. So that's you know that's.

A.

Hey throughput port.

Type item you know you only have a X number of staff and that's about all we can get through the pipe.

You know at the same time originating 100, 5000, 6000 70 million at the same quarter.

Okay, and then lastly ill step back what is your outlook.

We're hoping to be able to sell between six and $8 million every quarter.

Okay.

Thank you.

Okay.

Next question comes from Tyler Stafford Stevens. Please proceed with your question.

Hey, good afternoon gentlemen.

Your next question.

Hey, I wanted to just to clarify on on the margin outlook. The comment about relatively stable. It does that include the impact from Pacific Global and then can you just clarify if that is referring to the core margin or there are the gap margin.

Hi, I'm.

I'm, referring to the core margin.

Okay.

And I also believe with Pacificorp specific global has slightly lower they're a NIM than we have and they will put pressure on our NIM.

But at the same time, they're going through the same type of.

Scenarios, we are that they're they're Cds are gonna be repriced, lower and so forth than we probably have to quarter of repricing Cds. So that the first quarter in the second quarter. So they're going through the same things that we are going through right.

Right now okay Yep, Okay, and so can you give us a sense of how much of your Cds should mature in the next quarter or too.

I guess I agree with the earlier question that <unk> stable outlook.

I wish I think a high degree of Cds that are repricing 50 basis points lower to that 170.

I would've thought it would given a little bit more lift to the margin.

Okay. Let me tell you that right now we believe that there are.

In the Los Angeles region, we have $235 million Cdthree pricing.

And in New York, We have 85.5, I don't have the data for Chicago.

Yet since we're not on the same systems.

And Ah.

That there on that our systems right now at the both of them are on our systems at about a 235 rate and they should be repricing.

Down.

To the 170, something like that rate okay.

Okay, Thanks, David very clear.

And then just on the going back to the mortgage expectations for for the sales for for 2020.

What would you expect from a gain on sale margin that you're kind of factoring in its been bouncing around a little bit the last couple of corner. So just trying to figure out what what you're expecting there.

Looking at Uh Huh.

1.25 net to the bottom line.

Okay.

Okay and does that compare roughly two at 2.2% margin in the fourth quarter.

That would yes 2.2.

To the bottom line is.

After you take all the cost out and everything it's probably two to 225.

Selling them up to 25 to 250.

After you take all the cost out.

Okay.

Okay, so sort of and not not much change to what you've seen in the fourth quarter for example.

We're not seeing much change okay got it.

Okay I think that's it for me thanks.

Okay.

And as a reminder to ask a question you will need to press star one on your telephone.

And our next question comes from Kelly.

Please proceed with your question.

Hi, Thanks for letting me get back in.

At this stage.

At this liquidity.

Level cash.

Well, we like to operate only about 50 million.

[laughter] saw regulators at like us to operate out of 100 million. Okay. So.

So you know we really on cash cash.

Cash at the Federal Reserve Bank, we really only need about 50 million to operate this thing we don't have huge swings typically on a day to day basis, and so forth okay.

But.

Compared to that I'd like to 172 million average.

If you had this quarter.

100 million.

Yes closer to 100 million as norm or okay.

Right.

See I was hoping you could talk a little bit about rising mortgage.

Changes in competition.

Sure.

Yeah.

You can talk I didn't get to question can you repeat the question. Please.

Just on ready mortgage wondering any competition.

And also where you are.

Now.

Well there's.

Actually one of the major competition in southern California exited so we do expect.

Boosting production.

You know, we just opened up the Chicago market I do expect Oh volume decreased steadily New York has been stabilizing. So I was just overall I think we are I like where we stand in 2020, I think we're gonna be doing probably lot more than a year 2019.

Okay.

About rate rate's going to be remains to be changes.

Based upon a treasury movement, we try to change I'll read the Treasury has gone down almost 25 Bips in last 10 days or we're not looking to lower I'll read I think I'll read is a good is where it is a but if you continue to down trend on the T.N.X., we may look down to load.

Read between two point a half.

Thank you.

Thank you and I'm not showing any further questions at this time I'll now turn the call to Mr. team for any further remarks.

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. Thank you for participating.

Now disconnect.