Q2 2021 RBB Bancorp Earnings Call
Good day everyone.
And welcome to the RFP.
Corp Earnings conference call for the second quarter 2021.
This time, all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session to ask the question. During the session you will need to press the star.
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If you require any further assistance. Please press star Zero. Please note that today's event is being recorded I would now like to turn the conference over to Katherine way. Thank you. Please go ahead.
Thank you good day, everyone and thank you for joining us.
To discuss army be Bancorp financial results for the second quarter of 2021 with me today from management are president and CEO, Alan <unk>, EVP, and Chief Financial Officer, David Morris, EVP, and Chief Credit Officer, Jeffrey Yeh, EVP and Chief risk Officer.
Management.
We 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.
The litigation Reform Act of 19.
95, such forward looking statements are based upon specific assumptions that may or may not prove correct for looking statements are also subject to known and unknown risks and uncertainties and other factors relating to RBC Bank card operations and business environment all.
All of which are difficult to play.
Any of.
Of which are beyond the point.
Yeah.
For a detailed discussion of these risks and uncertainties. Please refer to the documents the company.
Filed with the absence of any reason for materialize or any of these assumptions prove incorrect, obviously bank cards. The results could differ materially from its expectations as set forth in these states.
<unk> 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 <unk> Alan.
Alan.
Thank you Catherine Good day, everyone and thank you all for joining us today.
The continued strength of our differentiator of business.
The motto BB work right.
And the healthy return on tangible common equity in the second quarter.
Consistent focus on deposit franchise resulted in significant growth of non interest bearing deposits, which now represent approximately 30% of all.
Our total of deposits.
Well the.
Part of net interest margin declined due to excess liquidity.
Our discipline.
Loan origination efforts.
The loan balances and yields staple.
We had a strong quarter of non mortgage loan growth. Please for makeup.
For another soft quarter in mortgage.
We were also pleased to announce our free into the Hawaiian market debt is home to a librarian Asian American communities.
We're excited to enter this new market and bringing our relationship base. Thank you monitor to Hawaii.
We remain well positioned to pursue additional of getting to and strategic growth opportunities and look forward to continuing to enhance long term shareholders value with debt.
I will turn the call over to David to discuss some of the quarter's financial highlights before.
The 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 7.4% from last quarter and more than doubled from a year earlier.
Year to a record $13.4 million or <unk>, 70, or <unk> 67 cents per diluted share.
We reported stable quarter over quarter pretax.
Our pre provision income of $19.5 million.
Our net income benefited.
Several factors first net income increased $1.4 million due to stable interest income and interest expense and.
And a decrease in provision for loan losses.
Non interest income decreased by 1 point.
Primarily due to lower mortgage loan sales.
It was largely offset by lower noninterest expense as cost normalized after a seasonally high first quarter.
Net interest margin was 333% for the second quarter a decrease.
Kris of 40 basis points for.
From the first quarter and down 9 basis points from a year prior <unk>.
Adjusting for the excess liquidity, we are carrying our net interest margin in the second quarter, what has been 368%.
Loans held for investment total.
The 2.7 billion as of June 30th which was stable from last quarter. We had another good quarter of growth of commercial real estate.
Which grew at a 15% annualized rate and construction, which grew at a 52% annualized rate.
Unfortunately.
Our non QM mortgage production, which is our most profitable mortgage product continues to lag leading to a 57 million dollar decrease.
And our mortgage loan portfolio we are.
We are acting to revitalize the non QM origination channel but.
It continues to be challenged by the rate environment.
Our average yield on earning assets for the quarter was $3.99.
Down.
50 basis points from the prior quarter and 66 basis points from the prior year as with the NIM.
This decrease was due almost.
Almost entirely to lower returns on our excess capital.
The process once again showed very strong growth with total deposits, increasing by $249 million and noninterest bearing deposits increasing by $153 million we.
We're pleased with the rapid progress we have <unk>.
We have made improving our deposit base, but we intend to monitor the new balances for some time before we deploy them into higher yielding assets.
Our average cost of interest bearing deposits for the quarter was 0.59% which was down 14.
Basis points.
From the prior quarter.
The 83 basis points from the prior year.
We still expect some improvements in our deposits.
As the last of our high cost Cds mature and are replaced by the lower cost deposits.
Non performing assets decreased.
<unk> by $700000 to $19.5 million.
In the second quarter decreased 5 basis points to.
0.5% of total assets as of July 15th we had for loans and deferments totaling about $3 million.
Okay.
We took a provision for credit losses of.
$628000.
In the second quarter, primarily attributable to loan growth our capital levels remained strong with all of our capital ratios well above regulatory minimums.
Finally.
Before we take your questions in mid June we were notified that we were awarded a $1.8 million.
Under the U S treasuries <unk> rapid response program.
We were 1 of only 8 banks in California to receive this award and.
And we feel it is a testament to our reputation as the community focused lender.
These funds.
That will allow us to respond to the economic impacts of the COVID-19, pandemic and distressed and underserved communities with that we're happy to take your questions.
Operator, please open up the call.
Thank you Lee Minder to ask a question you will need the press star 1 on your telephone to withdraw.
Your question press the pound key please standby, while we compile the Q&A roster.
Your first question is from.
The line of Nick <unk> with Piper Sandler.
Good day everyone.
Hi.
Yes, I'd like to start on loan growth it looks like Paydowns and payoffs of impeded the year day growth. The single family book, what is your expectation for net loan growth for the remainder of the year.
I still think we will be targeting.
Target of 10%, 9% to 10% loan growth.
Okay is that target predicated on the prepayments and pay downs slowing significantly from the second quarter level.
I see in the.
The mortgage side of things the prepay.
Pes are beginning to flow.
We also believe that the second quarter of.
In the commercial side, our current decreased significantly.
But also our loan origination pipeline is.
Very strong rate at the moment very strong in the commercial side.
Good morning.
For the strong.
And as you mentioned this is the second quarter and the ROE was very strong noninterest bearing deposit growth, even when compared to the industry can you give us some color on how you've been able to drive such a robust advanced there and secondly, as debt prompted any change in strategy at the bank.
Okay.
To get the out the 3 groups.
The growth is.
Existing customer base and.
Just going back in.
Asking for more deposits from them that.
That is maybe.
The third of this okay.
A third of it is maybe half.
Of the third.
Third of it is maybe new customers the path of the customers with the bank.
Putting in significant balances.
And then a third of it is just the amount of excess liquidity. There is of the market. There's just a ton of excess liquidity out there.
And that's showing up in the bank accounts because.
You can't everything is delayed.
The here the market here all of the commentary.
The purchase of the and everything is delayed so money, it's just sitting until it's being used.
Yes.
Hence.
It Hasnt changed our strategy at all.
We believe that the.
The net some of this excess liquidity and in 2022 will go away the.
Excess liquidity that's in the market will go away hopefully in a.
Okay.
Over a period of.
The time instead of at once.
And.
So therefore, we're not going to invest a certain amount of it.
We want to increase our for loan production as much as possible.
So we are not selling non QM loans at this moment for holding on to every month QM loan we can apply.
Keith on the mortgage loans.
The stable.
Until then until that comes back to.
Normal production there.
And finally, we are putting some money into.
But where we are.
We're putting a couple of hundred million dollars into.
The investments net of short term.
For shorter term measurement relation.
Average life of 3 years.
To get more of the heap.
To get more than the 8 basis points that we are earning on fed funds.
Okay, but we want to keep it short because we do believe rates will rise.
That's great color David Thank you and lastly, just a nice pop in SBA sales in the quarter. It looks like you're capitalizing on the favorable environment. There what is your expectation for that business and the revenue we can generate.
The thesis.
Fourth quarter on SBA.
At least be the same as our first 2 quarters.
I do think that SBA has.
<unk>.
In the last year it was all PPP PPP and.
Now it is.
But just more of an operational now its PPP forgiveness.
And with our origination people are out and about the so I think we will be doing okay for the rest of the year.
In addition, <unk>.
Jim site.
Small business largely the <unk> really suffering all of it.
Just trying to.
Some wide and.
Thanks to the PPP and all of the other axis.
Assistant with.
Hopefully with the slowing down.
Of the pandemic.
We see a lot more small pieces of getting back on the feet.
<unk>.
Starting to.
<unk> increased debt productivity.
Productivity of <unk>.
Increased debt inventory kind of.
Both of the business so we see.
Quite a lot more inquiries about.
SBA financing either on inventory.
Or improvement or even up per chase of the warehousing industrial properties the.
Especially in southern California the.
Back to industrial property has to be so strong debt.
It's really kind of a multi but multiple of beats on almost all industrial property debt.
Our small business are looking for so we see of strong growth in the business in the industrial sector the sector.
Thanks for the color and thank you for taking my questions.
Yes.
Your next question comes from the line of Kelly Motta with K B W.
Hi.
Good morning, all for their good afternoon here.
Hi.
And then I don't know about.
Earlier on in your prepared remarks he talked.
About the.
There are still of lot of strategic growth opportunities.
Obviously, you're entering Hawaii, which for the new market for you.
Wondering if you guys can expand a bit more on any update on how.
Emily.
M&A is working interest since the.
The latter.
Last quarter.
Yes in fact.
After the pandemic.
We see.
Yes.
A lot more institution debt.
Looking for.
For some kind of alliance.
<unk>.
Sure.
Of our partnerships so.
In fact.
Right now we pop up we see.
At least 2 to achieve more packets that we'd be looking at so looking at those banks that we consider.
Not a big Bang it just debt after the pandemic I believe of lot of board members all of a lot of management believes that the.
The other way for survived a better way of growth is to just become part of a larger archive initiation of part of the larger bank. This is how I Steve debt.
A few.
Dan the treat the attribute good income asset quality.
Quite good strategic location with some of <unk>.
Nice distribution outlet the I'm looking for a partnership is more debt to 2 bad.
1 plus 1 is larger than 2 so we see quite of few opportunity in the areas that we are looking at including.
In Northern California, including Texas.
Including the Georgia, Atlanta and of course, Washington States as well, so we see a lot more of.
We think the parts of it even now and.
The pre pandemic.
Great. Thanks, Thanks, Al and then I.
Follow.
Though up question on us if the markets for we're still the same.
I just.
I also wanted to ask a bit about the <unk>.
Non QM mortgages.
You spoke about the.
The 1 priority is getting that channel up and running do.
Do you have a sense of when production.
It's kind of normalize on that and kind of what what needs to happen in order to.
Get it there.
Yes.
Yeah.
Scenes.
Pandemic recover.
First of the recent.
We see most of our comp.
<unk>.
<unk> for the non QM actually is from non bank lender.
Non bank lenders looking on.
Smaller margin.
Really looking for the volume.
Unfortunately at the same time because of the non bank lender.
Quite a lot less of the compliance issue than the bank.
They tend to be quite aggressive in underwriting and processing of this is this is.
What we see so since about beginning of the year, we even though we still what we of correspondent and brokers, we ship a lot of our focus on.
<unk>.
Retail customers our debt.
Retail banking.
2 of bringing our customers.
From our own branch system.
Debt.
In this patch treatments it proven to be previous successful of.
Bringing in.
Our customer of that who know us debt not rare.
Trying to go to the non bank lender, so we see debt.
Volume picking up.
I'll say that.
It probably.
Probably we'll need is to have at least 2 quarters to.
Bring the.
Volume back to close to normal.
Got it.
Thanks, Alan that's helpful last question for me.
On expenses.
The dropped pretty nicely quarter over quarter kind of similar to I think what was said on the call last time, just wanted to see if theres any update on how we should be thinking about the run.
So as we get into the back half of the year.
Well.
As probably every company is around the country were having pressures on salaries and so forth.
So I would say that we would be between 14, 7% and $15 million range in our quarterly.
Alright.
Okay. Thanks, David Thank you I'll step back.
Your next question comes from the line of Andrew Terrell with Stephens, Inc.
Okay.
Hey, Thanks, good morning.
Good morning.
Hey, so I hear.
And clear on the non QM piece of the mortgage business, but David any kind of.
The data expectations on Fannie.
Sales in the back half of the year or is there any kind of increased appetite just given where the QM.
Non QM production are there any more appetite to balance sheet more of the the Fannie.
A lot of auctions.
We have.
While we have thought about balance of.
Putting on Fannie.
Sure.
30 year loans, they probably will not prepay very fast when you are in.
A sub $2.75.
Fannie per cent range.
On.
And so forth.
Kind of be stuck with us for ever.
So we have kind of made the decision that we will continue to.
So our Fannie Mae production at this time.
We review it quarterly.
Because we don't know what's going to happen with the economy and we don't know what rates are going to go.
And so forth we reveal of quarterly.
We think our production is going to remain about the same as it has been.
We're going to be the 20.
Dollar range and just a reminder, that all of our production comes out of the New York region and Fannie Mae.
I shouldn't say all 98% of it comes out of the.
New York region.
And we're happy with the performance there at this time.
Great and then just looking at the blended mortgage gain on sale margin. This quarter was around 2.5% or so just just given there might be of lesser mix of non QM.
For sales volume do you think the the gain on sale margin could compress a little bit from here or are we likely kind of at or near floor.
Well.
Our Fannie may gain on sale margin, it's been averaging closer to.
The 2 points.
I would say our gain on sale margin of close to 2526.
And Fannie Mae.
As for about the last.
Okay of QM.
When we had with the similar.
To that so.
I would hope because of some of the things that we've done with content of mandatory delivery and so forth debt in the third quarter, especially in August and September you'll begin.
Non of margin gain on sales go up slightly because of that.
Okay.
Right now the 2.
2.6.
252.
2 for that range is where the average is right at the moment.
Understood. Okay. Thank you and then if I can squeeze 1.
The C&I I might have missed it but did you repurchase any shares this quarter and can you maybe just talk about the appetite for repurchases moving forward I know the valuations improve the bad since we last spoke.
We repurchased the.
Yeah.
I have it here at the <unk>.
200 <unk>.
Believe.
The last 1 of 222.
<unk> and <unk>.
Shares as I believe with what we repurchased in the quarter and yes, we.
The all depends on where our stock is trading.
If we're going to be active in the market or not but we do probably believe that.
We'll be trading will be.
Purchasing.
More during the third quarter also probably to the same degree of about 250000 shares.
We still have 456000 in our program.
That we could do.
Okay.
I appreciate you for taking my questions I'll step back.
Okay.
And again that is star 1 if you would like to ask the question at this time.
Yes.
Thank you for a question.
From Andrew Terrell with Stephen.
Hey, Andrew.
Hey, just 1.
1 more quick 1 can you remind of why you Havent Cds repricing in the back half of the year and just what the rate differential between the back book and new Cds as of today.
Okay.
We have.
415 million will mature in the third quarter at 87 bps.
Our ongoing 1 year rate is about 50 bps.
And I just have the turn a couple of pages here because I still have the fourth quarter 2 of your App.
But I have to find it.
The fourth quarter.
As.
<unk>.
272.
Millions of.
Again, it's at the.
Approximately 73 bps, so it will be going down for the 50 the quarter okay.
Okay.
Perfect and then just 1 last 1 on the margin as well I know loan yields over the past several quarters have been in kind of the low of.
5% range for new originations of credit your originated today is the kind of new production yield still around the low 5% level and the bulk of any kind of loan yield.
Options behind us or are you seeing competition or anything step up in your markets Thats pressuring or are you expecting the pressure of new origination yields moving forward.
I think.
Our yields on.
It is very competitive out there, but I still believe that we are able to.
Comprise contain our yields.
Throughout the rest of this year.
At the same levels they are now.
Yes, yes, okay.
Okay.
Thanks for taking my questions congrats on the quarter.
Okay. Thank you.
Yes.
And there are no additional questions at this time I'll turn the call back over to management for 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 at the nice day.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
I'm going to take.
[music].
Yes.