Q3 2021 RBB Bancorp Earnings Call
Good day, everyone and welcome to the R. B B Bancorp conference call for the third quarter 'twenty 'twenty. One at this time all participants are in a listen only mode.
Later, you will have an opportunity to ask question.
Yeah.
A question and answer session.
Yes.
N.
Sure.
<unk> can be registered to ask a question at any time by pressing the star one on your Touchtone phone. Please note that today's event is being recorded and I will be standing by should you need any assistance I would now.
I'd like to turn the conference over to Katherine way.
Thank you good day, everyone and thank you for joining us to discuss the army the Bancorp's financial results for the third 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 COO.
<unk> strategy Officer, Simon PE, EVP, and Chief lending officer Tammy So.
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 in.
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.
Looking statements are also subject to known and unknown risks and uncertainties and other factors relating to our Bebe 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.
He see if any of these uncertainties materialize or any of these assumptions prove incorrect, our really big horse results could differ materially from its expectations as set forth statement.
Statements.
The company assumes no obligation to update such forward looking statements unless required.
Now I'd like to turn the call over to Ali.
Alan.
Thank you Catherine.
Hey, everyone and thank you for joining us today.
We are pleased to report another quarter of record earnings.
On loan growth and improving performance ratios.
Loan growth during the third quarter was driven by a nationwide all originations of construction and commercial real estate loans.
We were pleased with the geographic diversity of loan originations and BB is that it fits our strategy of expansion into Asian American communities across the United States.
Higher loan balances and stable loan yields contributed to an increase in interest income.
Continue to focus on.
Cost of deposits further reduce our interest expense, resulting in record net interest income during the quarter.
Non interest income benefited from a $1 8 million C. D. F. Ike wind that was awarded to the bank to help address the economy impacts of COVID-19 in distressed and underserved communities.
We are proud to have received this grant and believe it is a testament to our focus on community development.
Our net interest margin remained stable from the previous quarter, but was down modestly from a year prior due to <unk>.
Liquidity Beach.
Despite that especially with you these are old and our E increase from last quarter and last year. When there were impacted by effects of pandemic.
We remain well positioned to pursue additional organic and strategic growth opportunities and look forward to continuing to enhance long term shareholder value.
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 14, 8% from last quarter, and 83% from a year earlier to a record $15 $4 million or 77 cents per diluted share in the third quarter.
Third quarter results included the impact of a 1.8 million dollar C. D F. I grant that increased net income.
By $1 3 million.
And EPS by an approximately seven cents.
Our normalized net income benefited from several factors due to an increase in earning assets and stable yields net interest income increased $1 five.
A million dollars from.
From the prior quarter.
Interest expense decreased.
<unk> $382000 from <unk>.
Fire quarter due to continued management of costs.
I am deposits.
Non interest income increased by about $1 4 million.
At the C. D F. I Grant I mentioned made up for lower loan sale gains.
Net interest expense were down modestly for the.
From the last quarter and up about half a million dollars from a year ago.
Primarily due to increased compensation costs.
Net interest margin was 338% for the third quarter, an increase of five basis points from the second quarter down 21 basis points from a year.
ROA and ROE TCE rebounded in the third quarter two.
154% and 16.17% respectively.
Adjusting for the impact of the C D five gram.
Wei and <unk> would have been 151% and $15 eight 2%, respectively, which is still a healthy increase from last quarter's results.
Net loans held for investments totaled.
$2 $8 billion.
September 30th which was.
$830 million increase from last quarter we.
We had a very strong quarter of growth in commercial real estate.
Construction and other.
Oh well that's.
Our F mortgages and C&I is decreased about $10 million.
The growth in other loans as a result of relationship with a leading provider of point of sale financing solutions for the home.
Home improvement industry.
We expect to continue to add approximately $5 million of these loans per month until mid next year.
Non QM mortgage production, which is our most profitable mortgage product continues to lag due to the rate environment.
Our average yield on earning assets.
For the quarter.
For the quarter was stable from the last quarter at 397% and down 66 basis points.
From the prior year as with the NIM. This year over year decrease was due mostly entirely to lower returns on our excess capital.
Turning to deposits.
Commercial customer activity, which has driven a rapid increase in non interest bearing deposits over the past few quarters.
Led to a $90 million increase in average non interest bearing deposits by $115 million decrease at the end of the quarter.
Comparison with the end of last quarter.
Our average cost of interest bearing.
Deposits for the quarter was 051 percent, which was down eight basis points from the prior quarter and 63 basis points from the prior year.
Nonperforming.
Assets decreased by $5 million to $14 5 million.
In the second quarter, decreasing 12 basis points to three 8% of total assets.
Decline in nonperforming.
Assets with.
Due to pay off.
The return to nonaccrual status of one large mortgage.
And then we see the <unk>.
Pandemic SBA guarantees.
As of October 15th we had one loan and COO.
COVID-19, deferment totaling about $241000.
Okay.
Took a provision for credit losses of one two.
$2 million in the second in the third quarter, primarily primarily attributable to loan growth.
Our capital levels remained strong with all of our capital ratios well above regulatory minimums.
With that we're happy to take your questions. Operator, Please open up the call.
Certainly at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by press the pound key.
That is star one if you would like to ask a question and we will take our first question from Nick Charlie with Piper Sandler Your line is now active.
Good day everyone.
Hey, Nick.
So I would like to start on loan growth nice to see the pipeline follow through that you were discussing last quarter do you feel still feel like you'll be in the 9% to 10% growth range for the full year 'twenty, one and is it likely that commercial continues to be the growth driver.
Okay.
I think our loan growth will be probably closer to 8% this year okay.
And.
But we hope to continue to grow in the 8% to 9% on an ongoing basis.
As commercial are going to continue to be the growth driver should that tell us a little bit I think.
Commercial is going to be.
More of it.
Driver then.
And then real estate is.
Mortgages.
Okay. Okay. That's helpful.
On the deposit front some contraction after generating very strong noninterest bearing growth in the first half of the year what was driving those declines from the end of June.
A couple of our customers with just normal.
Transactional volume and in fact that their volumes are back up now.
Yeah.
Fair enough okay.
And then can you update us on your expectations for the gain on sale business I'd. Appreciate your take on each of the channels.
Yeah.
I think we're going to be close.
We're trying to shoot for a little bit better than we did this quarter, we would like to be at the $2 million range.
I think SBA may be a little bit better this quarter than it was last quarter.
Given the pipeline the pipeline seems to be pretty good and SBA.
Mortgage will be probably about the same.
Great and then lastly, I see the branch deal is slated to close in short order could.
Could you provide an update on M&A opportunities and your thoughts on a potential transaction.
Okay, we are constantly looking at.
Organizations we.
We have a couple that we're looking at today again, we're looking to.
So possibly expand into.
Northern California Houston.
The Seattle region.
Those are our priorities.
Thank you for taking my questions.
We will take our next question from Tim Coffey with Janney. Your line is open.
Great Good morning, everybody.
Can you.
Can you repeat what you said about the point of sale and the home improvement loans.
And the other line alone line item.
Okay.
No.
We have an agreement with a.
Uh huh.
An organization that produces home improvement loans.
And where we are.
<unk> put on $5 million per month.
Through I think may of next year.
So that's what we are doing.
Okay.
What are the yields on those.
The yields are about $4 75. After you take all the cost out of it.
Associated with it.
To help to use our excess liquidity.
The.
The longevity of those loans is only about two and a half years.
So the whole point is to try to use the excess liquidity that we have instead of investing them into a bond.
That would lose value.
We are doing.
Yeah.
Okay.
Are you finding I mean, looking just looking at the kind of the loan growth that you saw in the quarter and.
The buckets it was in commercial.
Commercial real estate is this a sign that your clients are starting to get off the bathroom.
Some money to work.
Can you repeat the question Tim.
Yeah, I'm trying to figure out if you're seeing greater activity among your commercial real estate investor clients or if this is just kind of a one off thing.
Oh.
I think we're seeing continued.
Tom.
Continued interest in commercial real estate lending in the areas, where we have are located.
I think the volume is still there.
Well.
Yes.
David It's right that we see a strong demand.
In quite a few sectors.
We see achieved the strongest sectors right now if the industrial properties.
Not only the price of the industrial probably catch so high but the demand dropped the industrial probably has tremendous debt.
The price even higher.
Other than that.
We do not see on commercial real estate, we've not BBC.
And the increases on <unk>.
Champion Center.
And commercial but we do see a strong demand on concession loan side.
And subsequently reaching into getting a higher financing on multifamily area.
Yes.
It could be totally 100% of payments or we see a lot of mix use of about less than 10% on the first draw as retail and then on the auto for us it would be all.
Residential units it could be apartments or it could be a.
Condominiums.
Same time, the other area that we see a strong demand would be on loan demand issue would be on mobile home parks.
RV Park and at the same time, even on the hotel side, we see.
Loan growth on demands.
Coming back as well however on the hotel motel sides, we underwritten very carefully but in general we really see a strong demand.
Every sectors of.
Commercial real estate asset.
Shopping center and.
Commercial office.
Okay, great. Thanks, very much very helpful.
And then have you how.
How is your outlook on the capital returns our allocation changed at all given kind of the growth outlook that you're seeing right now.
No I mean.
It Hasnt changed.
Okay. Okay, yes.
Great. Thank you those are my questions.
We will take our next question from Kelly Motta with K VW. Your line is open.
Hey, Alan and David.
Good morning.
Thanks for taking the question.
They dropped off accidentally of the call you may have covered that spot I was hoping you.
If you could provide some color on.
Hawaii branch expansion and kind of the opportunities you see in that market as well as well.
Whether or not that's an area you.
With potentially feel like adding in <unk>.
Good a location established there.
Okay Kelly we're.
Very excited about Hawaii, because we think we can bring.
Especially our.
Our mortgage and our CRE products, our bridge products too.
The islands there so we're very happy with that.
We don't think that we will have huge growth in the first year.
But I think Saudi starting in the second year. After we get all everything implemented and placed in there you'll begin to see significant growth there.
Yes.
This is <unk>.
Again, we are very excited but this is only one branch in Hawaii. So on the deposit side, we were really trying to understand the market and in.
In the next year, we put a very little growth on that deposit.
Andy.
Besides understanding that market is we tend to assemble a team of our retail managers.
With our staff to be sure that they are well trained understand up system understand our products.
No.
First of all I believe the first six months after the escrow close will be more.
No.
B b on both loans and deposit sides on the loan side at June from time to time, we do have enquiries on loans.
Either mortgage as well as commercial so we believe that with a with a.
Branch in Hawaii, It would really help us too.
Generate loans.
From from from from Hawaii.
We are very optimistic about our client that branch.
Got it and I apologize, if I missed it but turning to expenses.
Did you.
Sure.
Well controlled this quarter I was wondering if you had provided any.
Update or color on how youre thinking about the push pull of expenses next quarter and into next year.
Okay.
Again, typically our expenses increase at the beginning of the year, because we have salary increases.
And so forth.
Alright.
Temporary every year I think our expenses will be.
A little bit higher than they were this quarter, let's say.
Bounding back to where we were in the second quarter of about 14 point.
Seven maybe $14 8 million okay.
That's weak.
And we will increase.
Most likely in the salary area.
Probably in the 5% range because of the inflationary pressures that we're seeing in the market.
Got it. Thank you. Thank you David.
Yes.
We will take our next question from Andrew <unk> with Stephens. Your line is now open.
Hey, good morning.
Andrew Good morning.
I might have missed it but did you buy back any shares in the quarter and David just to make sure I heard you correctly is the.
The expectation is still to kind of continue with the repurchase moving forward.
Okay.
We will we did buyback some shares in the quarter I don't have the number in front of me but.
It wasn't that large because of the.
<unk>.
The market price we had.
Sitting out there.
We'll continue to buy back shares.
Later in the quarter.
This year, but not.
Not a significant enough not a huge number okay Andrew.
Got it okay, when I say huge number it won't be over 100000.
Okay.
Perfect. Thanks, Thanks for the color I appreciate it.
And then just back to your point on deposit growth I wanted to make sure I heard correctly.
Look at the noninterest bearing balances point to point.
There was a decline of $115 million this quarter, but did I hear correctly that the expectation was that this would come back to the bank.
Yes in fact, it already has.
Okay.
Perfect.
The rest of my questions were asked and answered and I appreciate it.
Yes.
And once again, if you would like to ask a question. It is start and one on your Touchtone phone and we will take our next question from Ben <unk> with <unk> group.
Hey, good morning, guys.
Good morning.
I was wondering if you guys could just kind of like a 10000 foot view.
I think a little bit bigger picture I know that.
This year is setting the stage for even stronger 22% and 23 in terms of growth.
The addition of the Hawaii branch.
The construction purchasing loans I was curious on why you think there is the need to do a whole bank acquisition.
I know that you have a pretty growth trajectory going forward.
Notably better than some of your peers in Europe.
Evaluation is improving.
I'm just kind of curious on.
Well, one the desire to do it and if theres anything youre looking for in terms of.
Loan categories, or specialty lending or something like that or two would you also be open to doing lift outs or is it a whole bank acquisition normally.
Well I'll start with that is that net.
Necessarily have to be a whole bank acquisition.
It could be branches or it could be product line it could be.
Anything of that nature and it could also be anything from.
Yes.
Some type of finance company to a full fledged bank.
Number one number two is we are looking for specific marketing areas.
That we want to be in right now we could open de novo in those places.
We find out that as much as.
It's much more difficult to open de novo in a separate state.
Or.
Distant geographic region.
So that's the emphasis.
About it we want to expand our market area and so forth.
And the third thing is we tend to.
Really return.
A pretty good return.
So the investments that we have done in different locations.
Our strategy at chasing this day, one when we open a paying in 2008 and is present.
<unk>.
And trust that IPO is that our strategy is to serve Asian American communities.
Across the United States So.
We.
That is something that we do best and we think that this is something that we'll continue to do so.
Definitely looking at to acquire.
The whole situation.
There is opportunities that the recent.
Hawaii.
On your branches because at.
At the time that the seller.
Like to ask for certain reason wed like to unload one of the.
They believed it to remote to them, but however to absolutely see that as a pump opportunity for us to it.
<unk> spend to a new market, which we had on the <unk>.
One site, we have from time to time has enquiries about Hawaii.
Many times, so we believe that would be a good start for us to adjust.
<unk> our foothold.
Like David said.
We would prefer to acquire eight.
Whole bank.
This is within our niche market.
It could be a niche bank or it could be.
Minsheng Bank, however, with most of the branches in the niche market area.
Again, besides what we keep talking about northern California, we talked about Seattle, We've talked about Houston in fact is another area.
We would be very interested looking into what the Phoenix.
Arizona lately, a lot of foreign investment in investment.
<unk>.
Going into the Phoenix, we see that Phoenix is it real upcoming market. So that is another market that.
We may we may have been a branch or we may just buy a branch or hopefully.
Then we have to go de Novo and set of a branch. So we will go to those major cities, where we see a large population of Asian Americans.
But I want to make sure you realize that.
Ever since the start of this bank.
Organic originations such as a very important to us also and we.
We continue to believe that this thing can grow between eight and 10%.
Every year organically.
Hey.
Yes.
That's really helpful color.
I appreciate that insight.
Thank you.
I mean ultra reiterate.
Growth through acquisitions.
So an important part.
Maybe I'm digging a little too deep here, but I was wondering if you could kind of little clarity on.
Essentially why we havent seen.
Something recently gave me, California disruption as it sells.
In price or selling prices are.
Too high relative to your expectations or maybe a cultural fit that wasn't appropriate.
You know anything that.
It kind of kept you on the sidelines.
Arizona.
We're not really on the sidelines.
I wouldn't.
<unk> categorized that has been on the sidelines for just.
Haven't found the right fit yet.
Has turned down deals where.
Culturally we didn't think it would fit.
Our pricing wasn't right, we couldnt get to a price that we thought was right.
So we have turned down some deals.
Or or I shouldn't say it turned out we never got to the finish line okay.
Deals so I wouldn't say that we're sitting on the sidelines we're just.
We haven't gotten somebody thats fits yet okay. Yes, we are looking at.
Is that can that have immediate accretion and so as we believe.
Doing the wrong long run it's not just cost savings during the long run besides cost Damian.
There is potential for us to spend.
The <unk> market or the other markets that either on different product lines.
Different customer base.
However, we believe we are still continue to stay on most of those.
Area.
Where we see a lot of.
Growth in population and in our in our niche market.
Got you that's really helpful commentary I appreciate it guys and congrats on a solid quarter.
Okay. Thank you.
And there are no further questions on the line at this time I will turn the program back over to management 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 heavily nicely.
Okay.
Okay got it.
This does conclude today's Rbbc Bancorp conference call for the third quarter 2021, you may disconnect. Your line at any time and have a wonderful day.
If this works.
Okay.
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