Q2 2022 RBB Bancorp Earnings Call
Good day, everyone and welcome to the R. B B Bancorp earnings conference call for the second quarter 2022 at this time all participants are in a listen only mode. Later, you'll have the opportunity to ask questions. During the question and answer session.
You May register to ask a question at any time by pressing star one on your Touchtone phone you may withdraw yourself from the queue by pressing the pound key I will be standing by should you need any assistance and please note that today's event is being recorded I would now like to turn the conference over to Katherine way. Please go ahead.
Thank you good day, everyone and thank you for joining us to discuss <unk> 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 assignment.
<unk>, EVP and Chief Risk Officer, Vincent Leo EVP, and director of private banking P. T 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 our BB bank cards operations and business environment all.
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 S E C.
If any of these uncertainties materialize or any of these assumptions prove incorrect or maybe being <unk> 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 re hires during the quarter positioning the bank for continued profitable growth.
<unk> were higher than anticipated due to the ongoing costs related to the board of directors investigation.
We expect those costs to wind down over the next two quarters. Despite elevated expenses net income increased by five 9% from last quarter and by 15, 7% from the last year to $15 $5 million or 80 cents per diluted share.
In the second quarter.
Adjusting for the $1 7 million of nonrecurring investigation expenses.
Net income would've been a record $17 2 million.
Or 90 cents 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 dollar increase from a year ago.
Second quarter non interest income increased by $478000 from the previous quarter due to a $757000 game.
On a corporate real estate that we disposed off offset by a decline in loan sales as Fannie Mae originations continued to lag.
Noninterest expense increased from last quarter, primarily due to the $1 7 million expense related to the ongoing board of directors.
Investigation net interest margin.
What's one of them or one of the highlights of the quarter, increasing to 4.08% from $3 four 9% last quarter and $3 three 3% a year ago.
We are cautiously optimistic that we'll be able to maintain our NIM above four in the coming quarters as asset yields continued to increase more quickly than deposit cost annualized ROA and our O T C.
Increased in the second quarter to one, 6% and 15.89% respectively.
Net loans held for investments increased by about 39 million in the second quarter, which equates to about 5% annualized growth rate CNI S. P. A N C. A R E all decreased from the last quarter, but.
But we had growth in construction in single family mortgages, the decline in C&I and CRE.
Whereas due to normal pay off.
Which means for.
Property purchases.
Or two competitors at lower rates.
Our yield on average, earning assets increased to 466%.
Which was a 66 point increase.
Basis point increase from last quarter, and 67 basis points 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.
Nonperforming loans decreased to $13 9 million due to the.
$7 million April repayment I mentioned during last quarter's call. We took a provision of credit loss of $915000 in the second quarter, primarily attributable to loan growth.
Our capital levels remained strong with all of our capital ratios way up above regulatory minimums.
We took advantage of.
The temporary dislocation in our share price to repurchase 527754 shares or two 7% of outstanding shares in the second quarter.
After renewing our buyback last week, we now have the capacity to repurchase up to 500000 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.
That's our first trading day on the NASDAQ.
Thanks to all of our investors management Board and investment bankers for the past five years, who have supported us with.
With that we're happy to take your questions. Operator, Please open up the call.
Thank you at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key.
Once again that is star one to ask a question, we'll pause for a moment to allow questions to queue.
Thank you our first question will come from Nick <unk> with Piper Sandler Your line is now open.
Hey, David how are you.
I'm looking at 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 there 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 it 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 we'll see loans increase in both sectors next quarter.
And I'm going to answer 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.
On the mortgage loans okay.
In that vein can you update us on your expectations for the gain on sale business do you feel like youre going to get to a sustainable level in 2023, or it's still below where you were in previous years. So I think we'll be back to a sustainable level in 2023. The second the last quarter of this year I'm, hoping to be there with.
SBA team back in place.
Maybe not in the third quarter, a lot, but in the fourth quarter and in subsequent quarters I think we should be back in that market and I think we'll be back in the mortgage market also except Fannie Mae's Fannie Maes are off it up there.
Nobody is getting a Fannie Mae loan right now.
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 of the we only had about a 5% this quarter, but the and we budgeted around the <unk>.
One, 9% and 10% so I think we'll be closer to around seven 8%.
Hey.
Thank you for taking my questions.
Thank you. Our next question will come from Kelly Motta with Kb double you. Your line is now open.
Hi, Good morning, David Thank you so much for the question.
Maybe I should've NIM expansion this quarter was incredible.
Incredible was there anything more one time in there any interest recoveries, where you should be aware about.
And with your expectation for NIM to hopefully stay above 4% is I believe what you said.
What what kind of deposit.
Data and assumptions go into that because I would assume those would accelerate as rates.
Right.
Okay.
<unk>.
Let's talk about deposits first deposits, we really haven't raised our rates yet.
That it's going to happen.
So I would project that our beta will be.
Probably around.
Is 65 or 75 given.
Starting at the next rate hike or so.
Okay, that's going to be pretty high I realize that.
But again, we haven't raised our rates and we have competitors at two right now.
We have competitors at $2 50, even on a one year CD and we're still at <unk>.
70 basis points or.
And so forth.
So that's number one number two is yes, we always have prepayments.
Of loan prepayment fees in our in our.
Yeah.
Okay.
And in our numbers and we probably had a little bit higher than normal.
Typically have like a couple of hundred thousand.
We had about 500000.
This quarter and prepayment.
Fees in our and calculated our NIM, so there's about $300000 there.
That is probably above normal.
Got it thank you and on the other side can you just remind us about the repricing of the loan book, how much of it slowed and maybe where.
Loans are coming on now.
Okay.
About a third of our book is floating rate, maybe tough, but the most 40%, but a third.
It was truly floating rate.
So on the mortgage side, although we're pricing at 625 right now on the mortgage side.
Were in the queue because it takes 60 days or 90 to 90 days to fund the mortgage loan.
We're in the low fives right now.
Okay in.
On.
Yeah.
C R E.
We're looking at.
I would have to say the spreads have narrowed but we're looking at prime plus one took prime plus one and a half pricing at the most right now.
If it's a fixed rate loan I'm, telling everybody six 5% unless it's a very high quality.
Very high quality.
Apartment building or that nature, which we're still in the 5.5 ratio.
Okay.
So that's where we are at.
At this time.
Okay.
That may change tomorrow.
Thank you David.
Maybe maybe a last kind of.
About M&A, just wonder wondering and update them.
If you have any update on gateway, 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 okay.
Number one number two we.
We do always look at potential partners either on our side to acquire are on their side 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.
Our.
We can prove that we can grow over a period of time.
And so forth.
As a management team here okay.
Did I answer all three of those I think I did.
<unk> gateway.
I anticipate gateway to close by the end of this year if not early next year I mean January 2nd of next year.
Okay.
Got it. Thank you so much for the question David I appreciate it.
Okay.
Yes.
Thank you again as a reminder, please press star one now if you would like to join the queue. Our next question will come from Andrew <unk> with Stephens. Your line is open.
Hi, Andrew Hey, good morning.
Okay.
Hey, just wanted to follow up on that.
The last question there.
Any update on kind of CEO search at this point.
I am meeting with the CMG Committee, the last Uh Huh I met with them last week.
And I'm meeting with a doctor Cal and Christina Carroll.
Again this week early next week.
And to go over the plans and so forth and I'm, hoping that.
You know we will have an announcement soon.
Okay soon being within the next.
Moths or so.
Okay perfect. Thank you and.
And I heard you on the kind of loan growth outlook for the balance of the year it.
It seems to imply kind of a mid single digit type level for the next.
A 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 you're just a little above 100% loan to deposit ratio at the end of the second quarter.
I'm just wondering your thoughts on whether you think you can fund that loan growth with core deposit growth or should we expect any kind of incremental reliance on wholesale funding and the balance of the year.
I think we will be able to fund our loan growth.
The Uh huh.
Well I may not call them core deposits, but through.
Deposits that we originate on the retail side.
Okay.
Because it's up to us to make a make a million dollar deposit or core.
What I mean, it's up to us to cross sell it's up to us to bring them into the family and make it a true relationship. So if somebody comes to us.
Let's say for right reasons, it's up to us to turn them into a true core depositor.
Yeah understood Okay.
Last one for me just a modeling question I know there was pre tax about one two.
You called out elevated in the legal and professional line item it sounds like that should dissipate over the coming couple of quarters do you have an estimated kind of dollar amount.
Remaining to kind of recognize in that line item is that correct. It should it should fall out of the run rate. The next couple of quarters.
It should.
I think our our legal and professional line item should be between five and $600000 a quarter.
<unk> said that.
It is.
So so having said that.
I think youre, probably still going to see close to $1 million quarter. This year this quarter and hopefully something more normal come the fourth quarter.
Because they are still ongoing odds and in Spain com.
Being researched I guess.
Okay.
Good I appreciate you taking my questions.
Yeah.
Thank you. Our next question will come from Tim Coffey with Janney. Your line is now open great. Thank you good morning, David Hey, Tom how are you. Good. Good. Thank you just 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.
There's.
Let's look at the let's look at lenders first and then we'll go to the deposit side.
And then some other general questions.
And the reason that it's interesting because if we're going into a recession.
Do I want to have a ton of lenders on our P&L.
I hire and then they have nothing to do.
[laughter], okay. So so.
I would like to have another we are however, we are hiring a lender that will be out of our Orange County Irvine office.
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, and New York, and Chicago, and L. A but I don't think we'll fill them.
On 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 and.
In the areas.
When we may have some underperforming branches.
Yeah.
If we find those people we will bring those people on it immediately because our franchise values is is tied to our core funding.
So.
That that would not wait for HAE.
Uh huh.
The.
Recession figuring it out but if we find those people we would bring those want 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.
Yeah.
Alright, that's very helpful. The rest of my questions had been asked thank you.
Okay.
Thank you. Our next question will come from Dan <unk> with Hovde Group. Your line is now open.
Right.
Yes.
I Wonder if we could take a minute.
Funding and R&D. So the deposit beta was kind of in that 75 area, which is pretty high but I mean, when you compare it to.
Growing at your pace.
A little bit more level set kind of in the range of normality.
You guys can do on a proactive approach from a funding perspective that you're not already doing that could potentially limit that or that could help support the margin moving up into the right.
Okay. Let me tell you what we're doing we're doing a lot of little things here.
We.
Number one is we have.
We don't really have a cash management department, although we have all the products.
And we found out that a lot.
All of our customers on the on the loan side.
Wood wood.
With.
Bank with us if they knew we had those products. So what we're trying to do is bundle those up and have brochures that lenders can easily go out to explain to our customers that's number one.
Number two is.
This is certainly not this year it may be next year.
Eventually all banks are going to have to be dealing with the deal.
With marijuana and in thanking marijuana customers.
We have them already in the lower tiers, whether it be the property, they're leasing up property tour.
<unk>.
Our borrowers leasing out properly, but we have no dispensaries or something of that nature.
That is on the pipeline to go after and that's always that's been in the pipeline for the last year or two.
But just haven't gotten to it yet, but I'm, putting that has a higher priority because of the.
There.
The cash deposits as cash and no no interest rate.
And the third is that we have some trust companies that we bank and Thats why you see this fluctuation well why don't we go after more trust companies.
And thank them also.
Because you know some of the trust companies.
Bank actually do some crypto stuff and that's why you see this wide fluctuation.
Sometimes during the quarter, our noninterest bearing accounts because they may have a flush of cash coming in and sometimes they may have a flush cash going out we projected that we would have $300 million to $350 million worth of cash going out of those accounts.
The beginning of this year.
During the first six months of the year.
But we can expand if we expand that market.
These trust companies and especially the ones that may not be Fintech related just trust companies, you'll see a lot more noninterest bearing deposits coming into us.
So that's our strategy to help our our NIM.
Our NIM not increase as much when you look at pay the betas with CD product, but let's see.
And our money market type of item, but that's.
Hey.
The overall the overall strategy is to get more noninterest bearing deposits.
And to capture fully capture our customer.
The a full relationship and that has always been our strategy. We are a relationship bank.
Gotcha great.
Uh huh.
There's a lot of little things add up.
Yep.
My only other question I don't think.
Put your feet to the fire here too much but when you think about your overall profitability the running at let's call. It a one and a half ROA and a healthy amount.
Capital.
And then the shares outstanding you don't have a huge amount of volume so you can repurchase.
Preventing you guys from doing something more aggressive.
Trading close to tangible here around one one tangible so like why not put out a tender or something to that degree given your high level of profitability.
We have considered the tender and we thought it would be better to buy at market instead of paying a premium.
Got it that's fair I 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.
Yes.
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 are supporting us.
We look forward to speaking to many of you in the next couple of days since I've gotta 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.
Okay.
[music].
Hum.
[music].