Edited Transcript of RBB.OQ earnings conference call or presentation 21-Apr-20 6:00pm GMT

First, we have fully implemented our company-wide business continuity plan, so that we may continue to operate our business, while keeping our employees and clients safe and healthy. We are offering work-from-home options, and about 41% of our workforce is currently working remotely. For those who are continuing to come into the office, we have teams working in shifts and are practicing social distancing between employees. We are also conducting most of our meetings over the phones and online. We are working with all of our customers who are affected by this crisis to provide them guidance and help review their options. We have contacted borrowers across several business lines and provided payment deferrals to many.

As of last week, we have extended payment relief on $257 million loans across our entire $2.3 billion loan portfolio, representing 10.7% of the total. We have granted $186 million of these payment deferrals to our commercial customers and $71 million to our single-family residential mortgage borrowers. However, it is too early in the stage of this economic slowdown to determine how many of our customers will ultimately need payment deferrals. We are very focused on monitoring and responding to our customers’ needs in the near term. We believe that by helping them get through this situation, we are both helping the country and creating a strong bond with our clients. This should also help us bring new business to the bank over the long term.

I’m generally pleased with our first quarter financial performance and the healthy underlying fundamentals of the company. We plan to continue to originate new loans across all of our business lines in a disciplined manner, and we remain focused on maintaining strong liquidity to help our existing customers continue to operate through this crisis. We will also continue to execute on our strategic goals by growing our franchise organically within our existing markets and by expanding our franchise beyond our existing markets.

I want to thank the entire RBB family for their devotion to our customers and their hard work as we manage through this pandemic. There’s a good amount of work ahead, but I’m confident that our bank will emerge from these events a stronger organization.

Before I turn the call over to David, I want to say a word about our dividend. In the past two years, we have strived to pay out a portion of earnings in the form of cash dividends. Last year, that amounted to a payout ratio of approximately 20%. Given our lower earnings in the first quarter and uncertainty about the remainder of 2020, the Board decided that it was prudent to declare a $0.06 per share dividend this quarter, down from $0.12 last quarter. Further dividends will be decided upon by the Board on a quarterly basis and will mainly be based on our view of the earnings potential of the company.

I will now turn the call over to David for discussion of first quarter results. David?

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David Morris, RBB Bancorp – Executive VP & CFO [4]

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Thank you, Alan. We have provided a great level of detail in our press release, so I’m going to focus on those items where some additional discussion is warranted.

In general, the pandemic impacted our results through lower organic loan growth and an increased provision for loan losses, but our overall credit quality remained relatively stable and our operating expenses were in line with our expectations.

Our total loans were up just over $200 million during the quarter, but this was primarily driven by our acquisition of Pacific Global Bank, which accounted for $172 million of the increase. We also transferred $13 million in single-family mortgages on a net basis to the available for sale bucket as part of our ongoing balance sheet strategy.

Total single-family loan production in the first quarter was $112 million, down from $126 million in the fourth quarter. Payoffs and paydowns were also modestly lower in the first quarter. We sold just over $100 million of mortgages in the first quarter, down from $162 million in the fourth quarter. $32 million were sold to Fannie Mae and $69 million were sold to private investors.

Going forward, we still expect to sell some of our residential mortgage production each quarter, but it will depend on market conditions and our production levels.

And as Alan mentioned, we plan to continue making new loans in a disciplined manner. However, given the uncertainty surrounding the economy, we likely won’t see enough demand to reach our previously targeted loan portfolio growth for the year, at least for the short term, until the impact from the pandemic begins to subside.

Now turning to deposits. Total deposits, excluding broker deposits, increased by $221 million during the quarter, mainly due to our acquisition of PGB, which accounted for $187 million of the increase.

Noninterest-bearing deposits increased by $46 million and our non-maturity interest-bearing deposits increased by $34 million. Broker CDs declined by $34 million. Our average cost of interest-bearing deposits was down 21 basis points in the quarter. We experienced lower costs on both our non-maturity deposits and our CDs given the lower interest rate environment.

Going forward, we expect the cost of our deposits to be modestly down, as the gap between the rates that we pay our new CDs and rates we pay on maturing CDs continue to work in our favor.

Moving on to the net interest margin. On both a reported basis and adjusted for purchase discount accretion, NIM decreased by 12 basis points from the previous quarter. Our NIM was negatively impacted by a 26 basis point decrease in total earning asset yields, only being partially offset by a 23 basis point decline in total interest-bearing liability costs. The decline in asset yields was partially driven by a buildup in liquidity heading into a period where we will likely be facing meaningful [payment] (corrected by the company after the call) deferrals in our loan portfolio.

Going forward, we believe that our net interest margin should be relatively stable to slightly down. But it depends on a number of factors that are very hard to predict at this point, including the direction of loan yields and the level of excess liquidity that we will carry on our balance sheet.

Turning to noninterest income and expenses. Our noninterest income was down in the first quarter, mainly due to fewer loan sales in the quarter, as previously discussed.

Our total noninterest expense was up from the fourth quarter, but all due to the PGB acquisition. We actually had lower travel, marketing, and business expenses as we maintained our focus on controlling our costs.

Starting in the current quarter, we expect to begin to see the cost savings associated with PGB merger. In addition, we have already closed a branch in the New York region, plan a second branch closure in the New York region at the end of the year, plan 1 branch closure in the LA region and plan to open a branch in Edison, New Jersey in the second half.

We have also canceled the sale of the Brooklyn operations center until after the COVID-19 crisis has passed. Going forward, our total noninterest expense should decrease slightly as we close duplicative branches and continue to merge redundant systems. However, loan collection expense may increase depending upon the severity of the economic downturn.

Shifting to income taxes. Our effective tax rate for the quarter was 33%, including the impact from the exercise of stock options during the quarter. We anticipate an effective tax rate between 30% and 33% for the full year of 2020 and between 30% and 33% for the second quarter, excluding the impact of the stock option activity that we may experience from quarter-to-quarter.

Now turning to our asset quality. Our nonperforming loans increased by $7.3 million during the quarter, as we placed two SBA loans, six C&I loans and four residential mortgages on nonaccrual at the end of the quarter. The two SBA loans total $3.6 million and are secured by $2 million in real estate collateral and $1.9 million of the $3.6 million is guaranteed.

The C&I loans total $1.9 million, and the mortgage loans total $1.6 million, and we feel that there is sufficient collateral value supporting these loans, so we don’t believe that any impairment exists.

During the quarter, we had $631,000 in net charge-offs related to the two SBA loans discussed earlier.

Our provision for loan losses was $1.9 million for the first quarter, up $659,000 from the fourth quarter. The increase was due to higher loan balances and increase in past due loans and nonperforming loans and the expected impact of COVID-19 pandemic.

Our allowance for loan losses stood at 0.84% of total loans held for investment, down from 0.86% at the end of the year. It’s impossible at this time to determine what impact the COVID-19 induced economic slowdown will have on our asset quality. We have provided a table in our earnings release that lays out the exposure that we have to borrowers in certain industries that are deemed to be more at-risk to the effect of this public health crisis than others.

Our largest exposure is to general retail and mixed-use commercial properties, at just over 11% of our total loans. And while we do have exposures to hotels and motels, the non-SBA portion of the exposure only represents 2.5% of our total loans.

Our capital levels remain strong, and we believe that we have the liquidity to help our clients weather this storm. And we also believe that we will emerge from this a stronger company, well positioned to continue the pursuit of our long-term goal of growth and value creation, both organically and through strategic acquisitions.

With that, we are happy to take your questions. Operator, please open the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division – MD [2]

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I wanted to start on the dividend cut. And I was — obviously, I’d say quite surprised to see that last night, particularly given just how much capital you guys currently have with the total risk base of, call it, 22%, so can you help us better appreciate why the Board made the decision to cut the dividend now given that, let’s say, robust capital position in addition to the growth expectations being a little bit more tempered for the remainder of the year, that would obviously help capital as well? Just curious the thought process there, what you guys are seeing that would warrant that.

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Alan Thian, RBB Bancorp – Chairman, President & CEO [3]

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Well — good afternoon, this is Alan. Well, we had a very lengthy discussion with the Board during our last Board meeting. We realized that we have a lot of capital, we have a lot of liquidity, and our debate is how much should be given back to our shareholders at this juncture. Well, again, as I reported earlier, our formula is that we are looking at a 20% cash payout of our earnings. That’s one of our grounds of determining how much we should pay.

Then the second thing, actually, we have is that even though we pay out quarterly, actually, we are really looking at an annual dividend as a whole of $0.48. So by looking at this pandemic and we’ve seen this as possible, it could be a larger crisis. We talk about 1982 when we had the high prime rate. We are talking about 1990, we had the RTC, and we are talking about 2008, when we had the subprime lending. Again, at this point, it is at the very beginning of the whole situation. So, we do not have a crystal ball to see how this crisis will emerge.

So we thought just to be a responsible operator, we should reflect this as a concern as cautious. So again, we are using this to show as a gesture that we do believe this is a concern. We don’t believe this could be an even serious crisis and we would really start with cutting up to half, which pretty much reflects the 20% payout of our first quarter earnings. And with the whole mindset that if second quarter, third quarter, things are getting a lot better, then we intend to make up the shortfall of what we are paying at the first quarter.

So again, we want to explain that this is not something that we believe is a permanent cut. We just believe that this is showing that just like our business continuation plan, this is just to show that we would react to anything that impacts us negatively in the short term. But again, with the intention that when every is back to normal, we will make up for what we have cut this quarter.

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Tyler Stafford, Stephens Inc., Research Division – MD [4]

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Okay. Got it. And did you say over a 4-quarter basis, you’re looking at a $0.48 dividend, cumulatively, is that what I heard?

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David Morris, RBB Bancorp – Executive VP & CFO [5]

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When we talked about it at the beginning of the year, we looked at what we thought we would pay based upon our formula. And we thought for this year, the 4 quarters, we would be paying $0.48. Okay?

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Tyler Stafford, Stephens Inc., Research Division – MD [6]

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Okay. All right. Got it.

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David Morris, RBB Bancorp – Executive VP & CFO [7]

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Okay. So that’s…

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Alan Thian, RBB Bancorp – Chairman, President & CEO [8]

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So this is just a first quarter reaction that we respond to the possible negative impact on us.

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Tyler Stafford, Stephens Inc., Research Division – MD [9]

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Got it. I wanted to also ask about the reserve levels. I think the release mentioned that there was — part of the provision and reserve was around COVID. I was just curious if you could just quantify how much of that qualitative factor for COVID-19 impacted the provision and the reserve this quarter?

And then secondly, where are you comfortable running that reserve ratio in this environment should it came down a basis point or so? Would you expect that to remain around here? Or should we see or expect to see further reserve build as we move throughout 2020, given the macro environment?

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David Morris, RBB Bancorp – Executive VP & CFO [10]

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Okay. Right now, Tyler, there’s a 2-basis point qualitative factor put in there for COVID-19 over all of our loans, not just over the affected groups. That’s number one.

We will be looking at our ALLL in greater detail at the affected group level to determine if we need to raise that acute quantitative factor in those affected areas and maybe decrease it in other areas. Number one.

Number two is, we do expect to put in more reserves, definitely in the second quarter. Depending upon — definitely in the second quarter. The third quarter, we do not really know yet. So we’re going to see this quarter-to-quarter. We don’t have enough information. If things — if by July 30 and if all those deferrals that we’ve granted for three months, pay in the month of July, we know our answer. If they don’t pay, we know our answer too. Okay? So it’s really a July decision.

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Tyler Stafford, Stephens Inc., Research Division – MD [11]

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Okay, okay. And then just lastly for me. I saw you guys built liquidity this quarter. I am just curious if you’re planning to put on and build further liquidity also given the macro backdrop?

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David Morris, RBB Bancorp – Executive VP & CFO [12]

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Now what we’re investing in that liquidity — we’re investing in liquidity now in everything that’s short term or a floating rate with a minimum of a floor. So we do not expect to put on more liquidity really. It all depends upon what our loan growth is versus loan sales. And our loan sales right now don’t look that promising. I mean, we can definitely sell directly to Fannie Mae through the flow system that we have already. But we can probably sell to a couple of banks also. But it all depends upon — we don’t have any other plans to put on another $150 million in liquidity; we think that’s enough.

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Operator [13]

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Our next question comes from Kelly Motta with KBW.

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Kelly Motta, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [14]

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I think maybe following up on loan sales, maybe turning to the SBA portion of that. I know in your release, you mentioned the PPP loans, which I assume are kept on balance sheet. I was wondering with the backdrop and the focus on PPP, should we be taking out SBA 7A gain on sales as well?

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David Morris, RBB Bancorp – Executive VP & CFO [15]

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I think you should take out gain on sales on SBAs right now. Yes, for at least this quarter, okay, because, I mean, as our SBA team is just completely inundated with PPP loans.

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Kelly Motta, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [16]

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Got it. Do you have a magnitude of kind of the interest there? Were you able — we’ve heard how popular the program has been. Were you selectively going out to your customers and getting that? Or do you have a big backlog for pushing through more loans as we potentially get another batch of funding here?

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David Morris, RBB Bancorp – Executive VP & CFO [17]

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Okay. We originally went out to our clients and said, okay, we’re open for PPP, and we got about probably 150 applications. Of which, we got 117 of them approved by the SBA before it stopped. So we still have those 35 in the pipeline, plus we are increasing it to — we believe we’ll be able to do about another 65 to another 100 loans and so forth before the money runs out again. So that’s what we kind of feel that we can do right now. We weren’t like some lenders who opened it up to everybody, but we have opened it — we’re taking care of our customers first and then going to the rest of the world, second.

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Kelly Motta, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [18]

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And how should we be thinking about the rate at which these payoffs, do you — do you expect them like to be forgiven and this thus roll off on in 2Q or 3Q? And these fees, just to clarify, they should run through NII, is that right?

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David Morris, RBB Bancorp – Executive VP & CFO [19]

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So we don’t — okay, so these are what two year loans, right? So we expect them to probably pay off relatively quickly because I would hope most of them would get forgiven, okay, so within a year.

And again, it’s only a 1% interest rate, so it’s basically coming out of our excess liquidity that we have right now.

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Kelly Motta, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [20]

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Okay. And then the upfront SBA fees, are those — some things you’re saying that’s running through net interest income over the life of the loan. Have you figured that out yet for how we should be modeling that when we model those fees for you guys?

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David Morris, RBB Bancorp – Executive VP & CFO [21]

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We don’t. I haven’t even thought about that yet, Kelly. Okay?

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Operator [22]

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Our next question comes from Tim Coffey with Janney.

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Timothy Coffey, Janney Montgomery Scott LLC, Research Division – Director of Banks and Thrifts [23]

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David, it’s a — to follow-up on the last question about how you plan to fund the PPP loans. Are you planning not to use the facility, but your own liquidity?

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David Morris, RBB Bancorp – Executive VP & CFO [24]

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We don’t need the liquidity, so why should I borrow right now.

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Timothy Coffey, Janney Montgomery Scott LLC, Research Division – Director of Banks and Thrifts [25]

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Great. Okay. Yes, no, I just wanted to make sure I understood that correctly. And then the FHLB line that you took down during the quarter, was that fixed rate?

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David Morris, RBB Bancorp – Executive VP & CFO [26]

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Yes, it is for five years. Hey, Tim, I just want to make sure you realize, I am going to pledge those loans to the FRB, just in case I do need to have liquidity, okay?

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Timothy Coffey, Janney Montgomery Scott LLC, Research Division – Director of Banks and Thrifts [27]

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Right. Yes. Okay, no, we understand. And then the — I guess, the kind of the, what we call, on balance sheet loan growth or organic loan growth, the non-PPP stuff, what are you thinking that’s going to look like this year?

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David Morris, RBB Bancorp – Executive VP & CFO [28]

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Well, right now, we will probably — we did about $52 million last quarter in CRE. And we’ll probably be able to do about the same or between that and $70 million, okay, is what we’re looking at.

On mortgage, we see our production probably going down to about $25 million to $30 million a month at the most right now, and that may regain after the crisis subsides. Okay?

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Timothy Coffey, Janney Montgomery Scott LLC, Research Division – Director of Banks and Thrifts [29]

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Okay. And then did you have — what kind of fair value marks did you take on the acquired loan portfolio for this quarter? Or how should we think about kind of what the discount on those loans are?

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David Morris, RBB Bancorp – Executive VP & CFO [30]

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Well, the number one, the loans are pretty short term. That’s why the loans mature within two years. So our marks were in the range of 1% to 1.2%. We — actually, we increased the probability of default and so forth on almost all of them to get to that point because the standard model was a little bit less than that.

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Timothy Coffey, Janney Montgomery Scott LLC, Research Division – Director of Banks and Thrifts [31]

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Okay. Okay, great. And then just kind of looking at the inputs to expenses this next quarter. You mentioned that you’ll possibly have loan collection fees go up, but are you — did you also run overtime to work through the PPP loans?

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David Morris, RBB Bancorp – Executive VP & CFO [32]

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Yes, we had some overtime for our PPP, but it’s not going to be huge because most of the people that were working on them are officers, about $21,000 in overtime.

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Operator [33]

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Our next question is actually a follow-up question, Kelly Motta with KBW.

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Kelly Motta, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [34]

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Sorry, David, do you — I have a follow-up question on expenses, but I don’t know if I cut you off.

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David Morris, RBB Bancorp – Executive VP & CFO [35]

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Go ahead with your follow-up question.

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Kelly Motta, Keefe, Bruyette, & Woods, Inc., Research Division – Associate [36]

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Okay. I was just hoping you could remind us about the cost saves you expect to get from PGB and how we should be thinking for the trajectory of realizing that throughout the year? Should most of that come on now that you completed the conversion late in the quarter here?

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David Morris, RBB Bancorp – Executive VP & CFO [37]

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Okay. Our system expenses should begin to show in the second quarter. And manpower expenses should begin to show in the second and third quarter in PGB, okay? And then any reduction in branches, they only have three branches, but they do have two of them that they own, but they do have one that’s within a block of each other. So that should be pretty quickly. That should be maybe next year, okay?

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Operator [38]

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And I’m not showing any further questions at this time. I’d like to turn the call back over to Mr. Thian.

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Alan Thian, RBB Bancorp – Chairman, President & CEO [39]

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Once again, thank you all for joining us today. We invite you to join our upcoming annual shareholders meeting that will be held by webcast and over the telephone on Wednesday, May 13, at 11:00 in the morning, Pacific Time. Have a nice day.

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Operator [40]

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Ladies and gentlemen, this concludes today’s presentation. You may now disconnect, and have a wonderful day.