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spk03: Good day, everyone, and welcome to the RBB Bancorp conference call for the third quarter 2021. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 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 like to turn the conference over to Catherine Way.
spk00: Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the third quarter of 2021. With me today from management are President and CEO Alan Tian, EVP and Chief Financial Officer David Morris, EVP and Chief Credit Officer Jeffrey Yeh, EVP and Chief Strategy Officer Simon Peng, EVP and Chief Lending Officer Tammy Fung. 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. 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 risk and uncertainties and other factors relating to RBB 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. If any of these uncertainties materialize or any of these assumptions prove incorrect, RBV Bancorp's results could differ materially from its expectations as set forth in the site statement. The company assumes no obligation to update such forward-looking statements unless required. Now, I'd like to turn the call over to Alan. Alan?
spk01: Thank you, Catherine. Good day, everyone, and thank you for joining us today. We are pleased to report another quarter of record earnings, strong loan growth, and improving performance ratios. Loan growth during the third quarter was driven by nationwide originations of construction and commercial real estate loans. We were pleased with the geographic diversity of loan originations and believe it validates 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. Continued focus on our cost of deposits further reduced our interest expense, resulting in record net interest income during the quarter. Net interest income benefited from a $1.8 million CDFI grant that was awarded to the bank to help address the economic 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 developments. Our net interest margin remained stable from the previous quarter, but was down modestly from a year prior due to excess liquidities. Despite the excess liquidities, ROA and ROE increased from last quarter and last year when they 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 shareholders' 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?
spk09: 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 80.3% 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 CDFI grant that increased net income by $1.3 million and EPS by approximately 7 cents. Our normalized net income benefited from several factors due to an increase in earning assets and stable yields. Net interest income increased $1.5 million from the prior quarter. Interest expense decreased by $382,000 from the prior quarter due to continued management of cost of our time deposits, non-interest income increased by about $1.4 million, as the CDFI grant I mentioned made up for lower loan sales gains. Net interest expense were down modestly 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 3.38% for the third quarter, an increase of five basis points from the second quarter, down 21 basis points from a year prior. ROA and ROTCE rebounded in the third quarter to 1.54% and 16.17% respectively. Adjusting for the impact of the CDFI grant, ROA and ROTCE would have been 1.51% and 15.82% respectively, which is still a healthy increase from last quarter's results. Net loans held for investments totaled $2.8 billion on September 30th, which was a $130 million increase from last quarter. We had a very strong quarter of growth in commercial real estate, construction, and other loans, while SRF mortgages and CNIs each decreased about $10 million. The growth in other loans is the result of relationships with a leading provider of point-of-sale financing solutions for the home improvement industry. We expect to continue to add approximately $5 million of these loans per month until mid-next year. Our 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 was stable from the last quarter at 3.97%, 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, but a $115 million decrease at the end of the quarter in comparison with the end of last quarter. Our average cost of interest-bearing deposits for the quarter was 0.51%, which was down eight basis points from the prior quarter and 63 basis points from the prior year. Non-performing assets decreased by $5 million to $14.5 million in the second quarter, decreasing 12 basis points to 0.38% of total assets. The sharp decline in non-performing assets was due to payoffs, the return to non-accrual status of one large mortgage, and the receipt of pre-pandemic SBA guarantees. As of October 15th, We had one loan in COVID-19 deferment totaling about $241,000. We took a provision for credit losses of $1.2 million in the third quarter, primarily attributable to loan growth. Our capital levels remain strong with all of our capital ratios well above regulatory minimums. With that, we are happy to take your questions. Operator, please open up the call.
spk03: Certainly. At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and 1 if you would like to ask a question. And we will take our first question from Nick Cacciarilli with Piper Sandler. Your line is now active.
spk08: 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 still feel like you'll be in the 9 to 10% growth range for the full year 21? And is it likely that commercial continues to be the growth driver?
spk09: I think. I think our our loan growth will be probably closer to 8% this year. OK, and. but we hope to continue to grow in the 8% to 9% on an ongoing basis.
spk08: Is commercial going to continue to be the growth driver, or should that tilt a little bit more towards the simple thing?
spk09: I think commercial is going to be more of a driver than real estate is, I mean mortgages.
spk08: Okay, that's helpful. On the deposit front, some contraction after generating very strong non-interest-bearing growth in the first half of the year. What was driving those declines from the end of June?
spk09: It's a couple of our customers with just normal transactional volume. In fact, their volumes are back up now.
spk08: Very nice. 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.
spk09: 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 in SBA. Mortgage will be probably about the same.
spk08: Great, and then lastly, I see the branch deal is slated to close in short order. Could you provide an update on M&A opportunities and your thoughts on a potential transaction?
spk09: Okay, we are constantly looking at organizations. We have a couple that we're looking at today. Again, we're looking to possibly expand into Northern California, Houston, or the Seattle region. Okay, those are our priorities.
spk08: Thank you for taking my questions.
spk03: We will take our next question from Tim Coffey with Danny. Your line is open.
spk07: Great. Morning, everybody. David, can you repeat what you said about the point of sale and the home improvement loans and the other loan line item?
spk09: Okay. So we have an agreement with a an organization that produces home improvement loans. And we are committed to put on $5 million a month through, I think, May of next year. So that's what we are doing.
spk07: Okay. What are the yields on those?
spk09: The yields are about 4.75 after you take all the costs out of it associated with it. It's to help use our excess liquidity. Okay. 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 that.
spk07: Okay. Are you finding, I mean, just looking at the kind of loan growth that you saw in the quarter and the buckets it was in, especially commercial real estate, is this a sign that your clients are starting to get off the bench and put some money to work?
spk09: Can you repeat the question, Tim?
spk07: 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.
spk09: I think we're seeing continued growth. continued interest in commercial real estate lending in the areas where we are located. I mean, I think the volume is still there.
spk01: Well, David is right that we see a strong demand in quite a few sectors. We see actually the strongest sectors right now is industrial properties. not only the price of the industrial property gets so high, but the demand on industrial property is tremendous that push the price even higher. Other than that, we do not see, on commercial real estate, we do not really see any increases on shopping center and commercial, but we do see a strong demand on construction loan side and subsequently breaching into get a hard financing on multifamily area. It could be a total 100% apartments, or we see a lot of mixed use of about less than 10% on the first floor as retail, and then on the upper floors, it would be all residential units. It could be apartments, or it could be condominiums. At the same time, the other area that we see a strong demand would be on loan demand, which actually would be on mobile home parks, as well as RV parks. And at the same time, even on the hotel side, we see loan growth on demand. coming back as well. But however, on the hotel and motel sites, we underwritten very carefully. But in general, we really see a strong demand on almost every sectors of commercial real estate except shopping center and commercial office.
spk07: Okay, great. Thanks, Alan. That's very helpful. And then, has your outlook on the capital returns or allocation changed at all, given kind of the growth and outlook that you're seeing right now?
spk09: No. I mean, it hasn't changed. Okay? Okay. Yes.
spk07: All right. Great. Thank you. Those are my questions.
spk03: We will take our next question from Kelly Moti with KBW. Your line is open.
spk04: Hey, Alan and David. Good morning. Thanks for taking the question. I apologize. I dropped off accidentally of the call. You may have covered this, but I was hoping you could provide some color on your Hawaii branch expansion and kind of the opportunities you see in that market as well as whether or not that's an area you would potentially feel like adding in once you get a location established there.
spk09: Okay, Kelly, we're very excited about Hawaii because we think we can bring especially our mortgage and our CRE products, our bridge products to the islands there. So we're very happy with that. We don't think that we'll have huge growth in the first year, but I think Starting the second year after we get everything implemented and placed in there, you'll begin to see significant growth there.
spk01: Again, we are very excited, but this is only one branch in Hawaii. So on the deposit side, we would really try to understand the market. And in the next year, we put a very little growth on our deposits. Besides understanding the market, we try to assemble a good team of our retail managers with our staff to be sure that they are well-trained, understand our system, understand our product. So, first of all, I believe the first six months after the escrow close will be more a get-to-know RPB on both loans and deposit sides. On the loan side, actually from time to time, we do have inquiries on loans on either mortgage as well as commercial. So we believe that with a branch in Hawaii, it would really help us to generate loans from Hawaii. So we are very optimistic about acquiring that branch.
spk04: Got it. And I apologize if I missed it, but turning to expenses, They're very well controlled this quarter. I was wondering if you had provided any update or color on how you're thinking about the push-pull of expenses next quarter and into next year.
spk09: Okay. Again, typically our expenses increase at the beginning of the year because we have salary increases and so forth like that. every year. I think our expenses will be a little bit higher than they were this quarter. Let's say rebounding back to where we were in the second quarter of about $14.7 million, maybe $14.8 million. Okay? 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.
spk04: Got it. Thank you. Thank you, David.
spk03: We'll take our next question from Andrew Terrell with Stevens. Your line is now open.
spk02: Hey, good morning. Hey, Andrew. Good morning. Yeah, 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 expectation still to kind of continue with the repurchase moving forward?
spk09: We did buy back some shares in the quarter. I don't have the number in front of me, but it wasn't that large because of the market price we had sitting out there. We will continue to buy back shares. later in the quarter this year, but not a significant, not a huge number. Okay, Andrew?
spk02: Okay.
spk09: When I say a huge number, it won't be over 100,000.
spk02: Okay. Perfect. 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. If I look at the non-interest-bearing balances point-to-point, There was a decline of, I think, $115 million this quarter. But did I hear correctly that the expectation was that some of this would come back to the bank?
spk09: Yes. In fact, it already has.
spk02: Okay. Perfect. The rest of my questions were asked and answered. I appreciate it.
spk03: And once again, if you would like to ask a question, it is start and 1 on your touchtone phone. And we will take our next question from Ben Gerwinger. with Hovey Group.
spk06: Hey, good morning, guys.
spk05: Good morning. I was wondering if you guys could just kind of take a 10,000-foot view and 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. And then you also have the addition of the Hawaii branch and the construction purchasing of loans. I'm curious on why you think there's 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, and your evaluation is improving. I'm just kind of curious on, well, one, the desire to do it, and if there's anything you're 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 whole bank acquisition only?
spk09: Well, I'll start with it. It doesn't 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 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. Now, we could open de novo in those places. We find out that it's much more difficult to open de novo in a separate state or a distant geographic region. So that's the impetus about it. We want to expand our market area and so forth. And the third thing is we tend to really return, get a pretty good return on the investments that we have done in different locations.
spk01: Our strategy Actually, since day one, when we opened our bank in 2008, and it further reinforced that at our IPO, is that our strategy is to serve Asian American communities across the United States. So we believe that is something that we do best, and we think that this is something that we'll continue to do. So we are definitely looking to acquire a whole bank situation if there is an opportunity. The reason of Hawaii that we acquired only a branch is because just at the time that the seller would like to unload, for certain reason would like to unload one of the areas they believe is too remote to them. But however, to us, we see that as an opportunity for us to expand to a new market which we have on the long side we have from time to time has inquiries about Hawaii many times so we believe that would be a good start for us to just establish our foothold. The other area like David said we would prefer to acquire a whole bank if this is within our niche market or it could be a niche bank or it could be an A mainstream bank, however, with most of their branches in the niche market area. Again, besides what we keep talking about, Northern California, we talk about Seattle, we talk about Houston. In fact, there's another area that we would be very interested looking into would be Phoenix of Arizona. Lately, there's a lot of foreign investment opportunities. going into the Phoenix, we see that Phoenix is a real upcoming market. So that is another market that we may buy a branch, or we may just buy a branch, or hopefully, if not, then we have to go de novo and set up a branch. So we will go to those major cities where we see a large population of Asian Americans.
spk09: But then I want to make sure you realize that ever since the start of this bank, Organic originations have been very important to us also, and we continue to believe that this bank can grow between 8% and 10% every year organically.
spk06: Okay? Yeah, that is a really helpful caller.
spk05: I appreciate that insight. And since you did say, I mean, also reiterated that, Growth through acquisition is also an important part. Maybe I'm digging a little too deep here, but I was wondering if you could kind of give a little clarity on potentially why we haven't seen something recently given the California disruption. Is it selling prices are too high relative to expectations or maybe a cultural fit that wasn't appropriate? Is there anything that kind of kept you on the sidelines? Or has it just been that?
spk09: We're not really on the sidelines. I wouldn't categorize it as being on the sidelines. We just haven't found the right fit yet. We have turned down deals where culturally we didn't think it was fit or pricing wasn't right. We couldn't get to a price that we thought was right. So we have turned down some deals. you know, or I shouldn't say turned down. We never got to the finish line, okay, on deals. So I wouldn't say that we're sitting on the sidelines. We just haven't gotten somebody that fits yet, okay?
spk01: Yes, we're looking at deals that have immediate accretion, as well as we believe during the long run, it's not just cost savings. During the long run, besides cost savings, that there's potential for us to expand into the existing market or the other markets that either on different product lines or different customer base. But however, we believe we are still continue to stay on most of this area where we see a lot of growth in population and in our niche market.
spk06: Gotcha. That's really helpful commentary. I appreciate it, guys, and congrats on a solid quarter. Okay, thank you.
spk03: 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.
spk01: Once again, thank you all for joining us today. We look forward to speaking to many of you in the coming days and weeks. Have a nice day.
spk09: I got a call from Nick.
spk03: This does conclude today's RBB Bancorp conference call for the third quarter 2021. You may disconnect your line at any time and have a wonderful day.
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