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spk07: Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the first quarter 2022. 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. It is now my pleasure to turn the program over to Ms. Catherine Way. Ma'am, please begin.
spk00: Thank you. Good day everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the first quarter of 2022. With me today for management is Interim President and CEO and CFO David Morris, EVP and Chief Credit Officer Jeffrey Yeh, EVP and Chief Strategy Officer Simon Pang, and EVP and Chief Risk Officer Vincent Liu. 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 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, RBB Baincourt's 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?
spk01: Thank you, Catherine. Good day, everyone, and thank you for joining us today. With me today, I have our Chairman of the Board, Dr. James Kalb, and Board Member Christina Kalb. Royal Business Bank had a great first quarter start to the year, as loans held for investments topped $3 billion for the first time. Average non-interest-bearing deposits increased by 10%, and net interest income grew. Importantly, our results demonstrate the strength of our business we have built and our ability to grow profits in a variety of economic environments. I know that recent personnel announcements have raised questions, but I feel confident that our strategy will continue to be an effective driver of shareholder value. I appreciate the support the Board has given me and look forward to working with the rest of the RBB team to drive the bank forward. Turning to the financial results, net income declined by 6.9% from last quarter's record performance. but increased by 17.4% from the years earlier to $14.6 million, or 74 cents per diluted share in the first quarter. Net income benefited from several factors. A $167.7 million increase in average earning assets and improving yield drove a $1.3 million increase in net interest income from the prior quarter. Net interest income also benefited from a decline in interest expense due to a decline in average interest-bearing liabilities and a decline in deposit costs. First quarter non-interest income decreased by $212,000 from the previous quarters primarily due to lower Fannie Mae loan sales. Non-interest expense increased from last quarter due to a $2.5 million increase in compensation expense, a $420,000 increase in data processing, and a $400,000 increase in director's fees. The increase in compensation and director's fees was due to converting executive bonuses from 100% cash to a combination of cash and RSUs. This resulted in a reversal in bonus expenses both for the executives, and for directors in the fourth quarter. The increase in data processing was due to a number of special projects and reclassification of mortgage systems expenses. These first quarter non-interest expense increases were offset by a $680,000 decrease in legal and professional expenses. Net interest margin was 3.49%, percent for the first quarter, an increase of six basis points from the fourth quarter and a decrease of 24 basis points from a year prior. Annualized ROA and ROTCE decreased in the first quarter to 1.39 percent and 14.91 percent. Net loans held for investments exceeded $3 billion as of March 31. which was a $75 million increase from last quarter. We had a good growth in CNI, construction, and mortgage, while SBA, commercial real estate, decreased from the prior quarter. On the positive side, our non-QM mortgage production, which is our most profitable mortgage product, is beginning to show signs of life. Our yield on average earning assets for the quarter increased 3%. basis points to 4%, but was down 49 basis points from the prior year. As with the NIM, this year-over-year decrease was due entirely to lower returns on our excess capital. With respect to funding, commercial customer activity drove $124 million of growth in average non-interest-bearing deposits over the quarter. Our average cost of interest-bearing deposits for the quarter was 0.44%, which was down three basis points from the prior quarter and 29 basis points from the prior year. Non-performing assets were stable at $21 million at the end of the first quarter, but declined by about $7 million in early April as three non-performing loans were fully repaid. As of April 15th, we had no loans and COVID-19 deferment. We took a provision for credit loss of $366,000 in the first 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.
spk07: 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 pressing the pound key. Once again, that is star and one to ask a question, and we'll pause for a moment to allow questions to queue. Our first question will come from Kelly Moda with KBW.
spk03: Hi, good morning. Thanks for the question. Loan growth was quite good, and I heard you mention on the call that your non-QM product is showing signs of life again. What's the outlook for growth as we look ahead? And, you know, with what's going on with rates, does that temper at all what you're expecting for the non-QM going forward with what's going on with Resi Mortgage?
spk01: Well, what's going on with our mortgage department is, I guess, a switch from our Fannie Mae production to the non-QM. As rates go up, it seems like our product does much better in that environment than a Fannie Mae product does. So I think you're going to see our production increase in non-QM. We have not made any decision yet if we're going to hold those on our books or if we're going to sell them.
spk08: Or sell them.
spk03: Okay. Okay, that's helpful. And then also with the prospect for, you know, the several rate hikes now going forward, how do you expect the balance sheet to perform and NIM expansion in a rising rate environment? Do you have kind of a rule of thumb for every 25 basis points of hikes of what we should see in terms of NII or NIM?
spk01: You would probably only see just three or five basis points increase. You gotta remember our cash, most of our investments will reprice quickly because we're in very short-term items. So they'll reprice or some of them already have repriced very quickly. But the CDs, only about $350 million will reprice, and we are holding the CD line pretty strong right now. So we haven't moved our pricing at all yet. I expect with this 50 basis point increase, or we're thinking it's 50 basis point increase in May, we will probably have to begin adjusting our our CD pricing and our money market pricing. As far as our commercial loans are concerned, all of our commercial loans that are prime driven will automatically move up. So that's about 35 to 40% of our portfolio.
spk03: Okay, thank you, David. And then with With Alan's departure, you're now in the interim CEO role as well as still CFO. Can you share any thoughts of you and the board in terms of where you're looking to replace? Have you started a CEO search yet? Are you looking to fill more on that? The CFO side just interested in kind of the go forward outlook for the executive management team.
spk01: Okay, right now we just finished the announcement about Alan and so forth. So now that that is done, the board is now going to concentrate on finding a replacement for Alan over the next few months.
spk06: Okay, thanks, David. I will step back for the time being. Appreciate it. Thank you. Our next question will come from Andrew Carroll with Stevens.
spk04: Hi, Andrew. Hey, good morning. Maybe just dovetailing off of the last point, I know you mentioned the board was going to be concentrating on finding a replacement for Alan, but where do we stand in terms of replacement of chief lending officer?
spk01: We decided not to hire a chief lending officer. That position was created last year, and we don't believe we need it, and we will be replacing that with two or three lenders.
spk04: Okay. And then outside of kind of what has been announced, have you seen any other attrition on the lending front at the bank?
spk01: We haven't really seen... Of course, we have loans that are maturing, and whether or not we get those loans, it depends on the competitiveness of the bank. And we are being extremely competitive right now. We are... We will not... We are going to defend our book to the best of our ability. Having said that, Most of our loans are two to five years in maturity, and most of our loans have pre-payment penalties. So if they do leave, there will be some type of incremental income related to that.
spk08: Okay.
spk04: And then David or maybe Dr. Cowell would love to hear just kind of thoughts on I realize you're kind of engaged in a search process for a new CEO, but wondering how you're thinking about potentially maybe other strategic alternatives, including kind of a partnership with another institution that could maybe kind of solve that problem as well.
spk01: Okay. I'll answer that, too. You know, of course, we always are looking at strategic alternatives. But our stock price right now does not reflect the value of the institution.
spk04: Okay, fair enough. And then if I could just sneak one more in, David, on the SBA gain on sale this quarter. Just looking at the reported income versus what was sold, it looks like the gain-on-sale margin came down from about 7.9% last quarter to 5.6% this quarter, so about a 240 basis point swing. I was hoping you could just discuss what the driver behind that gain-on-sale margin compression was within SBA specifically, and then the outlook kind of going forward. Is 5.6% kind of the level for new SBA gain-on-sale margins, or how are you thinking about it?
spk01: That's because of the rate.
spk08: that was offered on those loans, okay?
spk01: So the SBA margin is all based upon the length of the loan and the rate, the prime plus whatever. So they were a little bit lower yielding.
spk04: Were these all 7a?
spk01: Yes, they were.
spk08: Okay, I'll step back for now, thanks.
spk06: All right, thank you. Our next question will come from Nick Cucurell with Piper Sandler.
spk08: Good day, everyone. How are you?
spk01: I'm fine. How about yourself?
spk05: Good, thank you. Just to piggyback on the non-QM commentary, can you update us on your full-year organic loan growth targets?
spk01: I think our full-year organic loan growth is going to be between 5% and 6% instead of 8% and 10%. Okay. Mainly because... mainly because we have a couple of commercial lenders that are not here anymore, and we have one SBA. Our SBA team leader left the bank also, but we have rehired for the SBA team lead already. Okay.
spk05: Okay, and then comparing the end of period versus average cash balances, it seems to suggest a sizable move up in the NIM, at least in the near term. At this point in the quarter, has the excess liquidity position continued to decline? And can you help us think about your expectation for the NIM more generally?
spk01: Our excess liquidity is down, okay, right at the moment. And in general, as I've said over the last year, that we would begin losing deposits. And we have begun to lose our deposits from on our non-interest-bearing DDA, as expected, in the late third quarter, I mean, late March, and continuing on through April, as we predicted. So I don't expect our NIM to be increasing as much as people think it should be, I mean, will be. I would see, you know, five to ten basis points a quarter at the most, okay?
spk05: Okay. And then just to expand on the SBA discussion, can you update us on your expectations for the gain on sale business in total? Should we expect consistency from this quarter's level?
spk01: I think you'll see only – I don't think you'll see any SBA loan sales this quarter and only Fannie Mae loan sales, which are also declining because of the market. So I don't see us being at our $2 million target per quarter. until maybe the third or fourth quarter of this year.
spk08: Thank you for taking my questions. Okay.
spk06: All right, thank you. Our next question will come from Ben Gerlinger with the Hope Group.
spk08: Hey, good morning. Good morning.
spk02: I was curious if we could touch base a little bit on the capital. I know growth is slowing a little bit. As you said, your price doesn't reflect. what you think the company is worth and the stocks. Does that mean share repurchases are going to be a bigger priority, or is there something that prevents you with the pending deal?
spk01: No. In fact, the board has just reauthorized another 500,000 shares in our stock repurchase plan. What's restricting us is the volume. There are some days that we only have 2,000 shares traded, 5,000 shares traded. So it takes quite a bit of time to go through the 500,000 shares. Okay? It'll probably take the rest of this year to do that.
spk02: Yeah, no, the liquidity, I'm just trying to totally understand that. And then when you think about expenses, I know you said the chief lending officer is now kind of being converted to three roles. I'm assuming you mean that that's the cost or the salary associated with that. It's kind of being spaced over three people. But when you think about expenses going forward, you kind of have a full-year target, just kind of looking at the growth historically. Expenses have been very well managed because we potentially see expenses lower on a run rate.
spk01: Again, I think, as always, our first quarter is our highest quarter because of bonuses and certain other expenses that we pay. I believe we will be, you'll see, over the next two quarters, reductions from this $16 million level down to maybe a $15.5 million. to a $15.3 million level.
spk08: Okay. That's helpful. I appreciate it. All right.
spk06: Thank you. Again, to ask a question, please press star 1.
spk07: And our next question will come from Nick Couturel with Piper Sandler.
spk05: Just a quick follow-up. Are you still expecting the gateway transaction to close in the second quarter?
spk01: No. We're expecting it to be closed in the second half of the year.
spk08: Thank you very much. Okay.
spk06: All right. Thank you. It appears that we have no further questions in the queue at this time.
spk08: Okay. Thank you to everybody.
spk06: Thank you, ladies and gentlemen. This does conclude today's program. We thank you for your participation, and you may disconnect at any time.
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