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RBB Bancorp (RBB 2.41%)
Q2Â 2019 Earnings Call
Jul 23, 2019, 2:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon and welcome to the RBB Bancorp's Second Quarter 2019 Earnings Conference Call. My name is Ashley and I will be your operator today. At this time, all participants are in a listen-only mode. This call is being recorded and will be available for replay through July 30th, 2019, starting this afternoon, approximately one hour after the completion of this call. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)
I would now like to turn the call over to Mr. Larry Clark, Investor Relations for the Company. Please go ahead, Mr. Clark.
Larry Clark -- Investor Relations
Thank you, Ashley. Good afternoon, everybody, and thank you for joining us to discuss RBB Bancorp's financial results for the second quarter ended June 30, 2019. With me today from management, our Chairman and President, CEO, Alan Thian; EVP, Chief Financial Officer, David Morris; EVP and Chief Credit Officer, Jeffrey Yeh; EVP and Chief Branch Administrator, Wilson Mach; EVP and Chief Risk Officer, Vincent Liu; and EVP and Director of Mortgage Lending, Larsen Lee.
Management will provide a brief summary of the results and then we'll open the call to your questions. During the course of 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 required documents that Company has filed with the SEC. If any of these uncertainties materialize or these any of these assumptions prove incorrect, RBB Bancorp's results could differ materially from its expectations set forth in these statements. The Company assumes no obligation to update such forward-looking statements unless required by law.
At this time, I'd like to turn the call over to Alan Thian. Alan?
Alan Thian -- Chairman, President and Chief Executive Officer
Thank you, Larry. Good afternoon, everyone, and thank you for joining us today. I'm going to begin with an overview of our second quarter performance, and then David will provide some additional details on our financial results.
We are pleased with our operating performance for the second quarter. We made good progress with our balance sheet management. selling $175 million in residential mortgage loans and reducing our wholesale funding by $235 million. Our focus on increasing core deposits helped drive our deposit growth and we continued to experience low credit costs and well-managed expenses. These factors all contributed to another solid quarter of net income. Loans held for investment was down slightly from the prior quarters as we also sold some of these loans.
Our near-term goal is to grow our loans held for investment. Therefore, for the third quarter, we plan to bring all of the loans that we originate on to our balance sheet and hold them. Therefore, we don't plan on selling any loans this quarter. However, we expect to resume selling mortgage loans in the fourth quarter and depending on our production levels, we are targeting between $150 million and $225 million at that time.
Turing to deposits, we grew total deposits by $51 million, driven by a very strong increase in our retail time deposits. Once again, partly due to customer rotating out of low interest non-maturity deposits into higher yield CDs. However, we also reduced our brokered CDs by $48 million. Our integration of First American International is almost finished. We have optimized its operation footprint closing two non-banking offices and one branch and have opened one new branch. We have also renegotiated new contract with most of our system vendors, and we are also making good progress on introducing offices, deposits and commercial lending products to the newer branch network and expect future growth from that group.
The last major task is to bring both the New York division and our West Coast operations on to one common mortgage loan origination platform, which we plan to implement this quarter.
In summary, our balance sheet repositioning and the First American integration is nearly complete, and now we are looking forward to resuming growth at a more normalized rate. In addition to organic growth opportunities, we plan to continue to expand our franchise through both acquisitions and branch openings. We also continue to invest in our business in order to create more opportunities to generate higher earnings with a view of creating additional long-term value for our shareholders.
And now, turning over to David for more detail on our second quarter results. David?
David Morris -- Executive Vice President and Chief Financial Officer
Thank you, Alan. I'll start with a discussion about our loan activity. Our total loans were down $28 million at quarter end due to loan sales and pay-offs exceeding new production. Our average total loan balance was also down by just over $100 million during the quarter, mostly driven by $95 million reduction in loans held for sale.
Total commercial loan production for the second quarter was consistent when compared to the first quarter as commercial lending is still ramping up across our branch network, residential mortgage loan production was lower due to the rebalancing of the balance sheet, which is now complete. We expect origination volume to pickup in the second half of the year, although there will likely be a ramp up in the third quarter as we train our lending personnel on the new mortgage origination platform. While we expect to sell the majority of our residential production in the fourth quarter, loan balances should begin to grow again as we retain all of our residential and commercial production in the third quarter.
We continue to see healthy demands in the secondary market for our loans. During the quarter, we sold approximately 10% of our mortgages to other banks, 39% to Fannie Mae and the remaining 51% to institutional investors.
Now, turning to deposits. Total deposits increased by $51 million in the quarter. But as Alan mentioned, we continue to see a rotation out of lower interest non-maturity deposits into higher yielding CDs as customers continue to seek to lock in higher rates. We also let a portion of our higher rate brokered CDs run off the balance sheet as we had less of a need for wholesale funding during -- funding due to our strong loan sales.
The overall shift in our deposit mix, which included a higher percent of time deposits, resulted in a 12 basis point increase in the cost of our average interest bearing liabilities when compared with prior quarters, 21 basis points for the interest bearing deposits. Going forward, we expect the increase in our cost of deposits to moderate as interest rates are expected to decline and the gap between the rates that we pay on new cities and the rates we paid on maturing CDs continued to narrow.
Moving on to the net interest margin. On a reported basis, NIM decreased by 20 basis points from the previous quarter to 3.64%. Excluding purchase discount accretion, our core NIM declined 13 basis points during the quarter. The decrease was primarily due to higher cost of funds combined with a slightly lower yield, excluding accretion that we are receiving on our loan.
Going forward, we expect that our loan yields will increase as commercial originations should pick up and they generate higher starting yields than our residential loans. Given that we anticipate a deceleration in the increase in our cost of funds, we should see our net interest margin stabilize in the third quarter and then increase in the fourth.
Turning to non-interest income, we generate higher gain on sale income due to the higher loan sales, and we also booked higher fee income due to receive in our annual CDFI BEA award and cyclical safe deposit box income. For the third quarter, we expect a decline in non-interest income due to no expected loan sales. However, we anticipate non-interest income in the fourth quarter to be equivalent to approximately two quarters worth and then moving to historical levels in the first quarter of 2020 when we resume a more normalized schedule of loan sales.
Our total non-interest expense was down $426,000 from the first quarter, the decrease was mainly due to lower salaries and employee benefits, partially offset by higher occupancy and equipment expenses, legal and professional expenses and data processing costs. Some other occupancy expense increase was the result of prior periods property taxes in New York City and the rest was due to our recently opened new branches.
We will see some additional cost savings from our First American integration rolls through the numbers in the third quarter as we renegotiate in major systems contract with a vendor in the second quarter. We expect that our non-interest expense will decline slightly for the third quarter as we more fully realize our cost savings from First American, but this was partially offset by further investments that we are making to grow our business. The efficiency ratio for the second quarter was 50%, down slightly from the first quarter. Going forward, we expect to maintain our efficiency ratio at or below 50%.
Shifting to income taxes or effective tax rate for the quarter was 30.3%. This includes the impact of a deduction for stock option exercise in the amount of $52,000. We anticipate our effective tax rate of between 20% and 30% for 2019.
Now, turning to our asset quality, which remains strong. Our non-performing loans increased by $4 million during the quarter as we placed three loans on non-accrual status at the end of the quarter, including a $3 million SBA loan secured by a hotel. 75% of the face amount of that loan is guaranteed and we believe that the loan is well collateralized. So we don't anticipate any impairment to be taken.
Our credit losses remain low. During the quarter, we had one charge-off in the amount of $32,000 on a commercial and industrial loan. Provision for loan losses was $357,000 for the second quarter, reflecting our lower average loan balances during the quarter. This brought our allowance for loan losses to 0.89% and total loans held for investment of 3 basis points from the end of the prior quarter.
We also saw a decline in loans active during the quarter and we are not seeing any asset quality deterioration. We continue to maintain a very strong credit quality culture and we remain vigilant on asset quality. With respect to capital, our capital levels remains strong. Our tangible common equity to tangible assets increased to 12.01% at the end of June, up from 10.96% at the end of March.
And we believe that we have sufficient equity capital to support forecast loan growth. However, it is important to reiterate that we are also mindful of where our stock price is trading and that -- and the need to manage capital efficiently and to deploy it in a manner that enhances profitability. To that end, in June, our Board approved the stock repurchase program enabling us to repurchase up to 1 million shares of our common stock or approximately 5% of our outstanding shares. We intend to mainly utilize this program to purchase the additional shares that get issued as a result of our stock option awards, theyby minimizing the share count creep due to such awards. However, if at times we find our share price particularly compelling, we may also choose to opportunistically purchase shares. To date, we haven't purchased any shares out of the program.
And one final note, we recently declared a quarterly dividend of $0.10 per share, which translates into a $0.20 payout ratio. We are committed to delivering shareholder value and returning a portion of our earnings to shareholders in the form of a dividend, it's one aspect of that strategy.
With that, we will happily take your questions. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question comes from the line of Aaron Deer with Sandler O'Neill. Your line is now open.
Aaron Deer -- Sandler O'Neill -- Analyst
Hi. Good morning, everyone.
Alan Thian -- Chairman, President and Chief Executive Officer
Good morning.
David Morris -- Executive Vice President and Chief Financial Officer
Hi, good afternoon.
Aaron Deer -- Sandler O'Neill -- Analyst
I appreciate your comments. With respect to Alan, your comment regarding getting back to a more normalized growth, I'd like to explore a little bit what you mean by that. If we ended the June 30th quarter at about $2.3 billion in total loans, given the plan to sales for the fourth quarter, where would you expect total loans to end of the year, the total balances?
David Morris -- Executive Vice President and Chief Financial Officer
Okay. We would expect the balances to be closer to the -- between the $2.4 billion and $2.45 billion
Aaron Deer -- Sandler O'Neill -- Analyst
Okay.
David Morris -- Executive Vice President and Chief Financial Officer
We want to get back to a 10% to 12% growth of our balance sheet. And as you can see in the second quarter, we accomplished or accomplished that with deposits. And if you take out the wholesale deposits, our retail side actually increased quite a bit. Our total deposits increased by like 9.4%, I believe. But if you take out on an annualized basis, if you take out the repayment of the wholesale deposits, they increased significantly more in the 16% range, I believe.
Aaron Deer -- Sandler O'Neill -- Analyst
Sure. Okay. And then, David, on the expenses, you gave a little bit of commentary regarding the efficiency ratio and such, sort of just given some of the cost saves that are yet to be had, as well as the kind of variability that you've had in the compensation line over the last couple of quarters? Maybe give us your expectation of what the total non-interest expense number in terms of dollar amount might be over the next quarter too.
David Morris -- Executive Vice President and Chief Financial Officer
Okay. So I believe it was 14.9%, let me double check my number.
Aaron Deer -- Sandler O'Neill -- Analyst
That sounds right.
David Morris -- Executive Vice President and Chief Financial Officer
14.9%. I think we are going to decrease it down to about 14.8% for next quarter, and then 14.7% the quarter after that.
Aaron Deer -- Sandler O'Neill -- Analyst
Okay, that's great. And then, one last question. You also gave some thoughts regarding your very strong capital levels, and doesn't sound like you're going to necessarily be real active with share repurchases, most of the stock order to take a hit. I guess, it also sounds like that capital might also be used for M&A. So I'm just wondering what -- are there continued conversations on the M&A front and given where the stock trades today and as well as other bank stocks, I guess relative to, what are your expectations for getting a deal done? And are there any markets in particular that are attractive? I know you've talked about San Francisco in the past, just wondering what might be next on the target list?
David Morris -- Executive Vice President and Chief Financial Officer
Well, again, when we mentioned that we get into normalize of our business, definitely that includes continuing looking at M&A. And again, at this point, I guess, there are certain new area that we are looking at, San Francisco is always on our target. The other area that we are aggressively looking at includes Seattle, includes Texas and includes Chicago. And I would say that we -- hopefully we can identify a target probably within the next six months.
To answer your -- the other question is, we do not think our next acquisition will be the size of the one we just did. We think it'll be a much smaller institution. We're looking at institutions more in the $400 million range right at the moment and, in the immediate future, most of these would be cash deals.
Aaron Deer -- Sandler O'Neill -- Analyst
Okay, that's great. I appreciate the color. Thank you. Thank you.
Alan Thian -- Chairman, President and Chief Executive Officer
Thank you.
Operator
Thank you. And our next question comes from the line of Tyler Stafford with Stephens. Your line is now open.
Tyler Stafford -- Stephens -- Analyst
Hey. Good afternoon, guys, and thanks for taking the questions.
Alan Thian -- Chairman, President and Chief Executive Officer
Hey, Tyler.
Tyler Stafford -- Stephens -- Analyst
Maybe to start just on fees, just a clear couple of questions I had there. So no mortgage sales expected in the third quarter. But what about SBA sales?
David Morris -- Executive Vice President and Chief Financial Officer
Don't expect -- we're not going to sell any loans in the third quarter.
Tyler Stafford -- Stephens -- Analyst
Okay.
David Morris -- Executive Vice President and Chief Financial Officer
So then we're going to sell loans in the fourth quarter to return us back to where we were. We're shooting to have approximately the same EPS for the year. OKay?
Tyler Stafford -- Stephens -- Analyst
OKay.
David Morris -- Executive Vice President and Chief Financial Officer
That's the projected.
Tyler Stafford -- Stephens -- Analyst
David, you mentioned the fourth quarter fees should approximate two quarters worth of fees. What exactly does that mean?
David Morris -- Executive Vice President and Chief Financial Officer
Two quarters worth of loan sales.
Tyler Stafford -- Stephens -- Analyst
Two quarters worth of loan sales? Okay.
David Morris -- Executive Vice President and Chief Financial Officer
Yeah. Add that -- I misspoke a little bit there. It' should be two quarters of loan sales, should be in the fourth quarter. Okay?
Tyler Stafford -- Stephens -- Analyst
Okay. And just to confirm that the expected loan balances by the end of the year, $2.4 billion to $2.5 billion, that does include, I believe, you wrote-down $150 million $225 million of expected four key mortgage sales. Is that right?
David Morris -- Executive Vice President and Chief Financial Officer
Yeah, that does.
Tyler Stafford -- Stephens -- Analyst
Okay. On the margin, I think, in your prepared comments, you talked about you expect commercial yields to increase and the third quarter NIM to stabilize, and then the fourth quarter margin to increase. What does that trajectory on the margin look like if we get a Fed cut next week?
David Morris -- Executive Vice President and Chief Financial Officer
Okay. If we get -- of course, I don't have a crystal ball. If we have a Fed that I'm assuming the Fed cut in the statement I just said. So we've already decreased our rates on the one-year CD down to the 1.80% to 1.90% level. We have -- so we've done that. We have cut out our promotion that we had going on and and so forth. Again, we're right now liability sensitive, slightly liability sensitive and, on the asset side, for the last -- for a long time, I mean, more than a couple of years, we've been starting the start rate for our commercial real estate loans, which are generally short-term loans, is the floor. So we put on a loan today at, let's say, prime plus one, that is the floor. So we should -- if interest rates go down, we should see a pretty immediate stopping of -- well, even if rates don't go down, we should see a normalization of our NIM not going up or down much, and then we coming back up because of the floors and so forth we have on the loans.
Now, one of the things that we're looking at right now is, we still have CDs on the books at very low rates that we'll reprice in the first part of the third quarter. So there -- but after that, they roll over at much higher rates. We have some two-year CDs and three-year CDs, which are locked in at a much lower rate that we'll be repricing during the quarter.
Tyler Stafford -- Stephens -- Analyst
Okay. That helps. Maybe switching gears that the expense numbers that you gave in the prior question for 3Q and 4Q, did that include the benefit from the vendor contract renegotiation?
Alan Thian -- Chairman, President and Chief Executive Officer
Yeah.
Tyler Stafford -- Stephens -- Analyst
Just lastly for me. I guess what I'm struggling with is the efficiency ratio guidance that you gave in the prepared remarks about staying at or below the 50%. I'm struggling to figure out how you would be able to do that in the third quarter if you're not planning any loan sales at all? Is that part of the third quarter or is that just kind of...
David Morris -- Executive Vice President and Chief Financial Officer
That's not possible in the third quarter. It's not possible for the third quarter. We're working hard on a long-term...
Tyler Stafford -- Stephens -- Analyst
Just a long, OK. Okay. Got it. All right. That's it for me. Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Kelly Motta with KBW. Your line is now open.
Kelly Motta -- KBW -- Analyst
Hi. Thank you so much for the question.
Alan Thian -- Chairman, President and Chief Executive Officer
Hi, Kelly.
Kelly Motta -- KBW -- Analyst
Hi. I think maybe just picking off -- picking back off that last question on the NIM and deposits, can you just help me out with the gap on the deposit repricing this quarter -- this upcoming quarter versus the last quarter? And sort of -- I may have missed your commentary on the NIM trajectory on why you expect it to sort of stabilize from here or should there be a bit more pressure just as that rolls over, and then maybe some expansion from there?
David Morris -- Executive Vice President and Chief Financial Officer
Okay. So just to give you an example, in the Western region, we have $216 million of CDs that are maturing in the third quarter, OK. That's excluding $70 million of brokered CDs with an average rate of 2.2% and an average term of about 11 months, OK. So we would see that -- we are offering rates lower than that at this point in time. So we would see that portion of our book have a decrease in rates. However, a much smaller piece, but on the East Coast, we have $19 million at an average rate of 1.52%, OK? They were 24 month CDs, and if we're assuming that they would go back at the same rate that they are -- until one-year CDs, that would be 1.80% or 1.90%. So there's still some mixture in the two -- of the two. This is what I'm saying. Does that help you?
Kelly Motta -- KBW -- Analyst
Yeah. Thanks a lot. And then, maybe switching to some loans, a lot of people have been talking about increased pay-offs and pay downs. Just wondering how that's been trending for you and how you're managing that with your expectation for the resumption of a further strong growth?
David Morris -- Executive Vice President and Chief Financial Officer
Okay, I do -- we do pay-offs for $53 million in the second quarter versus $39 million for the first quarter. We know that -- we know there will be about $25 million of pay-off in the third quarter. And we do think there is a prospect that it may roll into the first quarter another $25 million in the first quarter also -- I mean, the fourth quarter. Okay? So -- but we do see an increase -- we do see increased production in our commercial side. And after we've complete this phase of selling our loans on the mortgage side of selling and slowing down our production, we purposely slowed down our production on the mortgage side and we see by the middle of this quarter, our production levels will be back up to the $50 million to $60 million a month in mortgage. Okay?
Kelly Motta -- KBW -- Analyst
Great, thanks. And maybe if I can sneak in one last one. Your release mentioned your appetite for potentially some more de novo branching, wondering if there's any upcoming plans or if that's just something you're still exploring and would those sort of follow the same regions that you mentioned where you're interested in M&A? Thanks.
David Morris -- Executive Vice President and Chief Financial Officer
It's more of a long-term. We haven't found -- we need to find the team in the location before we can move into a spot. But right now, this long-term -- and again, we most likely wouldn't -- we would do some on the -- either in the New York area or in our LA area, possibly one up in San Francisco, but there's nothing on the books. There's more long-term.
Kelly Motta -- KBW -- Analyst
Thanks a lot, David.
David Morris -- Executive Vice President and Chief Financial Officer
Okay.
Operator
Thank you. [Operator Instructions] And I'm not showing any further questions at this time. I would now like to turn the call back over to Thian for any closing remarks.
Alan Thian -- Chairman, President and Chief Executive Officer
Once again, thank you all for joining us today. We look forward to speaking with you next quarter.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Larry Clark -- Investor Relations
Alan Thian -- Chairman, President and Chief Executive Officer
David Morris -- Executive Vice President and Chief Financial Officer
Aaron Deer -- Sandler O'Neill -- Analyst
Tyler Stafford -- Stephens -- Analyst
Kelly Motta -- KBW -- Analyst
