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RBB Bancorp (NASDAQ:RBB)
Q1 2020 Earnings Call
Apr 21, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the RBB Bancorp earnings conference call for the first quarter of 2020. My name is Kevin and I'll be your operator today. [Operator Instructions] This call is being recorded and will be available for replay through April 28, 2020 starting this afternoon approximately one hour after the completion of this call. [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, Kevin. Good day, everyone and thank you for joining us to discuss RBB Bancorp's financial results for the first quarter of 2020. With me today from management are Chairman and President and CEO, Alan Thian; EVP and Chief Financial Officer, David Morris; EVP and Chief Credit Officer, Jeffrey Yeh; 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 up to your questions.

During the course of this conference call, statements may be -- 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 the Company has filed with the SEC. If any of these uncertainties materialize or any of these assumptions prove incorrect, RBB Bancorp'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.

At this time, I'd like to turn the call over to Alan Thian. Alan?

Yee Phong (Alan) Thian -- Chairman, President and Chief Executive Officer

Thank you, Larry. Good day, everyone and thank you for joining us today. I will start by providing a Company update and then David will discuss our first quarter financial results.

The COVID-19 pandemic has created extreme challenges in our country and the world. The physical and financial health of our customers, investors and employees are our foremost concerns. We are committed to help our local businesses and the communities that we serve during these difficult times. We expect to grant loan deferrals to our customer who need temporary relief and we are partnered with the Small Business Administration to offer loans to affected clients through the Payroll Protection Program.

First we have fully implemented our companywide business continuation 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 customer who are affected by this crisis to provide them guidance and help [Indecipherable]. We have [Indecipherable] 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 this payment deferrals to our commercial customer and $71 million to our single-family residential mortgage borrowers. However, it is too early in this stage of this economy slowdown to determine how many of our customer will ultimately need payment deferrals.

We are very focused on monitoring and responding to our customers' needs in the near terms. 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 are also continuing 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 is a good amount of work ahead, but I am 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 dividend. Last year that amounted to a payout ratio of approximately 20%. Given our lower ending in the first quarter and uncertainty about the remainders 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 a discussion of first quarter results. David?

David R. Morris -- Executive Vice President and Chief Financial Officer

Thank you, Alan. We have provided a great level of detail in our press release. So I am going to focus on those items where some additional discussion is warranted. In general, the pandemic impact on results 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 previous target 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 brokered deposits, increased by $221 million during the quarter, mainly due to our acquisition of PGB which accounted for $187 million of the increase. Non-interest-bearing deposits increased by $46 million and our non-maturing interest-bearing deposits increased by $34 million. Brokered CDs declined by $34 million. Our average cost of interest-bearing deposits was down 21 basis points in the quarter. We experienced lower cost 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 on our new CDs and rates we pay on maturing CDs continue to work in our favor.

Moving on to the net interest margin. Both on 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 the -- into a period where we will likely be facing meaningful downward 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 maintain 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 one branch closure in the LA region and plan to open a branch in Edison, New Jersey in the second half.

We have also cancelled 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 [Indecipherable] branches and continue to remove 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 of between 30% and 33% for the full year 2020 and between 30% and 33% for the second quarter, including 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 place two SBA, six C&I and four residential mortgages on nonaccrual at the end of the quarter. The two SBA loans totaled $3.6 million and are secured by $2 million in real estate collateral at $1.9 million for the $3.6 million is guaranteed.

The C&I loans totaled $1.9 million and the mortgage loans totaled $1.6 million and we feel that there is sufficient collateral values 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, an increase in past due loans and nonperforming loans and the expected impacts of COVID-19 pandemic. Our allowance for loan losses stood at 0.84%. Total loans held for investments 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 related --earnings release that lays out the exposure that we have to borrowers in certain industries that are deemed to be 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 hotel and motel, 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 the storm. And we also believe that we will emerge from this a stronger company well positioned in 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.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Tyler Stafford with Stephens.

Tyler Stafford -- Stephens -- Analyst

Hey. Good afternoon gentlemen.

Yee Phong (Alan) Thian -- Chairman, President and Chief Executive Officer

Good afternoon.

David R. Morris -- Executive Vice President and Chief Financial Officer

Good afternoon.

Tyler Stafford -- Stephens -- Analyst

Thanks for taking the question. I wanted to start on the dividend cut. And I was, obviously, I think 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 that would obviously help capital as well? Just curious to the thought process there. What you guys are seeing that would warrant that?

Yee Phong (Alan) Thian -- Chairman, President and Chief Executive Officer

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 we given back to our shareholders at this juncture.

Well, again as I reported earlier, our formula is that we are looking at 20% cash payout of our earning. That's one of our grounds of determining how much we should pay. Then the second thing actually we have is that we are -- even though we pay out quarterly, actually we are really looking at 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 have this high prem [Phonetic] rate, we are talking about 1990 we have ITC and we are talking about 2008 and we have this subprime lending. Again, at this point it is at the very beginning of the whole situation. So at this point, we do not have a crystal ball to see how well this crisis emerge. So we thought just to be a responsible operator we should reflect this as a concern, as a cautious. So again, we are using this to show as a gesture that we do believe this is a concern, we do believe this could be an even serious crisis, and we would really start with cutting up to half which pretty much reflect the 20% payout of our first quarter earning. And with the whole mindset that if second quarter, third quarter things is getting a lot better, then we intended 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 a business continuation plan, this is just to show that we would react to anything that impact us negatively at the short term, but again with the intention that when every bank go to the normal, we will make it up for what we have cut this quarter.

Tyler Stafford -- Stephens -- Analyst

Okay, got it. Thanks for that, Alan. And did you say over a four-quarter basis you're looking at a $0.48 dividend cumulatively, is that what I heard?

David R. Morris -- Executive Vice President and Chief Financial Officer

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 the -- this year the four quarters, we will be paying $0.48. Okay.

Tyler Stafford -- Stephens -- Analyst

Okay, all right. Got it.

Yee Phong (Alan) Thian -- Chairman, President and Chief Executive Officer

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

Tyler Stafford -- Stephens -- Analyst

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 that qualitative factor for COVID-19 impacted the provision in 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?

David R. Morris -- Executive Vice President and Chief Financial Officer

Okay. Right now, Tyler, there is 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 to 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 quarter-to-quarter -- we're going to play [Phonetic] this quarter to quarter, we don't have enough information. If things -- if by July 30th, 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. Okay?

Tyler Stafford -- Stephens -- Analyst

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

David R. Morris -- Executive Vice President and Chief Financial Officer

No, we're investing in that liquidity, we're investing in the liquidity now and everything the 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 put on another $150 million in liquidity and we think that's enough.

Tyler Stafford -- Stephens -- Analyst

Okay, all right. That's it from me. Thanks guys.

Operator

Our next question comes from Kelly Motta with KBW.

Kelly Motta -- KBW -- Analyst

Hi. Thank you so much for the questions. 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 our balance sheet. I was wondering with the backdrop of the focus on PPP, should we be taking out SBA 7A gain on sales as well?

David R. Morris -- Executive Vice President and Chief Financial Officer

I think you should take out gain on sales on SBAs right now, yes, for at least this quarter.

Kelly Motta -- KBW -- Analyst

Okay.

David R. Morris -- Executive Vice President and Chief Financial Officer

Okay, because as our SBA team is just completely inundated with PPP loans.

Kelly Motta -- KBW -- Analyst

Got it. Do you have a magnitude of kind of the interest there? Were you able -- we heard how top here the program had 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?

David R. Morris -- Executive Vice President and Chief Financial Officer

Okay. We originally went out to our clients and said, OK, we're open for PPP and we got about probably 150 applications, of which we got 117 of them approved by the SBA before this -- it stopped. So we still have those 35 in the pipeline plus we are increasing it to, we believe we will be able to do about another 65 to another 100 loans and so forth before the money runs out again. Okay. So that's what we kind of feel like we can do right now.

We weren't like some lenders who open it up to everybody. But we have opened it -- we're taking care of our customers first and then go into the rest of the world second.

Kelly Motta -- KBW -- Analyst

And how should we be thinking about the rate at which these payoffs do you expect them must be forgiven? And this does roll off in 2Q or 3Q and these fees, just to clarify, they should run through NIIs. Is that right?

David R. Morris -- Executive Vice President and Chief Financial Officer

So we don't -- OK so these are what two-year loans, right. So we expect them to probably pay off relatively quickly because I hope most of them would get forgiven, OK, 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.

Kelly Motta -- KBW -- Analyst

Okay. And then the upfront SBA fees, are those -- sometime you're [Phonetic] 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?

David R. Morris -- Executive Vice President and Chief Financial Officer

We don't -- I -- we haven't -- I haven't even thought about that yet, Kelly, OK.

Kelly Motta -- KBW -- Analyst

Okay. All right. Thanks. I'll step back.

David R. Morris -- Executive Vice President and Chief Financial Officer

Yeah.

Operator

Our next question comes from Tim Coffey with Janney.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Thank you. Good morning, everybody.

David R. Morris -- Executive Vice President and Chief Financial Officer

Good morning.

Tim Coffey -- Janney Montgomery Scott -- Analyst

David, just to -- hey, to follow up on that last question about how you plan to fund the PPP loans, are you planning not to use the facility but your own liquidity?

David R. Morris -- Executive Vice President and Chief Financial Officer

We don't need the liquidity, so why should I borrow right now?

Tim Coffey -- Janney Montgomery Scott -- Analyst

Great. Okay. Yeah -- no, 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?

David R. Morris -- Executive Vice President and Chief Financial Officer

Yes, it is for five years.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Okay.

David R. Morris -- Executive Vice President and Chief Financial Officer

Hey, Tim, I just want to make sure you realize, I am going to pledge those loans to FRP just in case I do need to have liquidity. Okay.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Right. Yeah.

David R. Morris -- Executive Vice President and Chief Financial Officer

Okay.

Tim Coffey -- Janney Montgomery Scott -- Analyst

I understand. And then the -- I guess we have a, what we call, on balance sheet loan growth or organic loan growth, the non PPP stuff, what are you thinking it's going to look like this year?

David R. Morris -- Executive Vice President and Chief Financial Officer

Well, right now we will probably -- [Indecipherable] $52 million last quarter and we are in CRE and we will probably be able to do about the same or between that and $70 million. Okay. That's what we're looking at.

On mortgage, I'll let -- 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 be -- may regain after the crisis of sites. Okay?

Tim Coffey -- Janney Montgomery Scott -- Analyst

Thanks. 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?

David R. Morris -- Executive Vice President and Chief Financial Officer

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

Tim Coffey -- Janney Montgomery Scott -- Analyst

Okay. Okay, great. And then just kind of looking at the inputs to expenses this next quarter. You mentioned that [Indecipherable] fees go up, but are you -- did you also run over time to work through the PPP loans?

David R. Morris -- Executive Vice President and Chief Financial Officer

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

Tim Coffey -- Janney Montgomery Scott -- Analyst

Okay. Okay.

David R. Morris -- Executive Vice President and Chief Financial Officer

Yeah.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Okay, so then -- all right, I understand. Okay. Those are all my questions. Thank you.

Operator

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

Kelly Motta -- KBW -- Analyst

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

David R. Morris -- Executive Vice President and Chief Financial Officer

Go ahead. What's your follow-up?

Kelly Motta -- KBW -- Analyst

Okay. 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 of the trajectory of realizing that throughout the year. Should most of that come on now that you've completed a conversion late in the quarter here?

David R. Morris -- Executive Vice President and Chief Financial Officer

Okay. Our system expenses should begin to show in the second quarter. We will -- 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 one -- and the two of them 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. Okay?

Kelly Motta -- KBW -- Analyst

Great. Thank you.

Operator

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

Yee Phong (Alan) Thian -- Chairman, President and Chief Executive Officer

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 13th at 11 o'clock in the morning Pacific Time. Have a nice day.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Larry Clark -- Investor Relations

Yee Phong (Alan) Thian -- Chairman, President and Chief Executive Officer

David R. Morris -- Executive Vice President and Chief Financial Officer

Tyler Stafford -- Stephens -- Analyst

Kelly Motta -- KBW -- Analyst

Tim Coffey -- Janney Montgomery Scott -- Analyst

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