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RBB Bancorp (NASDAQ:RBB)
Q2 2020 Earnings Call
Jul 28, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to the RBB Bancorp Earnings Conference Call for the Second Quarter of 2020. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Please note that today's event is being recorded.

I would now like to turn the conference over to Larry Clark from Financial Profiles Inc. Please go ahead, Mr. Clark.

Larry Clark -- Financial Profiles Inc., Senior Vice President

Thank you, Lorrie. Good day, everyone and thank you for joining us to discuss RBB Bancorp's financial results for the second 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 Chief Risk Officer, Vincent Liu. 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 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'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 brief overview of our financial performance and then David will discuss our results in more detail.

As COVID-19 crisis continues to impact our country and the economy, our top priority remains the health of our employees and customers. I'm proud of our entire team for doing what it takes to support our local businesses and the communities that we serve during this difficult times. Despite the challenges caused by the pandemic, we delivered improved performance in a number of areas during the second quarter, including growing our car loans and deposits, expanding our net interest margin, achieving improved credit quality, and leveraging our operating expenses in line with expectation.

While our financial performance was impacted by lower loan sales and increased provision of loan losses, we managed to maintain our EPS at $0.32 per share and we are building a foundation for future earnings growth. Our loan highlight remains strong, and we continue to writedown our deposit costs while increasing our core non-interest bearing deposits. We expect to resume higher loan sales by the fourth quarter as we adjust to our production levels as the market conditions for loan sales improve. We continue to work with all of our customers who are affected by this crisis, providing them guidance, support, including loan payment rebates as needed. At quarter end, we had extended payment rebates on $411 million loans across our entire $2.6 billion loan portfolio, representing 15.8% of the total. We have granted $192 million of this payment deferrals to our commercial customers and $219 million to our single family resident mortgage borrowers.

I'm pleased to report that as of July 20, $185 million or 45% of these loans have resumed making payments. We expect further improvement by end of August, as 45% of our loan did not start receiving deferrals until May and 85% of the loans that received deferrals in April have resumed making payments. To date, we have had limited request for a second round of deferrals. And at this time, we anticipate that less than 25% of our loan balances that participated in the first round of the program will need additional assistance. We believe that this speaks to both the high quality of our loan portfolio and the strength of our local markets. However, it is still difficult to predict the ultimate impact that this pandemic will have on our customer. Given economic uncertainties, the original government stimulus package ending soon and the number of new COVID-19 continuing to increase across some of our primary markets. So we believe that bolstering reserves, maintaining strong liquidity, and building upon our already solid capital base is prudent at this time.

With respect to our dividend, the Board decided that it was prudent to again declare $0.06 per share dividend this quarter, with the ongoing uncertainty around the pandemic. However, we anticipate being able to restart dividends to a higher level once we obtain more clarity on future business conditions and the earnings potential of the company.

I'm generally pleased with second quarter financial performance and a healthy underlying fundamentals of the company. We try 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 saving customer to operate through this crisis. We also continue to execute on our strategic goals by growing our franchise organically with our existing markets and by expanding our franchise beyond our existing markets. I want to thank the entire RBB family for their dedication to our customers and their hard work as we manage through this environment. There remains more work to do, but I'm confident that our bank will emerge from this pandemic a stronger organization.

I will now turn the call over to David for discussion of our second 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'm going to focus only on those items where some additional discussion is warranted. Our total loans held for investment were up just over $140 million during the quarter, driven both by organic loan growth across most of our segments and also due to $33 million new PPP loans. We also transferred $53 million of single-family mortgages from the available for sale bucket as part of our ongoing balance sheet strategy.

Total single family loan production in the second quarter was $118 million, up from $107 million in the first quarter. Payoffs and paydowns were also modestly lower in the second quarter. We only sold $5 million of mortgages in the second quarter, down from $101 million in the first quarter. Going forward, we expect to sell more of our residential mortgage production, but it will depend upon market conditions in our production levels. And as Alan mentioned, we plan to continue making new loans in a disciplined manner. However, given uncertainty surrounding the economy, we likely won't see the same demand that we saw in the second quarter.

Now turning to deposits. Total deposits, excluding brokered deposits increased by $62 million during the quarter. Mainly due to the healthy increase in non-interest bearing deposits and non-maturity deposits, which increased by $100 million in the quarter. Partially offsetting this increase was $100 million decline in our time deposits, which included a $32 million decrease in how our brokered deposits as we let higher CDs -- higher cost CDs run off the balance sheet given our strength, strong core deposit gathering activities, which will reduce our need for wholesale funding.

Our average cost of interest bearing deposits was down 30 basis points in the quarter. We experienced lower cost on both our non-maturing deposits and on our CDs, given the lower interest rate environment. Going forward, we expect the cost of our deposits to be down as the gap between the rates that we pay on new CDs and the rates we paid on maturing CDs continue to work in our favor.

Moving on to the net interest margin. NIM increased by 5 basis points on a reported basis NIM and 1 basis points when adjusted for purchase discount accretion. Our relatively positive net performance was driven by our lower overall deposit cost due to both rate and mix and the fact that our loan yields didn't decline as much as our deposit costs. In addition, we are still being impacted by the pandemic. Going forward, we believe that our net interest margin should be slightly up, but it's depends on a number of factors that are very hard to predict at this point, including the direction of loan yields and the ongoing levels of liquidity that we'll carry on our balance sheet.

Turning to non-interest income and expense. Our non-interest income was down in the second quarter, mainly due to fewer loan sales in the quarter has previous discussed. Our total non-interest expense was down meaningful from the first quarter, driven lower sequential expenses in salaries and benefits, marketing and business promotion, data processing, and merger expense. We saw modest increases in occupancy and equipment expenses, insurance and regulatory assessments, legal and professional, and other expenses, the latter being driven by $366,000 writedown on our mortgage servicing right.

In the current environment, we continue to maintain our focus on controlling costs. Going forward, our total non-interest expense should be relatively stable to slightly increasing as our Edison branch comes online and we enhance our online capabilities. However, loan collection expense may increase depending upon the duration and severity of the economic downturn.

Shifting to income taxes our effective tax rate for the quarter was 31%, slightly lower than the first quarter due to the impact of affordable housing tax credits. We anticipate an effective tax rate of between 29% and 33% for the full year of 2020, excluding the impact from stock option activity that we may experience from quarter to quarter.

Now turning to the asset quality. Our non-performing loans decreased by $3.3 million during the quarter as we sold two hotel franchises. And had one loan return to accrual status. As a result, our NPLs to total loans improved 10 basis points to 56 basis point at quarter end. During the quarter, we had $319,000 in net charge-offs related to the two hotels we sold [Phonetic]. This was down from $631,000 in the first quarter. Our provision for loan losses was $3 million for the second quarter, up from $1.9 million in the first quarter. Increase was due to the higher loan balances and the expected impact of the pandemic. Our allowance for loan losses stood at 0.88% of total loans held for [Phonetic] investment, up from 0.84% at the end of March. As Alan mentioned, we believe that it is prudent to continue to build our reserves until we get more clarity on the ultimate impact that the economic slowdown might have on our asset quality. We are encouraged by the number of our customers resuming their payments and we expect to see continued improvement going forward.

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 position to continue the pursuit of our long-term goal of growth and value creation, both organically and through strategic acquisition.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Kelly Motta of KBW.

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

Good morning Kelly.

Kelly Motta -- KBW -- Analyst

Hi, good morning. Sorry I was -- I had muted myself. Your deferral trends looked really encouraging, thanks for the color on that 85% pull-through rate that you've had. I just wanted to clarify, of the ones that I presume making payments, are those back to full payment status or are they still just making partial payments?

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

They made their full P&I payment for the month of July. They made a partial payment or they came back and said, they made their payment and want another deferral or if they didn't make their payment we treated them as not making their payment. Okay?

Kelly Motta -- KBW -- Analyst

Great. And then I guess with your loan and mortgage sales, your prepared comments said that you expect they are going to return to normal levels later this year. You know, do you expect any loan sales in 3Q or do you think it's really going to take till the end of the year to kind of get that pipeline ramped up and going?

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

Okay. Just let you know that what we -- we will still sell to Fannie Mae. And I don't know what that volume will be for this quarter, that was $5 million last quarter. I'm hoping that we'll get back to -- of course when normal levels of about $30 million, OK. I'm not sure if that will happen or not. We also have about a -- we have a $11 million contract out with another bank that will settle this year in this month. But there is nothing from the big Wall Street firm nor there is anything from the Fannie Mae pull sales at the moment. We hopefully will expect though there is a lot of discussion with us right now, but I don't -- if we don't have a contract by the end of this week, it's not going to happen this quarter, it will be in the fourth quarter. Okay?

Kelly Motta -- KBW -- Analyst

Great. And then maybe lastly, if I can slip a third in, loan growth is obviously super strong even without the impact of PPP. What's really driving that? What's driving the demand in that? With you being selective going forward and your comments that loan growth obviously won't be at this level, what's kind of reasonable to expect from here?

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

Kelly, there is multiple reasons why we are seeing such strong loan growth. The first reason is the lower rates and people have cash and wants to put that cash to work. The second reason is there are other banks that are not as well capitalized as we are, who are pulling back on their -- on their capabilities and so forth. And that's what we're mainly seeing in the market right now. I see our commercial production being very strong for the second quarter right now, very strong for the second quarter, maybe slightly lower than the first quarter, but even in the second quarter, but getting there we may be very close to that. And then of course, if we don't sell any mortgage loans, we would have -- it's an increase on that also.

Kelly Motta -- KBW -- Analyst

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Nick Cucharale of Piper Sandler.

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

Hey Nick.

Nick Cucharale -- Piper Sandler -- Analyst

Good day guys, how are you?

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

We're feeling well.

Nick Cucharale -- Piper Sandler -- Analyst

Good, good. Doing OK. Just to follow up on the gain on sale side, so I heard the commentary on Fannie, are you seeing a thawing of private sales at this point? And was that part of your remarks for return in the fourth quarter?

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

Yeah. We're seeing some falling there, but like I said if we don't have a deal done by the end of this week, we won't be able to close probably by the end of the quarter, OK. It takes -- we have to have at least an LOI and some understanding or at least discussions around the LOI. And although we're talking with a number of people including Fannie Mae, by the way for the, there is nothing concrete yet.

Nick Cucharale -- Piper Sandler -- Analyst

Okay. And then with respect to expenses, thanks for your commentary on the run rate, is it fair to say that the cost savings from the PGB deal are complete at this point?

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

Yes. And what you are going to see is probably a little bit of increase because -- in expenses we'll be putting that online pretty soon. The near the end of the quarter, we also have some expenses for additional couple of little systems we're putting in, they are not big. But we're also going to hire some -- we can hire some people to backfill the people that we have lost within the quarter, to help with the process.

Nick Cucharale -- Piper Sandler -- Analyst

That's helpful. And then in the CD book. What is your current offering rate? And how much of the portfolio is expected to mature in the September quarter?

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

Okay. We expect $313 million to mature at a 2.02 rate. I expect that to go in under one. Our posted rates I believe right now are like 0.78. So I expect there may be some people who get the one, but I expect most people to be below one.

Nick Cucharale -- Piper Sandler -- Analyst

Great. Thanks so much for taking my questions.

Operator

[Operator Instructions] Our next question is a follow-up from Kelly Motta of KBW.

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

Hey, Kelly.

Kelly Motta -- KBW -- Analyst

Hi, thanks so much. I wanted to follow-up on the margin here. Your loan yields seem to holding in pretty well better than expected, what is new production coming on related to the book and I know you said you expect NIM to be up, but I'm just kind of interested in how production is coming in versus roll off?

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

Well, let's break it down. The mortgage -- [Indecipherable] our start rate is around 4.75 on West Coast. On East Coast it is 4.38 [Phonetic] plus one point I believe it is. So you know on CRE, most of our CRE is starting at around 4.50. We will do for very good customers -- we shouldn't say this out loud, but we will good customers loans below 4.5, but they have to be very good the path of the base customers as well.

Kelly Motta -- KBW -- Analyst

Great. That's helpful. And then in your release, I really appreciate your comments about the dividend and you have really strong capital and you mentioned that you're still will evaluate expansions in other markets. I'm wondering, with the environment really challenging and multiples depressed like, is there -- do you think this is an opportunity for kind of based on the towel and you could buy some new partnerships or is it just kind of a wait and see at this point, with all the uncertainty going on?

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

Well, I think it depends on how long this goes, because yes, I think there will be people who wants to be thrown in the towel and so forth. But I don't think -- I think everybody is hopeful that this will end within a quarter or two from now and -- in it, but there will be a lot of fall out. And depending upon the capital level, whether they can stand out that -- the fall out because there will be certain number of businesses that will never open again. But we know that and, but we know that at some point in time there will be banks out there going to market. Okay.

Kelly Motta -- KBW -- Analyst

Thank you. That's helpful.

Operator

At this time there are no further questions. I will now turn the call back to Mr. Tien for any additional or closing remarks.

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

Well, once again thank you all for attending us today. We look forward to speaking to many of you in the coming days and weeks. Have a nice day and stay safe. Thank you.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Larry Clark -- Financial Profiles Inc., Senior Vice President

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

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

Kelly Motta -- KBW -- Analyst

Nick Cucharale -- Piper Sandler -- Analyst

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