Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the first quarter 2021. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the conference over to Catherine Wei. Thank you. Please go ahead.
Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the first quarter of 2021. With me today from management are Chairman, President, and CEO, Alan Thian, EVP, and Chief Financial Officer, David Morris. 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 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 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. Now, I'd like to turn the call over to Alan Thian. Alan?
Thank you, Catherine. Good day, everyone, and thank you for joining us today. We started 2021 with excellent first-quarter results as our differentiated business model benefited from the rapidly improving economy. We reported record net income, improving margins, stable credit qualities, and strong growth in non-interest-bearing deposits. First quarter earnings benefited from further improvement in our net interest margin and an increase in revenue related to loan sales. First quarter net interest expenses were moderately higher than fourth quarter expenses due to mortgage commissions and tax paid on compensation. As expected, we had limited loan growth in the first quarter, but still expect to have healthy growth for the remainder of the year. We raised $120 million of subordinated debt, which increases our ability to pursue profitable organic and strategic growth opportunities.
We believe we are well-positioned to accelerate our profitable growth in 2021 by providing exceptional customer service to the individuals, businesses, and communities that we serve. Given the bank's record net income and our outlook on the future, our board of directors increased the dividend by 8% to $0.13 per share and renewed the share repurchase program. With that, I'll turn the call over to David to discuss some of the quarter's financial highlights before opening up the call for questions. David?
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 12% from last quarter and 85% from a year earlier to a record $12.5 million or $0.63 per diluted share in the first quarter. We reported record pre-tax, pre-provision income of $19.6 million, which was up slightly from last quarter's $18.9 million. Our net income benefited from several factors. First, net interest income increased to $2.1 million due to stable interest income, improvements in our cost of deposits, and a decrease in provision for loan losses. Second, non-interest income increased by about $1.4 million as loan sales continued to increase, mainly in the Fannie Mae-qualified market. We continue to be cautiously optimistic that loan sales will continue at a similar pace in the second quarter.
Net interest margin was 3.73% for the first quarter, an increase from 3.67% in the fourth quarter of 2020, and up from 3.37% a year prior. As we continue to increase our non-interest-bearing deposits and drive down the cost of our interest-bearing deposits while holding the yield of our loans portfolio stable. Loans held for investment totaled $2.7 billion as of March 31st, increasing $8.4 million from December 31st of 2020. We had good growth in commercial real estate, which grew at a 24% annual rate, and construction, which grew at a 49% annual rate. Our non-QM mortgage originations continued to lag due to the low interest rate environment, which when combined with payoffs and the sale of mortgages, resulted in a meaningful $83 million decrease in our mortgage loan portfolio.
We continue to take action to revitalize the non-QM origination channels, but could face continued headwinds if the rate environment does not improve. Our average yield on earning assets for the quarter was 4.49%, down six basis points from the prior quarter of 37 basis points from the prior year. Deposits grew $186 million from the fourth quarter, with a $170 million increase in non-interest-bearing deposits as our efforts to attract these deposits from our banking clients gained traction. Our average cost of interest-bearing deposits for the quarter was 0.73%, which was down 20 basis points from the prior quarter and 99 basis points from the prior year. We expect the cost of our deposits to continue to decline in the second quarter as higher cost CDs mature and are replaced by lower cost deposits.
Near the end of the quarter, we completed a $120 million sub-debt offering at a 4% rate, which was used in part to redeem $50 million, 6.5% sub-debt issuance that we had outstanding. We believe the additional low-cost capital increases our ability to pursue attractive organic and strategic growth opportunities. Non-performing assets increased by $400,000 to $20.2 million in the first quarter, decreasing four basis points to 0.55% of total assets. As of April 15th, we had 21 loans in deferment totaling about $18 million. We took a provision for credit losses of $1.5 million in the first quarter, primarily attributable to remaining COVID-19 related economic risk and 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.
As a reminder, if you would like to ask a question, you may do so by pressing star, then the number 1 on your telephone keypad. Again, that is star one if you would like to ask a question. Your first question is from Nick Cucharale of Piper Sandler.
Hi, everyone. How are you?
Great, Nick. How about yourself?
I'm doing very well, thanks. It looks like you had a similar level of 1 to 4 production as the fourth quarter, sales were certainly a lot higher in the first quarter. Can you give us some color on that decision and strategically how you're thinking about the trade-off between keeping those loans on balance sheet compared to sales?
Okay. Right now, $83 million of those sales was Fannie Mae. The rest of those were holdovers from the fourth quarter that we already had commitments to sell. Okay. We honored those commitments on that side.
Okay.
In the future, we expect that Fannie Mae selling will be a little bit less than the $83 million, but similar. We see the non-QM dropping off significantly, especially coming to the third quarter.
Okay. That's very helpful. Given the sub-debt issuance in the quarter, your capital levels are quite strong, as you mentioned. Can you update us on your appetite for M&A and specific geographies that are top of mind?
We're very interested in mergers and acquisitions basically in the San Francisco Bay Area, Texas, Seattle, and we would even expand to a merger here in Southern California if the analytics look good.
On the NIM, do you feel as though you have some room for further improvement given the liability repricing dynamic you discussed?
We will have about $286 million repriced in the second quarter, going from our CD rate right now was about 0.99 and going down to 0.4. The issue is that we have so much cash that it's very hard to invest into anything that makes any money right at the moment. I believe you'll see continued cost to fund improvement, but you will see the yield on non-loan investments be coming down because the amount of cash. Basically, I am saying I see it be about flat without or increasing slightly.
That's very helpful. Thanks for taking my questions.
Okay.
Our next question is from Kelly Motta of KBW.
Hi, thanks for the question. Good morning over there.
Hey, Kelly.
Hey. Maybe turning to expenses, they were a little bit higher during the quarter with, I think mortgage commissions were probably a part of that. Looking ahead, is this kind of a good run rate to go through? Are there any moving pieces that we should keep in mind when looking forward towards the rest of the year?
I think our level was a little high for this quarter, as it typically is. It's typically about $400,000-$500,000 higher than the rest of the year.
Yes
the cost to go down.
Okay. Got it. Looking at the loan portfolio, you had really good CRE growth. It's continued to be really strong. As well as construction, can you maybe provide what categories you're seeing the most demand in and the outlook there?
This is Alan. On the construction loan side, I would say that pretty much we see construction growth actually is in L.A. as well as in N.Y. Most of the construction actually are multifamily units with mixed use where you may have the commercial on the ground floors, and then you could have condominium or apartments in the upper floors. The ratio of the mixed use normally would be about 10% as a commercial and 90% are mixed use of either condo or apartments. Most of the size of the construction projects, probably we are looking at about maybe 10,000, about 8,000 of residential storefronts, and then maybe between 30-50 units on the mixed use of either condos or apartments, whereas we are financing on about 65% loan to cost or 55%-60% on loan to value.
Great. Thank you. I'll step back.
As a reminder, if you would like to ask a question, you may do so by pressing star then the number one on your telephone keypad. Again, that is star one to ask a question. Your next question is from Brett Rabatin of Hovde Group.
Hey, good morning, everyone.
Good morning.
Good morning.
Wanted to make sure I understood the dynamic around the fee income going forward. You mentioned that the Fannie Mae loans, you saw a little bit less of that going forward, and I know you originated, I think it was $37 million or $38 million of SBA loans in 1Q. Is the way to think about the dynamic around those two pieces going forward is SBA probably continues to increase while the sales on the Fannie Mae loans declines? Or can you give us any additional color on how you see those two components interacting going forward?
Okay. Right now, the big gain in our SBA portfolio was we did round two of PPP. Although our SBA program is going strong right now because of the 90% guarantee-
Guarantee
The big growth in the first quarter was mostly PPP loans. Having said that, I think over time, you're going to see residential sales go down and SBA sales go up as SBA Department gets more traction in originating regular old 7(a) loans. Okay? That's what I see. I see Fannie, for the foreseeable future, I see the non-QM market being really all about treading water and just replacing what is rolling off. Although we do have some commitments out there to sell this quarter, but not very much. I see Fannie Mae coming down slightly because of we cleared out our backlog due to the COVID issues we had last year, and we'll just be selling new originations.
Okay. That's helpful color. Then just around provisioning and reserves, it would seem like, I recognize that non-CECL filers are still going to need to maybe keep bolstering reserves a little bit, but it doesn't seem like you're going to have any asset quality issues to speak of. As we think about forward provisioning, it would seem like it could be even less than it was in 1Q, depending on growth, I suppose. Any color around how you think about provisioning going forward?
I think you just need to take 1.25 x our growth, and I don't see any additional large losses, plus any losses, and that's our provisioning. Okay. I do think there will be a time when we will recapture the $2.9 million that's out there in the special COVID reserve. We decided not to do that in the first quarter to see how everything shakes out in the second quarter.
At some point in time, you'll see that coming back to the bank if we don't have losses that go against that, and we don't see any right at the moment.
Okay. That's helpful. Thanks for all the color.
Okay.
Your final question is from Andrew Terrell of Stephens.
Hi. Hey, good afternoon.
Good afternoon.
Yeah, I just wanted to circle back to the expense base really quickly. David, I appreciate the comments about 1Q typically running about $400,000 or $500,000 higher than kind of the rest of the year. I guess, shouldn't we also see a step down kind of in this next quarter from the, I think it was $428,000 data processing expense that you called out in the release. Just trying to put a finer brush on the go-forward expense run rate.
Yeah. Some of that is we are converting off of one system onto another, and we had to pay some duplicate amounts. That will be going away over the next couple of months.
Okay. Perfect. I appreciate it. Then just thinking about loan yields. They've held in around this low kind of 5% level over the past couple of quarters or few quarters. I guess just thinking about loan yields moving forward, what kind of yield are you getting on new originations currently? Has the competitive dynamic changed more recently that might put some pressure on kind of new origination yields and portfolio yields going forward?
Yeah. Okay. On the CRE side and so forth, we are seeing our rates are prime plus 2.5, 2.75, depending on what type of loan it is, and so forth. If you add that up, that's above five. When we're looking at our multifamily loans, you're talking about a 4.5 start rate to a 5% rate, and so forth. Unless they're a very good customer. If they have a lot of deposits with us, we will make exceptions. Where we're seeing really the pressure, I think, is going to be on the mortgage side. The non-QM mortgages, we're replacing the runoff that's a 5 coupon, let's say, or a 5.25 coupon with a 4 coupon or a 4.25 coupon. That's what's creating the pressure in our book right at the moment.
Yes. Right. I would say that on the commercial side, commercial real estate, we are looking at about 5%-5.25%. Multifamily, we are looking at 4.75%-5%. Mortgage, we are looking at about 4.25%. We will not do any loans less than 4%.
Okay. Thanks, Alan, and thanks, David. That's excellent color. Just last question for me. I saw the dividend and the renewed buyback yesterday morning. Just is it fair to assume you guys are still planning to be active on the buyback going forward given that announcement?
Yes.
Yes.
Okay, perfect. That's it for me. Thanks for taking my questions.
Okay.
There are no further questions in queue. Do you all have any closing remarks?
No more question?
Mm-mm.
Okay. 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.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.