Good day, everyone, and welcome to the RBB Bancorp Earnings Conference Call for the second quarter 2022. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing star one on your touch-tone phone.
You may withdraw yourself from the queue by pressing the pound key. I will be standing by should you need any assistance. Please note that today's event is being recorded. I would now like to turn the conference over to Catherine Wei. Please go ahead.
Thank you. Good day, everyone, and thank you for joining us to discuss RBB Bancorp's financial results for the second quarter of 2022. With me today from management are Interim President and CEO and CFO, David Morris; EVP and Chief Credit Officer, Jeffrey Yeh; EVP and Chief Strategy Officer, Simon Pang; EVP and Chief Risk Officer, Vincent Liu; EVP and Director of Private Banking, Tsu Te Huang; EVP and Branch Administrator, Ashley Chang.
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 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 David Morris. David?
Thank you, Catherine. Good day, everyone, and thank you for joining us today. Royal Business Bank had another great quarter with strong earnings, improving margins, and solid loan growth. We also announced several new hires and rehires during the quarter, positioning the bank for continued profitable growth.
Expenses were higher than anticipated due to the ongoing costs related to the Board of Directors investigation, but we expect those costs to wind down over the next two quarters. Despite elevated expenses, net income increased by 5.9% from last quarter and by 15.7% from last year to $15.5 million or $0.80 per diluted share in the second quarter.
Adjusting for the $1.7 million on non-recurring investigation expenses, net income would've been a record $17.2 million or $0.90 per diluted share. Net income benefited from solid loan growth, increasing asset yields, and a stable interest expense, all of which combined to drive record net interest income of $37.1 million, which was a $2.6 million increase from last quarter and a $7 million increase from a year ago.
Second quarter non-interest income increased by $478,000 from the previous quarter due to a $757,000 gain on a corporate real estate that we disposed of, offset by a decline in loan sales as Fannie Mae originations continued to lag. Non-interest expense increased from last quarter, primarily due to the $1.7 million expense related to the ongoing Board of Directors investigation.
Net interest margin was one of the highlights of the quarter, increasing to 4.08% from 3.49% last quarter and 3.33% a year ago. We are cautiously optimistic that we'll be able to maintain our NIM above 4% in the coming quarters as asset yields continue to increase more quickly than deposit costs.
Annualized ROA and ROTCE increased in the second quarter to 1.6% and 15.89%, respectively. Net loans held for investments increased by about $39 million in the second quarter, which equates to about 5% annualized growth rate. C&I, SBA, and CRE all decreased from the last quarter, but we had growth in construction and single-family mortgages.
The decline in C&I and CRE were due to normal payoff, which means for property purchases or to competitors at lower rates. Our yield on average earning assets increased to 4.66%, which was a 66 basis point increase from last quarter and 67 basis point increase from the prior year.
With respect to funding, anticipated commercial customers' activity drove a $219 million decrease in average non-interest-bearing deposits over the quarter. Our average cost of interest-bearing deposits for the quarter was 0.49%, which was up 5 basis points from the prior quarter, but down 10 basis points from the prior year. Given the rapid increase in rates, we do expect some upward pressure on deposit costs for the remainder of the year.
Non-performing loans decreased to $13.9 million due to the $7 million April repayment I mentioned during last quarter's call. We took a provision of credit loss of $915,000 in the second quarter, primarily attributable to loan growth. Our capital levels remain strong, with all of our capital ratios way above regulatory minimums.
We took advantage of the temporary dislocation in our share price to repurchase 527,754 shares, or 2.7% of outstanding shares in the second quarter. After renewing our buyback last week, we now have the capacity to repurchase up to 500,000 more shares. We understand how the recent personnel announcements have impacted our share price, but we remain confident in our strategy and believe it continues to be an effective driver of shareholder value.
Lastly, I would like to say this is a very important day in our history. Today, five years ago, was our first trading day on the Nasdaq. Thanks to all of our investors, management board and investment bankers for the past five years who have supported us. With that, we are happy to take your questions. Operator, please open up the call.
Thank you. At this time, if you would like to ask a question, please press star one on your touch tone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star one to ask a question. We will pause for a moment to allow questions to queue. Thank you. Our first question will come from Nick Cucharale with Piper Sandler. Your line is now open.
Good day, David, how are you?
I'm okay, Nick, how about yourself?
I'm good, thank you. With all the hires you mentioned, do you currently have the teams in place to restart growth in the commercial book, or should we expect growth to continue to be tilted towards the single-family portfolio in coming quarters?
Well, I'm going to answer that with a yes and a yes. We have the people in place for commercial growth. Okay. At the same time, the non-QM market, which we are not selling quite yet, has really picked up for us.
I think you will see loans increase in both sectors next quarter. I'm gonna answer another question which you haven't asked, but you'll probably ask, "When will you do more loan sales?" We're hoping to be able to do some sales late in this quarter, but I doubt that will happen. I think we will have to wait until the fourth quarter to begin to sell the mortgage loans. Okay?
In that vein, can you update us on your expectations for the gain on sale business? Do you feel like you're gonna get to a sustainable level in 2023, or it's still below where you were in previous years?
No, I think we'll be back to sustainable level in 2023. The last quarter of this year, I'm hoping to be there. With the SBA team back in place, maybe not in the third quarter a lot, but in the fourth quarter and in subsequent quarters, I think we should be back in that market, and I think we'll be back in the mortgage market also. It's a Fannie Mae. Fannie Maes are off, you know. Nobody is getting a Fannie Mae loan right now.
Okay. Can you just refresh us on your full year organic growth targets for loan growth?
Well, right now we're probably gonna have, for this year, about 7% because we only had about 5% this quarter. We budgeted around a 9%-10%. I think we'll be closer to around 7%-8%. Okay?
Thank you for taking the questions.
Thank you. Our next question will come from Kelly Motta with KBW. Your line is now open.
Hi. Good morning, David. Thank you so much for the question. Maybe your NIM expansion this quarter was incredible. Was there anything more one-time in there, any interest recoveries we should be aware about? With your expectation for NIM to hopefully stay above 4% is, I believe, what you said, what kind of deposit betas and assumptions go into that b ecause I would assume those would accelerate as rates rise? Thanks.
Okay. Let's talk about deposits first. Deposits, we really haven't raised our rates yet. That is gonna happen. I would project that our beta will be probably around 65 or 75, given, you know, starting at the next rate hike or so. Okay. That's gonna be pretty high, I realize that.
But again, we haven't raised our rates, and we have competitors at two right now. We have competitors at 2.50 even, on a one-year CD, and we're still at 70 basis points, sort of, so forth. That's number one. Number two is, yes, we always have prepayment of loans, the prepayment fees in our numbers. We probably had a little bit higher than normal. We typically have, like, a couple hundred thousand. We had about $500,000 this quarter in prepayment fees in calculating our NIM. It's about $300,000 there. That is probably above normal.
Got it. Thank you. On the other side, can you just remind us about the repricing schedule of the loans, about how much of it floats and maybe where the loans are coming on now?
Okay. About a third of our book is floating rate, maybe up to at the most 40%, but a third. It's a truly floating rate. On the mortgage side, although we're pricing at 6.25 right now on the mortgage side, we're in the queue because it takes us 60 days to 90 days to fund a mortgage loan. We're in the low fives right now. Okay?
On CRE, we're looking at, I would have to say the spreads have narrowed. We're looking at prime + 1 to prime + 1.5 pricing at the most right now. If it's a fixed rate loan, I'm telling everybody 6.5%, unless it's a very high quality apartment building or of that nature, which we're still in the 5.5%. That's where we are at this time. Okay?
That may change tomorrow. Thank you, David. Maybe a last kind of question about M&A. Just wondering an update if you have any update on Gateway, if that's still supposed to close during the year, and if, with the CEO search, you guys have any updated thoughts on maximizing shareholder value through a potential sale. Thank you.
We've looked at a number of things. Number one, we do expect Gateway to sell. Okay? Number two, we do always look at potential partners, either on our side to acquire or on their side to acquire us.
I don't know if it's the right time for us to be out in the marketplace until we can prove that we can grow over a period of time and so forth as a management team here. Okay? Did I answer all three of those? I think I did. Oh, Gateway. I anticipate Gateway to close by the end of this year, if not early next year. I mean, January 2nd of next year. Okay?
Got it. Thank you so much for the questions, David. I appreciate it.
Okay.
Thank you. Again, as a reminder, please press star one now if you would like to join the queue. Our next question will come from Andrew Terrell with Stephens. Your line is open.
Hi, Andrew.
Hey, good morning.
Hey.
Hey, I just wanna follow up on that last question there. Any update on the kind of CEO search at this point?
I'm meeting with the [inaudible] committee. I met with them last week. I'm meeting with Dr. Kao , Christina Kao again this week or early next week, and to go over the plans and so forth. I'm hoping that, you know, we will have an announcement soon.
Okay.
Okay, soon being within the next month or so. Month.
Yeah. Okay. Perfect.
Okay.
Thank you. I heard you on the kind of loan growth outlook for the balance of the year, seems to imply kind of a mid-single digit type level for the next couple of quarters. I just wanna get your thoughts on growth on the other side of the balance sheet. Just I think you're just a little above 100% loan deposit ratio at the end of the second quarter.
Just wanna hear your thoughts on whether you think you can fund that loan growth with core deposit growth, or should we expect any kind of incremental reliance on wholesale funding in the balance of the year?
I think we will be able to fund our loan growth via, I may not call them core deposits, but through deposits that we originate on the retail side. Okay? Because it's up to us to make a million-dollar depositor core. You know what I mean? It's up to us to cross-sell. It's up to us to bring them into the family and make it a true relationship. If somebody comes to us, let's say, for rate reasons, it's up to us to turn them into a true core depositor.
Yep. Understood. Okay. Last one for me, just a modeling question. I know there was like pre-tax about $1.2 million. You called out elevated in the legal and professional line item. It sounded like that should dissipate over the coming couple of quarters. Do you have an estimated kind of dollar amount remaining to kind of recognize that line item a nd is that correct i t should fall out of the runway in the next couple of quarters?
It should. I think our legal and professional line item should be between $500,000-$600,000 a quarter. Having said that, I think you're probably still gonna see close to a $1 million quarter this year, this quarter, and hopefully something more normal come the fourth quarter, because there's still ongoing odds and ends being researched, I guess.
Okay, very good. I appreciate you taking my questions.
Thank you. Our next question will come from Tim Coffey with Janney. Your line is now open.
Great. Thank you. Morning, David.
Hey, Tim. How are you?
I'm good. Good, thank you. Just a question on additional recruitment. What is the appetite for that, and what is the likelihood of that, do you think?
Very interesting question. Okay. Let's look at lenders first, and then we'll go to the deposit side, and then some other general questions. The reason why it's interesting is because if we're going into a recession, do I wanna have a ton of lenders on our, you know, that I hire, and then they have nothing to do? We are hiring a lender that will be out of our Orange County, Irvine office to take care of the Orange County market and assist in SBA lending and commercial lending. That person comes on in September.
After that, I still have open positions for New York and Chicago and in L.A., but I don't think we'll fill them on that side of the game until after we know what's gonna happen with the economy in the next couple of months.
On the deposit side, we are constantly looking to upgrade our staff in areas where we may have some underperforming branches. If we find those people, we will bring those people on immediately because our franchise value is tied to our core funding.
That would not wait for the recession figuring it out. If we find those people, we would bring those on to upgrade our staff that we have. We have two or three branches that do not have branch managers right now just because we cannot find them. If we can find them, we will bring them on and go from there.
All right. That's very helpful. The rest of my questions have been asked. Thank you.
Yeah.
Thank you. Our next question will come from Ben Gerlinger with Hovde Group. Your line is now open.
Hey, Ben.
I wonder if we could take a minute to look at the kind of funding. I know you said the deposit beta was kind of in that 75 area, which is pretty high. I mean, when you compare it to banks that are growing at your pace, it's a little bit more level set and kind of in the range of normality.
Is there anything that you guys can do on a proactive approach from a funding perspective that you're not already doing that could potentially limit that or that could help support the margin moving up into the right?
Okay, let me tell you what we're doing. We're doing a lot of little things here. Number one is we don't really have a cash management department, although we have all the products. We found out that a lot of our customers on the loan side would bank with us if they knew we had those products.
What we're trying to do is bundle those up and have brochures that our lenders can easily go out to explain to our customers. That's number one. Okay. Number two is this is certainly not this year. It may be next year. Eventually all banks are gonna have to be dealing with marijuana and banking marijuana customers.
We have them already in the lower tiers, whether it be with the property, they're leasing out property to our borrowers leasing out property, but we have no dispensaries or something of that nature. That is in the pipeline to go after. That's been in the pipeline for the last year or two.
Just haven't gotten to it yet, but I'm putting that as a higher priority because of their cash deposit. It's cash and no interest rate. The third is that we have some trust companies that we bank, and that's where you see this fluctuation. Well, why don't we go after more trust companies and bank them also?
Because, you know, some of the trust companies we bank actually do some crypto stuff, and that's why you see this wide fluctuation sometimes during the quarter on our non-interest-bearing accounts because, you know, they may have a flush of cash coming in, and sometimes they may have a flush of cash going out.
We projected that we would have $300 million-$350 million worth of cash going out of those accounts at the beginning of this year or during the first six months of the year, b ut we can expand. If we expand that market of these trust companies, and especially the ones that may not be fintech related, just trust companies, you'll see a lot more non-interest-bearing deposits coming into us. That's a strategy to help our NIM not increase as much.
When you look at beta is a CD product, but it's a CD in a money market type of item, but that's the overall strategy is to get more non-interest-bearing deposits and to capture, fully capture our customer via full relationship. That has always been our strategy. We are a relationship bank.
Gotcha. No, that's great color, a nd like a lot of little things can really add up. My only other question, I don't mean to put your feet to the fire here too much, but when you think about your overall profitability, you're running at, let's call it a 1.5 ROA. You have a healthy amount of capital.
Well, I get that the shares are standing. You don't have a huge amount of volume so you can repurchase. What's preventing you guys from doing something more aggressive considering you're trading close to tangible here around 1.1 of tangible? Like why not put out a tender or something to that degree given your high level of profitability?
We have considered a tender, and we thought it would be better to buy at market instead of paying a premium.
Gotcha. That's fair. Appreciate the color.
Thank you. It appears we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.
Okay. Once again, I want to thank everybody for joining us today. I especially want to thank our investors and our investment bankers for the last five years of supporting us. We look forward to speaking to many of you in the next coming days since I'm going to be out on the road visiting people and so forth. Please have a nice day.
Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.