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Edited Transcript of RBB.OQ earnings conference call or presentation 23-Jul-19 6:00pm GMT

Q2 2019 RBB Bancorp Earnings Call

LOS ANGELES Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of RBB Bancorp earnings conference call or presentation Tuesday, July 23, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Richard Morris

RBB Bancorp - Executive VP & CFO

* Larry A. Clark

Financial Profiles, Inc. - SVP

* Yee Phong Thian

RBB Bancorp - Chairman, President & CEO

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Kelly Ann Motta

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Tyler Stafford

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good afternoon, and welcome to the RBB Bancorp Second Quarter 2019 Earnings Conference Call. My name is Ashley, and I will be your operator today. (Operator Instructions) This call is being recorded and will be available for replay through July 30, 2019, starting this afternoon approximately 1 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.

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Larry A. Clark, Financial Profiles, Inc. - SVP [2]

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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 are Chairman and President and 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 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?

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Yee Phong Thian, RBB Bancorp - Chairman, President & CEO [3]

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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's 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 continue to experience low credit cost and well-managed expenses. These factors all contributed to another solid quarter of net income.

Our loans held for investment were 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 onto 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.

Turning to deposits. We grew total deposits by $51 million, driven by a very strong increase in our retail time deposits. Once again, padding due to customer rotating out of low-interest nonmaturing 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 footprints, closing 2 nonbanking offices and 1 branch and have opened 1 new branch. We have also renegotiated new contracts with most of our system renters, and we are also making good progress on introducing our business 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 onto 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 will also continue to invest in our business in order to create more opportunities to generate higher earnings, all with a view of creating additional long-term value for our shareholders.

I'll now turn it over to David for more detail on our second quarter results. David?

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David Richard Morris, RBB Bancorp - Executive VP & CFO [4]

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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 payoff 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 pick up 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 nonmaturity 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 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 CDs and the rates we pay on maturing CDs continue 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 loans. 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 noninterest income. We generate higher gain-on-sale income due to the higher loan sales, and we also booked higher fee income due to receiving our annual CDFI BEA award and cyclical safe deposit box income. For the third quarter, we expect a decline in noninterest income due to no expected loan sales. However, we anticipate noninterest income in the fourth quarter to be equivalent to approximately 2 quarters' worth and then move into historical levels in the first quarter of 2012 -- 2020 when we resume a more normal schedule of loan sales.

Our total noninterest 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 cost. Some of the occupancy expense increase was the result of prior period 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 that will roll through the numbers in the third quarter as we renegotiate a major systems contract with a vendor in the second quarter. We expect that our noninterest expense will decline slightly for the third quarter as we more fully realize our cost savings from First American, but this will 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. Our 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 nonperforming loans increased by $4 million during the quarter as we placed 3 loans on nonaccrual 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.

Our 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 up 3 basis points from the end of the prior quarter. We also saw a decline in loans 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 remain 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 forecasted 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 a 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 additional shares that get issued as a result of our stock option awards, thereby 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 under the program.

And one final note. We recently declared a quarterly dividend of $0.10 per share, which translates into a 20% payout ratio. We are committed to delivering shareholder value and returning a portion of our earnings to shareholders as a form -- in the form of a dividend as one aspect of that strategy.

With that, we will happily take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Aaron Deer with Sandler O'Neill.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [2]

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I appreciate your comments. I -- 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. And if we ended the June 30 quarter at about $2.3 billion in total loans, given the planned fails for the fourth quarter, where would you expect total loans to end the year, the total balances?

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David Richard Morris, RBB Bancorp - Executive VP & CFO [3]

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Okay. We would expect the balances to be closer to between the $2.4 billion and $2.45 billion. We want to get back to like 10% to 12% growth of our balance sheet. And as you can see in the second quarter, we accomplished or accomplish 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 increased significantly more in the 16% range, I believe.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [4]

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Sure. Okay. And then, David, on the expenses, you gave a little bit of commentary regarding the efficiency ratio and such. I just wanted to -- just given some of the cost saves that are yet to be had as well as kind of the variability that you had in the compensation line over the last couple quarters, can you maybe give us your expectation of what the total noninterest expense number in terms of dollar amount might be over the next quarter or 2?

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David Richard Morris, RBB Bancorp - Executive VP & CFO [5]

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Okay. So I believe it looks $14.9 million -- let me double check my number.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [6]

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Yes, that sounds right.

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David Richard Morris, RBB Bancorp - Executive VP & CFO [7]

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$14.9 million. I think we are going to decrease it down to about $14.8 million for next quarter and then $14.7 million the quarter after that.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [8]

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Okay. That's great. And then just one last question. You also gave some thoughts regarding your very strong capital levels and it doesn't sound like you're going to necessarily be real active with share repurchases unless the stock were to take a hit. I guess -- but it also sounds like that capital might also be used for M&A. So I'm just wondering, what's -- are there continued conversations on the M&A front? And given where the stock trades today and just -- as well as other bank stocks, I guess, relative to you, 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.

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Yee Phong Thian, RBB Bancorp - Chairman, President & CEO [9]

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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, there are certain new areas 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 6 months.

And 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 will be a much smaller institution. We're looking at institutions more in the $400 million range right at the moment. And at -- in the immediate future, most of these would be cash deals.

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Operator [10]

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And our next question comes from the line of Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [11]

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Maybe to start just on fees, just to clear a couple of questions I had there. So no mortgage sales expected in the third quarter, but what about SBA sales?

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Yee Phong Thian, RBB Bancorp - Chairman, President & CEO [12]

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Don't expect -- we're not going to sell any loans in the third quarter. The fourth quarter -- 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? That's what we projected.

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Tyler Stafford, Stephens Inc., Research Division - MD [13]

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David, you mentioned the fourth quarter fees should approximate 2 quarters' worth of fees. What exactly does that mean?

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David Richard Morris, RBB Bancorp - Executive VP & CFO [14]

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Two quarters' worth of loan sales.

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Tyler Stafford, Stephens Inc., Research Division - MD [15]

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Two quarters' worth of loan sales. Okay.

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David Richard Morris, RBB Bancorp - Executive VP & CFO [16]

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Yes. Yes. Add that -- I misspoke a little bit there. It should be 2 quarters of loan sales should be in the fourth quarter, okay?

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Tyler Stafford, Stephens Inc., Research Division - MD [17]

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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 to $225 million of expected 4Q mortgage sales, is that right?

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David Richard Morris, RBB Bancorp - Executive VP & CFO [18]

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Yes. That does.

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Tyler Stafford, Stephens Inc., Research Division - MD [19]

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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?

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David Richard Morris, RBB Bancorp - Executive VP & CFO [20]

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Okay. If we get a -- of course I don't have a crystal ball. If we have a Fed -- I'm assuming the Fed cut in the statement I just said. So we've already decreased our rates on the 1-year CD down to the 1.90% -- 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 so forth.

On -- again, we're right now liability-sensitive -- slightly liability-sensitive. On the asset side, for the last -- well, 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 if we put on a loan today at, let's say, prime plus 1, 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 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 have -- still have CDs on the books at very low rates that we'll reprice in the first part of the third quarter. So they're -- but after that, they all are at much higher rates. We have some 2-year CDs, some 3-year CDs which are locked in at a much lower rate that we'll be repricing during the quarter.

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Tyler Stafford, Stephens Inc., Research Division - MD [21]

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Okay. That helps. The -- maybe switching gears. The expense numbers that you gave in the prior question for 3Q and 4Q, did that include the benefits from the vendor contract renegotiation?

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David Richard Morris, RBB Bancorp - Executive VP & CFO [22]

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Yes. Yes.

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Tyler Stafford, Stephens Inc., Research Division - MD [23]

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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 possible in the third quarter or is that just kind of...

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David Richard Morris, RBB Bancorp - Executive VP & CFO [24]

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No. That's not possible in the third quarter. It's not possible for the third quarter. We're looking on a long term.

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Operator [25]

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(Operator Instructions) And our next question comes from the line of Kelly Motta with KBW.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [26]

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I think maybe just pigging off -- pigging 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?

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David Richard Morris, RBB Bancorp - Executive VP & CFO [27]

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Okay. So just to give you an example. On the Western region, we have $216 million of CDs that are maturing in the third quarter, okay? That's excluding $70 million of brokered CDs with an average rate of 2.2% and an average term of about 11 months, okay? So we would see that we would -- our offering rates are lower than that at this point in time. So we would see that portion of our book have a decrease in rates.

However, much smaller piece, but on the East Coast we have $90 million at an average rate of 1.52%, okay? They were 24-month CDs. And if we're assuming that they would go back at the same rate that they are now -- into 1-year CDs, that will be a 1.80% or a 1.90%. So there's still some mixture in the 2 to -- of the 2. You see what I'm saying? Does that help you?

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [28]

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Yes. And then maybe switching to loans. A lot of people have been talking about increased payoffs 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 further strong growth.

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David Richard Morris, RBB Bancorp - Executive VP & CFO [29]

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Okay. I do -- we do payoffs for $53 million in the second quarter versus $39 million for the first quarter. We know of that -- we know there will be about, what...

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Yee Phong Thian, RBB Bancorp - Chairman, President & CEO [30]

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$20 million.

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David Richard Morris, RBB Bancorp - Executive VP & CFO [31]

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$25 million? $25 million of payoffs in the third quarter. And we do think there's a possibility that it may roll into the first quarter, another $25 million in the first quarter also -- I mean the third -- fourth quarter, okay?

So -- but we do see an increased -- we do see increased production in our commercial side. And after we complete this phase of selling our loans on the mortgage side or 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?

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [32]

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Great. 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 more interested in M&A?

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David Richard Morris, RBB Bancorp - Executive VP & CFO [33]

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It's more of a long term. We haven't found -- we need to find the team and the location before we can move into a spot. But right now, it's long term. And again, we most likely wouldn't -- we would do some on the -- either in the New York area or in our L.A. area, possibly one up in San Francisco, but there's nothing on the books now. It's more long term.

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Operator [34]

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(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.

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Yee Phong Thian, RBB Bancorp - Chairman, President & CEO [35]

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Once again, thank you all for joining us today. We look forward to speaking with you next quarter.

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Operator [36]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.