RBB Bancorp Q3 2023 Earnings Call Transcript

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October 24, 2023

There are 8 speakers on the call.

Operator

Good day, everyone, and welcome to the RBB Bancorp's Third Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen only mode, and It is now my pleasure to turn the floor over to your host, Catherine Wei. Ma'am, the floor is yours.

Speaker 1

Thank you. Good day, everyone, and thank you for joining us to discuss RBV Bancorp's results for the Q3 of 2023. With me today is Chief Executive Officer, David Morris President, Johnny Yves Chief Financial Officer, Alex Ko Chief Credit Officer, Jeffrey Yeh Chief Administrative Officer, Gary Fan and Chief Risk Officer, Vincent Liu. David and Alex will briefly summarize the results, which can be found in the earnings press release and 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.

Speaker 1

Forward looking statements are also subject known and unknown risks and uncertainties and other factors relating to RBV 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, RBV 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 the law. Now, I'd like to turn the call over to RMB's Chief Executive Officer, David Morris.

Speaker 1

David?

Speaker 2

Thank you, Catherine. Good day, everyone, and thank you for joining us today. We are pleased To be awarded a $5,000,000 CDFI ERP award by the U. S. Treasury in the 3rd quarter.

Speaker 2

We believe it's a real testament to our ongoing efforts to support the communities in which we operate, and we intend to use the funds to help low and moderate income communities recover from the COVID-nineteen pandemic by investing in their long term prosperity. We were also pleased to reach our target 95 percent loan to deposit ratio in the 3rd quarter. As we mentioned, this has been one Of our strategic priorities and now that we have achieved it, we expect to resume deposit supported loan growth, which will enhance our profitability and margins. Johnny, who joined us as President in the second quarter, Has done an excellent job developing a pipeline of high quality commercial loans that we expect to Originate beginning in Q4. As part of the deleveraging process, we have also Taken steps to de risk our loan portfolio by reducing our exposure to certain loan categories that we believe could be at risk In a higher for longer interest rate environment.

Speaker 2

While we believe these proactive approaches to managing our balance sheet will help protect us against potential credit losses. It also impacted our margin and interest income as the exited loans tended to carry higher interest rates. The decline in yield on loans held for investment during the quarter was a direct result of the reduction in high yielding loans as we sought to de risk our balance sheet. These actions when combined With the additional pressure of deposit costs negatively impacted net interest income and net interest margin, which declined to 2.87 percent in the 3rd quarter. We expect NIM to decline in the Q4 due to continued pressure on deposit cost and loan yields, but we expect the redemption Of the $55,000,000 of sub debt will benefit NIM in the future.

Speaker 2

Credit remained broadly stable in the 3rd quarter, but we did take a $2,200,000 charge against a specific loan that we hope to have off our books in the 4th quarter. We are optimistic that our proactive loan de risking combined with the 3rd quarter charge off and provisions have positioned us for improving credit over the coming quarters. With that, I'll hand it over to Alex, who will discuss the financial results. Alex?

Speaker 3

Thank you, David. Slide 3 has a summary of 3rd quarter results. The decrease in loan yield that David discussed resulted in a decline in interest income, While continued pressure on deposit costs led to an increase in interest expense. The decline in net interest income was offset by sharply higher non interest income, which benefited from the $5,000,000 CDFI award. Non interest Lesses decreased by 8.9%, primarily due to a reduction in legal and professional fees.

Speaker 3

As an insurance, we have referenced in the past, began to cover a significant portion of investigation related Legal expenses. We continue to closely manage expenses and anticipate total Non interest expenses to be approximately $70,000,000 in the 4th quarter before a Temporarily seasonal increase in the Q1 of next year. As David mentioned, 3rd quarter Net interest margin decreased 50 basis points to 2.87 percent due to the impact of decreasing loan yield, Lower loan balances and increasing deposit costs. Slide 4 includes summary balance sheet information And you can see that the decline in net loans held for investment. The net Loan to deposit ratio at the bank level at the end of the 3rd quarter was 95.4%.

Speaker 3

Slide 5 provides additional detail about our loan portfolio, which totaled $3,100,000,000 at the end of the 3rd quarter with an annualized yield of 5.99%. Commercial real estate loans, which include construction and land development loans, comprise 46% of our total loans And slide 67 have some details about our exposure. Our CRE office loan exposure stands at $45,000,000 and represents 1.4% of total loans and has an average Weighted LTV of 62%. Slide 8 has details About our $1,500,000,000 residential mortgage portfolio, which mostly consists of non QM mortgages in New York And California with an average LTV of 61%. Slide 10 has some details about Our deposit franchise total deposit decreased by $21,000,000 from the prior quarter.

Speaker 3

The decrease was mainly from a decrease in time deposits under $250,000 Non interest bearing deposits decreased slightly from the prior quarter. However, the pace of reduction of non interest bearing deposits Significantly slowed in Q3 compared to Q2. Our average cost of interest bearing deposits The quarter was 3.83%, up 36 basis points from the last quarter. It's worth noting that the pace of increase has slowed significantly from 72 basis points in the 2nd quarter and 82 basis points in the Q1. We continue to expect the pace of increases in deposit costs to slow in future quarters.

Speaker 3

Slide 12 provides some details on credit. Non performing loans decreased to $40,100,000 from $41,600,000 from the last quarter Due to $2,200,000 partial charge off of 1 large loan. We are cautiously optimistic that the remaining balance of this loan will be resolved in the Q4 with no additional losses. Delinquent loan increased by $12,000,000 from the prior quarter, mainly due to 1 large delinquent loan. However, After the end of the quarter, the delinquent loan balance decreased by $16,000,000 after a non credit related Temporary delay in payment of the large loan was corrected.

Speaker 3

Apart from the $2,200,000 charge off, Credit quality remained stable. Our allowance for credit losses Remains stable at 1.36 percent of total loans. Our capital levers remain Strong with all capital ratios well above regulatory well capitalized ratios. With that, we are happy to take your questions. Operator, please open up the call.

Operator

Certainly. Everyone at this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speaker Your first question is coming from Nathan Race from Piper Sandler. Your line is live.

Speaker 4

Yes. Hi, everyone. Good morning.

Speaker 5

Good morning, Nathan.

Speaker 4

Appreciate the commentary around the pressure to the Margin in the quarter and it sounds like you guys are expecting additional compression at least in the Q4 as well. I was kind of wondering if you can kind of just frame up the Magnitude of pressure that you're expecting into the Q4 and early next year assuming the rate hikes Stop from here.

Speaker 3

Sure. I'd be happy to do that, Nathan. As you mentioned, our net interest margin actually compressed This quarter actually more than what we expected in the Q2. And the reason for the larger compression was due to our The risking strategy as David mentioned, there was a large amount of payoff and pay down, especially payoff For the Q2, but the level of the payoff came down in the 3rd quarter. As an example, dollars 165,000,000 paid off in Q2.

Speaker 3

Now, we started $36,000,000 paid off in the 3rd quarter. And I would expect there is a one large loan that will be paid off in the 4th quarter. That will have a higher interest rate. It will maybe impact a little bit negatively to further compress Loan yield and net interest margin, but that's the only one that I think will have a negatively impact on the loan yield and margin. Related to deposit cost, as I mentioned, Launches bearing deposit didn't decrease that much and also time deposit under 250,000 Increased, but I think the level of the increase on the deposit cost will slow down In Q4 and more slowdown or even stabilize next year.

Speaker 3

So that's the true net interest income main margin impact. Also As David mentioned, we are expecting to redeem our sub debt, total $55,000,000 On December 1, so Q4 impact it will be minimum, but it will more positive impact in Q4 as well as next year, because the rate was 6.18% and quarterly Or annually actually about $850,000 we could have paid going forward. But anyhow, so with all those combination of the loan deposit and Redemption of the sub debt, we would expect to compress in Q4 a little bit more, But not to the extent that we have seen 50 basis point reduction in Q3.

Speaker 4

Got it. That's very helpful.

Speaker 2

I also think it depends on what the Fed does. If the Fed increases rates Now or in November, which most of us do not believe anymore, we would have Probably less compression on the loan side, then we'll see if they Do not increase rates. Okay.

Speaker 4

Got it. Understood. And Alex, I couldn't quite catch in terms of the amount Kind of non core runoff that you had in 3Q and subsequent, I think you guys had about $320,000,000 in kind of non core loans that you guys are looking to Run off going forward. So I guess I'm just curious where those balances stand going forward?

Speaker 3

Are you referring to the Q4 loan expected payoff? I just want to make sure I hear

Speaker 5

it correct.

Speaker 4

Yes. I'm just trying to understand how much more in kind of non core loans you guys have remaining as of today?

Speaker 3

Yes. I believe we are talking about $57,000,000 if you ask me the dollar amount. And I think that's the only loan that we are aware that we strategically decided to let go or refinance by other our competitors.

Speaker 4

Okay, got it. And then just curious around any additional color you can provide on the

Speaker 2

Talk about it first, so other people can chime in. It's a it was it was a $12,000,000 loan on our books that we've charged off 2 point $2,000,000 The reason for the collateral value decreases, at least according to the appraisal is Due to this millionaire's tax, where it is in the city of L. A. And it's a block away from Beverly Hills, which does not have a millionaire's tax. So, with the new appraisal we, charged off, they do have an Offer on the place that would get us out a hole right at the moment and we'll see if that can be It's closed by the end of the year.

Speaker 4

Got it. If I could just ask one more on kind of the Expectations for share repurchases continuing. Any thoughts on perhaps when that could occur and any governors that we should be Monitoring in terms of perhaps resuming share repurchases going forward?

Speaker 2

We're very optimistic that we'll be able to Resume our repurchase in the November timeframe, we're hoping mid November.

Speaker 4

Okay. Greg, that's perfect.

Speaker 2

And 433,000 shares left.

Speaker 4

Understood. I appreciate all the color. Thank you.

Operator

Your next question is coming from Andrew Terrell from Stephens. Your line is live.

Speaker 5

Hey, good afternoon.

Speaker 2

Hey, Andrew. How are you?

Speaker 5

Good. How are you guys? Around the margin. Just to make sure I understand maybe the magnitude of how we should think about the move into 4th quarter. Do you have the spot Cost of deposits at the end of the quarter either total or interest bearing?

Speaker 3

Yes, Andrew. Let me give you a breakdown of the spot rate for the deposit. Now and MMA accounts, we have About 2.5% combined. And the savings account, we have about $134,000,000 The spot rate for that is 1.15 percent. CD, let me break it down between those 2 under 250 At over $250,000 under $250,000 CD, the spot rate is 4.43 percent And the CD over 250,000, the spot rate is 4.5%.

Speaker 5

Okay. That's incredibly helpful. I really appreciate it. And then similar question just on Loans as well. I'm trying to understand the timing throughout the quarter of when the pay down occurred, the wait on the loan yields.

Speaker 5

It might be just if you have just like the exit spot loan yield on the loan portfolio or how it's trending so far in the 4th quarter?

Speaker 2

Well, right now for the Q4, we haven't had significant runoff at all In the Q4, we expect we have a $20,000,000 mortgage loan sale that's closing today, and they're about a $675,000,000 coupon. And then we have this $157,000,000 which is at 9.5. 9.5. 9.5. And we don't know exactly when that's going to roll off.

Speaker 2

It's currently on our books today. We expect that it would be rolling off by November 15. It's supposed to go by the end of this month, but it's Only a week away, so.

Speaker 3

Yes. Andrew, let me give you a little bit more color if that Will be helpful on your model of the margin. Like we had about $45,000,000 loan originated for the Q3, we've been talking about the payoff and pay down, but the rate was not bad, average rate of 9.75%. And we will continue to originate our loans. Obviously, we are deleveraging the high risk loans.

Speaker 3

That's one point. The second point, the margin compression for the quarter was due to the payoff pay down. And I did mention $165,000,000 in Q2 And $36,000,000 in Q3. And other than that $57,000,000 that we Talked about, that should be it. So I think that will give you an idea of the loan yield and the margin side of the Equation?

Speaker 6

Yes. In addition to that $58,000,000 $7,000,000 and the most we are expecting is less than $10,000,000

Speaker 2

Yes, normal, Right.

Speaker 6

No more payoff.

Speaker 3

Yes. That's payoff,

Speaker 4

payoff. Okay.

Speaker 5

Understood. Okay. I appreciate it. And then maybe just one more question around the expenses. It sounds like about $17,000,000 or so in 4Q and then if I heard you right, a little bit of a seasonal lift into the Q1 of next year.

Speaker 5

Just wanted to get maybe a bit of expectations In this kind of operating environment, how you're thinking about managing expense growth? Is that $17,000,000 number Something you think you can kind of manage around, throughout the balance of 2024? Or should we expect some expense growth off that base As you kind of continue to reinvest into the franchise?

Speaker 3

Yes. Maybe I can attempt to answer for that. Yes. The basis for the $17,000,000 in Q4 was based on the fact that our legal and the professional fee Expense will be much smaller than previous quarters and even smaller than the Q4, given About 85% or even higher of those SEC investigation or investigation related Expenses, it used to be 1,000,000 of dollars will be covered by the insurance. So that is the biggest contributor for the reduction of the Legal expenses, but also as you know, we did have some mature weaknesses and a lot of outside kind of advisory consulting services, Not to mention the credit related, we want to make sure the review by third party and CECL related validation, all those Professional fees, I would expect that will go down.

Speaker 3

So $17,000,000 is the one that we expect in Q4. But if you're asking me the run rate for $24,000,000 and going forward, I think it can be even lower than $70,000,000 But the Like salary and benefit expenses, obviously, we are very careful managing the salary and benefit expenses. But if we really grow, We need to hire the qualified employees. But I think overall the run rate for Q4, I would Feel comfortable about $17,000,000 and 2024, it can be Even more or higher, but in the neighborhood of $70,000,000 caveat is Q1 on seasonal kind of high expenses.

Speaker 5

Okay. Understood. I really appreciate all of the color and thank you all for taking the questions.

Speaker 3

Thank you, Andrew.

Operator

Thank you. Your next question is coming from Kelly Motta from KBW. Your line is live.

Speaker 7

Hi, good morning. Thanks for the question.

Speaker 2

Hi, Kelly.

Speaker 7

I was hoping maybe you could provide us with an update on the SEC investigation. It was nice to The insurance kick in, so it's not dropping down to expenses, but I was wondering if You had any idea in terms of, potential timeline towards resolution?

Speaker 2

Well, if you know how the SEC works, They don't tell us anything. So we really cannot really Comment on where they are. We just know where they are based upon If they're asking us for a bunch of information and that has significantly that pretty much has slowed down and stopped.

Speaker 7

Got it. And I know Gateway was terminated. Just wondering as

Speaker 1

we look

Speaker 7

ahead, Is that San Francisco market still one that you're interested in getting in? And does this shift at all You know your appetite for M and A versus potentially de novo branches or things like that in order to Drive expansion into new markets as you've done in the past.

Speaker 2

Okay. It depends on the type of acquisition, but yes, we are After a while, we would be we would entertain an acquisition in San Francisco and we would also look at Local market here or local markets where we already have branches where we can get significant cost savings, Much more than your typical 30% to 40%, something closer to a 70% or 80% cost save. And that would make a lot of sense, because there's a lot of duplication, especially here in LA. There's 17 or more Chinese American banks and we all have branches on Valley Boulevard, Maybe multiple branches on Valley Boulevard and it doesn't make sense that we have 17 banks serving the same market. So, but right now, it is not, on the radar screen.

Speaker 2

Okay.

Speaker 7

Got it. And then in terms of, now that you're down to your targeted loan to deposit ratio, just wondering where you're seeing The best opportunities for growth by category, if there's any particular industry or Segment where you're seeing more attractive risk adjusted returns.

Speaker 2

Yes, go ahead, Johnny.

Speaker 6

Hi, Kelly. This is Johnny. Hi. How are you? While we there's no obviously, there's still a lot of demand for Construction, CRE related type of loans and obviously and probably because There's not too many lenders right now that are very keen on wanting to do more construction loans.

Speaker 6

But for us, Obviously, that's an area that we'll still continue to look at case by case on opportunistic basis. If there's good quality Experience development with track records, certainly we still look at that. On the non construction CRE side, On the C and I types of businesses, certainly, for example, SBA, where you are SBA We see demand there, but obviously, we're very selective even though these are government guaranteed types of credit. But for C and I, there's certain demand there, but at this we just reached this 95% loan to deposit ratio. And Now, obviously, we are better positioned now to sort of re launch our lending.

Speaker 6

So on the C and I side, certainly, we will be Pursuing a little bit more on an elevated basis, but still very selective at this point.

Speaker 7

Got it. Thank you so much. I'll step back.

Operator

Thank you. There are no further questions in the queue.

Speaker 2

Okay. I would like to thank everybody for joining us today. You all have a good day. Thank you. Bye bye.

Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

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