RBB Bancorp Q4 2023 Earnings Call Transcript

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January 23, 2024

There are 10 speakers on the call.

Operator

Good day, everyone, and welcome to the RBV Bancorp's 4th Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the floor over to your host, Brian Stevens.

Operator

Sir, the floor is yours.

Speaker 1

Thank you, Matt. Good day, everyone, and thank you for joining us With me today are Chief Executive Officer, David Morris President, Johnny Lee Interim Chief Financial Officer, Lynn Hopkins Chief Credit Officer, Jeffrey Yeh Chief Administrative Officer, Gary Fan and Chief Risk Officer, Vincent Liu. David and Lynn will briefly summarize the results, which can be found in the earnings press release and investor presentation that are available on our Investor Relations website. And then we'll open the call up to your questions. I would ask that everyone please refer to the disclaimer regarding forward looking statements and the investor presentation and the bank's SEC filings.

Speaker 1

Now, I'd like to turn the call over to RBB's Chief Executive Officer, David Morris. David?

Speaker 2

Thank you, Brian. Good day, everyone, and thank you for joining us. We undertook several initiatives last year to position RBB for the future. We strengthened our management team by adding respected senior executives including Johnny Lee as President and Lynn Hopkins as Interim Chief Financial Officer. We restructured our operations and established a more formal Reporting structure to better manage our national franchise business.

Speaker 2

We increased liquidity and mitigated balance sheet risk by reducing our loan to deposit ratio and strategically exiting certain higher risk Loan relationships. We also addressed regulatory concerns by adopting enhanced corporate governance policies and reconstituting our Board of Directors. With respect to the consent order we disclosed in October, We believe we have addressed all the deficiencies identified, but there can be no guarantee that additional measures will not be required. We are also pleased to share That we were notified by the SEC that they have concluded its investigation and that it did not intend to recommend any enforcement action against the bank. Some of the actions we took last year, namely corporate governance and AML related expenses, Increased liquidity and payment of our target 95% loan to deposit ratio and a reduction in higher risk, Higher yielding loans did impact results, but with the majority of the work We are better positioned to create long term shareholder value and expect profitability Cost of financing.

Speaker 2

In the 4th quarter, we were able to recognize the $5,000,000 CDFI ERP award that I mentioned last quarter as we distributed the funds to related recipients. Before I hand it over to Lynn, who we are thrilled to have as part of our team, I did want to mention that we were active buyers of our shares in the 4th quarter and invested approximately 6 point I recognize the benefits of having a buyback in place and expect to discuss a reauthorization at the next Board meeting. Lynn, welcome and take it away.

Speaker 3

Thank you, David. I've been here for about a month and a half, I'm still getting up to speed, but needless to say, I'm very happy to be part of the RBV team. I look forward to reconnecting with everyone in the coming weeks. Please feel free to refer to the investor presentation we have provided as I share my comments on the company's Q4 of 2023 Financial performance. Slide 3 of our investor presentation has a summary of 4th quarter results.

Speaker 3

We achieved $12,100,000 in net income or $0.64 per diluted share. Net income for the 4th quarter benefited from of a pre tax $5,000,000 CDFI ERP award. Adjusting for this revenue, 4th quarter net income would have been $8,600,000 or $0.45 per diluted share. Tangible book value per share increased 4% during the 4th quarter End the year at $23.48 due to net earnings, lower unrealized losses on our securities portfolio and share repurchases. Yield on our interest earning assets was relatively stable from last quarter, but interest income declined slightly due to a $102,000,000 reduction in average loans held for investment.

Speaker 3

This reduction combined with a rate related increase in interest expenses resulted in a $1,900,000 decrease in net interest income and further pressure on net interest margin, which declined to 2.73% in the 4th quarter. Credit quality improved in the 4th quarter With non performing loans decreasing by 21 percent to $31,600,000 This decrease was primarily due to payoff of a $9,900,000 non performing construction loan with no additional losses. Our allowance for loan losses remained stable at 1.38 percent of total loans compared to 1.36% at the end of the 3rd quarter. Non interest expenses totaled $16,400,000 and declined by 2.9% compared to the prior quarter, primarily due to lower salaries and benefits expense. We anticipate total non interest expenses to increase in the 1st quarter due to a temporary seasonal increase related mostly to taxes and to reflect compensation adjustments as we start the New Year.

Speaker 3

As a result, non interest expenses are expected to be around $17,500,000 Slide 4 includes Summary balance sheet information and you can see the decline in loans held for investment. As David mentioned, we believe there are near term steps We can take to reduce our funding costs, which should benefit margins and net interest income. Slide 5 provides additional detail about our loan portfolio, which totaled $3,000,000,000 at the end of the year and had a 4th quarter annualized yield of 5.96%. Commercial real estate loans, which include construction and land development loans, comprised 45% of our total loans and slide 67 have some details about our exposure. We continue to have limited CRE office loan exposure, which stood at $43,000,000 and represented 1.4% Total loans at the end of the 4th quarter.

Speaker 3

Slide 8 has details about our $1,500,000,000 residential mortgage portfolio, which consists of well secured non QM mortgages in New York and California with an average LTV of 61%. Slide 10 has some details about our deposit franchise. Total deposits were $3,200,000,000 at the end of the 4th quarter, A $20,700,000 increase compared to the 3rd quarter. This increase was due to a $53,500,000 increase in interest bearing deposits And a $32,800,000 decrease in non interest bearing demand deposits. Included in the increase in interest bearing deposits was a $20,400,000 reduction in wholesale deposits, which were replaced by non maturity deposits.

Speaker 3

Our average cost of interest bearing deposits for the 4th quarter was 4.08%, an increase of 25 basis points from the 3rd quarter versus the 36 basis point increase from the 2nd quarter to the 3rd quarter. We continue to expect The pace of increases in our deposit costs to slow in future quarters. Our capital levels remain strong with all capital ratios above The regulatory well capitalized threshold. With that, we are happy to take your questions. Operator, Please open up the call.

Operator

Certainly. At this time, we'll be conducting a question and answer session. Your first question is coming from Nathan Aras from Piper Sandler. Your line is live.

Speaker 4

Yes. Hi, everyone. Good afternoon.

Speaker 5

Hi, Nathan.

Speaker 4

Question just on the expense run rate into this year. I appreciate the guidance for 17.5 It's a starting point for the Q1, but just curious on how you think about the cadence of expenses in 2Q and 3Q as well?

Speaker 3

Sure. Nice to meet you over the phone here. So when we think about non interest expenses, I think there's a couple of ways, but one is our operating expense ratio relative to our earning assets. I think we've observed that it was closer to about 185 at the beginning of 2023 and it migrated down to about 1 and I think as we look forward with Some of the initiatives the bank undertook in 2023 and the expense related to those, we would anticipate that non interest expenses might look closer To 170 of average earning assets, plus or minus some basis points.

Speaker 4

Okay, got it. And then does that higher expense run rate for the Q1, does that contemplate some hires that you guys have Made recently and if so, how do you guys kind of think about those hires impacting the growth outlook in both loans and deposits going forward?

Speaker 3

I think without getting into all of the details of hires and The ins and outs of the salary expense, I think we believe we have the appropriate staff to be able to achieve goals in 2024 and grow appropriately. So I think it's all included in the number. Thanks.

Speaker 4

Okay. Thank you. And if I could just follow-up, are there any kind of guidepost that you guys can provide in terms of how to think about Both loan and deposit growth during 2024?

Speaker 3

So I think that At the end of 2023, we have our loan to deposit ratio down just below 95%. I think again with the actions the bank took during 2023 and given the current economic outlook, we expect to participate in some Loan growth might be a little bit premature to provide, I think specific guidance there. We do expect to fund our loan growth with deposit growth As we move forward here, it provide a range, but it might be a little bit too wide at this point.

Speaker 4

Understood. I appreciate that, Lynn. And if I could just follow-up with David on the pace of share repurchases going forward. Now I understand that you guys will likely be reengaging in the authorization that's out there Coming out of the Q4, but just any thoughts on just the pace of buybacks over the next quarter or 2?

Speaker 2

I would think the pace of buybacks Should be similar to that that we had on the 4th quarter. I think that's Pretty much what we want to do.

Speaker 4

Okay, great. I will step back. Thank you, everyone.

Operator

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

Speaker 2

Hi, Kelly. Are you there?

Operator

Once again, Kelly Moneta from KBW. Your line is live.

Speaker 6

I apologize. I was muted and talking to myself. Good morning. Hi, David and Lynn. It's wonderful to hear from you again.

Speaker 3

Hi, Kelly.

Speaker 6

I was hoping to touch more on loans in the pipeline Just wondering if you could spend a minute or so just discussing, I know Johnny has been working Build the pipelines and develop C and I relationships, just wondering kind of the Where that stands and it takes time for those pipelines to come on, Whether we could see another maybe quarter or 2 of loan contraction as things start to stabilize with one another?

Speaker 7

Hi, Kelly, this is Johnny. How are

Speaker 2

you? Well, last year, as

Speaker 7

you know, we were trying to achieve the loan to deposit ratio 95%. So we were kind of navigating through that and there were demands obviously but then we're trying to balance it so that we Don't overshoot it. So we had actually already positioned ourselves to build that momentum for growth For this year and I would simply share that the pipeline right now looks relatively promising, But I think the challenge right now is the mix. We have demands on all fronts But obviously we want to optimize the return. But I think credit quality is still 1st and foremost As far as selecting the appropriate types of deals to take on, But credit quality and then the definitely we want to generate appropriate returns and that's how we're looking at this pipeline right now.

Speaker 7

But overall, I think I'm pretty pleased with it but then generally usually is A slow month, but then I think the momentum is definitely too.

Speaker 6

Got it. That's helpful. And as we look ahead, I know guys have done a lot of work to bring the loan to deposit ratio down to a more normalized level. Just wondering how any kind of perspective growth, how you anticipate funding? Is it still Retail CDs, a lot of my banks are leaning on, just wondering what the outlook for funding looks like at this time When if and when we get rate cuts, how quickly you think betas will react On the downside?

Speaker 3

Sure, Kelly. Let me start. I will mention off of Johnny's comments, I think the pipeline is building and I think there is an that we will convert that into net loan growth. And as we look at the ratio of loan to deposits, We brought the ratio down. There's probably an opportunity for that to move between, 95% to 100% as we look at other sources for funding.

Speaker 3

I think we all know the Fed's program has been out there. I think we've been successful in bringing in some non maturity relationship deposits and other time deposits. So I think there is an opportunity for growth. It will be funded with Deposits with some focus on the commercial side of the business, there's an expectation that we have an opportunity to grow demand deposits, Which is obviously very helpful for net interest income and the margin. With respect to your comments or question about betas, I think we can appreciate that the talk About interest rates potentially coming down in the second half of this year, none of us know Exactly the timing or the magnitude, we think staying flexible on the funding side of The balance sheet is going to be important.

Speaker 3

So having some non maturity deposits can be helpful, potentially staying a little bit shorter to give us that flexibility. And then I don't know that I have a comment necessarily on the betas per se, but we definitely recognize We're not going to navigate through probably a changing interest rate environment.

Speaker 6

That's super helpful. Thanks, Lynn. Maybe last one for me and I'll step back. Flipping through the slides, I really like the slides on office and all the color you guys provide. On Slide 6, it Looks like there's about $9,000,000 in office with LTVs over 85%.

Speaker 6

Just wondering if David or anybody could provide some color on what kind of sits on the bucket and how concerned or not You are with office in general and kind of that higher LTV portion?

Speaker 8

Hi, this is Jeffrey. This is the loan that is in forbearance. We Already have a forbearance agreement with the borrower and the issue with this borrower is that they are working with their tenant and their tenant are government entity And then we are not concerned about the source of their ability to pay the rent. They just have to work with There are tenants. So then we are kind of optimistic that at the end of the forbearance agreement, this The issue could be resolved.

Speaker 6

Okay. Thanks for that, Jeffrey. I appreciate it. I will step back.

Operator

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

Speaker 5

Hey, good morning everybody. And Lynn, good to speak with you again.

Speaker 3

Yes, Likewise. Thanks, Andrew.

Speaker 5

If I could just follow-up on some of the last question there around the office Does that sit anywhere on the balance sheet from or can you just talk about where it sits from like a risk rating standpoint? Is it then criticized or classified Today and then is there a specific reserve against that loan today?

Speaker 8

In terms of the specific reserve, there is no specific reserve because They should be able to cash flow based on the source of the rent And besides them based on the value of the collateral and then we have done the impairment analysis and indicated no impairment. And It is classified loan. No loan, classified loan, yes.

Speaker 5

Okay. Got it. Very good. Thank you. If I could go back to David, just you mentioned in the prepared remarks Kind of taking steps in 2024 to optimize the cost of funding or maybe the cost of deposits.

Speaker 5

And then I heard some of the commentary around just the expectation to lean a little more heavily into the C and I oriented business, which would obviously carry A greater mix of DDAs and some core funding there. Is that really the kind of strategy or is there anything else that you're looking at that you could kind of elaborate on that That you could leverage you could pull in kind of 2024 to optimize the cost of funding?

Speaker 2

Well, that's all We have multiple options out there, Andrew. And without getting into real specifics, it's not just The loans and deposit ratios, it's also other investment other items out there to help us With the cost of funding and so forth I said loans, I'm sorry. There's other types of vehicles besides just deposits that can help us. Also, we do promotions like every bank does and we can guide those promotions into something that is lower Yielding than the highest rate CD and something that will give us flexibility to Go down the curve quicker, okay, also, so it won't be locked in.

Speaker 5

Okay, understood. And maybe just following up on that point specifically, can you refresh us on any time deposit Specials you're offering right now and kind of what the term or duration and the rate is on the specials you're offering. And then If you could also just remind us on the repricing dynamics for the 1st quarters, how much you've got rolling off and at what cost?

Speaker 2

Right now, we do not have a real special out there in the market for Time deposits, we do have a special out for, I believe it's DDA right at the moment. Okay. Personal checking and business checking. Now also I'll have Lynn That answered the rest of the question.

Speaker 3

Andrew, can Can you ask your question again? Yes.

Speaker 5

Yes. I think David addressed the first part. The other part was just the Time deposit repricing dynamics in the Q1, just how much is there scheduled to roll off and at what cost it's rolling off at?

Speaker 3

Sure. So we like I said, we ended the quarter with Our cost of deposits for the 4th quarter were about 4 percent, 408%. And within the numbers at the end of the year, we have About $275,000,000 of wholesale funds that are maturing in the first Those are pretty fully priced in, in the current interest rate environment. So to the extent that We need to roll those. I think they would have limited impact on our net interest margin.

Speaker 3

There is a portion of our retail deposits that will reprice in the 1st quarter. And again, I think that we're seeing some inversion in the yield curve related to funding costs. So To the extent that they're very short term, they might reprice up a bit. To the extent that we look out 12 months, we're probably pretty close to, I think Current carrying rate. So I think it's going to have a bit of a muted impact as we look forward And as our funding base continues to reprice in the current environment.

Speaker 3

So Hopefully, that's helpful. I think the time deposits that are coming off are I think between $450,000,000 $500,000,000 and We'll work to retain those in the current marketplace.

Speaker 5

And lastly, if I could sneak it in, can you just remind me, the $150,000,000 of FHLB that's termed out at I think by a low 1% cost right now. I think the maturity of that was in 2025, if memory serves. Could you just remind me the specific kind of date of maturity for the FHLB borrowings? It would

Speaker 2

be The Q1 of 2025, late Q1 2025. There's multiple maturity dates. So but it's only 1st

Operator

Your next question is coming from Tim Coffey from Janney. Your line is live.

Speaker 5

Great. Thank you. Good morning, everybody.

Speaker 2

We're good. Hi, Aaron. Good.

Speaker 9

David, I wonder if you can kind of talk me to you. When it comes to originating loans in the near term, are you opening to originating for sale?

Speaker 2

On the mortgage side, yes, And SBA also mortgage and SBA, yes.

Speaker 9

Yes. How do you see that market evolving over the course of Do we need the rate cuts in the back half of the year to really start to engage that customer base?

Speaker 2

I think SBA is not on the SBA side, no. Okay. On the mortgage side, I don't know if you need rate cuts per se, you need a change in maybe a lowering Of the long end of the yield curve because that's what prices mortgages. So we need the 10 year treasury to get back down So where it was before it went back up above 4, we need to be down to around 3 for that to happen.

Speaker 9

And then just kind of on your reserve And obviously I understand what comes through the income statement is dependent piece on the economy and the economic outlook. But if it continues to improve and you've de risked the portfolio, do you see a real reason to dramatically increase Provisions this next year?

Speaker 2

Really we cannot project that out right now, Tim, we don't have a crystal ball and we do not know what's going to happen with the economy and so forth. However, saying that, Our loan portfolio has improved with its quality and so forth. So And if it continues to improve, there may be something down there.

Speaker 9

All right. That's it for me. Thank you for the time.

Speaker 2

Okay.

Operator

Thank you. We have reached the end of the question and answer session. I will now turn the call over to David Morris, President and CEO for closing remarks.

Speaker 2

Once again, thank you for joining us today. We look forward to speaking to many of you in the coming days weeks. Have a nice day.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
RBB Bancorp Q4 2023
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